News Column

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

August 5, 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;

(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.

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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 June 30, 2014, our portfolio of investments, including properties in our Investment Management Platform, consisted of interests in 1,178 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. 27 --------------------------------------------------------------------------------

Table of Contents 2014 Transaction Overview



Brookdale Lease Amendments and Terminations and the Formation of Two RIDEA Joint Ventures ("Brookdale Transaction")

On July 31, 2014, Brookdale Senior Living Inc, ("Brookdale") completed its acquisition of Emeritus Corporation ("Emeritus") and became our largest senior housing relationship. In April 2014, HCP and Brookdale agreed to a multiple-element transaction that, upon its closing, will:

amend existing lease agreements on 153 HCP-owned senior housing communities, including the removal of embedded purchase options in leases relating to 30 properties;



terminate existing lease agreements on 49 HCP-owned senior housing properties, including the removal of embedded purchase options in leases relating to 19 properties. Subsequent to the lease termination, we will contribute these 49 properties to a newly formed consolidated RIDEA partnership; Brookdale will be a 20% equity partner and will manage the facilities on our behalf; and create a new $1.2 billion unconsolidated joint venture that will own 14 campuses of continuing care retirement communities in a RIDEA structure (the "CCRC JV"). HCP will own a 49% equity interest; Brookdale will own a 51% equity interest and will manage these communities on behalf of the CCRC JV.



UK Real Estate Portfolio Investment

On June 6, 2014, we acquired a portfolio of 20 care homes for $127 million (75.8 million) subject to long-term triple-net leases. These facilities are located throughout the United Kingdom ("UK") and represent our first real estate investment in the UK. The facilities are leased to Maria Mallaband Care Group. The triple-net leases have initial terms of 15 years, plus two 10-year extension options and provide for initial annual rent of $9.7 million (5.8 million). The cross-defaulted contractual rents will escalate based on the Retail Price Index (UK measure of inflation), subject to a floor of 2% and a ceiling of 4.5%. Other Investment Transactions



During the six months ended June 30, 2014, we completed $260 million of other investments and commitments in eight assets across our senior housing, life science and medical office segments.

During the six months ended June 30, 2014, we funded $109 million for construction and other capital projects, primarily in our life science, medical office and senior housing segments.

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 July 31, 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 August 26, 2014 to stockholders of record as of the close of business on August 11, 2014 and represents an annualized dividend pay rate of $2.18 per share. 28

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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 primarily invest, through the acquisition and development, in single operator or tenant properties and debt issued by operators in these sectors. Under the medical office segment, we invest, through the acquisition and development, single or multi-tenant MOBs, 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.



Comparison of the Three Months Ended June 30, 2014 to the Three Months Ended June 30, 2013

As part of the Brookdale Transaction, we will contribute 49 properties that are currently triple-net leased into a RIDEA structure, with Brookdale managing the communities and acquiring a 20% equity interest in the RIDEA entities. For the 49 properties in the RIDEA structure, we expect to prospectively report the resident level revenues and corresponding operating expenses in our consolidated financial statements rather than the triple-net rents. On or about August 29, 2014 (the "Anticipated Closing Date"), we expect to record an approximate $36 million net termination fee in rental and related revenues, which represents the termination value for the 49 leases, net of the cost to write-off the related straight-line rent assets and lease intangibles. For periods subsequent to the Anticipated Closing Date, we expect increases in resident fees and services revenue and operating expenses and a decrease in rental and related revenues. 29

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Further, we created the CCRC JV, which will be managed by Brookdale. For periods subsequent to the Anticipated Closing Date, we expect to record our share of income from unconsolidated joint ventures; and as a result of deconsolidating three properties, we expect a decrease in rental and related revenues and depreciation expense.



See additional information regarding the Brookdale Transaction in Note 20 to the Condensed Consolidated financial Statements.

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 1,071 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 June 30, 2014. Our consolidated total property portfolio represents 1,104 and 1,075 properties at June 30, 2014 and 2013, respectively, and excludes properties that were sold.



