Item 8. Financial Statements and Supplementary Data

HCP, Inc.

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm		68
Financial Statements:
Consolidated Balance Sheets—December 31, 2015 and 2014		69
Consolidated Statements of Operations—for the years ended December 31, 2015, 2014 and 2013		70
Consolidated Statements of Comprehensive (Loss) Income—for the years ended December 31, 2015, 2014 and 2013		71
Consolidated Statements of Equity—for the years ended December 31, 2015, 2014 and 2013		72
Consolidated Statements of Cash Flows—for the years ended December 31, 2015, 2014 and 2013		73
Notes to Consolidated Financial Statements		74

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of HCP, Inc.

Irvine, California

We have audited the accompanying consolidated balance sheets of HCP, Inc. and subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive (loss) income, equity, and cash flows for each of the three years in the period ended December 31, 2015. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of HCP, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 9, 2016 expressed an unqualified opinion on the Company’s internal control over financial reporting.

	/s/ Deloitte & Touche LLP

Los Angeles, California

February 9, 2016

HCP, Inc.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

		December 31,
		2015			2014
ASSETS
Real estate:
Buildings and improvements		$	12,501,511		$	10,972,973
Development costs and construction in progress			390,584			275,233
Land			1,995,657			1,889,438
Accumulated depreciation and amortization			(2,605,036)			(2,250,757)
Net real estate			12,282,716			10,886,887
Net investment in direct financing leases			5,905,009			7,280,334
Loans receivable, net			768,743			906,961
Investments in and advances to unconsolidated joint ventures			605,244			605,448
Accounts receivable, net of allowance of $3,261 and $3,785, respectively			48,929			36,339
Cash and cash equivalents			346,500			183,810
Restricted cash			60,616			48,976
Intangible assets, net			614,227			481,013
Other assets, net			817,865			901,668
Total assets(1)		$	21,449,849		$	21,331,436
LIABILITIES AND EQUITY
Bank line of credit		$	397,432		$	838,516
Term loans			524,807			212,986
Senior unsecured notes			9,120,107			7,589,960
Mortgage debt			932,212			982,785
Other debt			94,445			97,022
Intangible liabilities, net			75,273			84,723
Accounts payable and accrued liabilities			436,239			432,934
Deferred revenue			123,017			95,411
Total liabilities(1)			11,703,532			10,334,337
Commitments and contingencies
Common stock, $1.00 par value: 750,000,000 shares authorized; 465,488,492 and 459,746,267 shares issued and outstanding, respectively			465,488			459,746
Additional paid-in capital			11,647,039			11,431,987
Cumulative dividends in excess of earnings			(2,738,414)			(1,132,541)
Accumulated other comprehensive loss			(30,470)			(23,895)
Total stockholders’ equity			9,343,643			10,735,297
Joint venture partners			217,066			73,214
Non-managing member unitholders			185,608			188,588
Total noncontrolling interests			402,674			261,802
Total equity			9,746,317			10,997,099
Total liabilities and equity		$	21,449,849		$	21,331,436

	(1)		The Company’s consolidated total assets and total liabilities at December 31, 2015 and 2014 include certain assets of variable interest entities (“VIEs”) that can only be used to settle the liabilities of the related VIE. The VIE creditors do not have recourse to HCP, Inc. Total assets at December 31, 2015 include VIE assets as follows: buildings and improvements $791 million; land $125 million; accumulated depreciation and amortization $135 million; accounts receivable $16 million; cash $35 million; restricted cash $18 million; and other assets $20 million. Total assets at December 31, 2014 include VIE assets as follows: buildings and improvements $677 million; land $113 million; accumulated depreciation and amortization $111 million; accounts receivable $5 million; cash $42 million; and other assets of $23 million. Total liabilities at December 31, 2015 include accounts payable and accrued liabilities of $60 million and deferred revenue of $14 million from VIEs. Total liabilities at December 31, 2014 include accounts payable and accrued liabilities of $34 million and deferred revenue of $12 million of from VIEs. See Note 21 to the Consolidated Financial Statements for additional details.

See accompanying Notes to Consolidated Financial Statements.

