News Column

HCP, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

May 6, 2014

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," "estimate," "could," "would," "should" and other comparable and derivative terms or the negatives thereof. In addition, we, through our officers, from time to time, make forward-looking oral and written public statements concerning our expected future operations, strategies, securities offerings, growth and investment opportunities, dispositions, capital structure changes, budgets and other developments. Readers are cautioned that, while forward-looking statements reflect our good faith belief and reasonable assumptions based upon current information, we can give no assurance that our expectations or forecasts will be attained. Therefore, readers should be mindful that forward-looking statements are not guarantees of future performance and that they are subject to known and unknown risks and uncertainties that are difficult to predict. As more fully set forth under "Part I, Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, factors that may cause our actual results to differ materially from the expectations contained in the forward-looking statements include:



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

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



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

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

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



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

(g) Changes in federal, state or local laws and regulations, including those affecting the healthcare industry that affect our costs of compliance or increase the costs, or otherwise affect the operations of our operators, tenants and borrowers;



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

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

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



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

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

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

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

(o) The risks associated with our investments in joint ventures and unconsolidated entities, including our lack of sole decision making authority and our reliance on our joint venture partners' financial condition and continued cooperation; and

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

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

The information set forth in this Item 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 † 2014 Transaction Overview † Dividends † Critical Accounting Policies † Results of Operations † Liquidity and Capital Resources † Funds from Operations ("FFO") † Off-Balance Sheet Arrangements † Contractual Obligations † Inflation † Recent Accounting Pronouncements Executive Summary We are a Maryland corporation and were organized to qualify as a self-administered real estate investment trust ("REIT") that, together with our unconsolidated joint ventures, invests primarily in real estate serving the healthcare industry in the U.S. We acquire, develop, lease, manage and dispose of healthcare real estate, and provide financing to healthcare providers. At March 31, 2014, our portfolio of investments, including properties in our Investment Management Platform, consisted of interests in 1,154 facilities. Our Investment Management Platform represents the following joint ventures: (i) HCP Ventures III, LLC, (ii) HCP Ventures IV, LLC and (iii) the HCP Life Science ventures. Our business strategy is based on three principles: (i) opportunistic investing, (ii) portfolio diversification and (iii) conservative financing. We actively redeploy capital from investments with lower return potential or shorter investment horizons into assets representing longer term investments with attractive risk-adjusted return potential. We make investments where the expected risk-adjusted return exceeds our cost of capital and strive to capitalize on our operator, tenant and other business relationships to grow our business. Our strategy contemplates acquiring and developing properties on terms that are favorable to us. Generally, we prefer larger, more complex private transactions that leverage our management team's experience and our infrastructure. We follow a disciplined approach to enhancing the value of our existing portfolio, including ongoing evaluation of potential disposition of properties that no longer fit our strategy. We primarily generate revenue by leasing healthcare properties under long term leases with fixed and/or inflation indexed escalators. Most of our rents and other earned income from leases are received under triple net leases or leases that provide for substantial recovery of operating expenses; however, some of our medical office and life science leases are structured as gross or modified gross leases. Operating expenses are generally related to medical office buildings ("MOBs") and life science leased properties and senior housing properties managed by eligible independent contractors ("RIDEA properties"). Accordingly, for such MOBs, life science facilities and RIDEA properties, we incur certain property operating expenses, such as real estate taxes, repairs and maintenance, property management fees, utilities, employee costs for resident care and insurance. Our growth for these assets depends, in part, on our ability to (i) increase rental income and other earned income from leases by increasing rental rates and occupancy levels; (ii) maximize tenant recoveries given underlying lease structures; and (iii) control operating and other expenses. Our operations are impacted by property specific, market specific, general economic and other conditions. 26 --------------------------------------------------------------------------------

Table of Contents 2014 Transaction Overview



Expanding Relationship with Brookdale by Creating a $1.2 Billion CCRC Joint Venture and Amending Existing Emeritus Leases

On April 23, 2014, HCP and Brookdale Senior Living ("Brookdale") agreed to create a new $1.2 billion (before in-place refundable entry fee obligations) strategic joint venture to own and operate entry fee continuing care retirement communities ("CCRC JV"), representing 14 CCRC campuses, at closing. HCP and Brookdale will own 49% and 51%, respectively, of the CCRC JV based on each company's respective contributions at closing. Brookdale will continue to manage all properties post-closing under a long-term management agreement. Further, all existing Emeritus purchase options encompassing 49 HCP properties will be cancelled at closing; in exchange, all triple-net leases between HCP and Emeritus covering 202 senior housing properties will be amended contemporaneously, resulting in two portfolios: (i) RIDEA Portfolio: 49 non-stabilized properties will contributed into a RIDEA joint venture, with Brookdale managing the communities and acquiring a 20% ownership in the venture; and (ii) NNN-leased Portfolio: Brookdale and HCP will amend the triple-net master leases for the remaining 153 properties. all guaranteed by Brookdale.