Results are as of and for the three months ended June 30, 2014 and 2013 (dollars and square feet in thousands except per capacity data):

Senior Housing SPP Total Portfolio Three Months Ended June 30, Three Months Ended June 30, 2014 2013 Change 2014 2013 Change Rental revenues(1) $ 149,853$ 149,783$ 70$ 151,904$ 150,261$ 1,643 Resident fees and services 37,939 36,394 1,545 37,939 36,394 1,545 Total revenues 187,792 186,177 1,615 189,843 186,655 3,188 Operating expenses (24,350 ) (22,933 ) (1,417 ) (24,823 ) (23,336 ) (1,487 ) NOI 163,442 163,244 198 165,020 163,319 1,701 Straight-line rents (9,035 ) (10,308 ) 1,273 (9,288 ) (10,388 ) 1,100 DFL accretion (2,109 ) (4,730 ) 2,621 (2,109 ) (4,731 ) 2,622 Amortization of above and below market lease intangibles, net (147 ) (215 ) 68 (147 ) (195 ) 48 Adjusted NOI $ 152,151$ 147,991$ 4,160$ 153,476$ 148,005$ 5,471 Adjusted NOI % change 2.8 % Property count(2) 442 442 466 444 Average capacity (units)(3) 45,121 45,102 45,743 45,257 Average annual rent per unit(4) $ 13,528$ 13,039$ 13,501$ 13,031



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(1) Represents rental and related revenues and income from direct financing leases ("DFLs").

(2) From our past presentation of SPP for the three months ended June 30, 2013, we removed a senior housing property from SPP that was sold.

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



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

SPP NOI and Adjusted NOI. SPP adjusted NOI improved as a result of annual rent increases, including increases from properties that were previously transitioned from Sunrise to other operators. Total Portfolio NOI and Adjusted NOI. In addition to the impact of our SPP, our total portfolio NOI and adjusted NOI increased as a result of our senior housing acquisitions in 2014 and 2013. 30 -------------------------------------------------------------------------------- Table of Contents Post-Acute/Skilled Nursing SPP Total Portfolio Three Months Ended June 30, Three Months Ended June 30, 2014 2013 Change 2014 2013 Change Rental revenues $ 138,364$ 135,255$ 3,109$ 138,548$ 135,255$ 3,293 Operating expenses (78 ) (132 ) 54 (533 ) (632 ) 99 NOI 138,286 135,123 3,163 138,015 134,623 3,392 Straight-line rents (218 ) (150 ) (68 ) (218 ) (150 ) (68 ) DFL accretion (15,704 ) (16,663 ) 959 (15,704 ) (16,663 ) 959 Amortization of above and below market lease intangibles, net 11 11 - 12 12 - Adjusted NOI $ 122,375$ 118,321$ 4,054$ 122,105$ 117,822$ 4,283 Adjusted NOI % change 3.4 % Property count(1) 302 302 302 302 Average capacity (beds)(2) 38,504 38,404 38,504 38,404 Average annual rent per bed $ 12,720$ 12,336$ 12,739$ 12,337

-------------------------------------------------------------------------------- (1) From our past presentation of SPP for the three months ended June 30, 2013, we removed ten post-acute/skilled nursing properties from SPP that were sold. (2) 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 from our HCR ManorCare DFL investments. Life Science SPP Total Portfolio Three Months Ended June 30, Three



Months Ended June 30,

2014 2013 Change 2014 2013 Change Rental and related revenues $ 62,956$ 61,745$ 1,211$ 65,330$ 63,980$ 1,350 Tenant recoveries 11,728 11,123 605 12,211 11,247 964 Total revenues 74,684 72,868 1,816 77,541 75,227 2,314 Operating expenses (13,740 ) (12,740 ) (1,000 ) (15,449 ) (13,839 ) (1,610 ) NOI 60,944 60,128 816 62,092 61,388 704 Straight-line rents (2,504 ) (3,204 ) 700 (2,781 ) (3,203 ) 422 Amortization of above and below market lease intangibles, net (4 ) 103 (107 ) 28 93 (65 ) Lease termination fees - (13 ) 13 - (13 ) 13 Adjusted NOI $ 58,436$ 57,014$ 1,422$ 59,339$ 58,265$ 1,074 Adjusted NOI % change 2.5 % Property count 108 108 112 110 Average occupancy 92.3 % 91.4 % 92.4 % 91.6 % Average occupied square feet 6,405 6,341 6,565 6,476 Average annual total revenues per occupied square foot(1) $ 45$ 44$ 46$ 45 Average annual base rent per occupied square foot $ 38$ 37$ 38$ 38



