UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2017 .
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number 001-08895
 
HCP, INC.
(Exact name of registrant as specified in its charter)
 
 
 
Maryland
 
33-0091377
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
1920 Main Street, Suite 1200
Irvine, CA 92614
(Address of principal executive offices)
(949) 407-0700
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).  YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☒
 
Accelerated Filer ☐
Non-accelerated Filer ☐
 
Smaller Reporting Company ☐
(Do not check if a smaller reporting company)
 
 
 
 
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  YES ☐ NO ☒
At October 27, 2017 , there were  469,108,449 shares of the registrant’s $1.00 par value common stock outstanding.
 



HCP, INC.
INDEX
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


HCP, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
 
September 30,
2017
 
December 31,
2016
ASSETS
 

 
 

Real Estate:
 

 
 

Buildings and improvements
$
11,052,578

 
$
11,692,654

Development costs and construction in progress
429,459

 
400,619

Land
1,752,890

 
1,881,487

Accumulated depreciation and amortization
(2,699,174
)
 
(2,648,930
)
Net real estate
10,535,753

 
11,325,830

Net investment in direct financing leases
715,104

 
752,589

Loans receivable, net
402,152

 
807,954

Investments in and advances to unconsolidated joint ventures
822,369

 
571,491

Accounts receivable, net of allowance of $4,312 and $4,459, respectively
34,571

 
45,116

Cash and cash equivalents
133,887

 
94,730

Restricted cash
27,135

 
42,260

Intangible assets, net
400,867

 
479,805

Assets held for sale, net
216,074

 
927,866

Other assets, net
616,169

 
711,624

Total assets
$
13,904,081

 
$
15,759,265

LIABILITIES AND EQUITY
 

 
 

Bank line of credit
$
605,837

 
$
899,718

Term loans
226,205

 
440,062

Senior unsecured notes
6,393,926

 
7,133,538

Mortgage debt
145,417

 
623,792

Other debt
94,818

 
92,385

Intangible liabilities, net
53,427

 
58,145

Liabilities of assets held for sale, net
8,653

 
3,776

Accounts payable and accrued liabilities
381,189

 
417,360

Deferred revenue
140,378

 
149,181

Total liabilities
8,049,850

 
9,817,957

Commitments and contingencies


 


Common stock, $1.00 par value: 750,000,000 shares authorized; 469,034,877 and 468,081,489 shares issued and outstanding, respectively
469,035

 
468,081

Additional paid-in capital
8,224,531

 
8,198,890

Cumulative dividends in excess of earnings
(3,137,642
)
 
(3,089,734
)
Accumulated other comprehensive income (loss)
(24,491
)
 
(29,642
)
Total stockholders' equity
5,531,433

 
5,547,595

Joint venture partners
145,496

 
214,377

Non-managing member unitholders
177,302

 
179,336

Total noncontrolling interests
322,798

 
393,713

Total equity
5,854,231

 
5,941,308

Total liabilities and equity
$
13,904,081

 
$
15,759,265

_______________________________________
See accompanying Notes to the Unaudited Consolidated Financial Statements.


3


HCP, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 

 
 

 
 
 
 
Rental and related revenues
$
266,109

 
$
290,280

 
$
816,147

 
$
872,828

Tenant recoveries
36,860

 
34,809

 
105,794

 
99,715

Resident fees and services
126,040

 
170,752

 
391,688

 
500,717

Income from direct financing leases
13,240

 
14,234

 
40,516

 
44,791

Interest income
11,774

 
20,482

 
50,974

 
71,298

Total revenues
454,023

 
530,557

 
1,405,119

 
1,589,349

Costs and expenses:
 

 
 

 
 
 
 
Interest expense
71,328

 
117,860

 
235,834

 
361,255

Depreciation and amortization
130,588

 
141,407

 
397,893

 
421,181

Operating
155,338

 
187,714

 
467,582

 
542,751

General and administrative
23,523

 
34,781

 
67,287

 
83,011

Acquisition and pursuit costs
580

 
2,763

 
2,504

 
6,061

Impairments (recoveries), net
25,328

 

 
82,010

 

Total costs and expenses
406,685

 
484,525

 
1,253,110

 
1,414,259

Other income (expense):
 

 
 

 
 
 
 
Gain (loss) on sales of real estate, net
5,182

 
(9
)
 
322,852

 
119,605

Loss on debt extinguishments
(54,227
)
 

 
(54,227
)
 

Other income (expense), net
(10,556
)
 
1,432

 
40,723

 
5,064

Total other income (expense), net
(59,601
)
 
1,423

 
309,348

 
124,669

Income (loss) before income taxes and equity income (loss) from unconsolidated joint ventures
(12,263
)
 
47,455

 
461,357

 
299,759

Income tax benefit (expense)
5,481

 
424

 
14,630

 
(1,101
)
Equity income (loss) from unconsolidated joint ventures
1,062

 
(2,053
)
 
4,571

 
(4,028
)
Income (loss) from continuing operations
(5,720
)
 
45,826

 
480,558

 
294,630

Discontinued operations:
 

 
 

 
 
 
 
Income (loss) before transaction costs and income taxes

 
121,229

 

 
360,226

Transaction costs

 
(14,805
)
 

 
(28,509
)
Income tax benefit (expense)

 
1,789

 

 
(47,721
)
Total discontinued operations

 
108,213

 

 
283,996

Net income (loss)
(5,720
)
 
154,039

 
480,558

 
578,626

Noncontrolling interests' share in earnings
(1,937
)
 
(2,789
)
 
(7,687
)
 
(9,540
)
Net income (loss) attributable to HCP, Inc.
(7,657
)
 
151,250

 
472,871

 
569,086

Participating securities' share in earnings
(131
)
 
(326
)
 
(560
)
 
(977
)
Net income (loss) applicable to common shares
$
(7,788
)
 
$
150,924

 
$
472,311

 
$
568,109

Basic earnings per common share:
 
 
 
 
 
 
 
Continuing operations
$
(0.02
)
 
$
0.09

 
$
1.01

 
$
0.61

Discontinued operations

 
0.23

 

 
0.61

Net income (loss) applicable to common shares
$
(0.02
)
 
$
0.32

 
$
1.01

 
$
1.22

Diluted earnings per common share:
 
 
 
 
 
 
 
Continuing operations
$
(0.02
)
 
$
0.09

 
$
1.01

 
$
0.61

Discontinued operations

 
0.23

 

 
0.61

Net income (loss) applicable to common shares
$
(0.02
)
 
$
0.32

 
$
1.01

 
$
1.22

Weighted average shares used to calculate earnings per common share:
 
 
 
 
 
 
 
Basic
468,975

 
467,628

 
468,642

 
466,931

Diluted
468,975

 
467,835

 
468,828

 
467,132

Dividends declared per common share
$
0.370

 
$
0.575

 
$
1.110

 
$
1.725

See accompanying Notes to the Unaudited Consolidated Financial Statements.


4


HCP, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net income (loss)
$
(5,720
)
 
$
154,039

 
$
480,558

 
$
578,626

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in net unrealized gains (losses) on securities
(8
)
 
4

 
(2
)
 
(1
)
Change in net unrealized gains (losses) on cash flow hedges:
 
 
 
 
 
 
 
Unrealized gains (losses)
(3,672
)
 
1,184

 
(10,105
)
 
1,532

Reclassification adjustment realized in net income (loss)
654

 
154

 
674

 
494

Change in Supplemental Executive Retirement Plan obligation
74

 
70

 
222

 
211

Foreign currency translation adjustment
5,750

 
(838
)
 
14,362

 
(1,930
)
Total other comprehensive income (loss)
2,798

 
574

 
5,151

 
306

Total comprehensive income (loss)
(2,922
)
 
154,613

 
485,709

 
578,932

Total comprehensive income (loss) attributable to noncontrolling interests
(1,937
)
 
(2,789
)
 
(7,687
)
 
(9,540
)
Total comprehensive income (loss) attributable to HCP, Inc.
$
(4,859
)
 
$
151,824

 
$
478,022

 
$
569,392

See accompanying Notes to the Unaudited Consolidated Financial Statements.


5


HCP, Inc.
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except per share data)
(Unaudited)
 
Common Stock
 
Additional Paid-In Capital
 
Cumulative Dividends In Excess Of Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders’ Equity
 
Total Noncontrolling Interests
 
Total
Equity
 
Shares
 
Amount
 
 
 
 
 
 
January 1, 2017
468,081

 
$
468,081

 
$
8,198,890

 
$
(3,089,734
)
 
$
(29,642
)
 
$
5,547,595

 
$
393,713

 
$
5,941,308

Net income (loss)

 

 

 
472,871

 

 
472,871

 
7,687

 
480,558

Other comprehensive income (loss)

 

 

 

 
5,151

 
5,151

 

 
5,151

Issuance of common stock, net
998

 
998

 
16,352

 

 

 
17,350

 

 
17,350

Conversion of DownREIT units to common stock
68

 
68

 
2,003

 

 

 
2,071

 
(2,071
)
 

Repurchase of common stock
(144
)
 
(144
)
 
(4,315
)
 

 

 
(4,459
)
 

 
(4,459
)
Exercise of stock options
32

 
32

 
736

 

 

 
768

 

 
768

Amortization of deferred compensation

 

 
10,865

 

 

 
10,865

 

 
10,865

Common dividends ($1.110 per share)

 

 

 
(520,779
)
 

 
(520,779
)
 

 
(520,779
)
Distributions to noncontrolling interests

 

 

 

 

 

 
(19,520
)
 
(19,520
)
Issuances of noncontrolling interests

 

 

 

 

 

 
1,050

 
1,050

Deconsolidation of noncontrolling interests

 

 

 

 

 

 
(58,061
)
 
(58,061
)
September 30, 2017
469,035

 
$
469,035

 
$
8,224,531

 
$
(3,137,642
)
 
$
(24,491
)
 
$
5,531,433

 
$
322,798

 
$
5,854,231

 
Common Stock
 
Additional Paid-In Capital
 
Cumulative Dividends In Excess Of Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders’ Equity
 
Total Noncontrolling Interests
 
Total
Equity
 
Shares
 
Amount
 
 
 
 
 
 
January 1, 2016
465,488

 
$
465,488

 
$
11,647,039

 
$
(2,738,414
)
 
$
(30,470
)
 
$
9,343,643

 
$
402,674

 
$
9,746,317

Net income (loss)

 

 

 
569,086

 

 
569,086

 
9,540

 
578,626

Other comprehensive income (loss)

 

 

 

 
306

 
306

 

 
306

Issuance of common stock, net
2,290

 
2,290

 
53,421

 

 

 
55,711

 

 
55,711

Conversion of DownREIT units to common stock
145

 
145

 
5,948

 

 

 
6,093

 
(6,093
)
 

Repurchase of common stock
(236
)
 
(236
)
 
(8,431
)
 

 

 
(8,667
)
 

 
(8,667
)
Exercise of stock options
133

 
133

 
3,340

 

 

 
3,473

 

 
3,473

Amortization of deferred compensation

 

 
19,307

 

 

 
19,307

 

 
19,307

Common dividends ($1.725 per share)

 

 

 
(806,243
)
 

 
(806,243
)
 

 
(806,243
)
Distributions to noncontrolling interests

 

 
(36
)
 

 

 
(36
)
 
(18,651
)
 
(18,687
)
Issuances of noncontrolling interests

 

 

 

 

 

 
4,785

 
4,785

Deconsolidation of noncontrolling interests

 

 
(36
)
 
475

 

 
439

 
67

 
506

September 30, 2016
467,820

 
$
467,820

 
$
11,720,552

 
$
(2,975,096
)
 
$
(30,164
)
 
$
9,183,112

 
$
392,322

 
$
9,575,434

See accompanying Notes to the Unaudited Consolidated Financial Statements.


6


HCP, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income (loss)
$
480,558

 
$
578,626

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization of real estate, in-place lease and other intangibles:
 
 
 
Continuing operations
397,893

 
421,181

Discontinued operations

 
4,401

Amortization of deferred compensation
10,865

 
19,307

Amortization of deferred financing costs
11,141

 
15,598

Straight-line rents
(12,236
)
 
(14,412
)
Equity loss (income) from unconsolidated joint ventures
(4,571
)
 
4,028

Distributions of earnings from unconsolidated joint ventures
27,692

 
5,919

Loss (gain) on sales of real estate, net
(322,852
)
 
(119,605
)
Allowance for loan losses
59,420

 

Deferred income tax expense (benefit)
(17,786
)
 
47,195

Impairments (recoveries), net
22,590

 

Loss on extinguishment of debt
54,227

 

Casualty-related loss (recoveries), net
9,912

 

Foreign exchange and other losses (gains), net
(986
)
 
(127
)
Gain (loss) on sale of marketable securities
(50,895
)
 

Other non-cash items
(543
)
 
(2,035
)
Changes in:
 
 
 
Accounts receivable, net
396

 
7,558

Other assets, net
(2,617
)
 
(9,674
)
Accounts payable and accrued liabilities
(24,312
)
 
40,672

Net cash provided by (used in) operating activities
637,896

 
998,632

Cash flows from investing activities:
 
 
 
Acquisitions of real estate
(135,816
)
 
(257,242
)
Development and redevelopment of real estate
(261,510
)
 
(304,818
)
Leasing costs, tenant improvements, and recurring capital expenditures
(75,211
)
 
(64,501
)
Proceeds from sales of real estate, net
1,249,993

 
211,810

Contributions to unconsolidated joint ventures
(25,776
)
 
(10,169
)
Distributions in excess of earnings from unconsolidated joint ventures
4,845

 
14,458

Net proceeds from the RIDEA II transaction
480,614

 

Proceeds from the sales of Four Seasons investments
135,538

 

Principal repayments on direct financing leases, loans receivable and other
414,732

 
221,179

Investments in loans receivable, direct financing leases and other
(28,339
)
 
(129,335
)
Decrease (increase) in restricted cash
(3,247
)
 
4,459

Net cash provided by (used in) investing activities
1,755,823

 
(314,159
)
Cash flows from financing activities:
 
 
 
Net borrowings (repayments) under bank line of credit
23,419

 
1,157,897

Repayments under bank line of credit
(339,826
)
 
(135,000
)
Repayment of term loans
(234,459
)
 

Repayments of senior unsecured notes
(750,000
)
 
(900,000
)
Issuance of mortgage and other debt
5,395

 

Repayments of mortgage and other debt
(482,487
)
 
(249,540
)
Debt extinguishment costs
(51,415
)
 

Deferred financing costs

 
(1,057
)
Issuance of common stock and exercise of options
18,118

 
59,184

Repurchase of common stock
(4,459
)
 
(8,667
)
Dividends paid on common stock
(520,779
)
 
(806,243
)
Issuance of noncontrolling interests
1,050

 
4,785

Distributions to noncontrolling interests
(19,520
)
 
(18,687
)
Net cash provided by (used in) financing activities
(2,354,963
)
 
(897,328
)
Effect of foreign exchange on cash and cash equivalents
401

 
(754
)
Net increase (decrease) in cash and cash equivalents
39,157

 
(213,609
)
Cash and cash equivalents, beginning of period
94,730

 
346,500

Cash and cash equivalents, end of period
$
133,887

 
$
132,891

See accompanying Notes to the Unaudited Consolidated Financial Statements.

7


HCP, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  
NOTE 1.  Business

Overview
HCP, Inc., a Standard & Poor’s (“S&P”) 500 company, is a Maryland corporation that is organized to qualify as a real estate investment trust (“REIT”) which, together with its consolidated entities (collectively, “HCP” or the “Company”), invests primarily in real estate serving the healthcare industry in the United States (“U.S.”). The Company acquires, develops, leases, manages and disposes of healthcare real estate and provides financing to healthcare providers. The Company’s diverse portfolio is comprised of investments in the following reportable healthcare segments: (i) senior housing triple-net; (ii) senior housing operating portfolio (“SHOP”); (iii) life science and (iv) medical office.
Master Transactions and Cooperation Agreement with Brookdale
On November 1, 2017, the Company and Brookdale Senior Living Inc. (“Brookdale”) entered into a Master Transactions and Cooperation Agreement (the “MTCA”) to provide the Company with the ability to significantly reduce its concentration of assets leased to and/or managed by Brookdale. Through a series of dispositions and transitions of assets currently leased to and/or managed by Brookdale, as contemplated by the MTCA and further described below, the Company’s exposure to Brookdale is expected to be significantly reduced.
Master Lease Transactions. In connection with the overall transaction pursuant to the MTCA, the Company (through certain of its subsidiaries), and Brookdale (through certain of its subsidiaries) (the “Lessee”) entered into an Amended and Restated Master Lease and Security Agreement (the “Amended Master Lease”), which amended and restated the then-existing triple-net leases between the parties for 78 assets (before giving effect to the contemplated sale or transition of 34 assets discussed below), which account for primarily all of the assets subject to triple-net leases between the Company and the Lessee. Under the Amended Master Lease, the Company will have the benefit of a guaranty from Brookdale of the Lessee’s obligations and, upon a change in control, will have various additional protections under the MTCA and the Amended Master Lease including:
A security deposit (which increases if specified leverage thresholds are exceeded);
A termination right if certain financial covenants and net worth test are not satisfied;
Enhanced reporting requirements and related remedies; and
The right to market for sale the CCRC portfolio.
Future changes in control of Brookdale are permitted pursuant to the Amended Master Lease, subject to certain conditions, including the purchaser either meeting experience requirements or retaining a majority of Brookdale’s principal officers.
The Amended Master Lease preserves the renewal terms and, with certain exceptions, the rents under the previously existing triple-net leases. In addition, the Company and Brookdale agreed to the following:
The Company will have the right to sell, or transition to other operators, 32 triple-net assets. If such sale or transition does not occur within one year, the triple-net lease with respect to such assets will convert to a cash flow lease (under which the Company will bear the risks and rewards of operating the assets) with a term of two years, provided that the Company has the right to terminate the cash flow lease at any time during the term without penalty;
The Company will provide an aggregate $5 million annual reduction in rent on three assets, effective January 1, 2018;
The Company will sell two triple-net assets to Brookdale or its affiliates for $35 million ; and
The Company will have the right to convert five assets to a cash flow lease by December 31, 2017. The Company has the right to terminate the cash flow lease without penalty to facilitate the sale or transition of these additional assets, at its option.

8


Joint Venture Transactions. Also pursuant to the MTCA, the Company and Brookdale agreed to the following:
The Company, which currently owns 90% of the interests in its RIDEA I and RIDEA III joint ventures with Brookdale, will purchase Brookdale’s 10% noncontrolling interest in each joint venture. These joint ventures collectively own and operate 58 independent living, assisted living, memory care and/or skilled nursing facilities (the “RIDEA Facilities”);
The Company will have the right to sell, or transition to other managers, 36 of the RIDEA Facilities and terminate related management agreements with an affiliate of Brookdale without penalty. If the related management agreements are not terminated within one year, the base management fee ( 5% of gross revenues) increases by 1% of gross revenues per year over the following two years to a maximum of 7% of gross revenues;
The Company will sell four of the RIDEA Facilities to Brookdale or its affiliates for $239 million ;
A Brookdale affiliate will continue to manage the remaining 18 RIDEA Facilities pursuant to amended and restated management agreements, which provide for extended terms on select assets, modified performance hurdles for extensions and incentive fees, and modified termination rights (including stricter performance-based termination rights, a staggered right to terminate seven agreements over a 10 year period beginning in 2021, and a right to terminate at will upon payment of a termination fee, in lieu of sale-related termination rights) and two other existing facilities managed in separate RIDEA structures; and
The Company will have the right to sell, to certain permitted transferees, its 49% ownership interest in joint ventures that own and operate a portfolio of continuing care retirement communities and in which Brookdale owns the other 51% interest (the “CCRC JV”), subject to certain conditions and a right of first offer in favor of Brookdale. Brookdale will have a corresponding right to sell its 51% interest in the CCRC JV to certain permitted transferees, subject to certain conditions, a right of first offer and a right to terminate management agreements following such sale of Brookdale’s interest, each in favor of HCP. Following a change in control of Brookdale, the Company will have the right to initiate a sale of the CCRC portfolio, subject to certain rights of first offer and first refusal in favor of Brookdale.
RIDEA II Sale Transaction
In January 2017, the Company completed the contribution of its ownership interest in RIDEA II to an unconsolidated JV owned by HCP and an investor group led by Columbia Pacific Advisors, LLC (“CPA”) (“HCP/CPA PropCo” and “HCP/CPA OpCo,” together, the “HCP/CPA JV”). In addition, RIDEA II was recapitalized with  $602 million  of debt, of which  $360 million  was provided by a third-party and  $242 million  was provided by HCP. In return for both transaction elements, the Company received combined proceeds of  $480 million  from the HCP/CPA JV and  $242 million  in loan receivables and retained an approximately 40% ownership interest in RIDEA II (the note receivable and  40% ownership interest are herein referred to as the “RIDEA II Investments”). This transaction resulted in the Company deconsolidating the net assets of RIDEA II and recognizing a net gain on sale of  $99 million . The RIDEA II Investments are currently recognized and accounted for as equity method investments.
On November 1, 2017, the Company entered into a definitive agreement with an investor group led by CPA to sell its remaining 40% ownership interest in RIDEA II. The Company expects the transaction to close in 2018. CPA has also agreed to cause refinancing of the Company’s $242 million loan receivables from RIDEA II within one year following the close of the transaction. Total expected proceeds to the Company from the transaction and refinancing of the loan receivables from RIDEA II are $332 million .
NOTE 2.  Summary of Significant Accounting Policies

Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Management is required to make estimates and assumptions in the preparation of financial statements in conformity with GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from management’s estimates.
The consolidated financial statements include the accounts of HCP, Inc., its wholly-owned subsidiaries, joint ventures (“JVs”) and variable interest entities (“VIEs”) that it controls through voting rights or other means. Intercompany transactions and balances have been eliminated upon consolidation. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows have been included. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 . The accompanying unaudited interim financial information should be read

9


in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”).
Real Estate
On January 1, 2017 the Company adopted Accounting Standards Update (“ASU”) No. 2017-01, Clarifying the Definition of a Business (“ASU 2017-01”) which narrows the Financial Accounting Standards Board’s (“FASB”) definition of a business and provides a framework that gives entities a basis for making reasonable judgments about whether a transaction involves an asset, or a group of assets, or a business. ASU 2017-01 states that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. If this initial test is not met, a set cannot be considered a business unless it includes an acquired input and a substantive process that together significantly contribute to the ability to create outputs. In addition, ASU 2017-01 clarifies the requirements for a set of activities to be considered a business and narrows the definition of an output. This ASU is to be applied prospectively and the Company expects that a majority of its future real estate acquisitions and dispositions will be deemed asset transactions rather than business combinations. As a result, for asset acquisitions the Company will record identifiable assets acquired, liabilities assumed and any associated noncontrolling interests at cost on a relative fair value basis. In addition, for such asset acquisitions, no goodwill will be recognized, third party transaction costs will be capitalized and any associated contingent consideration will be recorded when the contingency is resolved. 
Reclassifications
Certain amounts in the Company’s consolidated financial statements have been reclassified for prior periods to conform to the current period presentation. Certain prior period amounts have been reclassified on consolidated statements of operations for discontinued operations (see Note 4).
Recent Accounting Pronouncements
In February 2017, the FASB issued ASU No. 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (“ASU 2017-05”). The amendments in ASU 2017-05 clarify the scope of the FASB’s recently established guidance on nonfinancial asset derecognition which applies to the derecognition of all nonfinancial assets and in-substance nonfinancial assets. In addition, ASU 2017-05 clarifies the accounting for partial sales of nonfinancial assets and in-substance nonfinancial assets to align with the new revenue recognition standard (see below). ASU 2017-05 is effective for annual periods beginning after December 15, 2017, including interim periods within, and must be adopted in conjunction with the Revenue ASUs (as defined below). ASU 2017-05 can be adopted using a full retrospective approach or a modified retrospective approach, resulting in a cumulative-effect adjustment to equity as of the beginning of the fiscal year in which the guidance is effective. The Company has not yet elected a transition method and is evaluating the complete impact of the adoption of the Revenue ASUs (see below) on January 1, 2018 to its consolidated financial position, results of operations and disclosures. The Company expects to complete its evaluation of the impacts of the Revenue ASUs during the fourth quarter of 2017.
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 is intended to improve financial reporting by requiring timelier recognition of credit losses on loans and other financial instruments held by financial institutions and other organizations. The amendments in ASU 2016-13 eliminate the “probable” initial threshold for recognition of credit losses in current accounting guidance and, instead, reflect an entity’s current estimate of all expected credit losses over the life of the financial instrument. Previously, when credit losses were measured under current accounting guidance, an entity generally only considered past events and current conditions in measuring the incurred loss. The amendments in ASU 2016-13 broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss. ASU 2016-13 is effective for fiscal years, and interim periods within, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within, beginning after December 15, 2018. A reporting entity is required to apply the amendments in ASU 2016-13 using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. Upon adoption of ASU 2016-13, the Company is required to reassess its financing receivables, including direct finance leases and loans receivable, and expects that application of ASU 2016-13 may result in the Company recognizing credit losses at an earlier date than would otherwise be recognized under current accounting guidance. The Company is evaluating the impact of the adoption of ASU 2016-13 on January 1, 2020 to its consolidated financial position and results of operations.
Between May 2014 and May 2016, the FASB issued three ASUs changing the requirements for recognizing and reporting revenue (together, herein referred to as the “Revenue ASUs”): (i) ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), (ii) ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”) and (iii) ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”). ASU 2014-09 provides guidance for revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2016-08 is intended to