All transactions described above are contingent upon the closing of Brookdale's pending merger with Emeritus.

Other Investment Transactions

During the quarter ended March 31, 2014, the Company: (i) made a $32 million investment in a medical office building ("MOB"); (ii) acquired an 85 percent interest in a $51 million senior housing community development project; and (iii) funded $53 million for construction and other capital projects, primarily in our life science, medical office and senior housing segments.



During the quarter ended March 31, 2014, we sold two post-acute/skilled nursing facilities for $22 million and a hospital for $17 million.

On May 1, 2014, we acquired two MOBs for $26 million. The properties, located in the historic Coconut Grove neighborhood of Miami, are on the campus of HCA's Mercy Hospital. Financing Activities



On February 12, 2014, we issued $350 million of 4.20% senior unsecured notes due 2024. The notes priced at 99.537% of the principal amount with an effective yield-to-maturity of 4.257%; net proceeds from this offering were $346 million.

On March 31, 2014, we amended our unsecured revolving credit facility and increased it by $500 million to $2.0 billion. The amended facility reduces our funded interest cost by 17.5 basis points and extends the maturity date to March 31, 2018. Based on our current credit ratings, the amended facility bears interest annually at LIBOR plus 92.5 basis points and has a facility fee of 15.0 basis points. Other terms of the amended facility were substantially unchanged, including a one-year extension option at our discretion, and the ability to increase the commitments by an aggregate amount of up to $500 million, subject to customary conditions. Dividends On May 1, 2014, we announced that our Board declared a quarterly common stock cash dividend of $0.545 per share. The common stock dividend will be paid on May 27, 2014 to stockholders of record as of the close of business on May 12, 2014 and represents an annualized dividend pay rate of $2.18 per share. 27 --------------------------------------------------------------------------------

Table of Contents Critical Accounting Policies The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to use judgment in the application of accounting policies, including making estimates and assumptions. We base estimates on the best information available to us at the time, our experience and on various other assumptions believed to be reasonable under the circumstances. These estimates affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, it is possible that different accounting would have been applied, resulting in a different presentation of our condensed 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, 2013 in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations"; our critical accounting policies have not changed during 2014. Results of Operations We evaluate our business and allocate resources among our five business segments: (i) senior housing, (ii) post-acute/skilled nursing, (iii) life science, (iv) medical office and (v) hospital. Under the senior housing, post-acute/skilled nursing, life science and hospital segments, we invest or co-invest primarily in single operator or tenant properties, through the acquisition and development of triple-net leased real estate, management of operations ("RIDEA") and by debt issued by operators in these sectors. Under the medical office segment, we invest or co-invest through the acquisition and development of MOBs that are leased under gross, modified gross or triple-net leases, generally to multiple tenants, and which generally require a greater level of property management. We use net operating income from continuing operations ("NOI") and adjusted NOI to assess and compare property level performance, including our same property portfolio ("SPP"), to make decisions about resource allocations, and to assess and compare property level performance. We believe these measures provide investors relevant and useful information because they reflect only income and operating expense items that are incurred at the property level and present them on an unleveraged basis. We believe that net income is the most directly comparable GAAP measure to NOI. NOI should not be viewed as an alternative measure of operating performance to net income as defined by GAAP since NOI excludes certain components from net income. Further, NOI may not be comparable to that of other REITs or real estate companies, as they may use different methodologies for calculating NOI. See Note 13 to the Condensed Consolidated Financial Statements for additional segment information and the relevant reconciliations from net income to NOI and adjusted NOI. Operating expenses are generally related to MOB and life science leased properties and senior housing properties managed by eligible independent contractors (RIDEA properties). We generally recover all or a portion of MOB and life science expenses from the tenants (tenant recoveries). The presentation of expenses as operating or general and administrative is based on the underlying nature of the expense. Periodically, we review the classification of expenses between categories and make revisions based on changes in the underlying nature of the expenses. Our evaluation of results of operations by each business segment includes an analysis of our SPP and our total property portfolio. SPP information allows us to evaluate the performance of our leased property portfolio under a consistent population by eliminating changes in the composition of our portfolio of properties. We identify our SPP as stabilized properties that remained in operations and were consistently reported as leased properties or RIDEA properties for the duration of the year-over-year comparison periods presented. Accordingly, it takes a stabilized property a minimum of 12 months in operations under a consistent reporting structure to be included in our SPP. Newly acquired operating assets are generally considered stabilized at the earlier of lease-up (typically when the tenant(s) controls the physical use of at least 80% of the space) or 12 months from the acquisition date. Newly completed developments, including redevelopments, are considered stabilized at the earlier of lease-up or 24 months from the date the property is placed in service. SPP NOI excludes certain non-property specific operating expenses that are allocated to each operating segment on a consolidated basis. 28 --------------------------------------------------------------------------------