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

SPP NOI and Adjusted NOI. SPP NOI increased as a result of increased occupancy. SPP adjusted NOI increased primarily as a result of annual rent escalations and increased occupancy. 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 June 30, 2014, 111,000 square feet of new leases commenced at an average annual base rent of $32.93 per square foot compared to 65,000 square feet of expiring and terminated leases with an average annual base rent of $22.94 per square foot. During the three months ended June 30, 2014, we acquired 83,000 square feet with an average annual base rent of $33.87 per square foot. 31

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Table of Contents Medical Office SPP Total Portfolio Three Months Ended June 30, Three Months Ended June 30, 2014 2013 Change 2014 2013 Change Rental and related revenues $ 74,815$ 73,767$ 1,048$ 77,238$ 76,727$ 511 Tenant recoveries 13,830 13,135 695 14,303 13,269 1,034 Total revenues 88,645 86,902 1,743 91,541 89,996 1,545 Operating expenses (34,185 ) (33,136 ) (1,049 ) (37,165 ) (35,113 ) (2,052 ) NOI 54,460 53,766 694 54,376 54,883 (507 ) Straight-line rents (555 ) (1,159 ) 604 (648 ) (1,345 ) 697 Amortization of above and below market lease intangibles, net 253 209 44 275 234 41 Lease termination fees (184 ) (2 ) (182 ) (233 ) (2 ) (231 ) Adjusted NOI $ 53,974$ 52,814$ 1,160$ 53,770$ 53,770 $ - Adjusted NOI % change 2.2 % Property count(1) 204 204 208 204 Average occupancy 91.5 % 91.1 % 90.8 % 90.2 % Average occupied square feet 12,689 12,585 12,931 12,739 Average annual total revenues per occupied square foot(2) $ 28$ 27 $ 28 $ 28 Average annual base rent per occupied square foot $ 23$ 23 $ 24 $ 24

-------------------------------------------------------------------------------- (1) From our past presentation of SPP for the three months ended June 30, 2013, we removed three 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.

SPP NOI and Adjusted NOI. SPP NOI increased primarily as a result of increased occupancy, annual rent escalations and termination fees. SPP adjusted NOI increased primarily as a result of increased occupancy and annual rent escalations.

Total Portfolio NOI. Total portfolio NOI decreased primarily as a result of decreased additional rents, partially offset by the impact of our medical office acquisitions in 2014 and termination fees. During the three months ended June 30, 2014, 588,000 square feet of new and renewal leases commenced at an average annual base rent of $20.98 per square foot compared to 607,000 square feet of expiring and terminated leases with an average annual base rent of $23.34 per square foot. During the three months ended June 30, 2014, we acquired 122,000 square feet with an average annual base rent of $36.66 per square foot. Hospital SPP Total Portfolio Three Months Ended June 30, Three



Months Ended June 30,

2014 2013 Change 2014 2013 Change Rental revenues $ 20,341$ 9,819$ 10,522$ 20,671$ 9,832$ 10,839 Tenant recoveries 596 628 (32 ) 596 628 (32 ) Total revenues 20,937 10,447 10,490 21,267 10,460 10,807 Operating expenses (895 ) (966 ) 71 (897 ) (967 ) 70 NOI 20,042 9,481 10,561 20,370 9,493 10,877 Straight-line rents 456 17,840 (17,384 ) 448 17,839 (17,391 ) Amortization of above and below market lease intangibles, net (342 ) (6,028 ) 5,686 (343 ) (6,028 ) 5,685 Adjusted NOI $ 20,156$ 21,293$ (1,137 )$ 20,475$ 21,304$ (829 ) Adjusted NOI % change (5.3 )% Property count(1) 15 15 16 15 Average capacity (beds)(2) 2,161 2,138 2,221 2,138 Average annual rent per bed $ 38,965$ 41,645$ 38,491$ 41,667



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(1) From our past presentation of SPP for the three months ended June 30, 2013, we removed two hospitals from SPP that were sold.