HCP, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

		Year Ended December 31,
		2015			2014			2013
Revenues:
Rental and related revenues		$	1,144,482		$	1,174,256		$	1,128,054
Tenant recoveries			126,485			110,688			100,649
Resident fees and services			525,453			241,965			146,288
Income from direct financing leases			633,835			663,070			636,881
Interest income			112,184			74,491			86,159
Investment management fee income			1,873			1,809			1,847
Total revenues			2,544,312			2,266,279			2,099,878
Costs and expenses:
Interest expense			479,596			439,742			435,252
Depreciation and amortization			510,785			459,995			423,312
Operating			614,375			384,603			298,282
General and administrative			96,022			82,175			103,042
Acquisition and pursuit costs			27,309			17,142			6,191
Impairments, net			1,403,853			—			—
Total costs and expenses			3,131,940			1,383,657			1,266,079
Gain on sales of real estate			6,377			3,288			—
Other income, net			14,404			7,528			18,216
Total other income, net			20,781			10,816			18,216
(Loss) income before income taxes and equity income from and impairment of unconsolidated joint ventures			(566,847)			893,438			852,015
Income tax benefit (expense)			9,011			(250)			(5,815)
Equity income from unconsolidated joint ventures			57,313			49,570			64,433
Impairments of investments in unconsolidated joint ventures			(45,895)			(35,913)			—
(Loss) income from continuing operations			(546,418)			906,845			910,633
Discontinued operations:
Income before impairment losses and gain on sales of real estate, net of income taxes			—			1,736			5,879
Impairment losses on real estate			—			—			(1,372)
Gain on sales of real estate, net of income taxes			—			28,010			69,866
Total discontinued operations			—			29,746			74,373
Net (loss) income			(546,418)			936,591			985,006
Noncontrolling interests’ share in earnings			(12,817)			(14,358)			(14,169)
Net (loss) income attributable to HCP, Inc.			(559,235)			922,233			970,837
Participating securities’ share in earnings			(1,317)			(2,437)			(1,734)
Net (loss) income applicable to common shares		$	(560,552)		$	919,796		$	969,103
Basic earnings per common share:
Continuing operations		$	(1.21)		$	1.94		$	1.97
Discontinued operations			—			0.07			0.16
Net (loss) income applicable to common shares		$	(1.21)		$	2.01		$	2.13
Diluted earnings per common share:
Continuing operations		$	(1.21)		$	1.94		$	1.97
Discontinued operations			—			0.06			0.16
Net (loss) income applicable to common shares		$	(1.21)		$	2.00		$	2.13
Weighted average shares used to calculate earnings per common share:
Basic			462,795			458,425			455,002
Diluted			462,795			458,796			455,702

See accompanying Notes to Consolidated Financial Statements.

HCP, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In thousands)

		Year Ended December 31,
		2015			2014			2013
Net (loss) income		$	(546,418)		$	936,591		$	985,006
Other comprehensive (loss) income:
Change in net unrealized (losses) gains on securities:
Unrealized (losses) gains			(5)			13			1,355
Reclassification adjustment realized in net income			—			—			(9,131)
Change in net unrealized gains on cash flow hedges:
Unrealized gains			1,894			2,258			6,435
Reclassification adjustment realized in net income			148			(1,085)			1,220
Change in Supplemental Executive Retirement Plan obligation			126			(627)			240
Foreign currency translation adjustment			(8,738)			(9,967)			47
Total other comprehensive (loss) income			(6,575)			(9,408)			166
Total comprehensive (loss) income			(552,993)			927,183			985,172
Total comprehensive income attributable to noncontrolling interests			(12,817)			(14,358)			(14,169)
Total comprehensive (loss) income attributable to HCP, Inc.		$	(565,810)		$	912,825		$	971,003

See accompanying Notes to Consolidated Financial Statements.

HCP, Inc.

CONSOLIDATED STATEMENTS OF EQUITY

(In thousands, except per share data)