10


improve the operability and understandability of the implementation guidance on principal versus agent considerations. ASU 2016-12 provides practical expedients and improvements on the previously narrow scope of ASU 2014-09. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”). ASU 2015-14 defers the effective date of ASU 2014-09 by one year to fiscal years, and interim periods within, beginning after December 15, 2017. All subsequent ASUs related to ASU 2014-09, including ASU 2016-08 and ASU 2016-12, assumed the deferred effective date enforced by ASU 2015-14. Early adoption of the Revenue ASUs is permitted for annual periods, and interim periods within, beginning after December 15, 2016. A reporting entity may apply the amendments in the Revenue ASUs using either a modified retrospective approach, by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or full retrospective approach.
As the primary source of revenue for the Company is generated through leasing arrangements, which are excluded from the Revenue ASUs (as it relates to the timing and recognition of revenue), the Company expects that it may be impacted in its recognition of non-lease revenue, such as certain resident fees in its RIDEA structures (a portion of which are not generated through leasing arrangements), non-lease components of revenue from lease agreements and its recognition of real estate sale transactions. Under ASU 2014-09, revenue recognition for real estate sales is largely based on the transfer of control versus continuing involvement under current guidance. As a result, the Company generally expects that the new guidance will result in more transactions qualifying as sales of real estate and revenue being recognized at an earlier date than under current accounting guidance. Additionally, upon adoption of the Revenue ASUs in 2018, the Company anticipates that it will be required to separately disclose the components of its total revenue between lease revenue accounted for under existing lease guidance and service revenue accounted for under the new Revenue ASUs, including non-lease components such as certain services embedded in base leasing fees. The Company has not yet elected a transition method and is evaluating the complete impact of the adoption of the Revenue ASUs on January 1, 2018 to its consolidated financial position, results of operations and disclosures. The Company expects to complete its evaluation of the impacts of the Revenue ASUs during the fourth quarter of 2017.
In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 amends the current accounting for leases to: (i) require lessees to put most leases on their balance sheets, but continue recognizing expenses on their income statements in a manner similar to requirements under current accounting guidance, (ii) eliminate current real estate specific lease provisions and (iii) modify the classification criteria and accounting for sales-type leases for lessors. ASU 2016-02 is effective for fiscal years, and interim periods within, beginning after December 15, 2018. Early adoption is permitted. The transition method required by ASU 2016-02 varies based on the specific amendment being adopted. As a result of adopting ASU 2016-02, the Company will recognize all of its significant operating leases for which it is the lessee, including corporate office leases and ground leases, on its consolidated balance sheets and will capitalize fewer legal costs related to the drafting and execution of its lease agreements. From a lessor perspective, the Company expects that it will be required to further bifurcate lease agreements to separately recognize and disclose non-lease components that are executory in nature. Lease components will continue to be recognized on a straight-line basis over the lease term and certain non-lease components will be accounted for under the Revenue ASUs. The disaggregated disclosure of lease and executory non-lease components (e.g., maintenance) will be required upon the adoption of ASU 2016-02 . The Company anticipates that it will elect a practical expedient offered in ASU 2016-02 that allows an entity to not reassess the following upon adoption (must be elected as a group): (i) whether an expired or existing contract contains a lease arrangement, (ii) lease classification related to expired or existing lease arrangements, or (iii) whether costs incurred on expired or existing leases qualify as initial direct costs. The Company does not expect the bifurcation of non-lease components from a lease agreement to significantly impact the existing revenue recognition pattern. The Company is still evaluating the complete impact of the adoption of ASU 2016-02 on January 1, 2019 to its consolidated financial position, results of operations and disclosures.
The following ASUs have been issued, but not yet adopted, and the Company does not expect a material impact to its consolidated financial position, results of operations, cash flows, or disclosures upon adoption:
ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). ASU 2017-12 is effective for fiscal years, including interim periods within, beginning after December 15, 2018 and early adoption is permitted. For cash flow and net investments hedges existing at the date of adoption, a reporting entity must apply the amendments in ASU 2017-12 using the modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. The presentation and disclosure amendments in ASU 2017-12 must be applied using a prospective approach.
ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 is effective for fiscal years, including interim periods within, beginning after December 15, 2019 (upon the first goodwill impairment test performed during that fiscal year). Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. A reporting entity must apply the amendments in ASU 2017-04 using a prospective approach. The Company plans to adopt ASU 2017-04 during the fourth quarter of 2017.
ASU No. 2016-18, Restricted Cash (“ASU 2016-18”). ASU 2016-18 is effective for fiscal years, and interim periods within, beginning after December 15, 2017. Early adoption is permitted. A reporting entity must apply the amendments

11


in ASU 2016-18 using a full retrospective approach. The Company plans to adopt ASU 2016-18 during the fourth quarter of 2017.
ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”). ASU 2016-16 is effective for fiscal years, and interim periods within, beginning after December 15, 2017. Early adoption is permitted as of the first interim period presented in any year following issuance. A reporting entity must apply the amendments in ASU 2016-16 using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. 
ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 is effective for fiscal years, and interim periods within, beginning after December 15, 2017. Early adoption is permitted. A reporting entity must apply the amendments in ASU 2016-15 using a full retrospective approach. The Company plans to adopt ASU 2016-15 during the fourth quarter of 2017.
ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 is effective for fiscal years, and interim periods within, beginning after December 15, 2017. Early adoption is permitted only for updates to certain disclosure requirements. A reporting entity is required to apply the amendments in ASU 2016-01 using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption.
NOTE 3.  Real Estate Property Investments

Investments in Real Estate
The following table summarizes the Company’s real estate acquisitions for the nine months ended September 30, 2017 (in thousands):
 
 
Consideration
 
Assets Acquired
Segment
 
Cash Paid/
Debt Settled
 
Liabilities
Assumed
 
Real Estate
 
Net
Intangibles
Life science
 
$
87,467

 
$
2,841

 
$
91,208

 
$
(900
)
Medical office
 
48,349

 
837

 
44,401

 
4,785

 
 
$
135,816

 
$
3,678

 
$
135,609

 
$
3,885

The following table summarizes the Company’s real estate acquisitions for the nine months ended September 30, 2016 (in thousands):
 
 
Consideration
 
Assets Acquired
Segment
 
Cash Paid/
Debt Settled
 
Liabilities
Assumed
 
Real Estate
 
Net
Intangibles
Senior housing triple-net
 
$
76,362

 
$
1,200

 
$
71,875

 
$
5,687

SHOP
 
113,971

 
76,931

 
177,551

 
13,351

Life science
 
49,000

 

 
47,400

 
1,600

Other non-reportable segments
 
17,909

 

 
16,596

 
1,313

 
 
$
257,242

 
$
78,131

 
$
313,422

 
$
21,951

In October 2017, the Company entered into definitive agreements to acquire a $228 million life science campus known as the Hayden Research Campus located in the Boston suburb of Lexington, Massachusetts. The Company will own an interest in this campus through a consolidated joint venture with King Street Properties. The campus includes two existing buildings totaling 400,000 square feet and is currently 66% leased.
Impairments of Real Estate
During the third quarter 2017, the Company determined that 11 underperforming senior housing triple-net assets that are candidates for potential future sale were impaired. Accordingly, the Company wrote-down the carrying amount of these 11 assets to their fair value, which resulted in an aggregate impairment charge of $23 million . The fair value of the assets was based on forecasted sales prices which are considered to be Level 2 measurements within the fair value hierarchy.

12


Casualty-Related Losses
As a result of Hurricane Harvey and Hurricane Irma during the third quarter of 2017, the Company recorded an estimated $11 million of casualty-related losses, net of a small insurance recovery. The losses are comprised of $6 million of property damage and (ii) $5 million of other associated costs, including storm preparation, clean up, relocation and other costs. Of the total $11 million casualty losses incurred, $10 million was recorded in Other income (expense), net, and $1 million was recorded in Equity income (loss) from unconsolidated joint ventures as it relates to casualty losses for properties owned by certain of our unconsolidated joint ventures. In addition, the Company recorded a $2 million deferred tax benefit associated with the casualty-related losses.
NOTE 4.  Discontinued Operations and Dispositions of Real Estate

Discontinued Operations - Quality Care Properties, Inc.
On October 31, 2016, the Company completed the spin-off (the “Spin-Off”) of its subsidiary, Quality Care Properties, Inc. (“QCP”). The Spin-Off included 338 properties, primarily comprised of the HCR ManorCare, Inc. (“HCRMC”) direct financing lease (“DFL”) investments and an equity investment in HCRMC. QCP is an independent, publicly-traded, self-managed and self-administrated REIT.
In connection with the Spin-Off, the Company entered into a Transition Services Agreement (“TSA”) with QCP. Per the terms of the TSA, the Company agreed to provide certain administrative and support services to QCP on a transitional basis for established fees. The TSA terminated on October 31, 2017.
Summarized financial information for discontinued operations for the three and nine months ended September 30, 2016 is as follows (in thousands):
 
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2016
Revenues:
 
 
 
Rental and related revenues
$
6,898

 
$
20,620

Tenant recoveries
386

 
1,147

Income from direct financing leases
116,429

 
345,940

Total revenues
123,713

 
367,707

Costs and expenses:
 
 
 
Depreciation and amortization
(1,467
)
 
(4,401
)
Operating
(1,033
)
 
(3,076
)
General and administrative
(6
)
 
(68
)
Acquisition and pursuit costs
(14,805
)
 
(28,509
)
Other income (expense), net
22

 
64

Income (loss) before income taxes
106,424

 
331,717

Income tax benefit (expense)
1,789

 
(47,721
)
Total discontinued operations
$
108,213

 
$
283,996

HCR ManorCare, Inc.
Discontinued operations is primarily comprised of QCP’s HCRMC DFL investments. During the nine months ended September 30, 2016 , the Company received cash payments of $346 million from the HCRMC DFL investments.
No accretion related to its HCRMC DFL investments was recognized in 2016 due to the Company utilizing a cash basis method of accounting beginning January 1, 2016.
The Company’s acquisition of the HCRMC DFL investments in 2011 was subject to federal and state built-in gain tax of up to $2 billion if all the assets were sold within 10 years of the acquisition date. At the time of acquisition, the Company intended to hold the assets for at least 10 years , at which time the assets would no longer be subject to the built-in gain tax. In December 2015, the U.S. Federal Government passed legislation which permanently reduced the holding period, for federal tax purposes, to 5 years , which the Company satisfied in April 2016. This legislation was not extended to certain states, which maintain a 10 year requirement. During the three months ended March 31, 2016, the Company determined that it may sell assets during the next five years and, therefore, recorded a deferred tax liability of $49 million representing its estimated exposure to state built-in gain tax.

13


Dispositions of Real Estate
Held for Sale
At September 30, 2017 , three senior housing triple-net facilities and four life science facilities were classified as held for sale, with an aggregate carrying value of $216 million , primarily comprised of real estate assets of $199 million.
At December 31, 2016 , 64 senior housing triple-net facilities, four life science facilities and a SHOP facility were classified as held for sale, with an aggregate carrying value of $928 million , primarily comprised of real estate assets of $809 million . All facilities held for sale at December 31, 2016 were sold during the first quarter of 2017.
2017 Dispositions 
In January 2017, the Company sold four life science facilities in Salt Lake City, Utah for $76 million , resulting in a net gain on sale of $45 million .
In March 2017, the Company sold 64 senior housing triple-net assets, previously under triple-net leases with Brookdale, for $1.125 billion to affiliates of Blackstone Real Estate Partners VIII, L.P., resulting in a net gain on sale of $170 million .
In April 2017, the Company sold a land parcel in San Diego, California for $27 million and one life science building in San Diego, California for $5 million and recognized a total net gain on sales of $1 million .
In August 2017, the Company sold two senior housing triple-net facilities for $15 million and recognized a gain on sale of $5 million .
2016 Dispositions
During the nine months ended September 30, 2016 , the Company sold five post-acute/skilled nursing facilities and two senior housing triple-net facilities for $130 million , a life science facility for $74 million , three medical office buildings for $20 million and a SHOP facility for $6 million and recognized total gain on sales of $120 million .
NOTE 5.  Net Investment in Direct Financing Leases

Net investment in DFLs consisted of the following (dollars in thousands):
 
September 30,
2017
 
December 31,
2016
Minimum lease payments receivable
$
1,076,049

 
$
1,108,237

Estimated residual value
504,457

 
539,656

Less unearned income
(865,402
)
 
(895,304
)
Net investment in direct financing leases
$
715,104

 
$
752,589

Properties subject to direct financing leases
29

 
30

Certain DFLs contain provisions that allow the tenants to elect to purchase the properties during or at the end of the lease terms for the aggregate initial investment amount plus adjustments, if any, as defined in the lease agreements. Certain leases also permit the Company to require the tenants to purchase the properties at the end of the lease terms.
In February 2017, the Company sold a hospital within a DFL in Palm Beach Gardens, Florida for $43 million to the current tenant and recognized a gain on sale of $4 million .

14


Direct Financing Lease Internal Ratings
The following table summarizes the Company’s internal ratings for DFLs at September 30, 2017 (dollars in thousands):
 
 
Carrying
Amount
 
Percentage of
DFL Portfolio
 
Internal Ratings
Segment
 
 
 
Performing DFLs
 
Watch List DFLs
 
Workout DFLs
Senior housing triple-net
 
$
630,500

 
88%
 
$
273,383

 
$
357,117

 
$

Other non-reportable segments
 
84,604

 
12
 
84,604

 

 

 
 
$
715,104

 
100%
 
$
357,987

 
$
357,117

 
$

Beginning September 30, 2013, the Company placed a 14 -property senior housing triple-net DFL (the “DFL Watchlist Portfolio”) on nonaccrual status and “Watch List” status. The Company determined that the collection of all rental payments was and continues to be no longer reasonably assured; therefore, rental revenue for the DFL Watchlist Portfolio has been recognized on a cash basis. During the three months ended September 30, 2017 and 2016 , the Company recognized income from DFLs of $4 million and $3 million , respectively, and received cash payments of $5 million from the DFL Watchlist Portfolio. During the nine months ended September 30, 2017 and 2016 , the Company recognized income from DFLs of $10 million and received cash payments of $14 million and $15 million , respectively, from the DFL Watchlist Portfolio. The carrying value of the DFL Watchlist Portfolio was $357 million and $361 million at September 30, 2017 and December 31, 2016 , respectively.
NOTE 6.  Loans Receivable

The following table summarizes the Company’s loans receivable (in thousands):
 
September 30, 2017
 
December 31, 2016
 
Real Estate
Secured
 
Other
Secured
 
Total
 
Real Estate
Secured
 
Other
Secured
 
Total
Mezzanine (1)
$

 
$
277,299

 
$
277,299

 
$

 
$
615,188

 
$
615,188

Other (2)
184,880

 

 
184,880

 
195,946

 

 
195,946

Unamortized discounts, fees and costs (1)

 
(607
)
 
(607
)
 
413

 
(3,593
)
 
(3,180
)
Allowance for loan losses (3)

 
(59,420
)
 
(59,420
)
 

 

 

 
$
184,880

 
$
217,272

 
$
402,152

 
$
196,359

 
$
611,595

 
$
807,954

_______________________________________
(1)
At December 31, 2016, included £282 million ( $348 million ) outstanding and £2 million ( $3 million ) of associated unamortized discounts, fees and costs, both related to the HC-One Facility, which paid off in June 2017.
(2)
At September 30, 2017 and December 31, 2016, included £122 million ( $163 million ) and £113 million ( $140 million ), respectively, outstanding primarily related to Maria Mallaband loans.
(3)
Related to the Company’s mezzanine loan facility to Tandem Health Care discussed below.
Loans Receivable Internal Ratings
The following table summarizes the Company’s internal ratings for loans receivable at September 30, 2017 (dollars in thousands):
 
 
Carrying
Amount
 
Percentage of
Loan Portfolio
 
Internal Ratings
Investment Type
 
 
 
Performing Loans
 
Watch List Loans
 
Workout Loans
Real estate secured
 
$
184,880

 
46%
 
$
184,880

 
$

 
$

Other secured
 
217,272

 
54
 
19,898

 

 
197,374


 
$
402,152

 
100%
 
$
204,778

 
$

 
$
197,374

Real Estate Secured Loans
Four Seasons Health Care. In March 2017, the Company sold its investment in Four Seasons Health Care’s (“Four Seasons”) senior secured term loan at par plus accrued interest for  £29 million ( $35 million ).

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Other Secured Loans
HC-One Facility. On June 30, 2017, the Company received £283 million ( $367 million ) from the repayment of its HC-One mezzanine loan.
Tandem Health Care Loan. On July 31, 2012, the Company closed a mezzanine loan facility to lend up to $205 million to Tandem Health Care (“Tandem”), as part of the recapitalization of a post-acute/skilled nursing portfolio (the “Tandem Portfolio”). The Company funded $100 million (the “First Tranche”) at closing and funded an additional $102 million (the “Second Tranche”) in June 2013. In May 2015, the Company increased and extended the mezzanine loan facility with Tandem to: (i) fund $50 million (the “Third Tranche”) and $5 million (the “Fourth Tranche”), which proceeds were used to repay a portion of Tandem’s existing senior and mortgage debt, respectively; (ii) extend its maturity to October 2018; and (iii) extend the prepayment penalty period through January 2017. The tranches (collectively, the “Tandem Mezzanine Loan”) bear interest at fixed annual rates of 12% 14% ,   6% and 6% per annum for the First, Second, Third and Fourth Tranches, respectively. The blended rate for the Tandem Mezzanine Loan is 11.5% per year.
Tandem leases the entire Tandem Portfolio to Consulate Health Care (“Consulate”) under a master lease (the “Tandem and Consulate Lease”). At September 30, 2017 , as a result of the Tandem Portfolio’s operating performance, there are outstanding events of default under the Tandem and Consulate Lease (“Events of Default”) due to: (i) Consulate’s failure to meet certain financial covenants under the Tandem and Consulate Lease and (ii) events of default under Consulate’s working capital facility, which, through a cross-default provision, are Events of Default. Starting in April 2017, Consulate failed to pay the full amount of its rent under the Tandem and Consulate Lease which triggered another Event of Default. Through cross-default provisions, these Events of Default are also events of default under the Tandem Mezzanine Loan and Tandem’s senior mortgage debt (each, a “Loan Event of Default”). The Tandem Mezzanine Loan requires Tandem to pay default interest at a rate of 16.5% per year during periods in which there is an outstanding Loan Event of Default. Tandem did not pay the additional 5% default interest rate spread above the 11.5% and, therefore, created a monetary event of default under the Tandem Mezzanine Loan.
Although Tandem continues to remain current on its non-default interest payment obligations under the Tandem Mezzanine Loan, the Company believes that it is probable it will be unable to collect all interest and principal payments, including default interest payments, according to the contractual terms of the Tandem Mezzanine Loan. As the Tandem Mezzanine Loan is deemed collateral-dependent and the carrying amount of the Tandem Mezzanine Loan exceeded the fair value of the underlying collateral at June 30, 2017, as part of its quarterly review process, the Company recorded an impairment charge and related allowance of $57 million during the three months ended June 30, 2017, reducing the carrying value to $200 million , which approximated the fair value of the collateral as of June 30, 2017. The decline in fair value of the collateral was driven by a variety of factors, including recent operating results of the underlying real estate assets, as well as market and industry data, that reflect a declining trend in admissions and a continuing shift away from higher-rate Medicare plans in the post-acute/skilled nursing sector. The calculation of the fair value of the collateral was primarily based on an income approach and relies on forecasted EBITDAR (defined as earnings before interest, taxes, depreciation and amortization, and rent) and market data, including, but not limited to, sales price per unit/bed, rent coverage ratios, and real estate capitalization rates. All valuation inputs are considered to be Level 2 measurements within the fair value hierarchy.
The Company entered into a forbearance agreement with Tandem on May 1, 2017, pursuant to which it agreed to forbear from exercising remedies, including waiving default interest, with respect to the above-described Loan Events of Default under the Tandem Mezzanine Loan until June 30, 2017, which was subsequently extended to July 31, 2017 with certain modifications.
On July 31, 2017, subsequent to its second quarter 2017 quarterly review process and the aforementioned impairment, the Company entered into a binding agreement (“Agreement”) with the borrowers to provide an option to repay the Tandem Mezzanine Loan at a discounted value of $197 million (the “Repayment Value”). Upon execution of the Agreement, the borrowers posted a $2 million non-refundable deposit and secured the right to repay the Tandem Mezzanine Loan by October 25, 2017 (at the Repayment Value). A second non-refundable deposit of $2 million was posted by the borrowers on August 31, 2017. The borrowers also retained the option to extend the term of the Agreement to December 31, 2017 upon satisfaction of one of the following requirements: (i) posting of an additional $4 million non-refundable deposit, (ii) providing evidence of a commitment letter(s) for financing to satisfy the full Repayment Value, which is subject to the Company’s approval and may be granted or withheld in the Company’s sole discretion, or (iii) paying down the principal balance of the Tandem Mezzanine Loan by at least $50 million . On October 25, 2017, the borrowers exercised their option to extend the term of the Agreement to December 31, 2017 by posting an additional $4 million non-refundable deposit. The borrowers are obligated to continue making interest payments based on the $257 million par value of the Tandem Mezzanine Loan through the repayment date, adjusted for any principal payments received from Tandem. As part of the Agreement, the Company agreed to forbear from exercising remedies, including waiving default interest, with respect to the above-described Loan Events of Default under the Tandem Mezzanine Loan, through December 31, 2017. If the option is not exercised, the entire $257 million par value of the Tandem Mezzanine Loan is due on October 31, 2018.
During the third quarter of 2017, the Company recorded an additional $3 million impairment charge to write down the carrying value of the Tandem Mezzanine Loan to the Repayment Value and assigned the Tandem Mezzanine Loan an internal rating of

16


Workout. The repayment of the Tandem Mezzanine Loan is subject to customary closing conditions and may not occur within the anticipated timeframe or at all.
Beginning in the first quarter of 2017, the Company elected to recognize interest income on a cash basis. During both the three months ended September 30, 2017 and 2016 , the Company recognized interest income and received cash payments of $8 million from Tandem. During both the nine months ended September 30, 2017 and 2016 , the Company recognized interest income and received cash payments of $23 million from Tandem. The carrying value of the Tandem Mezzanine Loan was $197 million and $256 million at September 30, 2017 and December 31, 2016 , respectively.