(2) Represents capacity as reported by the respective tenants or operators for the twelve-month period and a quarter in arrears from the periods presented. Certain operators in our hospital portfolio are not required under their respective leases to provide operational data. 32 --------------------------------------------------------------------------------

Table of Contents NOI and Adjusted NOI. SPP and total portfolio NOI decreased due to a net $12 million correction reducing previously recognized straight-line rents and increasing amortization of below market lease intangibles related to our Medical City Dallas hospital in 2013. SPP and total portfolio adjusted NOI decreased primarily as a result of the timing of additional rent payments.



Other Income and Expense Items

Interest income Interest income increased $3 million to $17 million for the three months ended June 30, 2014. The increase was primarily the result of interest earned from the second tranche funding in June 2013 of our mezzanine loan facility to Tandem Health Care (see Note 6 to the Condensed Consolidated Financial Statements for additional information). Interest expense



Interest expense decreased $2 million to $107 million for the three months ended June 30, 2014. The decrease was primarily the result of decreases in indebtedness and lower interest rates.

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 June 30,(1) 2014 2013 Balance: Fixed rate $ 8,309,884$ 8,415,499 Variable rate 318,500 301,503 Total $ 8,628,384$ 8,717,002 Percent of total debt: Fixed rate 96.3 % 96.5 % Variable rate 3.7 3.5 Total 100 % 100 % Weighted average interest rate at end of period: Fixed rate 5.15 % 5.24 % Variable rate 1.40 % 1.74 % Total 5.01 % 5.12 %

-------------------------------------------------------------------------------- (1) Excludes $73 million and $79 million at June 30, 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. At June 30, 2014 and 2013, $72 million and $86 million of variable-rate mortgages, respectively, and a 137 million ($234 million and $208 million, respectively) term loan are presented as fixed-rate debt as the interest payments were swapped from variable to fixed.



Depreciation and amortization expense

Depreciation and amortization expense increased $4 million to $113 million for the three months ended June 30, 2014. The increase was primarily the result of a change in estimate of the depreciable life and residual value of certain properties due to a potential sale.



General and administrative expenses

General and administrative expenses increased $5 million to $29 million for the three months ended June 30, 2014. The increase was primarily the result of increases in professional fees for transactional costs.

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Table of Contents Other income, net



Other income, net decreased $3 million to $1 million for the three months ended June 30, 2014. The decrease was primarily the result of realized gain contingency in 2013 for a past portfolio acquisition.

Comparison of the Six Months Ended June 30, 2014 to the Six Months Ended June 30, 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 1,065 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 June 30, 2014. Our consolidated total property portfolio represents 1,104 and 1,075 properties at June 30, 2014 and 2013, respectively, and excludes properties classified as discontinued operations.



Results are as of and for the six months ended June 30, 2014 and 2013 (dollars and square feet in thousands except per capacity data):

Senior Housing SPP Total Portfolio Six Months Ended June 30, Six Months Ended June 30, 2014 2013 Change 2014 2013 Change Rental revenues $ 297,635$ 297,547$ 88$ 301,989$ 299,157$ 2,832 Resident fees and services 75,992 72,139 3,853 75,992 72,139 3,853 Total revenues 373,627 369,686 3,941 377,981 371,296 6,685 Operating expenses (48,426 ) (45,879 ) (2,547 ) (49,371 ) (46,858 ) (2,513 ) NOI 325,201 323,807 1,394 328,610 324,438 4,172 Straight-line rents (19,118 ) (23,273 ) 4,155 (19,813 ) (23,565 ) 3,752 DFL accretion (4,652 ) (9,762 ) 5,110 (4,652 ) (9,762 ) 5,110 Amortization of above and below market lease intangibles, net (295 ) (463 ) 168 (294 ) (385 ) 91 Adjusted NOI $ 301,136$ 290,309$ 10,827$ 303,851$ 290,726$ 13,125 Adjusted NOI % change 3.7 % Property count(1) 438 438 466 444 Average capacity (units)(2) 44,871 44,852 45,597 45,141 Average annual rent per unit(3) $ 15,578$ 14,988$ 15,491$ 14,954



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(1) From our past presentation of SPP for the six months ended June 30, 2013, we removed a senior housing property from SPP that was sold.

(2) 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.