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Comparison of the Three Months Ended March 31, 2014 to the Three Months Ended March 31, 2013

Segment NOI and Adjusted NOI The tables below provide selected operating information for our SPP and total property portfolio for each of our five business segments. Our consolidated SPP consists of 1,066 properties representing properties acquired or placed in service and stabilized on or prior to January 1, 2013 and that remained in operations under a consistent reporting structure through March 31, 2014. Our consolidated total property portfolio represents 1,080 and 1,074 properties at March 31, 2014 and 2013, respectively, and excludes properties classified as discontinued operations.



Results are as of and for the three months ended March 31, 2014 and 2013 (dollars and square feet in thousands except per capacity data):

Senior Housing SPP Total Portfolio 2014 2013 Change 2014 2013 Change Rental revenues(1) $ 148,519$ 148,502$ 17$ 150,085$ 148,896$ 1,189 Resident fees and services 38,053 35,745 2,308 38,053 35,746 2,307 Total revenues 186,572 184,247 2,325 188,138 184,642 3,496 Operating expenses (24,075 ) (22,946 ) (1,129 ) (24,548 ) (23,522 ) (1,026 ) NOI 162,497 161,301 1,196 163,590 161,120 2,470 Straight-line rents (10,230 ) (13,136 ) 2,906 (10,524 ) (13,177 ) 2,653 DFL accretion (2,544 ) (5,031 ) 2,487 (2,544 ) (5,031 ) 2,487 Amortization of above and below market lease intangibles, net (147 ) (248 ) 101 (147 ) (190 ) 43 Adjusted NOI $ 149,576$ 142,886$ 6,690$ 150,375$ 142,722$ 7,653 Adjusted NOI % change 4.7 % Property count(2) 438 438 444 443 Average capacity (units)(3) 44,982 44,969 45,560 45,134 Average annual rent per unit(4) $ 13,340$ 12,754$ 13,283$ 12,743



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

(2) From our past presentation of SPP for the three months ended March 31, 2013, we removed two senior housing properties from SPP that were sold.

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



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

SPP NOI and Adjusted NOI. SPP NOI increased primarily as a result of increased NOI from RIDEA properties as a result of increased occupancy and rent increases related to new leases and leases not recognized on a straight-line basis (cash basis), partially offset by a decline in DFL income as a result of a 14-property DFL portfolio (the "DFL Portfolio") that was placed on a cash basis during 2013. SPP adjusted NOI improved primarily as a result of annual rent increases, including increases from properties that were previously transitioned from Sunrise to other operators, and increased NOI from RIDEA properties as a result of increased occupancy.



Total Portfolio NOI and Adjusted NOI. In addition to the impact of our SPP, our total portfolio NOI and adjusted NOI primarily increased as a result of our senior housing acquisitions in 2013.

29 -------------------------------------------------------------------------------- Table of Contents Post-Acute/Skilled Nursing SPP Total Portfolio 2014 2013 Change 2014 2013 Change Rental revenues(1) $ 137,659$ 133,836$ 3,823$ 137,780$ 133,836$ 3,944 Operating expenses (77 ) (128 ) 51 (532 ) (629 ) 97 NOI 137,582 133,708 3,874 137,248 133,207 4,041 Straight-line rents (282 ) (232 ) (50 ) (282 ) (232 ) (50 ) DFL accretion (18,878 ) (19,139 ) 261 (18,878 ) (19,139 ) 261 Amortization of above and below market lease intangibles, net 11 11 - 11 11 - Adjusted NOI $ 118,433$ 114,348$ 4,085$ 118,099$ 113,847$ 4,252 Adjusted NOI % change 3.6 % Property count(2) 302 302 302 302 Average capacity (beds)(3) 38,464 38,436 38,464 38,436 Average annual rent per bed $ 12,323$ 11,912$ 12,336$ 11,912



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

(2) From our past presentation of SPP for the three months ended March 31, 2013, we removed ten post-acute/skilled nursing properties from SPP that were sold. (3) Represents average capacity as reported by the respective tenants or operators for the twelve-month period and a quarter in arrears from the periods presented.