NOTE 7.  Investments in and Advances to Unconsolidated Joint Ventures

The Company owns interests in the following entities that are accounted for under the equity method (dollars in thousands):  
 
 
 
 
 
 
Carrying Amount
 
 
 
 
 
 
 
 
September 30,
 
December 31,
Entity (1)
 
Segment
 
Ownership%
 
2017
 
2016
CCRC JV (2)
 
SHOP
 
 
49
 
 
$
427,159

 
$
439,449

RIDEA II
 
SHOP
 
 
40
 
 
257,766

 

Life Science JVs (3)
 
Life science
 

50 - 63

 
64,111

 
67,879

MBK JV (2)
 
SHOP
 
 
50
 
 
38,366

 
38,909

Development JVs (5)
 
SHOP
 
 
50 - 90
 
 
19,867

 
10,459

Medical Office JVs (4)
 
Medical office
 
 
20 - 67
 
 
13,620

 
13,438

K&Y JVs (6)
 
Other non-reportable segments
 
 
80
 
 
1,465

 
1,342

Advances to unconsolidated joint ventures, net
 
 
 
 
 
 
 
15

 
15

 
 
 
 
 
 
 
 
$
822,369

 
$
571,491

_______________________________________
(1)
These entities are not consolidated because the Company does not control, through voting rights or other means, the JV.
(2)
Includes two unconsolidated JVs in a RIDEA structure (PropCo and OpCo).
(3)
Includes the following unconsolidated partnerships (and the Company’s ownership percentage): (i) Torrey Pines Science Center, LP ( 50% ); (ii) Britannia Biotech Gateway, LP ( 55% ); and (iii) LASDK, LP ( 63% ).
(4)
Includes three unconsolidated medical office partnerships (and the Company’s ownership percentage): HCP Ventures IV, LLC ( 20% ); HCP Ventures III, LLC ( 30% ); and Suburban Properties, LLC ( 67% ).
(5)
Includes four unconsolidated SHOP development partnerships (and the Company’s ownership percentage): (i) Vintage Park Development JV ( 85% ); (ii) Waldwick JV ( 85% ); (iii) Otay Ranch JV ( 90% ); and (iv) MBK Development JV ( 50% ).
(6)
Includes three unconsolidated joint ventures.
See Note 1 for further information on the deconsolidation of RIDEA II.
NOTE 8.  Intangibles

The following tables summarize the Company’s intangible lease assets and liabilities (in thousands):
Intangible lease assets
 
September 30,
2017
 
December 31,
2016
Gross intangible lease assets
 
$
775,848

 
$
911,697

Accumulated depreciation and amortization
 
(374,981
)
 
(431,892
)
Net intangible lease assets
 
$
400,867

 
$
479,805

Intangible lease liabilities
 
September 30,
2017
 
December 31,
2016
Gross intangible lease liabilities
 
$
124,454

 
$
163,924

Accumulated depreciation and amortization
 
(71,027
)
 
(105,779
)
Net intangible lease liabilities
 
$
53,427

 
$
58,145


17


NOTE 9.  Other Assets
The following table summarizes the Company’s other assets (in thousands):
 
September 30,
2017
 
December 31,
2016
Straight-line rent receivables, net of allowance of $22,705 and $25,059, respectively
$
313,627

 
$
311,776

Leasing costs and inducements, net
102,557

 
156,820

Deferred tax assets
60,254

 
42,458

Goodwill
47,019

 
42,386

Marketable debt securities, net
18,567

 
68,630

Other
74,145

 
89,554

Total other assets, net
$
616,169

 
$
711,624

Four Seasons Health Care Senior Notes 
In March 2017, pursuant to a shift in the Company’s investment strategy, the Company sold its £138.5 million par value Four Seasons senior notes (the “Four Seasons Notes”) for £83 million  ( $101 million ). The disposition of the Four Seasons Notes generated a £42 million ( $51 million ) gain on sale, recognized in other income, net, as the sales price was above the previously-impaired carrying value of £41 million ( $50 million ).  
NOTE 10.  Debt
Bank Line of Credit and Term Loans
The Company’s $2.0 billion unsecured revolving line of credit facility (the “Facility”) matures on March 31, 2018 and contains a committed  one -year extension option, at a cost of 30 basis points. Borrowings under the Facility accrue interest at LIBOR plus a margin that depends on the Company’s credit ratings. The Company pays a facility fee on the entire revolving commitment that depends on its credit ratings. Based on the Company’s credit ratings at September 30, 2017 , the margin on the Facility was 1.05% and the facility fee was 0.20% . The Facility also includes a feature that allows the Company to increase the borrowing capacity by an aggregate amount of up to $500 million , subject to securing additional commitments. During the nine months ended September 30, 2017 , the Company had net repayments of $316 million primarily using proceeds from the RIDEA II joint venture disposition, the sale of its Four Seasons Notes and the repayment of its HC-One Facility. At September 30, 2017 , the Company had $606 million , including £105 million ( $141 million ), outstanding under the Facility, with a weighted average effective interest rate of 2.40% .
On October 19, 2017, the Company terminated the Facility and executed a new $2.0 billion unsecured revolving line of credit facility (the “New Facility”) maturing on October 19, 2021. Borrowings under the New Facility accrue interest at LIBOR plus a margin that depends on the Company’s credit ratings ( 1.00% initially). The Company pays a facility fee on the entire revolving commitment that depends on its credit ratings ( 0.20% initially). The New Facility contains two , six-month extension options and includes a feature that allows the Company to increase the borrowing capacity by an aggregate amount of up to $750 million , subject to securing additional commitments.
On July 30, 2012, the Company entered into a credit agreement with a syndicate of banks for a £137 million unsecured term loan (the “2012 Term Loan”). In March 2017, the Company repaid the 2012 Term Loan.
On June 30, 2017, the Company repaid £51 million of its four -year unsecured term loan entered into in January 2015 (the “2015 Term Loan”). Concurrently, the Company terminated its three -year interest rate swap which fixed the interest of the 2015 Term Loan, and therefore, beginning June 30, 2017, the 2015 Term Loan accrues interest at a rate of British pound sterling (“GBP”) LIBOR plus 1.15% , subject to adjustments based on the Company’s credit ratings. At September 30, 2017 the Company had £169 million ( $226 million ) outstanding on the 2015 Term Loan.
The Facility (and following its termination, the New Facility) and 2015 Term Loan contain certain financial restrictions and other customary requirements, including cross-default provisions to other indebtedness. Among other things, these covenants, using terms defined in the agreements: (i) limit the ratio of Consolidated Total Indebtedness to Consolidated Total Asset Value to 60% ; (ii) limit the ratio of Secured Debt to Consolidated Total Asset Value to 30% ; (iii) limit the ratio of Unsecured Debt to Consolidated Unencumbered Asset Value to 60% ; (iv) require a minimum Fixed Charge Coverage ratio of 1.5 times; and (v) require a Minimum Consolidated Tangible Net Worth of $6.5 billion . At September 30, 2017 , the Company was in compliance with each of these restrictions and requirements of the Facility and 2015 Term Loan.

18


Senior Unsecured Notes
At September 30, 2017 , the Company had senior unsecured notes outstanding with an aggregate principal balance of $6.5 billion . The senior unsecured notes contain certain covenants including limitations on debt, maintenance of unencumbered assets, cross-acceleration provisions and other customary terms. The Company believes it was in compliance with these covenants at September 30, 2017 .
The following table summarizes the Company’s senior unsecured note payoffs for the nine months ended September 30, 2017 (dollars in thousands):
Date
 
Amount
 
Coupon Rate
May 1, 2017
 
$
250,000

 
5.625
%
July 27, 2017 (1)
 
$
500,000

 
5.375
%
_______________________________________
(1)
The Company recorded a $54 million loss on debt extinguishment related to the repurchase of senior notes.
The following table summarizes the Company’s senior unsecured notes payoffs for the year ended December 31, 2016 (dollars in thousands):
Date
 
Amount
 
Coupon Rate
February 1, 2016
 
$
500,000

 
3.750
%
September 15, 2016
 
$
400,000

 
6.300
%
November 30, 2016
 
$
500,000

 
6.000
%
November 30, 2016
 
$
600,000

 
6.700
%
There were no senior unsecured notes issuances for the nine months ended September 30, 2017 and the year ended December 31, 2016 .
Mortgage Debt
At September 30, 2017 , the Company had $139 million in aggregate principal of mortgage debt outstanding, which is secured by 16 healthcare facilities (including redevelopment properties) with a carrying value of $303 million . In March 2017, the Company paid off $472 million of mortgage debt.
Debt Maturities
The following table summarizes the Company’s stated debt maturities and scheduled principal repayments at September 30, 2017 (in thousands):
Year
 
Bank Line of
Credit (1)
 
2015 Term Loan (2)
 
Senior
Unsecured
Notes (3)
 
Mortgage
Debt (4)
 
Total (5)
2017 (three months)
 
$

 
$

 
$

 
$
847

 
$
847

2018
 
605,837

 

 

 
3,512

 
609,349

2019
 

 
226,680

 
450,000

 
3,700

 
680,380

2020
 

 

 
800,000

 
3,758

 
803,758

2021
 

 

 
700,000

 
11,117

 
711,117

Thereafter
 

 

 
4,500,000

 
116,481

 
4,616,481

 
 
605,837

 
226,680

 
6,450,000

 
139,415

 
7,421,932

(Discounts), premium and debt costs, net
 

 
(475
)
 
(56,074
)
 
6,002

 
(50,547
)
 
 
$
605,837

 
$
226,205

 
$
6,393,926

 
$
145,417

 
$
7,371,385

_______________________________________
(1)
Includes £105 million translated into U.S. dollars (“USD”). The Bank Line of Credit was terminated on October 19, 2017 and the Company executed a New Facility which matures in October 2021.
(2)
Represents £169 million translated into USD.
(3)
Effective interest rates on the notes ranged from 2.79% to 6.88% with a weighted average effective interest rate of 4.19% and a weighted average maturity of six years .
(4)
Interest rates on the mortgage debt ranged from 2.01% to 5.91% with a weighted average effective interest rate of 4.19% and a weighted average maturity of 20 years .
(5)
Excludes $95 million of other debt that have no scheduled maturities.


19


NOTE 11.  Commitments and Contingencies

Commitments
From October 31, 2016 through June 2017, HCP was the sole lender to QCP of an unsecured revolving credit facility (the “Unsecured Revolving Credit Facility”) which had a total commitment of $100 million at inception. The Unsecured Revolving Credit Facility was available to be drawn upon by QCP through October 31, 2017 with any drawn amounts due on October 31, 2018. Commitments under the Unsecured Revolving Credit Facility automatically and permanently decreased each calendar month by an amount equal to 50% of QCP’s and its restricted subsidiaries’ retained cash flow for the prior calendar month. All borrowings under the Unsecured Revolving Credit Facility were subject to the satisfaction of certain conditions, including (i) QCP’s senior secured revolving credit facility being unavailable, (ii) the failure of HCRMC to pay rent and (iii) other customary conditions, including the absence of a default and the accuracy of representations and warranties. QCP could only draw on the Unsecured Revolving Credit Facility prior to the one -year anniversary of the completion of the Spin-Off. Borrowings under the Unsecured Revolving Credit Facility would have born interest at a rate equal to LIBOR, subject to a 1.00% floor, plus an applicable margin of 6.25% . In addition to paying interest on outstanding principal under the Unsecured Revolving Credit Facility, QCP was required to pay a facility fee equal to 0.50% per annum of the unused capacity under the Unsecured Revolving Credit Facility to HCP, payable quarterly. No amounts were drawn on the Unsecured Revolving Credit Facility and the total commitment was reduced to zero at June 30, 2017.
Legal Proceedings
From time to time, the Company is a party to, or has a significant relationship to, legal proceedings, lawsuits and other claims. Except as described below, the Company is not aware of any legal proceedings or claims that it believes may have, individually or taken together, a material adverse effect on the Company’s financial condition, results of operations or cash flows. The Company’s policy is to expense legal costs as they are incurred.
Class Action
On May 9, 2016, a purported stockholder of the Company filed a putative class action complaint, Boynton Beach Firefighters’ Pension Fund v. HCP, Inc., et al ., Case No. 3:16-cv-01106-JJH, in the U.S. District Court for the Northern District of Ohio against the Company, certain of its officers, HCRMC, and certain of its officers, asserting violations of the federal securities laws. The suit asserts claims under sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and alleges that the Company made certain false or misleading statements relating to the value of and risks concerning its investment in HCRMC by allegedly failing to disclose that HCRMC had engaged in billing fraud, as alleged by the U.S. Department of Justice in a pending suit against HCRMC arising from the False Claims Act. The plaintiff in the suit demands compensatory damages (in an unspecified amount), costs and expenses (including attorneys’ fees and expert fees), and equitable, injunctive, or other relief as the Court deems just and proper. As the Boynton Beach action is in its early stages and a lead plaintiff has not yet been named, the defendants have not yet responded to the complaint. The Company believes the suit to be without merit and intends to vigorously defend against it.
Derivative Actions
On June 16, 2016 and July 5, 2016, purported stockholders of the Company filed two derivative actions, respectively Subodh v. HCR ManorCare Inc., et al. , Case No. 30-2016-00858497-CU-PT-CXC and Stearns v. HCR ManorCare, Inc., et al. , Case No. 30-2016-00861646-CU-MC-CJC, in the Superior Court of California, County of Orange, against certain of the Company’s current and former directors and officers and HCRMC. The Company is named as a nominal defendant. As both derivative actions contained substantially the same allegations, they have been consolidated into a single action. The consolidated action alleges that the defendants engaged in various acts of wrongdoing, including, among other things, breaching fiduciary duties by publicly making false or misleading statements of fact regarding HCRMC’s finances and prospects, and failing to maintain adequate internal controls. As the Subodh/Stearns action is in the early stages, defendants have not yet responded to the complaint. On April 18, 2017, the Court approved the parties’ stipulation staying the action pending further developments, including in the related securities class action litigation. The Court also adjourned the status conference scheduled for April 27, 2017 to January 10, 2018.
On April 10, 2017, a purported stockholder of the Company filed a derivative action, Weldon v. Martin et al. , Case No. 3:17-cv-755, in federal court in the Northern District of Ohio, Western Division, against certain of the Company’s current and former directors and officers and HCRMC. The Company is named as a nominal defendant. The Weldon complaint asserts similar claims to those asserted in the California derivative actions. In addition, the complaint asserts a claim under Section 14(a) of the Exchange Act , alleging that the Company made false statements in its 2016 proxy statement by not disclosing that the Company’s performance issues in 2015 were the direct result of billing fraud at HCRMC. On April 18, 2017, the Court re-assigned and transferred this action to the judge presiding over the related federal securities class action. Defendants have not yet been served or responded to the complaint. On July 11, 2017, the Court approved a stipulation by the parties to stay the case pending disposition of the motion to dismiss the class action.

20


On July 21, 2017, a purported stockholder of the Company filed another derivative action, Kelley v. HCR Manorcare, Inc., et al. , Case No. 8:17-cv-01259, in federal court in the Central District of California, against certain of the Company’s current and former directors and officers and HCRMC. The Company is named as a nominal defendant. The Kelley complaint asserts similar claims to those asserted in Weldon and in the California derivative actions. Like Weldon , the Kelley complaint also additionally alleges that the Company made false statements in its 2016 proxy statement, and asserts a claim for a violation of Section 14(a) of the Exchange Act. The case is currently before Judge James V. Selna. On September 25, 2017, Defendants moved to transfer the action to the Northern District of Ohio ( i.e. , the court where the class action and other federal derivative action are pending) or, in the alternative, to stay the action.  Oral argument is currently scheduled for December 4, 2017. Judge Selna granted the Company’s joint stipulation to stay the time to respond to the complaint until 60 days after the transfer or stay motion is decided.
Welltower v. Scott M. Brinker
On May 15, 2017, Welltower, Inc. filed a complaint in the Court of Common Pleas in Lucas County, Ohio, against Scott M. Brinker, alleging that he violated his non-competition obligations to Welltower prior to and upon acceptance of an offer of employment with the Company. In connection with Mr. Brinker’s hiring, the Company agreed to indemnify him for legal fees and any losses that result from the action. The matter is scheduled to be heard the week of November 6, 2017. The Company believes the suit to be without merit.
The Company is unable to estimate the amount of loss or range of reasonably possible losses with respect to the matters discussed above at September 30, 2017 .
NOTE 12.  Equity
Accumulated Other Comprehensive Income (Loss)
The following table summarizes the Company’s accumulated other comprehensive income (loss) (in thousands):
 
September 30,
2017
 
December 31,
2016
Cumulative foreign currency translation adjustment
$
(8,455
)
 
$
(22,817
)
Unrealized gains (losses) on cash flow hedges, net
(13,073
)
 
(3,642
)
Supplemental Executive Retirement plan minimum liability
(2,907
)
 
(3,129
)
Unrealized gains (losses) on available for sale securities
(56
)
 
(54
)
Total other comprehensive income (loss)
$
(24,491
)
 
$
(29,642
)

21


NOTE 13.  Segment Disclosures
The Company evaluates its business and allocates resources based on its reportable business segments: (i) senior housing triple-net, (ii) SHOP, (iii) life science and (iv) medical office. Under the medical office and life science segments, the Company invests through the acquisition and development of medical office buildings (“MOBs”) and life science facilities, which generally require a greater level of property management. The Company’s senior housing facilities are managed utilizing triple-net leases and RIDEA structures. The Company has non-reportable segments that are comprised primarily of the Company’s debt investments, hospital properties and care homes in the United Kingdom (“U.K.”). The accounting policies of the segments are the same as those in Note 2 to the Consolidated Financial Statements in the Company’s 2016 Annual Report on Form 10-K filed with the SEC, as updated by Note 2 herein. During the year ended December 31, 2016 , 17 senior housing triple-net facilities were transitioned to a RIDEA structure (reported in the Company’s SHOP segment). During the nine months ended September 30, 2017 , four senior housing triple-net facilities were transferred to the Company’s SHOP segment, of which one was transitioned to a RIDEA structure. The Company evaluates performance based upon: (i) property net operating income from continuing operations (“NOI”) and (ii) Adjusted NOI of the combined consolidated and unconsolidated investments in each segment. NOI is defined as rental and related revenues, including tenant recoveries, resident fees and services, and income from DFLs, less property level operating expenses. Adjusted NOI is calculated as NOI after eliminating the effects of straight-line rents, DFL non-cash interest, amortization of market lease intangibles, non-refundable entrance fees, net of entrance fee amortization and lease termination fees and the impact of deferred community fee income and expense. The adjustments to NOI and resulting Adjusted NOI for SHOP have been restated for prior periods presented to conform to the current period presentation for the adjustment to exclude the impact of deferred community fee income and expense, resulting in recognition as cash is received and expenses are paid.
Non-segment assets consist primarily of corporate assets, including cash and cash equivalents, restricted cash, accounts receivable, net, marketable equity securities and, if any, real estate held for sale. Interest expense, depreciation and amortization, and non-property specific revenues and expenses are not allocated to individual segments in evaluating the Company’s segment-level performance. See Note 17 for other information regarding concentrations of credit risk.

22


The following tables summarize information for the reportable segments (in thousands):
For the three months ended September 30, 2017 :
 
 
Senior Housing Triple-Net
 
SHOP
 
Life Science
 
Medical Office
 
Other Non-reportable
 
Corporate Non-segment
 
Total
Rental revenues (1)
 
$
77,220

 
$
126,040

 
$
90,174

 
$
119,847

 
$
28,968

 
$

 
$
442,249

HCP share of unconsolidated JV revenues
 

 
81,936

 
2,031

 
496

 
421

 

 
84,884

Operating expenses
 
(934
)
 
(86,821
)
 
(19,960
)
 
(46,486
)
 
(1,137
)
 

 
(155,338
)
HCP share of unconsolidated JV operating expenses
 

 
(65,035
)
 
(433
)
 
(143
)
 
(20
)
 

 
(65,631
)
NOI
 
76,286

 
56,120

 
71,812

 
73,714

 
28,232

 

 
306,164

Adjustments to NOI (2)
 
(600
)
 
4,551

 
(751
)
 
(582
)
 
(1,283
)
 

 
1,335

Adjusted NOI
 
75,686

 
60,671

 
71,061

 
73,132

 
26,949

 

 
307,499

Addback adjustments
 
600

 
(4,551
)
 
751

 
582

 
1,283

 

 
(1,335
)
Interest income
 

 

 

 

 
11,774

 

 
11,774

Interest expense
 
(640
)
 
(933
)
 
(87
)
 
(126
)
 
(618
)
 
(68,924
)
 
(71,328
)
Depreciation and amortization
 
(25,547
)
 
(24,884
)
 
(30,851
)
 
(42,047
)
 
(7,259
)
 

 
(130,588
)
General and administrative
 

 

 

 

 

 
(23,523
)
 
(23,523
)
Acquisition and pursuit costs
 

 

 

 

 

 
(580
)
 
(580
)
Recoveries (impairments), net
 

 

 

 

 
(25,328
)
 

 
(25,328
)
Gain (loss) on sales of real estate, net
 
(6
)
 
5,180

 
8

 

 

 

 
5,182

Loss on debt extinguishments
 

 

 

 

 

 
(54,227
)
 
(54,227
)
Other income (expense), net
 

 

 

 

 

 
(10,556
)
 
(10,556
)
Income tax benefit (expense)
 

 

 

 

 

 
5,481

 
5,481

Less: HCP share of unconsolidated JV NOI
 

 
(16,901
)
 
(1,598
)
 
(353
)
 
(401
)
 

 
(19,253
)
Equity income (loss) from unconsolidated JVs
 

 
(245
)
 
789

 
274

 
244

 

 
1,062

Net income (loss)
 
$
50,093

 
$
18,337

 
$
40,073

 
$
31,462

 
$
6,644

 
$
(152,329
)
 
$
(5,720
)
_______________________________________
(1)
Represents rental and related revenues, tenant recoveries, resident fees and services, and income from DFLs.
(2)
Represents straight-line rents, DFL non-cash interest, amortization of market lease intangibles, net, the deferral of community fees, net of amortization, lease termination fees and non-refundable entrance fees as the fees are collected by the Company’s CCRC JV, net of CCRC JV entrance fee amortization.


23


For the three months ended September 30, 2016 :
 
 
Senior Housing Triple-Net
 
SHOP
 
Life Science
 
Medical Office
 
Other Non-reportable
 
Corporate Non-segment
 
Total
Rental revenues (1)
 
$
104,262

 
$
170,739

 
$
90,847

 
$
113,653

 
$
30,574

 
$

 
$
510,075

HCP share of unconsolidated JV revenues
 

 
50,973

 
1,929

 
502

 
410

 

 
53,814

Operating expenses
 
(1,794
)
 
(121,502
)
 
(18,487
)
 
(44,738
)
 
(1,193
)
 

 
(187,714
)
HCP share of unconsolidated JV operating expenses
 

 
(42,463
)
 
(406
)
 
(148
)
 
(20
)
 

 
(43,037
)
NOI
 
102,468

 
57,747

 
73,883

 
69,269

 
29,771

 

 
333,138

Adjustments to NOI (2)
 
(1,003
)
 
4,081

 
(314
)
 
(814
)
 
(1,140
)
 

 
810

Adjusted NOI
 
101,465

 
61,828

 
73,569

 
68,455

 
28,631

 

 
333,948

Addback adjustments
 
1,003

 
(4,081
)
 
314

 
814

 
1,140

 

 
(810
)
Interest income
 

 

 

 

 
20,482

 

 
20,482

Interest expense
 
(644
)
 
(8,130
)
 
(634
)
 
(1,608
)
 
(2,260
)
 
(104,584
)
 
(117,860
)
Depreciation and amortization
 
(34,030
)
 
(26,837
)
 
(31,967
)
 
(41,111
)
 
(7,462
)
 

 
(141,407
)
General and administrative
 

 

 

 

 

 
(34,781
)
 
(34,781
)
Acquisition and pursuit costs
 

 

 

 

 

 
(2,763
)
 
(2,763
)
Gain (loss) on sales of real estate, net
 

 

 

 
(9
)
 

 

 
(9
)
Other income (expense), net
 

 

 

 

 

 
1,432

 
1,432

Income tax benefit (expense)
 

 

 

 

 

 
424

 
424

Less: HCP share of unconsolidated JV NOI
 

 
(8,510
)
 
(1,523
)
 
(354
)
 
(390
)
 

 
(10,777
)
Equity income (loss) from unconsolidated JVs
 

 
(3,517
)
 
778

 
462

 
224

 

 
(2,053
)
Discontinued operations
 

 

 

 

 

 
108,213

 
108,213

Net income (loss)
 
$
67,794

 
$
10,753

 
$
40,537

 
$
26,649

 
$
40,365

 
$
(32,059
)
 
$
154,039

_______________________________________
(1)
Represents rental and related revenues, tenant recoveries, resident fees and services, and income from DFLs.
(2)
Represents straight-line rents, DFL non-cash interest, amortization of market lease intangibles, net, the deferral of community fees, net of amortization, lease termination fees and non-refundable entrance fees as the fees are collected by the Company’s CCRC JV, net of CCRC JV entrance fee amortization.