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

SPP NOI and Adjusted NOI. SPP NOI increased as a result of rent increases related to new leases and increased RIDEA occupancy. SPP adjusted NOI improved as a result of annual rent increases, including increases from properties that were previously transitioned from Sunrise to other operators, and increased RIDEA occupancy, partially offset by a decrease in additional rents. Total Portfolio NOI and Adjusted NOI. In addition to the impact of our SPP, our total portfolio NOI and adjusted NOI increased as a result of our senior housing acquisitions in 2014 and 2013. 34 -------------------------------------------------------------------------------- Table of Contents Post-Acute/Skilled Nursing SPP Total Portfolio Six Months Ended June 30, Six Months Ended June 30, 2014 2013 Change 2014 2013 Change Rental revenues $ 276,023$ 269,091$ 6,932$ 276,328$ 269,091$ 7,237 Operating expenses (156 ) (260 ) 104 (1,065 ) (1,261 ) 196 NOI 275,867 268,831 7,036 275,263 267,830 7,433 Straight-line rents (500 ) (382 ) (118 ) (499 ) (382 ) (117 ) DFL accretion (34,583 ) (35,802 ) 1,219 (34,583 ) (35,802 ) 1,219 Amortization of above and below market lease intangibles, net 23 23 - 23 23 - Adjusted NOI $ 240,807$ 232,670$ 8,137$ 240,204$ 231,669$ 8,535 Adjusted NOI % change 3.5 % Property count(1) 302 302 302 302 Average capacity (beds)(2) 38,504 38,404 38,504 38,404 Average annual rent per bed $ 12,515$ 12,129$ 12,531$ 12,129

-------------------------------------------------------------------------------- (1) From our past presentation of SPP for the six months ended June 30, 2013, we removed ten post-acute/skilled nursing properties from SPP that were sold. (2) 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 from our HCR ManorCare DFL investments. Life Science SPP Total Portfolio Six Months Ended June 30, Six Months Ended June 30, 2014 2013 Change 2014 2013 Change Rental and related revenues $ 123,924$ 121,868$ 2,056$ 130,111$ 126,418$ 3,693 Tenant recoveries 22,360 21,704 656 23,552 22,139 1,413 Total revenues 146,284 143,572 2,712 153,663 148,557 5,106 Operating expenses (26,031 ) (24,762 ) (1,269 ) (29,610 ) (27,222 ) (2,388 ) NOI 120,253 118,810 1,443 124,053 121,335 2,718 Straight-line rents (4,607 ) (6,720 ) 2,113 (5,361 ) (6,895 ) 1,534 Amortization of above and below market lease intangibles, net (5 ) 200 (205 ) 46 178 (132 ) Lease termination fees (570 ) (13 ) (557 ) (570 ) (13 ) (557 ) Adjusted NOI $ 115,071$ 112,277$ 2,794$ 118,168$ 114,605$ 3,563 Adjusted NOI % change 2.5 % Property count 107 107 112 110 Average occupancy 91.6 % 91.3 % 91.8 % 91.5 % Average occupied square feet 6,281 6,268 6,488 6,450 Average annual total revenues per occupied square foot(1) $ 45$ 44$ 46$ 44 Average annual base rent per occupied square foot $ 38$ 37$ 38$ 37



--------------------------------------------------------------------------------

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

SPP NOI and Adjusted NOI. SPP NOI increased primarily as a result of increased occupancy and termination fees. SPP adjusted NOI increased as a result of annual rent escalations and increased occupancy. 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 six months ended June 30, 2014, 522,000 square feet of new and renewal leases commenced at an average annual base rent of $29.76 per square foot compared to 536,000 square feet of expiring and terminated leases with an average annual base rent of $21.76 per square foot. During the six months ended June 30, 2014, we acquired 83,000 square feet with an average annual base rent of $33.87 per square foot. 35