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

Life Science SPP Total Portfolio 2014 2013 Change 2014 2013 Change Rental and related revenues $ 61,857$ 61,012$ 845$ 64,781$ 62,438$ 2,343 Tenant recoveries 10,776 10,800 (24 ) 11,341 10,892 449 Total revenues 72,633 71,812 821 76,122 73,330 2,792 Operating expenses (12,440 ) (12,224 ) (216 ) (14,161 ) (13,383 ) (778 ) NOI 60,193 59,588 605 61,961 59,947 2,014 Straight-line rents (2,208 ) (3,648 ) 1,440 (2,580 ) (3,692 ) 1,112 Amortization of above and below market lease intangibles, net (1 ) 97 (98 ) 18 85 (67 ) Lease termination fees (570 ) - (570 ) (570 ) - (570 ) Adjusted NOI $ 57,414$ 56,037$ 1,377$ 58,829$ 56,340$ 2,489 Adjusted NOI % change 2.5 % Property count(2) 107 107 111 110 Average occupancy 91.0 % 91.2 % 91.1 % 91.4 % Average occupied square feet 6,228 6,264 6,411 6,423 Average annual total revenues per occupied square foot(1) $ 45$ 44$ 46$ 43 Average annual base rent per occupied square foot $ 38$ 37$ 38$ 37



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(1) Represents rental and related revenues and tenant recoveries.

(2) From our past presentation of SPP for the three months ended March 31, 2013, we removed two properties that were placed into redevelopment in 2014, which no longer meets our criteria for SPP as of the date it was placed into redevelopment. 30

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SPP NOI and Adjusted NOI. SPP NOI increased primarily as a result of an increase in termination fees. SPP adjusted NOI increased primarily as a result of annual rent escalations.

Total portfolio NOI and Adjusted NOI. In addition to the impact of our SPP, our total portfolio NOI and adjusted NOI increased primarily as a result of the impact of our life science development projects placed in service during 2014 and 2013. During the three months ended March 31, 2014, 411,000 square feet of new and renewal leases commenced at an average annual base rent of $28.91 per square foot compared to 471,000 square feet of expiring and terminated leases with an average annual base rent of $21.60 per square foot. Medical Office SPP Total Portfolio 2014 2013 Change 2014 2013 Change Rental and related revenues $ 74,480$ 72,603$ 1,877$ 75,765$ 74,084$ 1,681 Tenant recoveries 13,333 12,621 712 13,497 12,747 750 Total revenues 87,813 85,224 2,589 89,262 86,831 2,431 Operating expenses (33,186 ) (32,213 ) (973 ) (35,516 ) (34,264 ) (1,252 ) NOI 54,627 53,011 1,616 53,746 52,567 1,179 Straight-line rents (938 ) (1,520 ) 582 (1,002 ) (1,561 ) 559 Amortization of above and below market lease intangibles, net 271 216 55 293 234 59 Lease termination fees (8 ) - (8 ) (8 ) - (8 ) Adjusted NOI $ 53,952$ 51,707$ 2,245$ 53,029$ 51,240$ 1,789 Adjusted NOI % change 4.3 % Property count(1) 204 204 207 204 Average occupancy 91.7 % 91.4 % 90.9 % 91.2 % Average occupied square feet 12,659 12,593 12,861 12,768 Average annual total revenues per occupied square foot(2) $ 27$ 27$ 27$ 27 Average annual base rent per occupied square foot $ 23$ 23$ 23$ 23

-------------------------------------------------------------------------------- (1) From our past presentation of SPP for the three months ended March 31, 2013, we removed two MOBs from SPP that were sold and a MOB that was placed into redevelopment in 2013, which no longer meets our criteria for SPP as of the date it was placed into redevelopment.



(2) Represents rental and related revenues and tenant recoveries.

NOI and Adjusted NOI. SPP and total portfolio NOI and adjusted NOI increased primarily as a result of increased occupancy and annual rent escalations.