24


For the nine months ended September 30, 2017 :
 
 
Senior Housing Triple-Net
 
SHOP
 
Life Science
 
Medical Office
 
Other Non-reportable
 
Corporate Non-segment
 
Total
Rental revenues (1)
 
$
255,332

 
$
391,684

 
$
262,224

 
$
357,381

 
$
87,524

 
$

 
$
1,354,145

HCP share of unconsolidated JV revenues
 

 
239,667

 
5,975

 
1,481

 
1,256

 

 
248,379

Operating expenses
 
(2,927
)
 
(267,226
)
 
(56,024
)
 
(137,930
)
 
(3,475
)
 

 
(467,582
)
HCP share of unconsolidated JV operating expenses
 

 
(190,049
)
 
(1,234
)
 
(431
)
 
(58
)
 

 
(191,772
)
NOI
 
252,405

 
174,076

 
210,941

 
220,501

 
85,247

 

 
943,170

Adjustments to NOI (2)
 
(2,844
)
 
12,229

 
(1,094
)
 
(2,321
)
 
(3,164
)
 

 
2,806

Adjusted NOI
 
249,561

 
186,305

 
209,847

 
218,180

 
82,083

 

 
945,976

Addback adjustments
 
2,844

 
(12,229
)
 
1,094

 
2,321

 
3,164

 

 
(2,806
)
Interest income
 

 

 

 

 
50,974

 

 
50,974

Interest expense
 
(1,898
)
 
(6,950
)
 
(288
)
 
(382
)
 
(3,541
)
 
(222,775
)
 
(235,834
)
Depreciation and amortization
 
(77,478
)
 
(75,657
)
 
(95,648
)
 
(127,261
)
 
(21,849
)
 

 
(397,893
)
General and administrative
 

 

 

 

 

 
(67,287
)
 
(67,287
)
Acquisition and pursuit costs
 

 

 

 

 

 
(2,504
)
 
(2,504
)
Recoveries (impairments), net
 

 

 

 

 
(82,010
)
 

 
(82,010
)
Gain (loss) on sales of real estate, net
 
268,227

 
5,313

 
45,922

 
(406
)
 
3,796

 

 
322,852

Loss on debt extinguishments
 

 

 

 

 

 
(54,227
)
 
(54,227
)
Other income (expense), net
 

 

 

 

 

 
40,723

 
40,723

Income tax benefit (expense)
 

 

 

 

 

 
14,630

 
14,630

Less: HCP share of unconsolidated JV NOI
 

 
(49,618
)
 
(4,741
)
 
(1,050
)
 
(1,198
)
 

 
(56,607
)
Equity income (loss) from unconsolidated JVs
 

 
683

 
2,322

 
846

 
720

 

 
4,571

Net income (loss)
 
$
441,256

 
$
47,847

 
$
158,508

 
$
92,248

 
$
32,139

 
$
(291,440
)
 
$
480,558

_______________________________________
(1)
Represents rental and related revenues, tenant recoveries, resident fees and services, and income from DFLs.
(2)
Represents straight-line rents, DFL non-cash interest, amortization of market lease intangibles, net, the deferral of community fees, net of amortization, lease termination fees and non-refundable entrance fees as the fees are collected by the Company’s CCRC JV, net of CCRC JV entrance fee amortization.


25


For the nine months ended September 30, 2016 :
 
 
Senior Housing Triple-Net
 
SHOP
 
Life Science
 
Medical Office
 
Other Non-reportable
 
Corporate Non-segment
 
Total
Rental revenues (1)
 
$
319,989

 
$
500,704

 
$
269,994

 
$
331,881

 
$
95,483

 
$

 
$
1,518,051

HCP share of unconsolidated JV revenues
 

 
152,424

 
5,628

 
1,503

 
1,224

 

 
160,779

Operating expenses
 
(5,521
)
 
(350,949
)
 
(53,191
)
 
(129,715
)
 
(3,375
)
 

 
(542,751
)
HCP share of unconsolidated JV operating expenses
 

 
(125,244
)
 
(1,173
)
 
(452
)
 
(30
)
 

 
(126,899
)
NOI
 
314,468

 
176,935

 
221,258

 
203,217

 
93,302

 

 
1,009,180

Adjustments to NOI (2)
 
(8,464
)
 
14,648

 
(1,545
)
 
(2,361
)
 
(1,926
)
 

 
352

Adjusted NOI
 
306,004

 
191,583

 
219,713

 
200,856

 
91,376

 

 
1,009,532

Addback adjustments
 
8,464

 
(14,648
)
 
1,545

 
2,361

 
1,926

 

 
(352
)
Interest income
 

 

 

 

 
71,298

 

 
71,298

Interest expense
 
(8,859
)
 
(23,818
)
 
(1,904
)
 
(4,899
)
 
(7,067
)
 
(314,708
)
 
(361,255
)
Depreciation and amortization
 
(101,737
)
 
(78,124
)
 
(97,640
)
 
(120,432
)
 
(23,248
)
 

 
(421,181
)
General and administrative
 

 

 

 

 

 
(83,011
)
 
(83,011
)
Acquisition and pursuit costs
 

 

 

 

 

 
(6,061
)
 
(6,061
)
Gain (loss) on sales of real estate, net
 
23,940

 

 
29,428

 
8,333

 
57,904

 

 
119,605

Other income (expense), net
 

 

 

 

 

 
5,064

 
5,064

Income tax benefit (expense)
 

 

 

 

 

 
(1,101
)
 
(1,101
)
Less: HCP share of unconsolidated JV NOI
 

 
(27,180
)
 
(4,455
)
 
(1,051
)
 
(1,194
)
 

 
(33,880
)
Equity income (loss) from unconsolidated JVs
 

 
(8,477
)
 
2,263

 
1,541

 
645

 

 
(4,028
)
Discontinued operations
 

 

 

 

 

 
283,996

 
283,996

Net income (loss)
 
$
227,812

 
$
39,336

 
$
148,950

 
$
86,709

 
$
191,640

 
$
(115,821
)
 
$
578,626

_______________________________________
(1)
Represents rental and related revenues, tenant recoveries, resident fees and services, and income from DFLs.
(2)
Represents straight-line rents, DFL non-cash interest, amortization of market lease intangibles, net, the deferral of community fees, net of amortization, lease termination fees and non-refundable entrance fees as the fees are collected by the Company’s CCRC JV, net of CCRC JV entrance fee amortization.
The following table summarizes the Company’s revenues by segment (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Segment
 
2017
 
2016
 
2017
 
2016
Senior housing triple-net
 
$
77,220

 
$
104,262

 
$
255,332

 
$
319,989

SHOP
 
126,040

 
170,739

 
391,684

 
500,704

Life science
 
90,174

 
90,847

 
262,224

 
269,994

Medical office
 
119,847

 
113,653

 
357,381

 
331,881

Other non-reportable segments
 
40,742

 
51,056

 
138,498

 
166,781

Total revenues
 
$
454,023

 
$
530,557

 
$
1,405,119

 
$
1,589,349

See Notes 3 and 4 for significant transactions impacting the Company’s segment assets during the periods presented.

26


NOTE 14.  Earnings Per Common Share
Restricted stock and certain performance restricted stock units are considered participating securities, because dividend payments are not forfeited even if the underlying award does not vest, and require use of the two-class method when computing basic and diluted earnings per share.
For the three months ended September 30, 2017 , diluted loss per share from continuing operations is calculated using the weighted-average common shares outstanding during the period, as the effect of shares issuable under employee compensation plans and upon DownREIT unit conversions would have been anti-dilutive. All DownREIT units and approximately 1 million stock options were anti-dilutive for all periods presented.
Additionally, during the three months ended September 30, 2016 , 6 million shares, issuable upon conversion of 4 million DownREIT units, were not included because they are anti-dilutive. For the nine months ended September 30, 2017 and 2016 , 7 million and 6 million shares, respectively, issuable upon conversion of 4 million and 4 million DownREIT units, were not included because they are anti-dilutive.
The following table illustrates the computation of basic and diluted earnings per share (in thousands, except per share amounts):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Numerator
 
 
 
 
 
 
 
Net income (loss) from continuing operations
$
(5,720
)
 
$
45,826

 
$
480,558

 
$
294,630

Noncontrolling interests' share in earnings
(1,937
)
 
(2,789
)
 
(7,687
)
 
(9,540
)
Net income (loss) attributable to HCP, Inc.
(7,657
)
 
43,037

 
472,871

 
285,090

Less: Participating securities' share in earnings
(131
)
 
(326
)
 
(560
)
 
(977
)
Income (loss) from continuing operations applicable to common shares
(7,788
)
 
42,711

 
472,311

 
284,113

Discontinued operations

 
108,213

 

 
283,996

Net income (loss) applicable to common shares
$
(7,788
)
 
$
150,924

 
$
472,311

 
$
568,109


 
 
 
 
 
 
 
Denominator
 

 
 

 
 
 
 
Basic weighted average shares outstanding
468,975

 
467,628

 
468,642

 
466,931

Dilutive potential common shares - equity awards

 
207

 
186

 
201

Diluted weighted average common shares
468,975

 
467,835

 
468,828

 
467,132

Basic earnings per common share
 
 
 
 
 
 
 
Continuing operations
$
(0.02
)
 
$
0.09

 
$
1.01

 
$
0.61

Discontinued operations

 
0.23

 

 
0.61

Net income (loss) applicable to common shares
$
(0.02
)
 
$
0.32

 
$
1.01

 
$
1.22

Diluted earnings per common share
 

 
 

 
 
 
 
Continuing operations
$
(0.02
)
 
$
0.09

 
$
1.01

 
$
0.61

Discontinued operations

 
0.23

 

 
0.61

Net income (loss) applicable to common shares
$
(0.02
)
 
$
0.32

 
$
1.01

 
$
1.22



27


NOTE 15.  Supplemental Cash Flow Information
The following table provides supplemental cash flow information (in thousands):
 
Nine Months Ended September 30,
 
2017
 
2016
Supplemental cash flow information:
 

 
 

Interest paid, net of capitalized interest
$
261,799

 
$
401,628

Income taxes paid
9,897

 
5,734

Capitalized interest
12,607

 
8,490

Supplemental schedule of non-cash investing and financing activities:
 
 
 
Accrued construction costs
63,515

 
60,897

Non-cash acquisitions and dispositions settled with receivables and restricted cash held in connection with Section 1031 transactions

 
15,570

Vesting of restricted stock units and conversion of non-managing member units into common stock
2,464

 
6,620

Mortgages and other liabilities assumed with real estate acquisitions
3,678

 
78,131

Unrealized gains (losses) on available-for-sale securities and derivatives designated as cash flow hedges, net
(56
)
 
1,531

 
NOTE 16.  Variable Interest Entities
Unconsolidated Variable Interest Entities
At September 30, 2017 , the Company had investments in: (i) five unconsolidated VIE JVs, (ii) 48 properties leased to VIE tenants, (iii) marketable debt securities of one VIE and (iv) three loans to VIE borrowers. The Company has determined that it is not the primary beneficiary of and therefore does not consolidate these VIEs because it does not have the ability to control the activities that most significantly impact their economic performance. Except for the Company’s equity interest in the unconsolidated JVs (CCRC OpCo, RIDEA II PropCo, Vintage Park Development JV, Waldwick JV and the LLC investment discussed below), it has no formal involvement in these VIEs beyond its investments.
The Company holds a 49% ownership interest in CCRC OpCo, a joint venture entity formed in August 2014 that operates senior housing properties in a RIDEA structure and has been identified as a VIE (see Note 7). The equity members of CCRC OpCo “lack power” because they share certain operating rights with Brookdale, as manager of the CCRCs. The assets of CCRC OpCo primarily consist of the CCRCs that it owns and leases, resident fees receivable, notes receivable, and cash and cash equivalents; its obligations primarily consist of operating lease obligations to CCRC PropCo, debt service payments and capital expenditures for the properties, and accounts payable and expense accruals associated with the cost of its CCRCs’ operations. Assets generated by the CCRC operations (primarily rents from CCRC residents) of CCRC OpCo may only be used to settle its contractual obligations (primarily from debt service payments, capital expenditures, and rental costs and operating expenses incurred to manage such facilities).
In January 2017, as a result of the partial sale of its interest in RIDEA II, the Company concluded that it should deconsolidate RIDEA II as it is no longer the primary beneficiary of the joint venture. The HCP/CPA JV is the primary beneficiary of both RIDEA II PropCo and RIDEA II OpCo as it controls the significant activities of RIDEA II PropCo and, of the group that controls the significant activities of RIDEA II OpCo, is most closely associated to the entity. Furthermore, control over the HCP/CPA JV is shared between HCP and CPA, and as such, the Company does not consolidate the HCP/CPA JV. Subsequent to the partial sale of its interest in RIDEA II, the Company continues to hold a direct investment in RIDEA II PropCo, which has been identified as a VIE as Brookdale, the non-managing member, does not have any substantive participating rights or kick-out rights over the managing member, HCP/CPA PropCo (see Notes 4 and 7). The assets of RIDEA II PropCo primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; its obligations primarily consist of a combination of third-party and HCP debt (see Note 4). Assets generated by RIDEA II PropCo (primarily from RIDEA II OpCo lease payments) may only be used to settle its contractual obligations (primarily debt service payments on the third-party and HCP debt).
The Company holds an 85% ownership interest in two development joint ventures (Vintage Park Development JV and Waldwick JV) (see Note 7), which have been identified as VIEs as power is shared with a member that does not have a substantive equity investment at risk. The assets of each joint venture primarily consist of an in-progress senior housing facility development project that it owns and cash and cash equivalents; its obligations primarily consist of accounts payable and expense accruals associated

28


with the cost of its development obligations. Any assets generated by each joint venture may only be used to settle its respective contractual obligations (primarily development expenses and debt service payments).
The Company holds a limited partner ownership interest in an unconsolidated LLC that has been identified as a VIE. The Company’s involvement in the entity is limited to its equity investment as a limited partner, and it does not have any substantive participating rights or kick-out rights over the general partner. The assets and liabilities of the entity primarily consist of those associated with its senior housing real estate and development activities. Any assets generated by the entity may only be used to settle its contractual obligations (primarily development expenses and debt service payments).
The Company leases 48 properties to a total of seven tenants that have also been identified as VIEs (“VIE tenants”). These VIE tenants are “thinly capitalized” entities that rely on the operating cash flows generated from the senior housing facilities to pay operating expenses, including the rent obligations under their leases.
The Company holds commercial mortgage-backed securities (“CMBS”) issued by Federal Home Loan Mortgage Corporation (commonly referred to as Freddie MAC) through a special purpose entity that has been identified as a VIE because it is “thinly capitalized.” The CMBS issued by the VIE are backed by mortgage debt obligations on real estate assets.
The Company provided a £105 million ( $131 million at closing) bridge loan to Maria Mallaband Care Group Ltd. (“MMCG”) to fund the acquisition of a portfolio of care homes in the U.K. MMCG created a special purpose entity to acquire the portfolio and funded it entirely using the Company’s bridge loan. As such, the special purpose entity has been identified as a VIE because it is “thinly capitalized.” The Company retains a three -year call option to acquire all the shares of the special purpose entity, which it can only exercise upon the occurrence of certain events.
The Company provided seller financing of $10 million related to its sale of seven senior housing triple-net facilities. The financing was provided in the form of a secured five -year mezzanine loan to a “thinly capitalized” borrower created to acquire the facilities.
Between 2012 and 2015, the Company funded a $257 million mezzanine loan facility to Tandem as part of a recapitalization of the Tandem Portfolio (see Note 6). Due to a decline in the fair value of the Tandem Portfolio over time, there is no longer sufficient equity at risk in Tandem and it has become a “thinly capitalized” borrower.
The classification of the related assets and liabilities and the maximum loss exposure as a result of the Company’s involvement with these VIEs at September 30, 2017 was as follows (in thousands):
VIE Type
 
Asset/Liability Type
 
Maximum Loss
Exposure
and Carrying
Amount (1)
VIE tenants - DFLs (2)
 
Net investment in DFLs
 
$
602,501

VIE tenants - operating leases (2)
 
Lease intangibles, net and straight-line rent receivables
 
5,183

CCRC OpCo
 
Investments in unconsolidated joint ventures
 
214,140

RIDEA II PropCo
 
Investments in unconsolidated joint ventures
 
251,419

Development JVs
 
Investments in unconsolidated joint ventures
 
11,202

Tandem Health Care
 
Loans Receivable, net
 
197,374

Loan - Senior Secured
 
Loans Receivable, net
 
141,574

Loan - Seller Financing
 
Loans Receivable, net
 
10,000

CMBS and LLC investment
 
Marketable debt and cost method investment
 
33,630

_______________________________________
(1)
The Company’s maximum loss exposure represents the aggregate carrying amount of such investments (including accrued interest).
(2)
The Company’s maximum loss exposure may be mitigated by re-leasing the underlying properties to new tenants upon an event of default.
At September 30, 2017 , the Company had not provided, and is not required to provide, financial support through a liquidity arrangement or otherwise, to its unconsolidated VIEs, including circumstances in which it could be exposed to further losses (e.g., cash shortfalls).
See Notes 4, 6, and 7 for additional descriptions of the nature, purpose and operating activities of the Company’s unconsolidated VIEs and interests therein.

29


Consolidated Variable Interest Entities
HCP, Inc.’s consolidated total assets and total liabilities at September 30, 2017 and December 31, 2016 include certain assets of VIEs that can only be used to settle the liabilities of the related VIE. The VIE creditors do not have recourse to HCP, Inc. Total assets at September 30, 2017 and December 31, 2016 include VIE assets as follows (in thousands):
 
September 30, 2017
 
December 31, 2016
Assets
 
 
 
Building and improvements
$
2,833,834

 
$
3,522,310

Developments in process
22,860

 
31,953

Land
227,682

 
327,241

Accumulated depreciation
(584,621
)
 
(676,276
)
Net real estate
2,499,755

 
3,205,228

Investments in and advances to unconsolidated joint ventures
2,119

 
3,641

Accounts receivable, net
9,964

 
19,996

Cash and cash equivalents
36,262

 
35,844

Restricted cash
2,137

 
22,624

Intangible assets, net
132,905

 
169,027

Other assets, net
56,854

 
69,562

Total assets
$
2,739,996

 
$
3,525,922

Liabilities
 
 
 
Mortgage debt
45,067

 
520,870

Intangible liabilities, net
9,170

 
8,994

Accounts payable and accrued expenses
102,780

 
120,719

Deferred revenue
18,162

 
23,456

Total liabilities
$
175,179

 
$
674,039

RIDEA I.  The Company holds a 90% ownership interest in JV entities formed in September 2011 that own and operate senior housing properties in a RIDEA structure (“RIDEA I”). The Company has historically classified RIDEA I OpCo as a VIE and, as a result of the adoption of ASU No. 2015-02, Amendments to the Consolidation Analysis (“ASU 2015-02”), also classifies RIDEA I PropCo as a VIE due to the non-managing member lacking substantive participation rights in the management of RIDEA I PropCo or kick-out rights over the managing member. The Company consolidates RIDEA I PropCo and RIDEA I OpCo as the primary beneficiary because it has the ability to control the activities that most significantly impact these VIEs’ economic performance. The assets of RIDEA I PropCo primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; its obligations primarily consist of notes payable to a non-VIE consolidated subsidiary of the Company. The assets of RIDEA I OpCo primarily consist of leasehold interests in senior housing facilities (operating leases), resident fees receivable, and cash and cash equivalents; its obligations primarily consist of lease payments to RIDEA I PropCo and operating expenses of its senior housing facilities (accounts payable and accrued expenses). Assets generated by the senior housing operations (primarily from senior housing resident rents) of the RIDEA I structure may only be used to settle its contractual obligations (primarily from the rental costs, operating expenses incurred to manage such facilities and debt costs).
RIDEA III.   The Company holds a 90% ownership interest in JV entities formed in June 2015 that own and operate senior housing properties in a RIDEA structure. The Company has historically classified RIDEA III OpCo as a VIE and, as a result of the adoption of ASU 2015-02, also classifies RIDEA III PropCo as a VIE due to the non-managing member lacking substantive participation rights in the management of RIDEA III PropCo or kick-out rights over the managing member. The Company consolidates RIDEA III PropCo and RIDEA III OpCo as the primary beneficiary because it has the ability to control the activities that most significantly impact these VIEs’ economic performance. The assets of RIDEA III PropCo primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; its obligations primarily consist of a note payable to a non-VIE consolidated subsidiary of the Company. The assets of RIDEA III OpCo primarily consist of leasehold interests in senior housing facilities (operating leases), resident fees receivable, and cash and cash equivalents; its obligations primarily consist of lease payments to RIDEA III PropCo and operating expenses of its senior housing facilities (accounts payable and accrued expenses). Assets generated by the senior housing operations (primarily from senior housing resident rents) of the RIDEA III structure may only be used to settle its contractual obligations (primarily from the rental costs, operating expenses incurred to manage such facilities and debt costs).