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Table of Contents Medical Office SPP Total Portfolio Six Months Ended June 30, Six Months Ended June 30, 2014 2013 Change 2014 2013 Change Rental and related revenues $ 149,119$ 146,292$ 2,827$ 153,004$ 150,811$ 2,193 Tenant recoveries 27,136 25,748 1,388 27,799 26,016 1,783 Total revenues 176,255 172,040 4,215 180,803 176,827 3,976 Operating expenses (67,238 ) (65,253 ) (1,985 ) (72,681 ) (69,377 ) (3,304 ) NOI 109,017 106,787 2,230 108,122 107,450 672 Straight-line rents (1,460 ) (2,679 ) 1,219 (1,649 ) (2,906 ) 1,257 Amortization of above and below market lease intangibles, net 524 425 99 567 468 99 Lease termination fees (192 ) (2 ) (190 ) (241 ) (2 ) (239 ) Adjusted NOI $ 107,889$ 104,531$ 3,358$ 106,799$ 105,010$ 1,789 Adjusted NOI % change 3.2 % Property count(1) 203 203 208 204 Average occupancy 91.7 % 91.3 % 90.9 % 90.7 % Average occupied square feet 12,650 12,579 12,896 12,753 Average annual total revenues per occupied square foot(2) $ 28$ 27$ 28$ 27 Average annual base rent per occupied square foot $ 23$ 23$ 23$ 23

-------------------------------------------------------------------------------- (1) From our past presentation of SPP for the six months ended June 30, 2013, we removed three 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.

SPP NOI and Adjusted NOI. SPP NOI increased primarily as a result of increased occupancy, annual rent escalations and termination fees. SPP adjusted NOI increased primarily as a result of increased occupancy and 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 our medical office acquisitions in 2014 and 2013.

During the six months ended June 30, 2014, 1.0 million square feet of new and renewal leases commenced at an average annual base rent of $21.57 per square foot compared to 1.1 million square feet of expiring and terminated leases with an average annual base rent of $23.51 per square foot. During the six months ended June 30, 2014, we acquired 122,000 square feet with an average annual base rent of $36.66 per square foot. Hospital SPP Total Portfolio Six Months Ended June 30, Six Months Ended June 30, 2014 2013 Change 2014 2013 Change Rental revenues $ 40,959$ 28,962$ 11,997$ 41,619$ 28,987$ 12,632 Tenant recoveries 1,193 1,191 2 1,193 1,191 2 Total revenues 42,152 30,153 11,999 42,812 30,178 12,634 Operating expenses (1,842 ) (1,854 ) 12 (1,847 ) (1,855 ) 8 NOI 40,310 28,299 12,011 40,965 28,323 12,642 Straight-line rents 872 17,598 (16,726 ) 856 17,597 (16,741 ) Amortization of above and below market lease intangibles, net (685 ) (6,140 ) 5,455 (685 ) (6,140 ) 5,455 Adjusted NOI $ 40,497$ 39,757$ 740$ 41,136$ 39,780$ 1,356 Adjusted NOI % change 1.9 % Property count(1) 15 15 16 15 Average capacity (beds)(2) 2,161 2,138 2,221 2,138 Average annual rent per bed $ 39,185$ 38,925$ 38,706$ 38,948



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(1) From our past presentation of SPP for the six months ended June 30, 2013, we removed two hospitals from SPP that were sold.

(2) Represents capacity as reported by the respective tenants or operators for the twelve-month period and a quarter in arrears from the periods presented. Certain operators in our hospital portfolio are not required under their respective leases to provide operational data. 36 --------------------------------------------------------------------------------

Table of Contents NOI and Adjusted NOI. SPP and total portfolio NOI increased primarily due to a net $12 million correction reducing previously recognized straight-line rents and increasing amortization of below market lease intangibles related to our Medical City Dallas hospital during 2013. SPP and total portfolio adjusted NOI increased primarily as a result of annual rent escalations.



Other Income and Expense Items

Interest income Interest income increased $7 million to $34 million for the six months ended June 30, 2014. The increase was primarily the result of interest earned from the second tranche funding in June 2013 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 $4 million to $213 million for the six months ended June 30, 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.



Depreciation and amortization expense

Depreciation and amortization expense increased $8 million to $221 million for the six months ended June 30, 2014. The increase was primarily the result of a change in estimate of the depreciable life and residual value of certain properties due to a potential sale, the impact of our medical office and life science development projects placed in service and senior housing acquisitions in 2013.



General and administrative expenses

General and administrative expenses increased $6 million to $50 million for the six months ended June 30, 2014. The increase was primarily the result of increases in professional fees for transactional costs.