										Cumulative			Accumulated
							Additional			Dividends			Other			Total
		Common Stock					Paid-In			In Excess			Comprehensive			Stockholders’			Noncontrolling			Total
		Shares		Amount			Capital			Of Earnings			Income (Loss)			Equity			Interests			Equity
January 1, 2013		453,191		$	453,191		$	11,180,066		$	(1,067,367)		$	(14,653)		$	10,551,237		$	202,540		$	10,753,777
Net income		—			—			—			970,837			—			970,837			14,169			985,006
Other comprehensive income		—			—			—			—			166			166			—			166
Issuance of common stock, net		3,136			3,136			107,565			—			—			110,701			(3,683)			107,018
Repurchase of common stock		(242)			(242)			(10,196)			—			—			(10,438)			—			(10,438)
Exercise of stock options		876			876			16,626			—			—			17,502			—			17,502
Amortization of deferred compensation		—			—			39,980			—			—			39,980			—			39,980
Common dividends ($2.10 per share)		—			—			—			(956,685)			—			(956,685)			—			(956,685)
Distributions to noncontrolling interests		—			—			—			—			—			—			(17,664)			(17,664)
Issuance of noncontrolling interests		—			—			—			—			—			—			12,472			12,472
December 31, 2013		456,961			456,961			11,334,041			(1,053,215)			(14,487)			10,723,300			207,834			10,931,134
Net income		—			—			—			922,233			—			922,233			14,358			936,591
Other comprehensive loss		—			—			—			—			(9,408)			(9,408)			—			(9,408)
Issuance of common stock, net		2,939			2,939			89,749			—			—			92,688			(557)			92,131
Repurchase of common stock		(323)			(323)			(12,380)			—			—			(12,703)			—			(12,703)
Exercise of stock options		169			169			4,292			—			—			4,461			—			4,461
Amortization of deferred compensation		—			—			21,885			—			—			21,885			—			21,885
Common dividends ($2.18 per share)		—			—			—			(1,001,559)			—			(1,001,559)			—			(1,001,559)
Distributions to noncontrolling interests		—			—			—			—			—			—			(15,611)			(15,611)
Issuance of noncontrolling interests		—			—			—			—			—			—			57,746			57,746
Purchase of noncontrolling interests		—			—			(5,600)			—			—			(5,600)			(1,968)			(7,568)
December 31, 2014		459,746			459,746			11,431,987			(1,132,541)			(23,895)			10,735,297			261,802			10,997,099
Net (loss) income		—			—			—			(559,235)			—			(559,235)			12,817			(546,418)
Other comprehensive loss		—			—			—			—			(6,575)			(6,575)			—			(6,575)
Issuance of common stock, net		5,117			5,117			176,950			—			—			182,067			(3,183)			178,884
Repurchase of common stock		(198)			(198)			(8,540)			—			—			(8,738)			—			(8,738)
Exercise of stock options		823			823			26,764			—			—			27,587			—			27,587
Amortization of deferred compensation		—			—			26,127			—			—			26,127			—			26,127
Common dividends ($2.26 per share)		—			—			—			(1,046,638)			—			(1,046,638)			—			(1,046,638)
Distributions to noncontrolling interests		—			—			(263)			—			—			(263)			(18,884)			(19,147)
Issuance of noncontrolling interests		—			—			—			—			—			—			151,185			151,185
Purchase of noncontrolling interests		—			—			(5,986)			—			—			(5,986)			(1,063)			(7,049)
December 31, 2015		465,488		$	465,488		$	11,647,039		$	(2,738,414)		$	(30,470)		$	9,343,643		$	402,674		$	9,746,317

See accompanying Notes to Consolidated Financial Statements.