30


HCP Ventures V, LLC .  The Company holds a 51% ownership interest in and is the managing member of a JV entity formed in October 2015 that owns and leases MOBs (“HCP Ventures V”). Upon adoption of ASU 2015-02, the Company classified HCP Ventures V as a VIE due to the non-managing member lacking substantive participation rights in the management of HCP Ventures V or kick-out rights over the managing member. The Company consolidates HCP Ventures V as the primary beneficiary because it has the ability to control the activities that most significantly impact the VIE’s economic performance. The assets of HCP Ventures V primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; its obligations primarily consist of capital expenditures for the properties. Assets generated by HCP Ventures V may only be used to settle its contractual obligations (primarily from capital expenditures).
Vintage Park JV.   The Company holds a 90% ownership interest in a JV entity formed in January 2015 that owns an 85% interest in an unconsolidated development VIE (“Vintage Park JV”). Upon adoption of ASU 2015-02, the Company classified Vintage Park JV as a VIE due to the non-managing member lacking substantive participation rights in the management of the Vintage Park JV or kick-out rights over the managing member. The Company consolidates Vintage Park JV as the primary beneficiary because it has the ability to control the activities that most significantly impact the VIE’s economic performance. The assets of Vintage Park JV primarily consist of an investment in the Vintage Park Development JV and cash and cash equivalents; its obligations primarily consist of funding the ongoing development of the Vintage Park Development JV. Assets generated by the Vintage Park JV may only be used to settle its contractual obligations (primarily from the funding of the Vintage Park Development JV).
DownREITs .  The Company holds a controlling ownership interest in and is the managing member of five DownREITs. Upon adoption of ASU 2015-02, the Company classified the DownREITs as VIEs due to the non-managing members lacking substantive participation rights in the management of the DownREITs or kick-out rights over the managing member. The Company consolidates the DownREITs as the primary beneficiary because it has the ability to control the activities that most significantly impact these VIEs’ economic performance. The assets of the DownREITs primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; their obligations primarily consist of debt service payments and capital expenditures for the properties. Assets generated by the DownREITs (primarily from resident rents) may only be used to settle their contractual obligations (primarily from debt service and capital expenditures).
Other Consolidated Real Estate Partnerships.   The Company holds a controlling ownership interest in and is the general partner (or managing member) of multiple partnerships that own and lease real estate assets (the “Partnerships”). Upon adoption of ASU 2015-02, the Company classified the Partnerships as VIEs due to the limited partners (non-managing members) lacking substantive participation rights in the management of the Partnerships or kick-out rights over the general partner (managing member). The Company consolidates the Partnerships as the primary beneficiary because it has the ability to control the activities that most significantly impact these VIEs’ economic performance. The assets of the Partnerships primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; their obligations primarily consist of debt service payments and capital expenditures for the properties. Assets generated by the Partnerships (primarily from resident rents) may only be used to settle their contractual obligations (primarily from debt service and capital expenditures).
Other consolidated VIEs.   The Company made a loan to an entity that entered into a tax credit structure (“Tax Credit Subsidiary”) and a loan to an entity that made an investment in a development JV (“Development JV”) both of which are considered VIEs. The Company consolidates the Tax Credit Subsidiary and Development JV as the primary beneficiary because it has the ability to control the activities that most significantly impact the VIEs’ economic performance. The assets and liabilities of the Tax Credit Subsidiary and Development JV substantially consist of a development in progress, notes receivable, prepaid expenses, notes payable, and accounts payable and accrued liabilities generated from their operating activities. Any assets generated by the operating activities of the Tax Credit Subsidiary and Development JV may only be used to settle their contractual obligations.
NOTE 17.  Concentration of Credit Risk
Concentrations of credit risk arise when one or more tenants, operators or obligors related to the Company’s investments are engaged in similar business activities or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to the Company, to be similarly affected by changes in economic conditions. The Company regularly monitors various segments of its portfolio to assess potential concentrations of credit risks.
The following tables provide information regarding the Company’s concentrations of credit risk with respect to certain tenants:
 
 
Percentage of Gross Assets
 
 
Total Company
 
Senior Housing Triple-Net
 
 
September 30,
 
December 31,
 
September 30,
 
December 31,
Tenant
 
2017
 
2016
 
2017
 
2016
Brookdale (1)
 
11%
 
17%
 
42%
 
69%

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Percentage of Revenues
 
 
Total Company Revenues
 
Senior Housing Triple-Net Revenues
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Tenant
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Brookdale (1)
 
8%
 
12%
 
10%
 
12%
 
48%
 
60%
 
53%
 
59%
_______________________________________
(1)
Includes assets and revenues from 64 senior housing triple-net facilities that were classified as held for sale at December 31, 2016 and sold in March 2017. 
At September 30, 2017 and December 31, 2016 , Brookdale managed or operated, in the Company’s SHOP segment, approximately 13% and 18% , respectively, of the Company’s real estate investments based on gross assets. Because an operator manages the Company’s facilities in exchange for the receipt of a management fee, the Company is not directly exposed to the credit risk of its operators in the same manner or to the same extent as its triple-net tenants. At September 30, 2017 , Brookdale provided comprehensive facility management and accounting services with respect to 59 of the Company’s SHOP facilities and 62 SHOP facilities owned by its unconsolidated joint ventures, for which the Company or joint venture pay annual management fees pursuant to long-term management agreements. Most of the management agreements have terms ranging from 10 to 15 years , with three to four   5 -year renewal periods. The base management fees are 4.5% to 5.0% of gross revenues (as defined) generated by the RIDEA facilities. In addition, there are incentive management fees payable to Brookdale if operating results of the RIDEA properties exceed pre-established EBITDAR (as defined) thresholds.
Brookdale is subject to the registration and reporting requirements of the SEC and is required to file with the SEC annual reports containing audited financial information and quarterly reports containing unaudited financial information. The information related to Brookdale contained or referred to in this report has been derived from SEC filings made by Brookdale or other publicly available information, or was provided to the Company by Brookdale, and the Company has not verified this information through an independent investigation or otherwise. The Company has no reason to believe that this information is inaccurate in any material respect, but the Company cannot assure the reader of its accuracy. The Company is providing this data for informational purposes only, and encourages the reader to obtain Brookdale’s publicly available filings, which can be found on the SEC’s website at www.sec.gov.
See Note 1 for further information on the reduction of concentration related to Brookdale.
To mitigate the credit risk of leasing properties to certain senior housing and post-acute/skilled nursing operators, leases with operators are often combined into portfolios that contain cross-default terms, so that if a tenant of any of the properties in a portfolio defaults on its obligations under its lease, the Company may pursue its remedies under the lease with respect to any of the properties in the portfolio. Certain portfolios also contain terms whereby the net operating profits of the properties are combined for the purpose of securing the funding of rental payments due under each lease.
NOTE 18.  Fair Value Measurements
Financial assets and liabilities measured at fair value on a recurring basis at September 30, 2017 in the consolidated balance sheets are immaterial.

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The table below summarizes the carrying amounts and fair values of the Company’s financial instruments (in thousands):
 
September 30, 2017 (4)
 
December 31, 2016 (4)
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
Loans receivable, net (2)   
$
402,152

 
$
402,267

 
$
807,954

 
$
807,505

Marketable debt securities (2)   
18,567

 
18,567

 
68,630

 
68,630

Marketable equity securities (1)   
74

 
74

 
76

 
76

Warrants (3)   
58

 
58

 
19

 
19

Bank line of credit (2)   
605,837

 
605,837

 
899,718

 
899,718

Term loans (2)   
226,205

 
226,205

 
440,062

 
440,062

Senior unsecured notes (1)   
6,393,926

 
6,769,010

 
7,133,538

 
7,386,149

Mortgage debt (2)   
145,417

 
131,419

 
623,792

 
609,374

Other debt (2)   
94,818

 
94,818

 
92,385

 
92,385

Interest-rate swap liabilities (2)   
2,980

 
2,980

 
4,857

 
4,857

Currency swap asset (2)   

 

 
2,920

 
2,920

Cross currency swap liability (2)  
9,469

 
9,469

 

 

_______________________________________
(1)
Level 1: Fair value calculated based on quoted prices in active markets.  
(2)
Level 2: Fair value based on (i) for marketable debt securities, quoted prices for similar or identical instruments in active or inactive markets, respectively, or (ii) or for loans receivable, net, mortgage debt, and swaps, calculated utilizing standardized pricing models in which significant inputs or value drivers are observable in active markets. For bank line of credit, term loans and other debt, the carrying values are a reasonable estimate of fair value because the borrowings are primarily based on market interest rates and the Company’s credit rating.
(3)
Level 3: Fair value determined based on significant unobservable market inputs using standardized derivative pricing models.
(4)
During the nine months ended September 30, 2017 and year ended December 31, 2016 , there were no material transfers of financial assets or liabilities within the fair value hierarchy.
NOTE 19.  Derivative Financial Instruments
The following table summarizes the Company’s outstanding interest-rate and cross currency swap contracts at September 30, 2017 (dollars and GBP in thousands):
Date Entered
 
Maturity Date
 
Hedge Designation
 
Notional
 
Pay Rate
 
Receive Rate
 
Fair Value (1)
Interest rate:
 
 
 
 
 
 

 
 
 
 

 
 

July 2005 (2)
 
July 2020
 
Cash Flow
 
$
44,000

 
3.82%
 
BMA Swap Index

 
$
(2,980
)
Cross currency swap:
 
 
 
 
 
 
 
 
 
 
 
 
April 2017 (3)  
 
February 2019
 
Net Investment
 
£105,000 / $131,400

 
2.58%
 
3.75
%
 
$
(9,469
)
_______________________________________
(1)
Derivative assets are recorded in other assets, net and derivative liabilities are recorded in accounts payable and accrued liabilities on the consolidated balance sheets.
(2)
Represents three interest-rate swap contracts, which hedge fluctuations in interest payments on variable-rate secured debt due to overall changes in hedged cash flows.
(3)
Represents a cross currency swap to pay 2.584% on £105 million and receive 3.75% on $131 million through February 1, 2019, with an initial and final exchange of principals at origination and maturity at a rate of 1.251 USD/GBP. Hedges the risk of changes in the USD equivalent value of a portion of the Company’s net investment in its consolidated GBP subsidiaries’ attributable to changes in the USD/GBP exchange rate.
The Company uses derivative instruments to mitigate the effects of interest rate and foreign currency fluctuations on specific forecasted transactions as well as recognized financial obligations or assets. Utilizing derivative instruments allows the Company to manage the risk of fluctuations in interest and foreign currency rates related to the potential impact these changes could have on future earnings and forecasted cash flows. The Company does not use derivative instruments for speculative or trading purposes. Assuming a one percentage point shift in the underlying interest rate curve, the estimated change in fair value of each of the underlying derivative instruments would not exceed $2 million . Assuming a one percentage point shift in the underlying foreign currency exchange rates, the estimated change in fair value of each of the underlying derivative instruments would not exceed $2 million .
At September 30, 2017 , £150 million of the Company’s GBP-denominated borrowings under the 2015 Term Loan and a £105 million cross currency swap are designated as a hedge of a portion of the Company’s net investments in GBP-functional subsidiaries

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to mitigate its exposure to fluctuations in the GBP to USD exchange rate. For instruments that are designated and qualify as net investment hedges, the variability in the foreign currency to USD exchange rate of the instrument is recorded as part of the cumulative translation adjustment component of accumulated other comprehensive income (loss). Accordingly, the remeasurement value of the designated £150 million GBP-denominated borrowings and £105 million cross currency swap due to fluctuations in the GBP to USD exchange rate are reported in accumulated other comprehensive income (loss) as the hedging relationship is considered to be effective. The cumulative balance of the remeasurement value will be reclassified to earnings when the hedged investment is sold or substantially liquidated.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
All references in this report to “HCP,” “we,” “us” or “our” mean HCP, Inc., together with its consolidated subsidiaries. Unless the context suggests otherwise, references to “HCP, Inc.” mean the parent company without its subsidiaries.
Cautionary Language Regarding Forward-Looking Statements
Statements in this Quarterly Report on Form 10-Q that are not historical factual statements are “forward-looking statements.” We intend to have our forward-looking statements covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with those provisions. Forward-looking statements include, among other things, statements regarding our and our officers’ intent, belief or expectation as identified by the use of words such as “may,” “will,” “project,” “expect,” “believe,” “intend,” “anticipate,” “seek,” “forecast,” “plan,” “potential,” “estimate,” “could,” “would,” “should” and other comparable and derivative terms or the negatives thereof. Forward-looking statements reflect our current expectations and views about future events and are subject to known and unknown risks and uncertainties that could significantly affect our future financial condition and results of operations. While forward-looking statements reflect our good faith belief and assumptions we believe to be reasonable based upon current information, we can give no assurance that our expectations or forecasts will be attained. As more fully set forth under Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 , and Part II, Item 1A. “Risk Factors” in our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2017, risks and uncertainties that may cause our actual results to differ materially from the expectations contained in the forward-looking statements include, among other things:
our reliance on a concentration of a small number of tenants and operators for a significant portion of our revenues, with our concentration of assets operated by Brookdale Senior Living, Inc. (“Brookdale”) increasing as a result of the consummation of the spin-off of Quality Care Properties, Inc. (“QCP”) on October 31, 2016 (the “Spin-Off”);
the financial condition of our existing and future tenants, operators and borrowers, including potential bankruptcies and downturns in their businesses, and their legal and regulatory proceedings, which results in uncertainties regarding our ability to continue to realize the full benefit of such tenants’ and operators’ leases and borrowers’ loans;
the ability of our existing and future tenants, operators and borrowers to conduct their respective businesses in a manner sufficient to maintain or increase their revenues and to generate sufficient income to make rent and loan payments to us and our ability to recover investments made, if applicable, in their operations;
competition for tenants and operators, including with respect to new leases and mortgages and the renewal or rollover of existing leases;
our concentration in the healthcare property sector, particularly in senior housing, life sciences, medical office buildings and hospitals, which makes our profitability more vulnerable to a downturn in a specific sector that if we were investing in multiple industries;
availability of suitable properties to acquire at favorable prices, the competition for the acquisition and financing of those properties, and the costs of associated property development;
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 foreclose on loan collateral or replace an existing tenant or operator upon default;
the risks associated with our investments in joint ventures and unconsolidated entities, including our lack of sole decision making authority and our reliance on our partners’ financial condition and continued cooperation;
our ability to achieve the benefits of investments within expected time frames or at all, or within expected cost projections;
operational risks associated with third party management contracts, including the additional regulation and liabilities of our RIDEA lease structures;
the potential impact on us and our tenants, operators and borrowers from current and future litigation matters, including the possibility of larger than expected litigation costs, adverse results and related developments;
the effect on our tenants and operators of legislation, executive orders and other legal requirements, including the Affordable Care Act and licensure, certification and inspection requirements, as well as laws addressing entitlement programs and related services, including Medicare and Medicaid, which may result in future reductions in reimbursements;
changes in federal, state or local laws and regulations, including those affecting the healthcare industry that affect our costs of compliance or increase the costs, or otherwise affect the operations, of our tenants and operators;

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volatility or uncertainty in the capital markets, the availability and cost of capital as impacted by interest rates, changes in our credit ratings, and the value of our common stock, and other conditions that may adversely impact our ability to fund our obligations or consummate transactions, or reduce the earnings from potential transactions;
changes in global, national and local economic conditions, and currency exchange rates;
our ability to manage our indebtedness level and changes in the terms of such indebtedness;
competition for skilled management and other key personnel; and
our ability to maintain our qualification as a real estate investment trust (“REIT”).
Except as required by law, we do not undertake, and hereby disclaim, any obligation to update any forward-looking statements, which speak only as of the date on which they are made.
The information set forth in this Item 2 is intended to provide readers with an understanding of our financial condition, changes in financial condition and results of operations. We will discuss and provide our analysis in the following order:
Executive Summary
2017 Transaction Overview
Dividends
Results of Operations
Liquidity and Capital Resources
Off-Balance Sheet Arrangements
Non-GAAP Financial Measures Reconciliations
Critical Accounting Policies
Recent Accounting Pronouncements
Executive Summary
HCP, Inc., a Standard & Poor’s (“S&P”) 500 company, invests primarily in real estate serving the healthcare industry in the United States. We are a Maryland corporation organized in 1985 and qualify as a self-administered REIT. We acquire, develop, lease, manage and dispose of healthcare real estate. At September 30, 2017 , our portfolio of investments, including properties in our unconsolidated joint ventures (“JVs”), consisted of interests in 818 properties.  
We invest and manage our real estate portfolio for the long-term to maximize the benefit to our stockholders and support the growth of our dividends. The core elements of our strategy are: (i) to acquire, develop, lease, own and manage a diversified portfolio of quality healthcare properties across multiple geographic locations and business segments including senior housing, medical office, and life science, among others; (ii) to align ourselves with leading healthcare companies, operators and service providers, which over the long-term, should result in higher relative rental rates, net operating cash flows and appreciation of property values; (iii) to maintain adequate liquidity with long-term fixed rate debt financing with staggered maturities, which supports the longer-term nature of our investments, while reducing our exposure to interest rate volatility and refinancing risk at any point in the interest rate or credit cycles; and (iv) to continue to manage our balance sheet with a targeted financial leverage of 40% relative to our assets.
We believe that our real estate portfolio holds the potential for increased future cash flows as it is well-maintained and in desirable locations within markets where new supply is generally limited by the lack of available sites and the difficulty of obtaining the necessary licensing, other approvals and/or financing. Our strategy for maximizing the benefits from these opportunities is to: (i) work with new or existing tenants and operators to address their space and capital needs and (ii) provide high-quality property management services in order to motivate tenants to renew, expand or relocate into our properties.
The delivery of healthcare services requires real estate and, as a result, tenants and operators depend on real estate, in part, to maintain and grow their businesses. We believe that the healthcare real estate market provides investment opportunities due to the: (i) compelling long-term demographics driving the demand for healthcare services; (ii) specialized nature of healthcare real estate investing; and (iii) ongoing consolidation of the fragmented healthcare real estate sector.
While we emphasize healthcare real estate ownership, we may also provide real estate secured financing to, or invest in equity or debt securities of, healthcare operators or other entities engaged in healthcare real estate ownership. We may also acquire all or substantially all of the securities or assets of other REITs, operating companies or similar entities where such investments would be consistent with our investment strategies. We may co-invest alongside institutional or development investors through partnerships or limited liability companies.

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We monitor, but do not limit, our investments based on the percentage of our total assets that may be invested in any one property type, investment vehicle or geographic location, the number of properties that may be leased to a single tenant or operator, or loans that may be made to a single borrower. In allocating capital, we target opportunities with the most attractive risk/reward profile for our portfolio as a whole. We may take additional measures to mitigate risk, including diversifying our investments (by sector, geography, tenant or operator), structuring transactions as master leases, requiring tenant or operator insurance and indemnifications, and obtaining credit enhancements in the form of guarantees, letters of credit or security deposits.
Our REIT qualification requires us to distribute at least 90% of our REIT taxable income (excluding net capital gains); therefore, we do not retain capital. As a result, we regularly access the public equity and debt markets to raise the funds necessary to finance acquisitions and debt investments, develop and redevelop properties, and refinance maturing debt.
We maintain a disciplined balance sheet by actively managing our debt to equity levels and maintaining multiple sources of liquidity. Our debt obligations are primarily long-term fixed rate with staggered maturities.
We finance our investments based on our evaluation of available sources of funding. For short-term purposes, we may utilize our revolving line of credit facility or arrange for other short-term borrowings from banks or other sources. We arrange for longer-term financing by offering debt and equity securities, placing mortgage debt and obtaining capital from institutional lenders and JV partners.
2017 Transaction Overview
Master Transactions and Cooperation Agreement with Brookdale
On November 1, 2017, HCP and Brookdale entered into a Master Transactions and Cooperation Agreement (the “MTCA”) to provide us with the ability to significantly reduce our concentration of assets leased to and/or managed by Brookdale. Through a series of dispositions and transitions of assets currently leased to and/or managed by Brookdale, as contemplated by the MTCA and further described below, our exposure to Brookdale is expected to be significantly reduced.
Master Lease Transactions
In connection with the overall transaction pursuant to the MTCA, HCP (through certain of our subsidiaries), and Brookdale (through certain of its subsidiaries) (the “Lessee”) entered into an Amended and Restated Master Lease and Security Agreement (the “Amended Master Lease”), which amended and restated the then-existing triple-net leases between the parties for 78 assets (before giving effect to the contemplated sale or transition of 34 assets discussed below), which account for primarily all of the assets subject to triple-net leases between HCP and the Lessee. Under the Amended Master Lease, we will have the benefit of a guaranty from Brookdale of the Lessee’s obligations and, upon a change in control, will have various additional protections under the MTCA and Amended Master Lease including:
A security deposit (which increases if specified leverage thresholds are exceeded);
A termination right if certain financial covenants and net worth test are not satisfied;
Enhanced reporting requirements and related remedies; and
The right to market for sale the CCRC portfolio.
Future changes in control of Brookdale are permitted pursuant to the Amended Master Lease, subject to certain conditions, including the purchaser either meeting experience requirements or retaining a majority of Brookdale’s principal officers.
The Amended Master Lease preserves the renewal terms and, with certain exceptions, the rents under the previously existing triple-net leases. In addition, HCP and Brookdale agreed to the following:
We will have the right to sell, or transition to other operators, 32 triple-net assets. If such sale or transition does not occur within one year, the triple-net lease with respect to such assets will convert to a cash flow lease (under which we will bear the risks and rewards of operating the assets) with a term of two years, provided that the Company has the right to terminate the cash flow lease at any time during the term without penalty;
We will provide an aggregate $5 million annual reduction in rent on three assets, effective January 1, 2018;
We will sell two triple-net assets to Brookdale or its affiliates for $35 million; and
We will have the right to convert five assets to a cash flow lease by December 31, 2017. We have the right to terminate the cash flow lease without penalty to facilitate the sale or transition of these additional assets, at our option.

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Joint Venture Transactions
Also pursuant to the MTCA, HCP and Brookdale agreed to the following:
HCP, which currently owns 90% of the interests in its RIDEA I and RIDEA III joint ventures with Brookdale, will purchase Brookdale’s 10% noncontrolling interest in each joint venture. These joint ventures collectively own and operate 58 independent living, assisted living, memory care and/or skilled nursing facilities (the “RIDEA Facilities”);
We will have the right to sell, or transition to other managers, 36 of the RIDEA Facilities and terminate related management agreements with an affiliate of Brookdale without penalty. If the related management agreements are not terminated within one year, the base management fee (5% of gross revenues) increases by 1% of gross revenues per year over the following two years to a maximum of 7% of gross revenues;
We will sell four of the RIDEA Facilities to Brookdale or its affiliates for $239 million;
A Brookdale affiliate will continue to manage the remaining 18 RIDEA Facilities pursuant to amended and restated management agreements, which provide for extended terms on select assets, modified performance hurdles for extensions and incentive fees, and modified termination rights (including stricter performance-based termination rights, a staggered right to terminate seven agreements over a 10 year period beginning in 2021, and a right to terminate at will upon payment of a termination fee, in lieu of sale-related termination rights) and two other existing facilities managed in separate RIDEA structures; and
We will have the right to sell, to certain permitted transferees, our 49% ownership interest in joint ventures that own and operate a portfolio of continuing care retirement communities and in which Brookdale owns the other 51% interest (the “CCRC JV”), subject to certain conditions and a right of first offer in favor of Brookdale. Brookdale will have a corresponding right to sell its 51% interest in the CCRC JV to certain permitted transferees, subject to certain conditions, a right of first offer and a right to terminate management agreements following such sale of Brookdale’s interest, each in favor of HCP. Following a change in control of Brookdale, we will have the right to initiate a sale of the CCRC portfolio, subject to certain rights of first offer and first refusal in favor of Brookdale.
RIDEA II Sale Transaction
In January 2017, we completed the contribution of our ownership interest in RIDEA II to an unconsolidated JV owned by HCP and an investor group led by Columbia Pacific Advisors, LLC (“CPA”) (“HCP/CPA PropCo” and “HCP/CPA OpCo,” together, the “HCP/CPA JV”). In addition, RIDEA II was recapitalized with $602 million  of debt, of which  $360 million  was provided by a third-party and  $242 million  was provided by HCP. In return for both transaction elements, we received combined proceeds of  $480 million  from the HCP/CPA JV and  $242 million  in loan receivables and retained an approximately 40% ownership interest in RIDEA II (the note receivable and  40% ownership interest are herein referred to as the “RIDEA II Investments”). This transaction resulted in us deconsolidating the net assets of RIDEA II and recognizing a net gain on sale of  $99 million . The RIDEA II Investments are currently recognized and accounted for as equity method investments.
On November 1, 2017, we entered into a definitive agreement with an investor group led by CPA to sell our remaining 40% ownership interest in RIDEA II. We expect the transaction to close in 2018. CPA has also agreed to cause refinancing of our $242 million loan receivables from RIDEA II within one year following the closing of the transaction. Total expected proceeds to us from the transaction and refinancing of the loan receivables from RIDEA II are $332 million.
Acquisition Transactions
During the second quarter of 2017, we acquired Wateridge, a 124,000 square foot campus in the Sorrento Mesa submarket of San Diego, California for $26 million. Upon acquisition, we commenced repositioning one of the buildings into class-A lab space following an office-to-lab conversion strategy.
During the third quarter of 2017, we acquired a portfolio of three medical office buildings in Texas for $49 million and a life science facility in South San Francisco, California for $64 million.
In October, we entered into definitive agreements to acquire a $228 million life science campus known as the Hayden Research Campus located in the Boston suburb of Lexington, Massachusetts. HCP will own a majority interest in this campus through a joint venture with King Street Properties (“King Street”). The campus includes two existing buildings totaling 400,000 square feet and is currently 66% leased, anchored by major life science tenants including Shire US, Inc., a subsidiary of Shire plc, and Merck, Sharp and Dohme, a subsidiary of Merck and Co., Inc. Additionally, King Street is currently seeking approvals for the joint venture to develop an additional 209,000 square feet of life science space on the campus.