Other income, net Other income, net decreased $13 million to $3 million for the six months ended June 30, 2014. The decrease was primarily the result of 2013 gains of $11 million from the sale of marketable securities and a realized gain contingency in 2013 for a past portfolio acquisition. Discontinued operations



During the six months ended June 30, 2014, we sold two post-acute/skilled nursing facilities, a hospital and a MOB, recognizing gains of $28 million. During the six months ended June 30, 2013, we sold one property, realizing a gain of $1 million.

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 six months of 2014, (iii) fund capital expenditures, including tenant improvements and leasing costs, (iv) fund acquisition and development activities, and (v) make dividend distributions. 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 funds from borrowings and/or sales of equity and debt securities. 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 July 31, 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. 37 --------------------------------------------------------------------------------



Table of Contents

Net cash provided by operating activities was $608 million and $572 million for the six months ended June 30, 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.



The following are significant investing and financing activities for the six months ended June 30, 2014:

made investments of $395 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 $500 million, which were generally funded by cash provided by our operating activities; and

repaid $657 million of mortgages and senior unsecured notes and raised proceeds of $660 million from sales of senior unsecured notes and borrowings under our unsecured revolving line of credit facility.

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 July 31, 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 June 30, 2014, we had $310 million outstanding under the Facility with a weighted average effective interest rate of 1.42%. On July 30, 2012, we entered into a credit agreement with a syndicate of banks for a 137 million ($234 million at June 30, 2014) four-year unsecured term loan (the "Term Loan"). Based on the Company's debt ratings at June 30, 2014, the Term Loan accrues interest at a rate of GBP LIBOR plus 1.20%. 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 and Term Loan also require a Minimum Consolidated Tangible Net Worth of $9.5 billion at June 30, 2014. At June 30, 2014, we were in compliance with each of these restrictions and requirements of the Facility and Term Loan. Senior Unsecured Notes At June 30, 2014, we had senior unsecured notes outstanding with an aggregate principal balance of $6.9 billion. Interest rates on the notes ranged from 2.79% to 6.99% with a weighted average effective interest rate of 5.06% and a weighted average maturity of six years at June 30, 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 June 30, 2014. 38 --------------------------------------------------------------------------------

Table of Contents Mortgage Debt At June 30, 2014, we had $1.2 billion in aggregate principal amount of mortgage debt outstanding is secured by 94 healthcare facilities (including redevelopment properties) with a carrying value of $1.5 billion. Interest rates on the mortgage debt ranged from 0.44% to 8.69% with a weighted average effective interest rate of 6.20% and a weighted average maturity of three years at June 30, 2014. 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 June 30, 2014 (in thousands):

Year Amount(1) 2014 (Six months) $ 11,573 2015 708,421 2016 1,426,088 2017 1,300,477 2018 916,583 Thereafter 4,265,242 8,628,384 (Discounts) and premiums, net (27,375 ) $ 8,601,009



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(1) Excludes $73 million of other debt that represents Life Care Bonds that have no scheduled maturities.

Other Debt At June 30, 2014, we had $73 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 June 30, 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$ (6,057 ) November 2008 October 2016 Cash Flow 5.95 % 1 Month LIBOR+1.50% $ 26,000$ (2,270 ) July 2012 June 2016 Cash Flow 1.81 % 1 Month GBP LIBOR+1.20% 137,000 $ 2,576 July 2012 June 2016 Cash Flow $ 45,500 Buy USD/Sell GBP 29,000 $ (3,756 )

-------------------------------------------------------------------------------- (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.

39 --------------------------------------------------------------------------------

Table of Contents Equity



At June 30, 2014, we had 459 million shares of common stock outstanding. At June 30, 2014, equity totaled $11.0 billion, and our equity securities had a market value of $19.2 billion.