During the three months ended March 31, 2014, 429,000 square feet of new and renewal leases commenced at an average annual base rent of $22.37 per square foot compared to 483,000 square feet of expiring and terminated leases with an average annual base rent of $23.72 per square foot. 31 --------------------------------------------------------------------------------

Table of Contents Hospital SPP Total Portfolio 2014 2013 Change 2014 2013 Change Rental revenues(1) $ 20,617$ 19,142$ 1,475$ 20,948$ 19,155$ 1,793 Tenant recoveries 597 563 34 597 563 34 Total revenues 21,214 19,705 1,509 21,545 19,718 1,827 Operating expenses (947 ) (887 ) (60 ) (950 ) (888 ) (62 ) NOI 20,267 18,818 1,449 20,595 18,830 1,765 Straight-line rents 416 (242 ) 658 408 (242 ) 650 Amortization of above and below market lease intangibles, net (342 ) (112 ) (230 ) (342 ) (112 ) (230 ) Adjusted NOI $ 20,341$ 18,464$ 1,877$ 20,661$ 18,476$ 2,185 Adjusted NOI % change 10.2 % Property count(2) 15 15 16 15 Average capacity (beds)(3) 2,161 2,160 2,221 2,175 Average annual rent per bed $ 39,404$ 35,830$ 38,921$ 35,607



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

(2) From our past presentation of SPP for the three months ended March 31, 2013, we removed two hospitals from SPP that were sold.

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



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

Other Income and Expense Items

Interest income Interest income increased $4 million to $17 million for the three months ended March 31, 2014. The increase was primarily the result of interest earned from the second tranche funding of our mezzanine loan facility to Tandem Health Care (see Note 6 to the Condensed Consolidated Financial Statements for additional information) made in 2013. Interest expense



Interest expense decreased $2 million to $107 million for the three months ended March 31, 2014. The decrease was primarily the result of decreases in indebtedness.

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



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

As of March 31,(1) 2014 2013 Balance: Fixed rate $ 8,371,372$ 8,442,891 Variable rate 33,955 54,365 Total $ 8,405,327$ 8,497,256 32

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Table of Contents As of March 31,(1) 2014 2013 Percent of total debt: Fixed rate 99.6 % 99.0 % Variable rate 0.4 1.0 Total 100 % 100 % Weighted average interest rate at end of period: Fixed rate 5.16 % 5.24 % Variable rate 1.15 % 1.46 % Total 5.14 % 5.22 %

-------------------------------------------------------------------------------- (1) Excludes $74 million and $79 million at March 31, 2014 and 2013, respectively, of other debt that represents non-interest bearing life care bonds and occupancy fee deposits at certain of our senior housing facilities, which have no scheduled maturities. At March 31, 2014 and 2013, $72 million and $86 million of variable-rate mortgages, respectively, and a £137 million ($228 million and $208 million, respectively) term loan are presented as fixed-rate debt as the interest payments under such debt have been swapped (pay fixed and receive float).



Depreciation and amortization expense

Depreciation and amortization expense increased $4 million to $107 million for the three months ended March 31, 2014. The increase was primarily the result of the impact of our medical office and life science development projects placed in service and our senior housing acquisitions in 2013. Other income, net Other income, net decreased $10 million to $2 million for the three months ended March 31, 2014. The decrease was primarily the result of gains from the sale of marketable equity securities during 2013 of $11 million. Discontinued operations During the three months ended March 31, 2014, we sold two post-acute/skilled nursing facilities and a hospital, recognizing gains of $28 million. There were no sales of properties during the three months ended March 31, 2013.



Liquidity and Capital Resources

Our principal liquidity needs are to: (i) fund recurring operating expenses, (ii) meet debt service requirements including principal payments and maturities in the last nine months of 2014, (iii) fund capital expenditures, including tenant improvements and leasing costs, (iv) fund acquisition and development activities, and (v) make dividend distributions. During the three months ended March 31, 2014, distributions to shareholders and noncontrolling interest holders exceeded cash flows from operations by approximately $7 million, which was funded by cash on hand. We anticipate that cash flow from continuing operations over the next 12 months will be adequate to fund our business operations, debt service payments, recurring capital expenditures and cash dividends to shareholders. Capital requirements relating to maturing indebtedness, acquisitions and development activities may require funding from borrowings and/or equity and debt offerings. Access to capital markets impacts our cost of capital and ability to refinance maturing indebtedness, as well as our ability to fund future acquisitions and development through the issuance of additional securities or secured debt. Credit ratings impact our ability to access capital and directly impact our cost of capital as well. For example, as noted below, our revolving line of credit facility accrues interest at a rate per annum equal to LIBOR plus a margin that depends upon our debt ratings. We also pay a facility fee on the entire revolving commitment that depends upon our debt ratings. As of May 1, 2014, we had a credit rating of Baa1 from Moody's, BBB+ from Standard & Poor's ("S&P") and BBB+ from Fitch on our senior unsecured debt securities. Net cash provided by operating activities was $247 million and $214 million for the three months ended March 31, 2014 and 2013, respectively. The increase in operating cash flows is primarily the result of the following: (i) the impact from our investments in 2013, (ii) assets placed in service during 2013 and (iii) rent escalations and resets in 2013 and 2014. Our cash flows from operations are 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. 33 --------------------------------------------------------------------------------