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Disposition and Loan Repayment Transactions
During the first quarter of 2017, we completed the following disposition and loan repayment transactions:
In January 2017, we sold four life science facilities in Salt Lake City, Utah for $76 million , resulting in a net gain on sale of $45 million .
In February 2017, we sold a hospital within one of our DFLs in Palm Beach Gardens, Florida for $43 million to the current tenant and recognized a gain on sale of $4 million.
In March 2017, we sold 64 senior housing triple-net assets, previously under triple-net leases with Brookdale, for $1.125 billion to affiliates of Blackstone Real Estate Partners VIII, L.P., resulting in a net gain on sale of $170 million .
In March 2017, we sold our aggregate £138.5 million par value Four Seasons senior notes (“Four Seasons Notes”) for £83 million  ( $101 million ). The disposition of the Four Seasons Notes generated a £42 million ( $51 million ) gain on sale as the sales price was above the previously-impaired carrying value of £41 million ( $50 million ). In addition, we sold our Four Seasons senior secured term loan at par plus accrued interest for £29 million ( $35 million ).
During the second quarter of 2017, we completed the following disposition and loan repayment transactions:
In April 2017, we sold a land parcel in San Diego, California for $27 million and one life science building in San Diego, California for $5 million .
In June 2017, we received £283 million ( $367 million ) from the repayment of our HC-One Facility.
During the third quarter of 2017, we sold two senior housing triple-net facilities for $15 million and recognized a gain on sale of $5 million .
Financing Activities
During the nine months ended September 30, 2017 , we had net repayments of $316 million on our revolving line of credit (the “Facility”) primarily using proceeds from the RIDEA II joint venture disposition, the sale of our Four Seasons Notes and the repayment of our HC-One Facility.
During the first quarter of 2017, we repaid our £137 million unsecured term loan (the “2012 Term Loan”) and $472 million of mortgage debt.
During the second quarter of 2017, we repaid $250 million of maturing senior unsecured notes and paid down £51 million of our £220 million unsecured term loan (the “2015 Term Loan”).
During the third quarter of 2017, we repurchased $500 million of our 5.375% senior notes due 2021 and recorded a $54 million loss on debt extinguishment.
On October 19, 2017, we terminated the Facility and entered into a new $2.0 billion unsecured revolving line of credit facility (the “New Facility”) maturing on October 19, 2021. Borrowings under the New Facility accrue interest at LIBOR plus a margin that depends on our credit ratings (1.00% initially). We pay a facility fee on the entire revolving commitment that depends on our credit ratings (0.20% initially). The New Facility contains two, six-month extension options and includes a feature that allows us to increase the borrowing capacity by an aggregate amount of up to $750 million, subject to securing additional commitments.
Developments and Redevelopments
As of May 2017, we have leased 100% of The Cove Phase I and Phase II.
During the nine months ended September 30, 2017, we added $169 million of new projects to our development and redevelopment pipelines including:
Commenced $22 million of redevelopment projects at two recently-acquired life science assets in the Sorrento Mesa submarket of San Diego.
Commenced a $40 million redevelopment of a medical office building located in the University City submarket in Philadelphia near the University of Pennsylvania.
Entered into a joint venture agreement and commenced development on a 111 unit senior housing facility in Otay Ranch, California (San Diego MSA) for $31 million. Our share of the total construction cost is approximately $28 million with an estimated completion in the second half of 2018.
Commenced development on a 79 unit senior housing facility in Waldwick, New Jersey (New York MSA) for $31 million. Our share of the total construction costs is approximately $26 million with an estimated completion in late 2018.

39


Commenced a $16 million development expansion project in the Sorrento Mesa submarket of San Diego, California.

Dividends
The following table summarizes our common stock cash dividends declared in 2017:
Declaration Date
 
Record Date
 
Amount
Per Share
 
Dividend
Payable Date
February 2
 
February 15
 
$
0.37

 
March 2
April 27
 
May 8
 
0.37

 
May 23
July 27
 
August 7
 
0.37

 
August 22
October 26
 
November 6
 
0.37

 
November 21
Results of Operations
We evaluate our business and allocate resources among our reportable business segments: (i) senior housing triple-net; (ii) senior housing operating portfolio (“SHOP”); (iii) life science; and (iv) medical office. Under the medical office and life science segments, we invest through the acquisition and development of medical office buildings (“MOBs”) and life science facilities, which generally require a greater level of property management. Our senior housing facilities are managed utilizing triple-net leases and RIDEA structures. We have other non-reportable segments that are comprised primarily of our U.K. care homes, debt investments and hospitals. We evaluate performance based upon (i) property net operating income from continuing operations (“NOI”) and (ii) Adjusted NOI (cash NOI) of the combined consolidated and unconsolidated investments in each segment. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 2 of our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the U.S. Securities and Exchange Commission (“SEC”), as updated by Note 2 herein.
Non-GAAP Financial Measures
Net Operating Income
NOI and Adjusted NOI are non-U.S. generally accepted accounting principles (“GAAP”) supplemental financial measures used to evaluate the operating performance of real estate. We include properties from our consolidated portfolio, as well as our pro-rata share of properties owned by our unconsolidated joint ventures, in our NOI and Adjusted NOI. We believe providing this information assists investors and analysts in estimating the economic interest in our total portfolio of real estate. Our pro-rata share information is prepared on a basis consistent with the comparable consolidated amounts, is intended to reflect our proportionate economic interest in the operating results of properties in our portfolio and is calculated by applying our actual ownership percentage for the period. We do not control the unconsolidated joint ventures, and the pro-rata presentations of revenues and expenses included in NOI (see below) do not represent our legal claim to such items. The joint venture members or partners are entitled to profit or loss allocations and distributions of cash flows according to the joint venture agreements, which provide for such allocations generally according to their invested capital.
The presentation of pro-rata information has limitations, which include, but are not limited to, the following: (i) the amounts shown on the individual line items were derived by applying our overall economic ownership interest percentage determined when applying the equity method of accounting and do not necessarily represent our legal claim to the assets and liabilities, or the revenues and expenses and (ii) other companies in our industry may calculate their pro-rata interest differently, limiting the usefulness as a comparative measure. Because of these limitations, the pro-rata financial information should not be considered independently or as a substitute for our financial statements as reported under GAAP. We compensate for these limitations by relying primarily on our GAAP financial statements, using the pro-rata financial information as a supplement.
NOI is defined as rental and related revenues, including tenant recoveries, resident fees and services, and income from DFLs, less property level operating expenses; NOI excludes all other financial statement amounts included in net income (loss) as presented in Note 13 to the Consolidated Financial Statements. Management believes NOI provides relevant and useful information because it reflects only income and operating expense items that are incurred at the property level and presents them on an unleveraged basis. Adjusted NOI is calculated as NOI after eliminating the effects of straight-line rents, DFL non-cash interest, amortization of market lease intangibles, non-refundable entrance fees, net of entrance fee amortization and lease termination fees and the impact of deferred community fee income and expense. The adjustments to NOI and resulting Adjusted NOI for SHOP have been restated for prior periods presented to conform to the current period presentation for the adjustment to exclude the impact of deferred community fee income and expense, resulting in recognition as cash is received and expenses are paid. Adjusted NOI is oftentimes referred to as “cash NOI.” We use NOI and Adjusted NOI to make decisions about resource allocations, to assess and

40


compare property level performance, and to evaluate our same property portfolio (“SPP”), as described below. We believe that net income (loss) is the most directly comparable GAAP measure to NOI. NOI should not be viewed as an alternative measure of operating performance to net income (loss) as defined by GAAP since it does not reflect various excluded items. Further, our definition of NOI may not be comparable to the definition used by other REITs or real estate companies, as they may use different methodologies for calculating NOI. For a reconciliation of NOI and Adjusted NOI to net income (loss) by segment, refer to Note 13 to the Consolidated Financial Statements.
Operating expenses generally relate to leased medical office and life science properties and SHOP facilities. We generally recover all or a portion of our leased medical office and life science property expenses through tenant recoveries. We present expenses as operating or general and administrative based on the underlying nature of the expense. Periodically, we review the classification of expenses between categories and make revisions based on changes in the underlying nature of the expenses.
Same Property Portfolio
SPP NOI and Adjusted NOI information allows us to evaluate the performance of our property portfolio under a consistent population by eliminating changes in the composition of our portfolio of properties. We include properties from our consolidated portfolio, as well as properties owned by our unconsolidated joint ventures in our SPP NOI and Adjusted NOI (see NOI above for further discussion regarding our use of pro-rata share information and its limitations). SPP NOI excludes (i) certain non-property specific operating expenses that are allocated to each operating segment on a consolidated basis and (ii) entrance fees and related activity such as deferred expenses, reserves and management fees related to entrance fees. SPP NOI for properties that undergo a change in ownership is reported based on the current ownership percentage.
Properties are included in our SPP once they are stabilized for the full period in both comparison periods. Newly acquired operating assets are generally considered stabilized at the earlier of lease-up (typically when the tenant(s) control(s) the physical use of at least 80% of the space) or 12 months from the acquisition date. Newly completed developments and redevelopments are considered stabilized at the earlier of lease-up or 24 months from the date the property is placed in service. Properties that experience a change in reporting structure, such as a transition from a triple-net lease to a RIDEA reporting structure, are considered stabilized after 12 months in operations under a consistent reporting structure. A property is removed from our SPP when it is classified as held for sale, sold, placed into redevelopment, experiences a casualty event that significantly impacts operations or changes its reporting structure (such as triple-net to SHOP).
For a reconciliation of SPP to total portfolio Adjusted NOI and other relevant disclosures by segment, refer to our Segment Analysis below.
Funds From Operations (“FFO”)
We believe FFO applicable to common shares, diluted FFO applicable to common shares, and diluted FFO per common share are important supplemental non-GAAP measures of operating performance for a REIT. Because the historical cost accounting convention used for real estate assets utilizes straight-line depreciation (except on land), such accounting presentation implies that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen and fallen with market conditions, presentations of operating results for a REIT that use historical cost accounting for depreciation could be less informative. The term FFO was designed by the REIT industry to address this issue.
FFO, as defined by the National Association of Real Estate Investment Trusts (“NAREIT”), is net income (loss) applicable to common shares (computed in accordance with GAAP), excluding gains or losses from sales of depreciable property, including any current and deferred taxes directly associated with sales of depreciable property, impairments of, or related to, depreciable real estate, plus real estate and other depreciation and amortization, and adjustments to compute our share of FFO and FFO as adjusted (see below) from joint ventures. Adjustments for joint ventures are calculated to reflect our pro-rata share of both our consolidated and unconsolidated joint ventures. We reflect our share of FFO for unconsolidated joint ventures by applying our actual ownership percentage for the period to the applicable reconciling items on an entity by entity basis. We reflect our share for consolidated joint ventures in which we do not own 100% of the equity by adjusting our FFO to remove the third party ownership share of the applicable reconciling items based on actual ownership percentage for the applicable periods. Our pro-rata share information is prepared on a basis consistent with the comparable consolidated amounts, is intended to reflect our proportionate economic interest in the operating results of properties in our portfolio and is calculated by applying our actual ownership percentage for the period. We do not control the unconsolidated joint ventures, and the pro-rata presentations of reconciling items included in FFO (see above) do not represent our legal claim to such items. The joint venture members or partners are entitled to profit or loss allocations and distributions of cash flows according to the joint venture agreements, which provide for such allocations generally according to their invested capital. See NOI above for further discussion regarding our use of pro-rata share information and its limitations.
FFO does not represent cash generated from operating activities in accordance with GAAP, is not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to net income (loss). We compute FFO in accordance

41


with the current NAREIT definition; however, other REITs may report FFO differently or have a different interpretation of the current NAREIT definition from ours.
In addition, we present FFO before the impact of non-comparable items including, but not limited to, casualty-related charges (recoveries), severance and related charges, litigation costs, preferred stock redemption charges, impairments (recoveries) of non-depreciable assets, prepayment costs (benefits) associated with early retirement or payment of debt, foreign currency remeasurement losses (gains) and transaction-related items (“FFO as adjusted”). Prepayment costs (benefits) associated with early retirement of debt include the write-off of unamortized deferred financing fees, or additional costs, expenses, discounts, make-whole payments, penalties or premiums incurred as a result of early retirement or payment of debt. Transaction-related items include expensed acquisition and pursuit costs and gains/charges incurred as a result of mergers and acquisitions and lease amendment or termination activities. Management believes that FFO as adjusted provides a meaningful supplemental measurement of our FFO run-rate and is frequently used by analysts, investors and other interested parties in the evaluation of our performance as a REIT. At the same time that NAREIT created and defined its FFO measure for the REIT industry, it also recognized that “management of each of its member companies has the responsibility and authority to publish financial information that it regards as useful to the financial community.” We believe stockholders, potential investors and financial analysts who review our operating performance are best served by an FFO run-rate earnings measure that includes, in addition to adjustments made to arrive at the NAREIT defined measure of FFO, other adjustments to net income (loss). FFO as adjusted is used by management in analyzing our business and the performance of our properties, and we believe it is important that stockholders, potential investors and financial analysts understand this measure used by management. We use FFO as adjusted to: (i) evaluate our performance in comparison with expected results and results of previous periods, relative to resource allocation decisions, (ii) evaluate the performance of our management, (iii) budget and forecast future results to assist in the allocation of resources, (iv) assess our performance as compared with similar real estate companies and the industry in general and (v) evaluate how a specific potential investment will impact our future results. Other REITs or real estate companies may use different methodologies for calculating an adjusted FFO measure, and accordingly, our FFO as adjusted may not be comparable to those reported by other REITs. For a reconciliation of net income (loss) to FFO and FFO as adjusted and other relevant disclosure, refer to “Non-GAAP Financial Measures Reconciliations” below.

42


Funds Available for Distribution (“FAD”)
FAD is defined as FFO as adjusted after excluding the impact of the following: (i) amortization of acquired market lease intangibles, net, (ii) amortization of deferred compensation expense, (iii) amortization of deferred financing costs, net, (iv) straight-line rents, (v) non-cash interest and depreciation related to DFLs and lease incentive amortization (reduction of straight-line rents) and (vi) deferred revenues, excluding amounts amortized into rental income that are associated with tenant funded improvements owned/recognized by us and up-front cash payments made by tenants to reduce their contractual rents. Also, FAD: (i) is computed after deducting recurring capital expenditures, including leasing costs and second generation tenant and capital improvements, and (ii) includes lease restructure payments and adjustments to compute our share of FAD from our unconsolidated joint ventures and those related to CCRC non-refundable entrance fees. Certain amounts in the “Non-GAAP Financial Measures Reconciliation” below for FAD have been reclassified for prior periods to conform to the current period presentation. More specifically, we have combined wholly-owned and our share from unconsolidated joint ventures recurring capital expenditures, including leasing costs and second generation tenant and capital improvements (previously reported in “other”) into a single line item. In addition, we have combined cash CCRC JV entrance fees with CCRC JV entrance fee amortization into a single line item, separately disclosed deferred income taxes (previously reported in “other”) and collapsed immaterial line items into ‘other’. Adjustments for joint ventures are calculated to reflect our pro-rata share of both our consolidated and unconsolidated joint ventures. We reflect our share of FAD for unconsolidated joint ventures by applying our actual ownership percentage for the period to the applicable reconciling items on an entity by entity basis. We reflect our share for consolidated joint ventures in which we do not own 100% of the equity by adjusting our FAD to remove the third party ownership share of the applicable reconciling items based on actual ownership percentage for the applicable periods (see FFO above for further disclosure regarding our use of pro-rata share information and its limitations). Other REITs or real estate companies may use different methodologies for calculating FAD, and accordingly, our FAD may not be comparable to those reported by other REITs. Although our FAD computation may not be comparable to that of other REITs, management believes FAD provides a meaningful supplemental measure of our performance and is frequently used by analysts, investors, and other interested parties in the evaluation of our performance as a REIT. We believe FAD is an alternative run-rate earnings measure that improves the understanding of our operating results among investors and makes comparisons with: (i) expected results, (ii) results of previous periods and (iii) results among REITS more meaningful. FAD does not represent cash generated from operating activities determined in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs as it excludes the following items which generally flow through our cash flows from operating activities: (i) adjustments for changes in working capital or the actual timing of the payment of income or expense items that are accrued in the period, (ii) transaction-related costs, (iii) litigation settlement expenses, (iv) severance-related expenses and (v) actual cash receipts from interest income recognized on loans receivable (in contrast to our FAD adjustment to exclude non-cash interest and depreciation related to our investments in direct financing leases). Furthermore, FAD is adjusted for recurring capital expenditures, which are generally not considered when determining cash flows from operations or liquidity. FAD is a non-GAAP supplemental financial measure and should not be considered as an alternative to net income (loss) determined in accordance with GAAP. For a reconciliation of net income (loss) to FAD and other relevant disclosure, refer to “Non-GAAP Financial Measures Reconciliations” below.
Comparison of the Three and Nine Months Ended September 30, 2017 to the Three and Nine Months Ended September 30, 2016
Overview

Three Months Ended September 30, 2017 and 2016
The following table summarizes results for the three months ended September 30, 2017 and 2016 (dollars in thousands, except per share data):
 
Three Months Ended 
 
Three Months Ended 
 
 
 
September 30, 2017
 
September 30, 2016
 
 
Amount
 
Diluted Per Share
 
Amount
 
Diluted Per Share
 
Per Share Change
Net income (loss) applicable to common shares
$
(7,788
)
 
$
(0.02
)
 
$
150,924

 
$
0.32

 
$
(0.34
)
FFO
155,248

 
0.33

 
304,387

 
0.65

 
(0.32
)
FFO as adjusted
227,769

 
0.48

 
336,513

 
0.72

 
(0.24
)
FAD
202,407

 
 
 
317,540

 
 
 
 
Net income applicable to common shares (“EPS”) decreased primarily as a result of the following:
a reduction in net income from discontinued operations due to the spinoff of QCP on October 31, 2016;

43


a loss on debt extinguishment, representing a premium for early payment on the repurchase of our senior notes, in July 2017;
a reduction of NOI primarily as a result of the sale of 64 senior housing triple-net assets;
a reduction in resident fees and services, partially offset by a reduction in operating expenses, due to the partial sale and deconsolidation of RIDEA II during the first quarter of 2017;
impairments related to (i) our mezzanine loan facility to Tandem Health Care (the “Tandem Mezzanine Loan”) and (ii) 11 underperforming senior housing triple-net facilities in the third quarter of 2017;
casualty-related charges due to hurricanes in the third quarter of 2017; and
a reduction in interest income due to the payoff of: (i) our HC-One Facility in June 2017 and (ii) a participating development loan during the third quarter of 2016.
The decrease in EPS was partially offset by:
a reduction in interest expense as a result of debt repayments in the fourth quarter of 2016 and year-to-date 2017;
a reduction in severance and related charges primarily related to the departure of our former President and Chief Executive Officer in the third quarter of 2016 compared to severance and related charges primarily related to the departure of our former Executive Vice President and Chief Accounting Officer in the third quarter of 2017; and
a net gain on sales of real estate during the third quarter of 2017 compared to no sales during the third quarter of 2016 .
FFO decreased primarily as a result of the aforementioned events impacting EPS, except for gain on sales of real estate and impairments of real estate, which are excluded from FFO.
FFO as adjusted decreased primarily as a result of the aforementioned events impacting FFO, except for the following, which are excluded from FFO as adjusted:
a loss on debt extinguishment from the repurchase of our senior notes in July 2017; and
casualty-related charges due to hurricanes in the third quarter of 2017; partially offset by
a reduction in severance and related charges; and
an impairment related to our Tandem Mezzanine Loan in the third quarter of 2017.
Beginning in the third quarter of 2017, casualty-related charges (recoveries), net are excluded from FFO as adjusted.
FAD decreased primarily as a result of the aforementioned events impacting FFO as adjusted and increased leasing costs and tenant capital improvements.
Nine Months Ended September 30, 2017 and 2016
The following table summarizes results for the nine months ended September 30, 2017 and 2016 (dollars in thousands, except per share data):
 
Nine Months Ended
 
Nine Months Ended
 
 
 
September 30, 2017
 
September 30, 2016
 
 
Amount
 
Diluted Per Share
 
Amount
 
Diluted Per Share
 
Per Share Change
Net income (loss) applicable to common shares
$
472,311

 
$
1.01

 
$
568,109

 
$
1.22

 
$
(0.21
)
FFO
608,162

 
1.30

 
956,864

 
2.05

 
(0.75
)
FFO as adjusted
692,726

 
1.47

 
1,006,166

 
2.15

 
(0.68
)
FAD
621,109

 
 
 
964,437

 
 
 
 
EPS decreased primarily as a result of the following:
a reduction in net income from discontinued operations due to the spinoff of QCP on October 31, 2016;
a loss on debt extinguishment, representing a premium for early payment on the repurchase of our senior notes, in July 2017;
a reduction of NOI primarily as a result of the sale of 64 senior housing triple-net assets, and property sales in our life science and medical office segments;

44


a reduction in resident fees and services, partially offset by a reduction in operating expenses, due to the partial sale and deconsolidation of RIDEA II during the first quarter of 2017;
impairments of our Tandem Mezzanine Loan in the second and third quarter of 2017;
impairments related to 11 underperforming senior housing triple-net facilities in the third quarter of 2017;
casualty-related charges due to hurricanes in the third quarter of 2017; and
a reduction in interest income due to the payoff of three participating development loans during the second and third quarters of 2016.
The decrease in EPS was partially offset by the following:
an increased net gain on sales of real estate during the first three quarters of 2017 compared to the first three quarters of 2016 ;
a reduction in interest expense as a result of debt repayments during the second half of 2016 and year-to-date 2017;
a gain on sale of our Four Seasons Notes in the first quarter of 2017;
increased NOI from our 2016 acquisitions, developments placed in service, and annual rent escalations;
decreased depreciation and amortization expense as a result of the sale of 64 senior housing triple-net assets and the deconsolidation of RIDEA II during the first quarter of 2017, partially offset by depreciation and amortization of assets acquired during 2016 and year-to-date 2017;
a reduction in severance and related charges primarily related to the departure of our former President and Chief Executive Officer in the third quarter of 2016 compared to severance and related charges primarily related to the departure of our former Executive Vice President and Chief Accounting Officer in the third quarter of 2017; and
increased tax benefit primarily associated with state built-in gain tax for the disposition of certain real estate assets during 2016 and from the sale of a 40% interest in RIDEA II in 2017.
FFO decreased primarily as a result of the aforementioned events impacting EPS, except for depreciation and amortization, gain on sales of real estate and impairments of real estate, which are excluded from FFO.
FFO as adjusted decreased primarily as a result of the aforementioned events impacting FFO, except for the following which are excluded from FFO as adjusted:
a loss on debt extinguishment from the repurchase of our senior notes in July 2017;
impairments of our Tandem Mezzanine Loan in the second and third quarter of 2017; and
casualty-related charges due to hurricanes in the third quarter of 2017; partially offset by
a reduction in severance and related charges; and
gain on sale of our Four Seasons Notes in the first quarter of 2017.
FAD decreased primarily as a result of the aforementioned events impacting FFO as adjusted, increased leasing costs and tenant capital improvements, and lower lease restructure payments.
Segment Analysis 
The tables below provide selected operating information for our SPP and total property portfolio for each of our business segments. Our SPP for the three months ended September 30, 2017 consists of 729 properties representing properties acquired or placed in service and stabilized on or prior to July 1, 2016 and that remained in operation under a consistent reporting structure through September 30, 2017 . Our SPP for the nine months ended September 30, 2017 consists of 721 properties representing properties acquired or placed in service and stabilized on or prior to January 1, 2016 and that remained in operation under a consistent reporting structure through September 30, 2017 . Our total property portfolio consists of 818 and 881 properties at September 30, 2017 and 2016 , respectively, excluding properties in the Spin-Off.