At June 30, 2014, non-managing members held an aggregate of 4 million units in five limited liability companies ("DownREITs") for which we are the managing member. The DownREIT units are exchangeable for an amount of cash approximating the then-current market value of shares of our common stock or, at our option, shares of our common stock (subject to certain adjustments, such as stock splits and reclassifications). 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 described in the prospectus in one or more offerings. The securities described in the prospectus include common stock, preferred stock, depositary shares, debt securities and warrants. 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 uses 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 ours. FFO as adjusted represents FFO before the impact of impairments (recoveries) of non-depreciable assets, transaction-related items (defined below), severance-related items and preferred stock redemption charges. Management believes that FFO as adjusted is useful to investors, because it allows investors to compare the Company's results to prior reporting periods without the effect of items that by their nature would not be comparable. This measure is a modification of the NAREIT definition of FFO and should not be used as an alternative to net income or NAREIT FFO. 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 June 30, Six Months Ended June 30, 2014 2013 2014 2013 Net income applicable to common shares $ 218,396$ 213,023$ 476,444$ 443,130 Depreciation and amortization of real estate, in-place lease and other intangibles: Continuing operations 113,133 109,210 220,521 212,389 Discontinued operations - 1,557 - 3,095 DFL depreciation 3,956 3,529 7,802 6,958 Gain on sales of real estate - (887 ) (28,010 ) (887 ) Equity income from unconsolidated joint ventures (14,692 ) (15,585 ) (29,220 ) (30,386 ) FFO from unconsolidated joint ventures 17,151 18,356 34,112 35,897 Noncontrolling interests' and participating securities' share in earnings 3,883 3,702 9,458 7,379 Noncontrolling interests' and participating securities' share in FFO (5,370 ) (5,255 ) (11,511 ) (10,397 ) 40

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Table of Contents Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 FFO applicable to common shares 336,457 327,650 679,596 667,178 Distributions on dilutive convertible units 3,420 3,336 6,840 6,664 Diluted FFO applicable to common shares $ 339,877$ 330,986 $



686,436 $ 673,842

Diluted FFO per common share $ 0.73 $ 0.72 $

1.48 $ 1.46

Weighted average shares used to calculate diluted FFO per common share 464,610 461,462 464,138 461,058 Net income applicable to common shares $ 0.48 $ 0.47 $ 1.04 $ 0.97 Depreciation and amortization of real estate, in-place lease and other intangibles 0.24 0.24 0.48 0.47 DFL depreciation 0.01 0.01 0.02 0.01 Gain on sales of real estate - - (0.06 ) - Joint venture and participating securities FFO adjustments - - - 0.01 Diluted FFO applicable to common shares $ 0.73 $ 0.72 $



1.48 $ 1.46

Impact of adjustments to FFO: Transaction-related items(1) $ 6,839 $ - $ 6,839 $ - FFO as adjusted applicable to common shares $ 343,296$ 327,650$ 686,435$ 667,178 Distributions on dilutive convertible units and other 3,405 3,336 6,825 6,664 Diluted FFO as adjusted applicable to common shares $ 346,701$ 330,986 $



693,260 $ 673,842

Diluted FFO as adjusted per common share $ 0.75 $ 0.72 $



1.49 $ 1.46

Weighted average shares used to calculate diluted FFO as adjusted per common share 464,610 461,462 464,138 461,058

-------------------------------------------------------------------------------- (1) Transaction-related items include significant direct costs (e.g., pursuit, due diligence and closing) and unusual gains/charges incurred as a result of mergers and acquisitions and lease amendment or restructure activities. The three and six months ended June 30, 2014 include the impact of $6.8 million resulting from the Brookdale Transaction (primarily pre-closing legal fees) and UK real estate portfolio investment (primarily stamp-duty taxes that are common for UK real estate transactions).



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." 41

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Table of Contents Contractual Obligations



The following table summarizes our material contractual payment obligations and commitments at June 30, 2014 (in thousands):

Less than More than Total(1) One Year 2015-2016 2017-2018 Five Years Line of credit $ 310,000 $ - $ - $ 310,000 $ - Term loan(2) 234,352 - 234,352 - - Senior unsecured notes 6,850,000 - 1,300,000 1,350,000 4,200,000 Mortgage debt 1,234,032 11,573 600,157 557,060 65,242 Construction loan commitments(3) 19,487 5,376 14,111 - - Development commitments(4) 63,387 31,009 32,378 - - Ground and other operating leases 228,652 3,113 11,931 9,596 204,012 Interest(5) 2,431,932 209,801 752,633 486,744 982,754 Total $ 11,371,842$ 260,872$ 2,945,562$ 2,713,400$ 5,452,008



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(1) Excludes $73 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 June 30, 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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