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The following are significant investing and financing activities for the three months ended March 31, 2014:

† made investments of $54 million (development and acquisition of real estate and loans), net of proceeds from sales of real estate of $37 million;

† paid dividends on common stock of $250 million, which were generally funded by cash provided by our operating activities; and

† repaid $563 million of mortgages and senior unsecured notes and raised $350 million of unsecured notes to refinance the senior unsecured notes repayment. Debt



Bank Line of Credit and Term Loan

On March 31, 2014, we amended our unsecured revolving line of credit facility (the "Facility") with a syndicate of banks, which was scheduled to mature in March 2016, increasing the borrowing capacity by $500 million to $2.0 billion. The amended Facility matures on March 31, 2018, with a one-year committed extension option. Borrowings under the Facility accrue interest at LIBOR plus a margin that depends upon our debt ratings. We pay a facility fee on the entire revolving commitment that depends on our debt ratings. Based on our debt ratings at April 30, 2014, the margin on the Facility was 0.925%, and the facility fee was 0.15%. The Facility also includes a feature that will allow us to increase the borrowing capacity by an aggregate amount of up to $500 million, subject to securing additional commitments from existing lenders or new lending institutions. At March 31, 2014, we had no amounts drawn under the Facility. On July 30, 2012, we entered into a credit agreement with a syndicate of banks for a £137 million ($228 million at March 31, 2014) four-year unsecured term loan (the "Term Loan") that accrues interest at a rate of GBP LIBOR plus 1.20%, based on our current debt ratings. Concurrent with the closing of the Term Loan, we entered into a four-year interest rate swap contract that fixes the rate of the Term Loan at 1.81%, subject to adjustments based on our debt ratings. The Term Loan contains a one-year committed extension option. The Facility and Term Loan contain certain financial restrictions and other customary requirements. Among other things, these covenants, using terms defined in the agreements, (i) limit the ratio of Consolidated Total Indebtedness to Consolidated Total Asset Value to 60%, (ii) limit the ratio of Secured Debt to Consolidated Total Asset Value to 30%, (iii) limit the ratio of Unsecured Debt to Consolidated Unencumbered Asset Value to 60% and (iv) require a minimum Fixed Charge Coverage ratio of 1.5 times. The Facility also requires a Minimum Consolidated Tangible Net Worth of $9.5 billion at March 31, 2014. The Term Loan also requires a formula-determined Minimum Consolidated Tangible Net Worth of $9.2 billion at March 31, 2014. At March 31, 2014, we were in compliance with each of these restrictions and requirements of the Facility and Term Loan. Our Facility also contains cross-default provisions to other indebtedness of ours, including in some instances, certain mortgages on our properties. Certain mortgages contain default provisions relating to defaults under the leases or operating agreements on the applicable properties by our operators or tenants, including default provisions relating to the bankruptcy filings of such operator or tenant. Although we believe that we would be able to secure amendments under the applicable agreements if a default as described above occurs, such a default may result in significantly less favorable borrowing terms than currently available, material delays in the availability of funding or other material adverse consequences. Senior Unsecured Notes At March 31, 2014, we had senior unsecured notes outstanding with an aggregate principal balance of $6.9 billion. Interest rates on the notes ranged from 1.20% to 6.99% with a weighted average effective interest rate of 5.06% and a weighted average maturity of six years at March 31, 2014. The senior unsecured notes contain certain covenants including limitations on debt, maintenance of unencumbered assets, cross-acceleration provisions and other customary terms. We believe we were in compliance with these covenants at March 31, 2014. Mortgage Debt At March 31, 2014, we had $1.2 billion in aggregate principal amount of mortgage debt outstanding is secured by 95 healthcare facilities (including redevelopment properties) with a carrying value of $1.5 billion. Interest rates on the mortgage debt ranged from 0.69% to 8.69% with a weighted average effective interest rate of 6.19% and a weighted average maturity of three years at March 31, 2014. 34