45


Senior Housing Triple-Net

The following table summarizes results at and for the three months ended September 30, 2017 and 2016 (dollars in thousands, except per unit data):
 
SPP
 
Total Portfolio
 
Three Months Ended September 30,
 
Three Months Ended September 30,
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Rental revenues (1)
$
76,588

 
$
74,306

 
$
2,282

 
$
77,220

 
$
104,262

 
$
(27,042
)
Operating expenses
(188
)
 
(160
)
 
(28
)
 
(934
)
 
(1,794
)
 
860

NOI
76,400

 
74,146

 
2,254

 
76,286

 
102,468

 
(26,182
)
Adjustments to NOI
(252
)
 
(10
)
 
(242
)
 
(600
)
 
(1,003
)
 
403

Adjusted NOI
$
76,148

 
$
74,136

 
$
2,012

 
75,686

 
101,465

 
(25,779
)
Non-SPP adjusted NOI
 

 
 

 
 

 
462

 
(27,329
)
 
27,791

SPP adjusted NOI
 

 
 

 
 

 
$
76,148

 
$
74,136

 
$
2,012

Adjusted NOI % change
 

 
 

 
2.7
%
 
 

 
 

 
 

Property count (2)
201

 
201

 
 

 
204

 
292

 
 

Average capacity (units) (3)
20,041

 
20,054

 
 

 
20,311

 
28,378

 
 

Average annual rent per unit
$
15,236

 
$
14,819

 
 

 
$
15,089

 
$
14,555

 
 

_______________________________________
(1)
Represents rental and related revenues and income from DFLs.
(2)
From our 2016 presentation of SPP, we removed 73 senior housing properties from SPP that were sold, three senior housing properties that were classified as held for sale, and 15 senior housing properties that we transitioned to SHOP.
(3)
Represents average capacity as reported by the respective tenants or operators for the 12-month period and a quarter in arrears from the periods presented.
SPP adjusted NOI increased primarily as a result of the following:
annual rent escalations; and
higher cash rent received from our portfolio of assets leased to Sunrise Senior Living. 
Total Portfolio NOI and Adjusted NOI decreased primarily as a result of the following Non-SPP impacts:
senior housing triple-net facilities sold during 2016 and 2017; and
the transfer of 21 senior housing triple-net facilities to our SHOP segment, of which 18 were transitioned to a RIDEA structure during the fourth quarter of 2016 and year-to-date 2017.
The decrease to Total Portfolio NOI and Adjusted NOI is partially offset by the aforementioned increases to SPP.
The following table summarizes results at and for the nine months ended September 30, 2017 and 2016 (dollars in thousands, except per unit data):
 
SPP
 
Total Portfolio
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Rental revenues (1)
$
224,872

 
$
220,775

 
$
4,097

 
$
255,332

 
$
319,989

 
$
(64,657
)
Operating expenses
(470
)
 
(483
)
 
13

 
(2,927
)
 
(5,521
)
 
2,594

NOI
224,402

 
220,292

 
4,110

 
252,405

 
314,468

 
(62,063
)
Adjustments to NOI
(1,345
)
 
(5,585
)
 
4,240

 
(2,844
)
 
(8,464
)
 
5,620

Adjusted NOI
$
223,057

 
$
214,707

 
$
8,350

 
249,561

 
306,004

 
(56,443
)
Non-SPP adjusted NOI
 

 
 

 
 

 
(26,504
)
 
(91,297
)
 
64,793

SPP adjusted NOI
 

 
 

 
 

 
$
223,057

 
$
214,707

 
$
8,350

Adjusted NOI % change
 
 
 
 
3.9
%
 
 

 
 

 
 

Property count (2)
196

 
196

 
 
 
204

 
292

 
 

Average capacity (units) (3)
19,643

 
19,655

 
 
 
22,409

 
28,863

 
 

Average annual rent per unit
$
15,173

 
$
14,598

 
 
 
$
15,023

 
$
14,391

 
 

_______________________________________
(1)
Represents rental and related revenues and income from DFLs.
(2)
From our 2016 presentation of SPP, we removed 73 senior housing properties from SPP that were sold, three senior housing properties that were classified as held for sale, and 15 senior housing properties that we transitioned to SHOP.
(3)
Represents average capacity as reported by the respective tenants or operators for the 12-month period and a quarter in arrears from the periods presented.

46


SPP Adjusted NOI increased primarily as a result of the following:
annual rent escalations; and
higher cash rent received from our portfolio of assets leased to Sunrise Senior Living.
Total Portfolio NOI and Adjusted NOI decreased primarily as a result of the following Non-SPP impacts:
senior housing triple-net facilities sold during 2016 and 2017; and
the transfer of 21 senior housing triple-net facilities to our SHOP segment, of which 18 were transitioned to a RIDEA structure during the fourth quarter of 2016 and year-to-date 2017.
The decrease to Total Portfolio NOI and Adjusted NOI is partially offset by (i) increased non-SPP income from five senior housing triple-net facilities acquired in the first quarter of 2016 and (ii) the aforementioned increases to SPP.
Senior Housing Operating Portfolio

The following table summarizes results at and for the three months ended September 30, 2017 and 2016 (dollars in thousands, except per unit data):
 
SPP
 
Total Portfolio
 
Three Months Ended September 30,
 
Three Months Ended September 30,
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Rental revenues (1)
$
89,386

 
$
89,274

 
$
112

 
$
126,040

 
$
170,739

 
$
(44,699
)
HCP share of unconsolidated JV revenues
77,932

 
75,534

 
2,398

 
81,936

 
50,973

 
30,963

Operating expenses
(57,058
)
 
(57,796
)
 
738

 
(86,821
)
 
(121,502
)
 
34,681

HCP share of unconsolidated JV operating expenses
(64,688
)
 
(63,132
)
 
(1,556
)
 
(65,035
)
 
(42,463
)
 
(22,572
)
NOI
45,572

 
43,880

 
1,692

 
56,120

 
57,747

 
(1,627
)
Adjustments to NOI
200

 
(406
)
 
606

 
4,551

 
4,081

 
470

Adjusted NOI
$
45,772

 
$
43,474

 
$
2,298

 
60,671

 
61,828

 
(1,157
)
Non-SPP adjusted NOI
 

 
 

 
 

 
(14,899
)
 
(18,354
)
 
3,455

SPP adjusted NOI
 

 
 

 
 

 
$
45,772

 
$
43,474

 
$
2,298

Adjusted NOI % change
 

 
 

 
5.3
%
 
 

 
 

 
 

Property count (2)
122

 
122

 
 

 
158

 
145

 
 

Average capacity (units) (3)
22,105

 
16,761

 
 

 
25,678

 
23,575

 
 

Average annual rent per unit
$
50,847

 
$
49,678

 
 

 
$
52,667

 
$
56,895

 
 

_______________________________________
(1)
Represents resident fees and services.
(2)
From our past presentation of SPP, we have recast the components of SPP to reflect our retained 40% equity interest in RIDEA II within HCP share of unconsolidated JV revenues and operating expenses resulting from our deconsolidation of RIDEA II during the first quarter of 2017. Our 2016 total portfolio property count has been adjusted to include two properties classified as held for sale as of September 30, 2016.
(3)
Represents average capacity as reported by the respective tenants or operators for the 12-month period and a quarter in arrears from the periods presented.
SPP NOI and Adjusted NOI increased primarily as a result of the following:
increased rates for resident fees and service and lower expense growth; partially offset by
occupancy declines.
Total Portfolio NOI and Adjusted NOI decreased primarily as a result of the following:
decreased non-SPP income from our partial sale of RIDEA II; partially offset by
non-SPP income for 21 senior housing triple-net assets transferred to SHOP during the fourth quarter of 2016 and year-to-date 2017; and
the aforementioned increases to SPP.



47


The following table summarizes results at and for the nine months ended September 30, 2017 and 2016 (dollars in thousands, except per unit data):
 
SPP
 
Total Portfolio
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Rental revenues (1)
$
271,301

 
$
268,663

 
$
2,638

 
$
391,684

 
$
500,704

 
$
(109,020
)
HCP share of unconsolidated JV revenues
231,604

 
225,093

 
6,511

 
239,667

 
152,424

 
87,243

Operating expenses
(172,414
)
 
(170,467
)
 
(1,947
)
 
(267,226
)
 
(350,949
)
 
83,723

HCP share of unconsolidated JV operating expenses
(190,843
)
 
(185,368
)
 
(5,475
)
 
(190,049
)
 
(125,244
)
 
(64,805
)
NOI
139,648

 
137,921

 
1,727

 
174,076

 
176,935

 
(2,859
)
Adjustments to NOI
3

 
(1,693
)
 
1,696

 
12,229

 
14,648

 
(2,419
)
Adjusted NOI
$
139,651

 
$
136,228

 
$
3,423

 
186,305

 
191,583

 
(5,278
)
Non-SPP adjusted NOI
 

 
 

 
 

 
(46,654
)
 
(55,355
)
 
8,701

SPP adjusted NOI
 

 
 

 
 

 
$
139,651

 
$
136,228

 
$
3,423

Adjusted NOI % change
 
 
 
 
2.5
%
 
 

 
 

 
 

Property count (2)
121

 
121

 
 
 
158

 
145

 
 

Average capacity (units) (3)
21,643

 
16,631

 
 
 
25,683

 
23,447

 
 

Average annual rent per unit
$
51,620

 
$
49,519

 
 
 
$
53,385

 
$
55,632

 
 

_______________________________________
(1)
Represents rental and related revenues.
(2)
From our past presentation of SPP, we have recast the components of SPP to reflect our retained 40% equity interest in RIDEA II within HCP share of unconsolidated JV revenues and operating expenses resulting from our deconsolidation of RIDEA II during the first quarter of 2017. Our 2016 total portfolio property count has been adjusted to include two properties classified as held for sale as of September 30, 2016.
(3)
Represents average capacity as reported by the respective tenants or operators for the 12-month period and a quarter in arrears from the periods presented.
SPP NOI and Adjusted NOI increased primarily as a result of the following:
increased rates for resident fees and services; partially offset by
higher expense growth and a decline in occupancy.
Total Portfolio NOI and Adjusted NOI decreased primarily as a result of the following:
decreased non-SPP income from our partial sale of RIDEA II; partially offset by
non-SPP income for 21 senior housing triple-net assets transferred to SHOP during the fourth quarter of 2016 and year-to-date 2017; and
the aforementioned increases to SPP.

48


Life Science

The following table summarizes results at and for the three months ended September 30, 2017 and 2016 (dollars and square feet in thousands, except per square foot data):
 
SPP
 
Total Portfolio
 
Three Months Ended September 30,
 
Three Months Ended September 30,
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Rental revenues (1)
$
76,259

 
$
73,515

 
$
2,744

 
$
90,174

 
$
90,847

 
$
(673
)
HCP share of unconsolidated JV revenues
2,002

 
1,904

 
98

 
2,031

 
1,929

 
102

Operating expenses
(16,453
)
 
(14,970
)
 
(1,483
)
 
(19,960
)
 
(18,487
)
 
(1,473
)
HCP share of unconsolidated JV operating expenses
(433
)
 
(406
)
 
(27
)
 
(433
)
 
(406
)
 
(27
)
NOI
61,375

 
60,043

 
1,332

 
71,812

 
73,883

 
(2,071
)
Adjustments to NOI
1,545

 
453

 
1,092

 
(751
)
 
(314
)
 
(437
)
Adjusted NOI
$
62,920

 
$
60,496

 
$
2,424

 
71,061

 
73,569

 
(2,508
)
Non-SPP adjusted NOI
 

 
 

 
 

 
(8,141
)
 
(13,073
)
 
4,932

SPP adjusted NOI
 

 
 

 
 

 
$
62,920

 
$
60,496

 
$
2,424

Adjusted NOI % change
 

 
 

 
4.0
%
 
 

 
 

 
 

Property count (2)
112

 
112

 
 

 
131

 
133

 
 

Average occupancy
96.6
%
 
97.6
%
 
 

 
96.9
%
 
96.8
%
 
 

Average occupied square feet
6,395

 
6,457

 
 

 
7,143

 
7,675

 
 

Average annual total revenues per occupied square foot
$
51

 
$
48

 
 

 
$
52

 
$
48

 
 

Average annual base rent per occupied square foot
$
41

 
$
39

 
 

 
$
43

 
$
40

 
 

_______________________________________
(1)
Represents rental and related revenues and tenant recoveries.
(2)
From our past presentation of SPP for the three months ended September 30, 2016 , we removed four life science facilities that were classified as held for sale and a facility that was sold. Our 2016 total portfolio property count has been adjusted to include seven properties in development and eight properties classified as held for sale as of September 30, 2016.
SPP NOI and adjusted NOI increased primarily as a result of the following:
new leasing activity; and
specific to adjusted NOI, annual rent escalations.
Total Portfolio NOI and adjusted NOI decreased primarily as a result of the following impacts to Non-SPP:
decreased income from the sale of life science facilities in 2016 and 2017; partially offset by
increased income from (i) increased occupancy in portions of a development placed in operations in 2016 and 2017 and (ii) life science acquisitions in 2016 and 2017.
The decrease in Total Portfolio NOI and adjusted NOI was also partially offset by the aforementioned increases to SPP. 

49


The following table summarizes results at and for the nine months ended September 30, 2017 and 2016 (dollars and square feet in thousands, except per square foot data):
 
SPP
 
Total Portfolio
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Rental revenues (1)
$
226,803

 
$
217,906

 
$
8,897

 
$
262,224

 
$
269,994

 
$
(7,770
)
HCP share of unconsolidated JV revenues
5,890

 
5,569

 
321

 
5,975

 
5,628

 
347

Operating expenses
(46,770
)
 
(42,890
)
 
(3,880
)
 
(56,024
)
 
(53,191
)
 
(2,833
)
HCP share of unconsolidated JV operating expenses
(1,234
)
 
(1,180
)
 
(54
)
 
(1,234
)
 
(1,173
)
 
(61
)
NOI
184,689

 
179,405

 
5,284

 
210,941

 
221,258

 
(10,317
)
Adjustments to NOI
3,055

 
890

 
2,165

 
(1,094
)
 
(1,545
)
 
451

Adjusted NOI
$
187,744

 
$
180,295

 
$
7,449

 
209,847

 
219,713

 
(9,866
)
Non-SPP adjusted NOI
 

 
 

 
 

 
(22,103
)
 
(39,418
)
 
17,315

SPP adjusted NOI
 

 
 

 
 

 
$
187,744

 
$
180,295

 
$
7,449

Adjusted NOI % change
 

 
 

 
4.1
%
 
 

 
 

 
 

Property count (2)
112

 
112

 
 

 
131

 
133

 
 

Average occupancy
96.6
%
 
97.8
%
 
 

 
96.5
%
 
97.6
%
 
 

Average occupied square feet
6,391

 
6,466

 
 

 
7,032

 
7,651

 
 

Average annual total revenues per occupied square foot
$
50

 
$
47

 
 

 
$
52

 
$
48

 
 

Average annual base rent per occupied square foot
$
41

 
$
38

 
 

 
$
43

 
$
39

 
 

_______________________________________
(1)
Represents rental and related revenues and tenant recoveries.
(2)
From our past presentation of SPP for the nine months ended September 30, 2016 , we removed four life science facilities that were classified as held for sale and a facility that was sold. Our 2016 total portfolio property count has been adjusted to include seven properties in development and eight properties classified as held for sale as of September 30, 2016.

SPP NOI and Adjusted NOI increased primarily as a result of the following:
mark-to-market lease renewals;
new leasing activity; and
specific to adjusted NOI, annual rent escalations.
Total Portfolio NOI and Adjusted NOI decreased primarily as a result of the following impacts to Non-SPP:
decreased income from the sale of life science facilities in 2016 and 2017; partially offset by
increased income from (i) increased occupancy in portions of a development placed in operations in 2016 and 2017 and (ii) life science acquisitions in 2016 and 2017.
The decrease in Total Portfolio NOI and Adjusted NOI was also partially offset by the aforementioned increases to SPP. 


50


Medical Office

The following table summarizes results at and for the three months ended September 30, 2017 and 2016 (dollars and square feet in thousands, except per square foot data):
 
SPP
 
Total Portfolio
 
Three Months Ended September 30,
 
Three Months Ended September 30,
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Rental revenues (1)
$
101,804

 
$
100,211

 
$
1,593

 
$
119,847

 
$
113,653

 
$
6,194

HCP share of unconsolidated JV revenues
474

 
469

 
5

 
496

 
502

 
(6
)
Operating expenses
(38,587
)
 
(37,926
)
 
(661
)
 
(46,486
)
 
(44,738
)
 
(1,748
)
HCP share of unconsolidated JV operating expenses
(143
)
 
(147
)
 
4

 
(143
)
 
(148
)
 
5

NOI
63,548

 
62,607

 
941

 
73,714

 
69,269

 
4,445

Adjustments to NOI
650

 
4

 
646

 
(582
)
 
(814
)
 
232

Adjusted NOI
$
64,198

 
$
62,611

 
$
1,587

 
73,132

 
68,455

 
4,677

Non-SPP adjusted NOI
 

 
 

 
 

 
(8,934
)
 
(5,844
)
 
(3,090
)
SPP adjusted NOI
 

 
 

 
 

 
$
64,198

 
$
62,611

 
$
1,587

Adjusted NOI % change
 

 
 

 
2.5
%
 
 

 
 

 
 

Property count (2)
214

 
214

 
 

 
245

 
230

 
 

Average occupancy
91.7
%
 
92.1
%
 
 

 
91.8
%
 
91.6
%
 
 

Average occupied square feet
14,357

 
14,509

 
 

 
16,707

 
15,817

 
 

Average annual total revenues per occupied square foot
$
29

 
$
28

 
 

 
$
29

 
$
29

 
 

Average annual base rent per occupied square foot
$
24

 
$
23

 
 

 
$
24

 
$
24

 
 

_______________________________________
(1)
Represents rental and related revenues and tenant recoveries.
(2)
From our past presentation of SPP, we removed a MOB that was sold and four MOBs that were placed into redevelopment. Our 2016 property count has been adjusted to include four properties in development as of September 30, 2016.
SPP NOI and adjusted NOI increased primarily as a result of mark-to-market lease renewals and new leasing activity. Additionally, SPP adjusted NOI increased as a result of annual rent escalations.
Total Portfolio NOI and adjusted NOI increased primarily as a result of the aforementioned increases to SPP and the following impacts to Non-SPP:
increased income from our 2016 and 2017 acquisitions; and
increased occupancy in former redevelopment and development properties that have been placed into operations; partially offset by
decreased income from the sale of four MOBs during 2016 and 2017 and the placement of a MOB into redevelopment.



51


The following table summarizes results at and for the nine months ended September 30, 2017 and 2016 (dollars and square feet in thousands, except per square foot data):
 
SPP
 
Total Portfolio
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Rental revenues (1)
$
299,808

 
$
293,138

 
$
6,670

 
$
357,381

 
$
331,881

 
$
25,500

HCP share of unconsolidated JV revenues
1,414

 
1,406

 
8

 
1,481

 
1,503

 
(22
)
Operating expenses
(112,491
)
 
(109,929
)
 
(2,562
)
 
(137,930
)
 
(129,715
)
 
(8,215
)
HCP share of unconsolidated JV operating expenses
(431
)
 
(452
)
 
21

 
(431
)
 
(452
)
 
21

NOI
188,300

 
184,163

 
4,137

 
220,501

 
203,217

 
17,284

Adjustments to NOI
1,652

 
(175
)
 
1,827

 
(2,321
)
 
(2,361
)
 
40

Adjusted NOI
$
189,952

 
$
183,988

 
$
5,964

 
218,180

 
200,856

 
17,324

Non-SPP adjusted NOI
 

 
 

 
 

 
(28,228
)
 
(16,868
)
 
(11,360
)
SPP adjusted NOI
 

 
 

 
 

 
$
189,952

 
$
183,988

 
$
5,964

Adjusted NOI % change
 

 
 

 
3.2
%
 
 

 
 

 
 

Property count (2)
213

 
213

 
 

 
245

 
230

 
 

Average occupancy
91.9
%
 
92.1
%
 
 

 
91.9
%
 
91.4
%
 
 

Average occupied square feet
14,358

 
14,410

 
 

 
16,767

 
15,719

 
 

Average annual total revenues per occupied square foot
$
28

 
$
27

 
 

 
$
28

 
$
28

 
 

Average annual base rent per occupied square foot
$
24

 
$
23

 
 

 
$
24

 
$
23

 
 

_______________________________________
(1)
Represents rental and related revenues and tenant recoveries.
(2)
From our past presentation of SPP, we removed a MOB that was sold and four MOBs that were placed into redevelopment. Our 2016 property count has been adjusted to include four properties in development as of September 30, 2016.
SPP NOI and Adjusted NOI increased primarily as a result of mark-to-market lease renewals and new leasing activity. Additionally, SPP Adjusted NOI increased as a result of annual rent escalations.
Total Portfolio NOI and Adjusted NOI increased primarily as a result of the aforementioned increases to SPP and the following impacts to Non-SPP:
increased income from our 2016 and 2017 acquisitions; and
increased occupancy in former redevelopment and development properties that have been placed into operations; partially offset by
decreased income from the sale of four MOBs during 2016 and 2017 and the placement of a MOB into redevelopment.

52


Other Income and Expense Items

The following table summarizes the results of our other income and expense items for the three and nine months ended September 30, 2017 and 2016 (in thousands):
 
Three Months Ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
Interest income
$
11,774

 
$
20,482

 
$
(8,708
)
 
$
50,974

 
$
71,298

 
$
(20,324
)
Interest expense
71,328

 
117,860

 
(46,532
)
 
235,834

 
361,255

 
(125,421
)
Depreciation and amortization
130,588

 
141,407

 
(10,819
)
 
397,893

 
421,181

 
(23,288
)
General and administrative
23,523

 
34,781

 
(11,258
)
 
67,287

 
83,011

 
(15,724
)
Acquisition and pursuit costs
580

 
2,763

 
(2,183
)
 
2,504

 
6,061

 
(3,557
)
Impairments (recoveries), net
25,328

 

 
25,328

 
82,010

 

 
82,010

Gain (loss) on sales of real estate, net
5,182

 
(9
)
 
5,191

 
322,852

 
119,605

 
203,247

Loss on debt extinguishments
(54,227
)
 

 
(54,227
)
 
(54,227
)
 

 
(54,227
)
Other income (expense), net
(10,556
)
 
1,432

 
(11,988
)
 
40,723

 
5,064

 
35,659

Income tax benefit (expense)
5,481

 
424

 
5,057

 
14,630

 
(1,101
)
 
15,731

Equity income (loss) from unconsolidated joint ventures
1,062

 
(2,053
)
 
3,115

 
4,571

 
(4,028
)
 
8,599

Total discontinued operations

 
108,213

 
(108,213
)
 

 
283,996

 
(283,996
)
Noncontrolling interests’ share in earnings
(1,937
)
 
(2,789
)
 
852

 
(7,687
)
 
(9,540
)
 
1,853

Interest income
Interest income decreased for the three months ended September 30, 2017 as a result of the payoff of: (i) our HC-One Facility in June 2017 and (ii) a participating development loan during the third quarter of 2016.
Interest income decreased for the nine months ended September 30, 2017 as a result of (i) the payoff of our HC-One Facility in June 2017 and (ii) incremental interest income received during the second quarter of 2016 due to the payoff of three participating development loans.
Interest expense
Interest expense decreased for the three and nine months ended September 30, 2017 as a result of senior unsecured notes and mortgage debt repayments, which occurred primarily in the second half of 2016 and third quarter of 2017.
Approximately 89% and 86% of our total debt, inclusive of $44 million and $356 million of variable rate debt swapped to fixed through interest rate swaps, was fixed rate debt as of September 30, 2017 and 2016 , respectively. At September 30, 2017 , our fixed rate debt and variable rate debt had weighted average interest rates of 4.19% and 2.17% , respectively. At September 30, 2016 , our fixed rate debt and variable rate debt had weighted average interest rates of 4.65% and 1.84% , respectively. For a more detailed discussion of our interest rate risk, see “Quantitative and Qualitative Disclosures About Market Risk” in Item 3 below.
Depreciation and amortization expense
Depreciation and amortization expense decreased for the three and nine months ended September 30, 2017  primarily as a result of the sale of 64 senior housing triple-net assets and the deconsolidation of RIDEA II during the first quarter of 2017, partially offset by depreciation and amortization of assets acquired during 2016 and year-to-date 2017.
General and administrative expenses
General and administrative expenses decreased for the three and nine months ended September 30, 2017  primarily as a result of severance and related charges primarily resulting from the departure of our former President and Chief Executive Officer in the third quarter of 2016 compared to severance and related charges primarily related to the departure of our former Executive Vice President and Chief Accounting Officer in the third quarter of 2017.

53


Impairments (recoveries), net
We recognized $23 million of impairments on 11 underperforming senior housing triple-net facilities and a $3 million impairment on our Tandem Mezzanine Loan for the three months ended September 30, 2017 . During the nine months ended September 30, 2017 , we recognized $59 million of impairments on our Tandem Mezzanine Loan and the aforementioned senior housing triple-net facility impairments. For the three and nine months ended September 30, 2016 , there were no impairments recognized.
See Notes 3 and 6 to the Consolidated Financial Statements for further information related to our real estate impairments and Tandem Mezzanine Loan, respectively.
Gain (loss) on sales of real estate, net
During the nine months ended September 30, 2017  (primarily in the first quarter of 2017), we sold 66 senior housing triple-net assets, five life science facilities, a SHOP facility, a MOB and a 40% interest in RIDEA II and recognized total net gain on sales of real estate of $323 million . During the nine months ended September 30, 2016 , we sold a portfolio of five facilities in one of our non-reportable segments and two senior housing triple-net facilities, a life science facility, three MOBs and a SHOP facility and recognized total gain on sales of $120 million.
Loss on debt extinguishments
During the three and nine months ended September 30, 2017 , we repurchased $500 million of our 5.375% senior notes due 2021 and recognized a $54 million loss on debt extinguishment, primarily related to a premium for early payment.
Other income (expense), net
Other income (expense), net, decreased for the three months ended September 30, 2017 primarily as a result of $10 million of casualty-related charges due to hurricanes in the third quarter of 2017. Other income, net, increased for the nine months ended September 30, 2017 primarily as a result of the £42 million ( $51 million ) gain on sale of our Four Seasons Notes, partially offset by the aforementioned casualty-related charges in the third quarter of 2017.
Income tax benefit (expense)
The increase in income tax benefit for the three months ended September 30, 2017 was primarily the result of (i) a $2 million deferred tax benefit from the casualty-related charges recognized in the third quarter of 2017 and (ii) a $2 million income tax expense associated with state built-in gain tax for the disposition of certain real estate assets during 2016. The increase in income tax benefit for the nine months ended September 30, 2017  was primarily the result of: (i) a $6 million income tax expense associated with state built-in gain tax for the disposition of certain real estate assets during 2016, (ii) a $5 million tax benefit from the sale of a 40% interest in RIDEA II in 2017 and (iii) a $2 million deferred tax benefit from the casualty-related charges recognized in the third quarter of 2017.
Equity income (loss) from unconsolidated joint ventures
The increase in equity income from unconsolidated joint ventures for the three and nine months ended September 30, 2017 was primarily the result of income from our investment in RIDEA II which was deconsolidated in the first quarter of 2017.
Total discontinued operations
For the three and nine months ended September 30, 2017 , there were no discontinued operations. Discontinued operations for the three and nine months ended September 30, 2016 relate to income from the operations of QCP.
Liquidity and Capital Resources
We anticipate that our cash flow from operations, available cash balances and cash from our various financing activities will be adequate for at least the next 12 months for purposes of: (i) funding recurring operating expenses; (ii) meeting debt service requirements, including principal payments and maturities; and (iii) satisfying our distributions to our stockholders and non-controlling interest members.  
Our principal investing needs for the next 12 months are to:
fund capital expenditures, including tenant improvements and leasing costs; and
fund future acquisition, transactional and development activities.
We anticipate satisfying these future investing needs using one or more of the following:
issuance of common or preferred stock;

54


issuance of additional debt, including unsecured notes and mortgage debt;
draws on our credit facilities; and/or
sale or exchange of ownership interests in properties.
Access to capital markets impacts our cost of capital and ability to refinance maturing indebtedness, as well as our ability to fund future acquisitions and development through the issuance of additional securities or secured debt. Credit ratings impact our ability to access capital and directly impact our cost of capital as well. For example, our revolving line of credit facility accrues interest at a rate per annum equal to LIBOR plus a margin that depends upon our credit ratings. We also pay a facility fee on the entire revolving commitment that depends upon our credit ratings. At October 27, 2017 , we had a credit rating of BBB from Fitch, Baa2 from Moody’s and BBB from S&P Global on our senior unsecured debt securities.
Cash Flow Summary

The following summary discussion of our cash flows is based on the consolidated statements of cash flows and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below.
Cash and cash equivalents were $134 million and $95 million at September 30, 2017 and December 31, 2016 , respectively, representing an increase of $39 million . The following table sets forth changes in cash flows (in thousands):
 
Nine Months Ended September 30,
 
2017
 
2016
 
Change
Net cash provided by (used in) operating activities
$
637,896

 
$
998,632

 
$
(360,736
)
Net cash provided by (used in) investing activities
1,755,823

 
(314,159
)
 
2,069,982

Net cash provided by (used in) financing activities
(2,354,963
)
 
(897,328
)
 
(1,457,635
)
The decrease in operating cash flow is primarily the result of (i) decreased Adjusted NOI related to the QCP Spin-Off and dispositions in the fourth quarter of 2016 and first three quarters of 2017 and (ii) decreased interest received as a result of loan repayments during 2017; partially offset by (i) 2016 acquisitions, (ii) annual rent increases, and (iii) decreased interest paid as a result of lower balances on our senior unsecured notes, term loans and line of credit. Our cash flow from operations is dependent upon the occupancy levels of our buildings, rental rates on leases, our tenants’ performance on their lease obligations, the level of operating expenses and other factors.
The following are significant investing and financing activities for the nine months ended September 30, 2017 :
received net proceeds of $1.7 billion from the sale of real estate, including the sale and recapitalization of RIDEA II;
received net proceeds of $550 million primarily from the sale of our Four Seasons investments, the repayment of our HC-One Facility, and a DFL repayment;
made investments of $527 million primarily for the development of real estate;
repaid $1.8 billion, net under our bank line of credit, 2012 Term Loan, 2015 Term Loan, senior unsecured notes and mortgage debt; and
paid dividends on common stock of $521 million.
Debt

See Note 10 in the Consolidated Financial Statements for information about our outstanding debt.
See “2017 Transaction Overview” for further information regarding our significant financing activities through October 31, 2017.
Equity

At September 30, 2017 , we had 469 million shares of common stock outstanding, equity totaled $5.9 billion , and our equity securities had a market value of $13.2 billion .
At September 30, 2017 , non-managing members held an aggregate of 4 million units in five limited liability companies (“DownREITs”) for which we are the managing member. The DownREIT units are exchangeable for an amount of cash

55


approximating the then-current market value of shares of our common stock or, at our option, shares of our common stock (subject to certain adjustments, such as stock splits and reclassifications). At September 30, 2017 , the DownREIT units were convertible into 7 million shares of our common stock.
At-The-Market Program
In June 2015, we established an at-the-market program, in connection with the renewal of our shelf registration statement. Under this program, we may sell shares of our common stock from time to time having an aggregate gross sales price of up to $750 million through a consortium of banks acting as sales agents or directly to the banks acting as principals. There was no activity during the nine months ended September 30, 2017 and, at September 30, 2017 , shares of our common stock having an aggregate gross sales price of $676 million were available for sale under the at-the-market program. Actual future sales will depend upon a variety of factors, including but not limited to market conditions, the trading price of our common stock and our capital needs. We have no obligation to sell the remaining shares available for sale under our program.
Shelf Registration
We filed a prospectus with the SEC as part of a registration statement on Form S-3ASR, using a shelf registration process. Our current shelf registration statement expires in June 2018, at which time we expect to file a new shelf registration statement. Under the “shelf” process, we may sell any combination of the securities described in the prospectus through one or more offerings. The securities described in the prospectus include common stock, preferred stock, depositary shares, debt securities and warrants.
Off-Balance Sheet Arrangements
We own interests in certain unconsolidated joint ventures as described in Note 7 to the Consolidated Financial Statements. Except in limited circumstances, our risk of loss is limited to our investment in the joint venture and any outstanding loans receivable. In addition, we have certain properties which serve as collateral for debt that is owed by a previous owner of certain of our facilities. Our risk of loss for these certain properties is limited to the outstanding debt balance plus penalties, if any. We have no other material off-balance sheet arrangements that we expect would materially affect our liquidity and capital resources except for commitments and operating leases included in our Annual Report on Form 10-K for the year ended December 31, 2016 in “Contractual Obligations” under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

56


Non-GAAP Financial Measures Reconciliations
The following is a reconciliation from net income (loss) applicable to common shares, the most directly comparable financial measure calculated and presented in accordance with GAAP, to FFO, FFO as adjusted and FAD (in thousands, except per share data):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net income (loss) applicable to common shares
$
(7,788
)
 
$
150,924

 
$
472,311

 
$
568,109

Real estate related depreciation and amortization
130,588

 
142,874

 
397,893

 
425,582

Real estate related depreciation and amortization on unconsolidated joint ventures
16,358

 
12,607

 
47,711

 
36,347

Real estate related depreciation and amortization on noncontrolling interests and other
(3,678
)
 
(5,270
)
 
(11,711
)
 
(15,708
)
Other depreciation and amortization (1)
2,360

 
2,986

 
7,718

 
8,922

Loss (gain) on sales of real estate, net
(5,182
)
 
9

 
(322,852
)
 
(119,605
)
Loss (gain) on sales of real estate, net on unconsolidated joint ventures

 

 

 
(215
)
Loss (gain) on sales of real estate, net on noncontrolling interests

 

 

 
(2
)
Taxes associated with real estate dispositions (2)

 
257

 
(5,498
)
 
53,434

Impairments (recoveries) of real estate, net (3)
22,590

 

 
22,590

 

FFO applicable to common shares
$
155,248

 
$
304,387

 
$
608,162

 
$
956,864

Distributions on dilutive convertible units and other

 
2,376

 
5,250

 
10,622

Diluted FFO applicable to common shares
$
155,248

 
$
306,763

 
$
613,412

 
$
967,486

 
 
 
 
 
 
 
 
Weighted average shares used to calculate diluted FFO per common share
469,156

 
471,994

 
473,519

 
473,011

 
 
 
 
 
 
 
 
Impact of adjustments to FFO:
 

 
 

 
 
 
 
Transaction-related items (4)
$
580

 
$
17,568

 
$
2,476

 
$
34,570

Other impairments (recoveries), net (5)
2,738

 

 
8,526

 

Severance and related charges (6)
3,889

 
14,464

 
3,889

 
14,464

Loss on debt extinguishment (7)
54,227

 

 
54,227

 

Litigation costs
2,303

 

 
7,507

 

Casualty-related charges (recoveries), net (8)
8,925

 

 
8,925

 

Foreign currency remeasurement losses (gains)
(141
)
 
94

 
(986
)
 
268

 
$
72,521

 
$
32,126

 
$
84,564

 
$
49,302

 
 
 
 
 
 
 
 
FFO as adjusted applicable to common shares
$
227,769

 
$
336,513

 
$
692,726

 
$
1,006,166

Distributions on dilutive convertible units and other
1,493

 
3,467

 
5,095

 
10,549

Diluted FFO as adjusted applicable to common shares
$
229,262

 
$
339,980

 
$
697,821

 
$
1,016,715

 
 
 
 
 
 
 
 
Weighted average shares used to calculate diluted FFO as adjusted per common share
473,836

 
473,692

 
473,519

 
473,011


57


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
FFO as adjusted applicable to common shares
$
227,769

 
$
336,513

 
$
692,726

 
$
1,006,166

Amortization of deferred compensation (9)
3,237

 
3,389

 
10,329

 
12,894

Amortization of deferred financing costs
3,439

 
5,037

 
11,141

 
15,598

Straight-line rents
(4,060
)
 
(3,295
)
 
(12,236
)
 
(14,412
)
Other depreciation and amortization
(2,360
)
 
(2,986
)
 
(7,718
)
 
(8,921
)
Leasing costs, tenant improvements, and recurring capital expenditures (10)
(28,783
)
 
(23,822
)
 
(79,903
)
 
(66,176
)
Lease restructure payments
311

 
1,868

 
1,165

 
14,480

CCRC entrance fees (11)
6,074

 
4,975

 
14,436

 
16,524

Deferred income taxes (12)
(3,807
)
 
(3,431
)
 
(10,523
)
 
(8,977
)
Other FAD adjustments
587

 
(708
)
 
1,692

 
(2,739
)
FAD applicable to common shares
$
202,407

 
$
317,540

 
$
621,109

 
$
964,437

Distributions on dilutive convertible units and other
1,596

 
3,513

 
5,250

 
10,622

Diluted FAD applicable to common shares
$
204,003

 
$
321,053

 
$
626,359

 
$
975,059

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Diluted earnings per common share
(0.02
)
 
0.32

 
1.01

 
1.22

Depreciation and amortization
0.31

 
0.33

 
0.93

 
0.97

Loss (gain) on sales of real estate, net
(0.01
)
 

 
(0.68
)
 
(0.25
)
Taxes associated with real estate dispositions (2)

 

 
(0.01
)
 
0.11

Impairments (recoveries) of real estate, net (3)
0.05

 

 
0.05

 

Diluted FFO per common shares
$
0.33

 
$
0.65

 
$
1.30

 
$
2.05

Transaction-related items (4)

 
0.04

 

 
0.07

Other impairments (recoveries), net (5)
0.01

 

 
0.02

 

Severance and related charges (6)
0.01

 
0.03

 
0.01

 
0.03

Loss on debt extinguishment (7)
0.11

 

 
0.11

 

Litigation costs

 

 
0.01

 

Casualty-related charges (recoveries), net (8)
0.02

 

 
0.02

 

Diluted FFO as adjusted per common shares
$
0.48

 
$
0.72

 
$
1.47

 
$
2.15

_______________________________________
(1)
Other depreciation and amortization includes DFL depreciation and lease incentive amortization (reduction of straight-line rents) for the consideration given to terminate the 30 purchase options on the 153-property amended lease portfolio in the 2014 Brookdale transaction.
(2)
For the nine months ended September 30, 2017, represents income tax benefit associated with the disposition of real estate assets in our RIDEA II transaction. For the nine months ended September 30, 2016, represents income tax expense associated with the state built-in gain tax payable upon the disposition of specific real estate assets, of which $49 million relates to the HCRMC real estate portfolio.
(3)
Represents impairments on 11 senior housing triple-net facilities.
(4)
On January 1, 2017, we early adopted the Financial Accounting Standards Board Accounting Standards Update No. 2017-01, Clarifying the Definition of a Business (“ASU 2017-01”) which prospectively results in recognizing the majority of our real estate acquisitions as asset acquisitions rather than business combinations. Acquisition and pursuit costs relating to completed asset acquisitions are capitalized, including those costs incurred prior to January 1, 2017. Real estate acquisitions completed prior to January 1, 2017 were deemed business combinations and the related acquisition and pursuit costs were expensed as incurred. For the three and nine months ended September 30, 2016, primarily relates to the QCP spin-off.
(5)
For the three months ended September 30, 2017, relates to the impairment of our Tandem Mezzanine Loan. For the nine months ended September 30, 2017, relates to the impairments of our Tandem Mezzanine Loan, net of the impairment recovery upon the sale of our Four Seasons Notes in the first quarter of 2017.
(6)
For the three months ended September 30, 2017, primarily relates to the departure of our former Executive Vice President and Chief Accounting Officer. For the three months ended September 30, 2016, primarily relates to the departure of our former President and Chief Executive Officer.
(7)
Represents the premium associated with the prepayment of $500 million of senior unsecured notes.
(8)
Includes $11 million of casualty-related charges and a $2 million deferred income tax benefit.
(9)
Excludes $0.5 million related to the acceleration of deferred compensation for restricted stock units that vested upon the departure of our former Executive Vice President and Chief Accounting Officer, which is included in the severance and related charges for the three and nine months ended September 30, 2017. Excludes $6 million related to the acceleration of deferred compensation for restricted stock units and stock options that vested upon the departure of our former President and Chief Executive Officer, which is included in severance and related charges for the three and nine months ended September 30, 2016.
(10)
Includes our share of leasing costs and tenant and capital improvements from unconsolidated joint ventures.

58


(11)
Represents our 49% share of non-refundable entrance fees as the fees are collected by our CCRC JV, net of reserves and CCRC JV entrance fee amortization.
(12)
Excludes $2 million of deferred tax benefit from the casualty-related charges, which is included in casualty-related charges (recoveries), net for the three and nine months ended September 30, 2017.

For a reconciliation of NOI and Adjusted NOI to net income (loss), refer to Note 13 to the Consolidated Financial Statements. For a reconciliation of SPP NOI and Adjusted NOI to total portfolio NOI and Adjusted NOI by segment, refer to the analysis of each segment in “Results of Operations” above.

Critical Accounting Policies
The preparation of financial statements in conformity with U.S. GAAP requires our management to use judgment in the application of accounting policies, including making estimates and assumptions. We base estimates on the best information available to us at the time, our experience and on various other assumptions believed to be reasonable under the circumstances. These estimates affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, it is possible that different accounting would have been applied, resulting in a different presentation of our consolidated financial statements. From time to time, we re-evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2016 in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 2 to the Consolidated Financial Statements. There have been no significant changes to our critical accounting policies during 2017 .
Recent Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements for the impact of new accounting standards.
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various market risks, including the potential loss arising from adverse changes in interest rates and foreign currency exchange rates, specifically the GBP. We use derivative financial instruments in the normal course of business to mitigate interest rate and foreign currency risk. We do not use derivative financial instruments for speculative or trading purposes. Derivatives are recorded on the consolidated balance sheets at fair value (see Note 19 to the Consolidated Financial Statements).
To illustrate the effect of movements in the interest rate and foreign currency markets, we performed a market sensitivity analysis on our hedging instruments. We applied various basis point spreads to the underlying interest rate curves and foreign currency exchange rates of the derivative portfolio in order to determine the change in fair value. Assuming a one percentage point change in the underlying interest rate curve, the estimated change in fair value of each of the underlying derivative instruments would not exceed $2 million . Assuming a one percentage point change in the underlying foreign currency exchange rates, the estimated change in fair value of each of the underlying derivative instruments would not exceed $2 million .
Interest Rate Risk.  At September 30, 2017 , our exposure to interest rate risk is primarily on our variable rate debt. At September 30, 2017 , $44 million of our variable-rate debt was hedged by interest rate swap transactions. The interest rate swaps are designated as cash flow hedges, with the objective of managing the exposure to interest rate risk by converting the interest rates on our variable-rate debt to fixed interest rates.
Interest rate fluctuations will generally not affect our future earnings or cash flows on our fixed rate debt and assets until their maturity or earlier prepayment and refinancing. If interest rates have risen at the time we seek to refinance our fixed rate debt, whether at maturity or otherwise, our future earnings and cash flows could be adversely affected by additional borrowing costs. Conversely, lower interest rates at the time of refinancing may reduce our overall borrowing costs. However, interest rate changes will affect the fair value of our fixed rate instruments. A one percentage point increase in interest rates would change the fair value of our fixed rate debt and investments by approximately $255 million and $0.8 million , respectively, and would not materially impact earnings or cash flows. Conversely, changes in interest rates on variable rate debt and investments would change our future earnings and cash flows, but not materially impact the fair value of those instruments. Assuming a one percentage point increase in the interest rate related to the variable-rate debt and variable-rate investments, and assuming no other changes in the outstanding balance at  September 30, 2017 , our annual interest expense and interest income would increase by approximately $9 million and $1 million , respectively.
Foreign Currency Risk.  At September 30, 2017 , our exposure to foreign currencies primarily relates to U.K. investments in leased real estate, loans receivables and related GBP denominated cash flows. Our foreign currency exposure is partially mitigated through the use of GBP-denominated borrowings and a foreign currency swap contract. Based solely on our operating results for the three

59


months ended September 30, 2017 , including the impact of existing hedging arrangements, if the value of the GBP relative to the U.S. dollar were to increase or decrease by 10% compared to the average exchange rate during the quarter ended September 30, 2017 , our cash flows would have decreased or increased, as applicable, by less than $1 million .
Market Risk.  We have investments in marketable debt securities classified as held-to-maturity because we have the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are recorded at amortized cost and adjusted for the amortization of premiums and discounts through maturity. We consider a variety of factors in evaluating an other-than-temporary decline in value, such as: the length of time and the extent to which the market value has been less than our current adjusted carrying value; the issuer’s financial condition, capital strength and near-term prospects; any recent events specific to that issuer and economic conditions of its industry; and our investment horizon in relationship to an anticipated near-term recovery in the market value, if any. At September 30, 2017 , both the fair value and carrying value of marketable debt securities was $19 million .
Item 4.  Controls and Procedures
Disclosure Controls and Procedures.  We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2017 . Based upon that evaluation, our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer) concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2017 .
Changes in Internal Control Over Financial Reporting.  There were no changes in our internal control over financial reporting (as such term as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

60


PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See the “Legal Proceedings” section of Note 11 to the consolidated financial statements for information regarding legal proceedings, which information is incorporated by reference in this Item 1.
Item 1A.  Risk Factors
There are no material changes to the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016 , as updated by Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a)
None.
(b)
None.
(c)
The following table sets forth information with respect to purchases of our common stock made by us or on our behalf or by any “affiliated purchaser,” as such term is defined in Rule 10b-18(a)(3) under the Exchange Act, during the three months ended September 30, 2017 .
Period Covered
 
Total Number
Of Shares
Purchased (1)
 
Average
Price
Paid Per
Share
 
Total Number Of Shares
(Or Units) Purchased As
Part Of Publicly
Announced Plans Or
Programs
 
Maximum Number (Or
Approximate Dollar Value)
Of Shares (Or Units) That
May Yet Be Purchased
Under The Plans Or
Programs
July 1-31, 2017
 
2,807

 
$
31.94

 

 

August 1-31, 2017
 
181

 
31.00

 

 

September 1-30, 2017
 
100

 
29.47

 

 

Total
 
3,088

 
31.80

 

 

_______________________________________
(1)
Represents shares of our common stock withheld under our equity incentive plans to offset tax withholding obligations that occur upon vesting of restricted shares and restricted stock units. The value of the shares withheld is based on the closing price of our common stock on the last trading day prior to the date the relevant transaction occurs.
Item 5. Other Information
(a)
None.
(b)
None.

61


Item 6. Exhibits
2.1
 

 
 
 
3.1
 


 
 
 
3.2
 


 
 
 
31.1
 
 
 
 
31.2
 
 
 
 
32.1
 
 
 
 
32.2
 
 
 
 
101.INS
 
XBRL Instance Document.*
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document.*
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.*
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.*
 
 
 
101.LAB
 
XBRL Taxonomy Extension Labels Linkbase Document.*
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.*
_______________________________________
*       Filed herewith.
**     Furnished herewith. 



62


SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 2, 2017
HCP, Inc.
 
 
 
(Registrant)
 
 
 
/s/ THOMAS M. HERZOG
 
Thomas M. Herzog
 
President and Chief Executive Officer
 
(Principal Executive Officer)
 
 
 
/s/ PETER A. SCOTT
 
Peter A. Scott
 
Executive Vice President and
 
Chief Financial Officer
 
(Principal Financial Officer)
 
 
 
/s/ SHAWN G. JOHNSTON
 
Shawn G. Johnston
 
Senior Vice President and
 
Chief Accounting Officer
 
(Principal Accounting Officer)


63
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