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Mortgage debt generally requires monthly principal and interest payments, is collateralized by real estate assets and is generally non-recourse. Mortgage debt typically restricts transfer of the encumbered assets, prohibits additional liens, restricts prepayment, requires payment of real estate taxes, requires maintenance of the assets in good condition, requires maintenance of insurance on the assets, and includes conditions to obtain lender consent to enter into and terminate material leases. Some of the mortgage debt is also cross-collateralized by multiple assets and may require tenants or operators to maintain compliance with the applicable leases or operating agreements of such real estate assets. Debt Maturities



The following table summarizes our stated debt maturities and scheduled principal repayments at March 31, 2014 (in thousands):

Year Amount(1) 2014 (Nine months) $ 104,597 2015 708,421 2016 1,420,007 2017 1,300,477 2018 606,583 Thereafter 4,265,242 8,405,327



(Discounts) and premiums, net (29,077 )

$ 8,376,250



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(1) Excludes $74 million of other debt that represents Life Care Bonds that have no scheduled maturities.

Other Debt At March 31, 2014, we had $74 million of non-interest bearing life care bonds at two of our continuing care retirement communities and non-interest bearing occupancy fee deposits at two of our senior housing facilities, all of which were payable to certain residents of the facilities (collectively, "Life Care Bonds"). The Life Care Bonds are generally refundable to the residents upon the termination of the contract or upon the successful resale of the unit. Derivative Instruments We use 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. We do not use derivative instruments for speculative or trading purposes. The following table summarizes our outstanding interest-rate and foreign currency swap contracts as of March 31, 2014 (dollars and GBP in thousands): Fixed Hedge Rate/Buy Floating/Exchange Notional/

Date Entered Maturity Date Designation Amount Rate Index Sell Amount Fair Value July 2005(1) July 2020 Cash Flow 3.82 % BMA Swap Index $ 45,600$ (5,837 ) November 2008 October 2016 Cash Flow 5.95 % 1 Month LIBOR+1.50% $ 26,300$ (2,455 ) July 2012 June 2016 Cash Flow 1.81 % 1 Month GBP



LIBOR+1.20% £ 137,000 $ 2,035 July 2012 June 2016Cash Flow$ 56,800 Buy USD/Sell GBP £ 36,200 $ (3,254 )

-------------------------------------------------------------------------------- (1) 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.



For a more detailed description of our derivative instruments, see Note 19 to the Condensed Consolidated Financial Statements and "Quantitative and Qualitative Disclosures About Market Risk" in Item 3.

35 --------------------------------------------------------------------------------

Table of Contents Equity



At March 31, 2014, we had 458 million shares of common stock outstanding. At March 31, 2014, equity totaled $11 billion, and our equity securities had a market value of $18 billion.

At March 31, 2014, non-managing members held an aggregate of 4 million units in four limited liability companies ("DownREITs") for which we are the managing member. The DownREIT units are exchangeable for an amount of cash approximating the then-current market value of shares of our common stock or, at our option, shares of our common stock (subject to certain adjustments, such as stock splits and reclassifications). Shelf Registration We have a prospectus that we filed with the U.S. Securities and Exchange Commission (the "SEC") as part of a registration statement on Form S-3ASR, using a shelf registration process which expires in July 2015. Under the "shelf" process, we may sell any combination of the securities in one or more offerings. The securities described in the prospectus include common stock, preferred stock, depositary shares, debt securities and warrants. The prospectus only provides a general description of the securities we may offer. The prospectus may not be used to sell securities unless accompanied by a prospectus supplement or a free writing prospectus. Each time we sell securities under the shelf registration, we will provide a prospectus supplement that will contain specific information about the terms of the securities being offered and of the offering. The prospectus supplement may also add, update or change information contained in the prospectus. We may offer and sell the securities pursuant to the prospectus through underwriters, dealers or agents or directly to purchasers, on a continuous or delayed basis. The securities may also be resold by selling security holders. The prospectus supplement for each offering will describe in detail the plan of distribution for that offering and will set forth the names of any underwriters, dealers or agents involved in the offering and any applicable fees, commissions or discount arrangements. We intend to use the net proceeds from the sales of the securities as set forth in the applicable prospectus supplement, and unless otherwise set forth therein, we will not receive any proceeds if the securities are sold by a selling security holder.



Funds From Operations ("FFO")

We believe FFO applicable to common shares, diluted FFO applicable to common shares, and basic 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 is defined as net income applicable to common shares (computed in accordance with GAAP), excluding gains or losses from acquisition and dispositions of depreciable real estate or related interests, impairments of, or related to, depreciable real estate, plus real estate and DFL depreciation and amortization, with adjustments for joint ventures. Adjustments for joint ventures are calculated to reflect FFO on the same basis. FFO does not represent cash generated from operating activities in accordance with GAAP, is not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to net income. We compute FFO in accordance with the current National Association of Real Estate Investment Trusts' ("NAREIT") definition; however, other REITs may report FFO differently or have a different interpretation of the current NAREIT definition from us. 36 --------------------------------------------------------------------------------



Table of Contents

Details of certain items that affect comparability are discussed under "Results of Operations" above. The following is a reconciliation of net income applicable to common shares, the most directly comparable financial measure calculated and presented in accordance with GAAP, to FFO (in thousands, except per share data): Three Months Ended March 31, 2014 2013 Net income applicable to common shares $ 258,047$ 230,107 Depreciation and amortization of real estate, in-place lease and other intangibles: Continuing operations 107,388 103,179 Discontinued operations - 1,538 DFL depreciation 3,846 3,429 Gain on sales of real estate (28,010 ) - Equity income from unconsolidated joint ventures (14,528 ) (14,801 ) FFO from unconsolidated joint ventures 16,961 17,541



Noncontrolling interests' and participating securities' share in earnings

5,576 3,677



Noncontrolling interests' and participating securities' share in FFO

(6,141 ) (5,141 ) FFO applicable to common shares 343,139



339,529

Distributions on dilutive convertible units 3,420 3,328 Diluted FFO applicable to common shares $ 346,559$ 342,857 Diluted FFO per common share $ 0.75 $ 0.74



Weighted average shares used to calculate diluted FFO per common share

463,661



460,650

Net income applicable to common shares $ 0.56



$ 0.51 Depreciation and amortization of real estate, in-place lease and other intangibles

0.23 0.23 DFL depreciation 0.01 0.01 Gain on sales of real estate (0.06 ) - Joint venture and participating securities FFO adjustments 0.01 (0.01 ) Diluted FFO applicable to common shares $ 0.75 $ 0.74



Off-Balance Sheet Arrangements

We own interests in certain unconsolidated joint ventures as described under Note 7 to the Condensed Consolidated Financial Statements. Except in limited circumstances, our risk of loss is limited to our investment in the joint venture and any outstanding loans receivable. In addition, we have certain properties which serve as collateral for debt that is owed by a previous owner of certain of our facilities, as described under Note 11 to the Condensed Consolidated Financial Statements. Our risk of loss for these certain properties is limited to the outstanding debt balance plus penalties, if any. We have no other material off-balance sheet arrangements that we expect would materially affect our liquidity and capital resources except those described below under "Contractual Obligations." 37

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Table of Contents Contractual Obligations



The following table summarizes our material contractual payment obligations and commitments at March 31, 2014 (in thousands):

Less than More than Total(1) One Year 2015-2016 2017-2018 Five Years Term loan(2) $ 228,269 $ - $ 228,269 $ - $ - Senior unsecured notes 6,937,000 87,000 1,300,000 1,350,000 4,200,000 Mortgage debt 1,240,058 17,597 600,159 557,060 65,242 Construction loan commitments(3) 55,481 11,581 43,900 - - Development commitments(4) 57,307 27,068 30,239 - - Ground and other operating leases 227,680 4,714 11,663 9,394 201,909 Interest(5) 2,473,420 262,679 745,613 482,374 982,754 Total $ 11,219,215$ 410,639$ 2,959,843$ 2,398,828$ 5,449,905



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(1) Excludes $74 million of other debt that represents Life Care Bonds that have no scheduled maturities.

(2) Represents £137 million translated into U.S. dollars.

(3) Represents commitments to finance development projects and related working capital.

(4) Represents construction and other commitments for developments in progress.

(5) Interest on variable-rate debt is calculated using rates in effect at March 31, 2014.

Inflation Our leases often provide for either fixed increases in base rents or indexed escalators, based on the Consumer Price Index or other measures, and/or additional rent based on increases in the tenants' operating revenues. Most of our MOB leases require the tenant to pay a share of property operating costs such as real estate taxes, insurance and utilities. Substantially all of our senior housing, life science, post-acute/skilled nursing and hospital leases require the operator or tenant to pay all of the property operating costs or reimburse us for all such costs. We believe that inflationary increases in expenses will be offset, in part, by the operator or tenant expense reimbursements and contractual rent increases described above.



Recent Accounting Pronouncements

See Note 2 to the Condensed Consolidated Financial Statements for the impact of new accounting standards. There are no accounting pronouncements that have been issued, but not yet adopted by us, that we believe will materially impact our condensed consolidated financial statements.


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