HCP, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

		Year Ended December 31,
		2015			2014			2013
Cash flows from operating activities:
Net (loss) income		$	(546,418)		$	936,591		$	985,006
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization of real estate, in-place lease and other intangibles:
Continuing operations			510,785			459,995			423,312
Discontinued operations			—			—			5,862
Amortization of market lease intangibles, net			(1,295)			(949)			(6,646)
Amortization of deferred compensation			26,127			21,885			39,980
Amortization of deferred financing costs, net			20,222			19,260			18,541
Straight-line rents			(28,859)			(41,032)			(39,587)
Loan and direct financing lease interest accretion			(95,713)			(78,286)			(86,314)
Deferred rental revenues			(2,813)			(1,884)			(2,843)
Equity income from unconsolidated joint ventures			(57,313)			(49,570)			(64,433)
Distributions of earnings from unconsolidated joint ventures			15,111			5,045			3,989
Lease termination income, net			(1,103)			(38,001)			—
Gain on sales of real estate			(6,377)			(31,298)			(69,866)
Foreign exchange and other gains, net			(7,178)			(2,270)			(10,817)
Impairments, net			1,449,748			35,913			1,372
Changes in:
Accounts receivable, net			(9,569)			(8,845)			6,656
Other assets			(19,453)			(6,287)			(58,290)
Accounts payable and other accrued liabilities			(23,757)			28,354			3,065
Net cash provided by operating activities			1,222,145			1,248,621			1,148,987
Cash flows from investing activities:
Acquisition of RIDEA III, net			(770,325)			—			—
Acquisition of the CCRC unconsolidated joint venture interest, net			—			(370,186)			—
Acquisitions of other real estate			(613,252)			(503,470)			(64,678)
Development of real estate			(281,017)			(178,513)			(130,317)
Leasing costs and tenant and capital improvements			(84,282)			(71,734)			(64,557)
Proceeds from sales and pending sales of real estate, net			58,623			104,557			95,816
Contributions to unconsolidated joint ventures			(69,936)			(2,935)			—
Distributions in excess of earnings from unconsolidated joint ventures			30,989			2,657			14,102
Purchases of marketable securities			—			—			(16,706)
Proceeds from sales of marketable securities			2,348			—			28,403
Principal repayments on loans receivable, direct financing leases and other			625,701			119,511			263,445
Investments in loans receivable, direct financing leases and other			(575,652)			(600,019)			(322,775)
Decrease (increase) in restricted cash			4,798			(11,747)			619
Net cash used in investing activities			(1,672,005)			(1,511,879)			(196,648)
Cash flows from financing activities:
Net borrowings under bank line of credit			98,743			845,190			—
Repayments under bank line of credit			(511,521)			—			—
Borrowings under term loan			333,014			—			—
Issuance of senior unsecured notes			1,936,017			1,150,000			800,000
Repayments of senior unsecured notes			(400,000)			(487,000)			(550,000)
Issuance of mortgage and other debt			—			35,445			6,798
Repayments of mortgage and other debt			(57,845)			(447,784)			(302,119)
Deferred financing costs			(19,995)			(16,550)			(7,300)
Issuance of common stock and exercise of options			206,471			96,592			114,082
Repurchase of common stock			(8,738)			(12,703)			—
Dividends paid on common stock			(1,046,638)			(1,001,559)			(956,685)
Issuance of noncontrolling interests			110,775			4,674			12,472
Purchase of noncontrolling interests			(7,049)			(5,897)			—
Distributions to noncontrolling interests			(19,147)			(15,611)			(17,664)
Net cash provided by (used in) financing activities			614,087			144,797			(900,416)
Effect of foreign exchange on cash and cash equivalents			(1,537)			1,715			960
Net increase (decrease) in cash and cash equivalents			162,690			(116,746)			52,883
Cash and cash equivalents, beginning of year			183,810			300,556			247,673
Cash and cash equivalents, end of year		$	346,500		$	183,810		$	300,556

See accompanying Notes to Consolidated Financial Statements.

HCP, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. Business

HCP, Inc., an S&P 500 company, is a Maryland corporation that is organized to qualify as a real estate investment trust (“REIT”) which, together with its consolidated entities (collectively, “HCP” or the “Company”), invests primarily in real estate serving the healthcare industry in the United States (“U.S.”). The Company acquires, develops, leases, manages and disposes of healthcare real estate and provides financing to healthcare providers.

NOTE 2. Summary of Significant Accounting Policies

Use of Estimates

Management is required to make estimates and assumptions in the preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”). These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from management’s estimates.

Principles of Consolidation

The consolidated financial statements include the accounts of HCP, Inc., its wholly-owned subsidiaries, joint ventures and variable interest entities that it controls through voting rights or other means. Intercompany transactions and balances have been eliminated upon consolidation.

The Company is required to continually evaluate its VIE relationships and consolidate these entities when it is determined to be the primary beneficiary of their operations. A VIE is broadly defined as an entity where either (i) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support, (ii) substantially all of an entity’s activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights, or (iii) the equity investors as a group lack, if any: (a) the power through voting or similar rights to direct the activities of an entity that most significantly impact the entity’s economic performance, (b) the obligation to absorb the expected losses of an entity, or (c) the right to receive the expected residual returns of an entity.

A variable interest holder is considered to be the primary beneficiary of a VIE if it has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and has the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. The Company qualitatively assesses whether it is (or is not) the primary beneficiary of a VIE. Consideration of various factors includes, but is not limited to, its form of ownership interest, its representation on the VIE’s governing body, the size and seniority of its investment, its ability and the rights of other investors to participate in policy making decisions and its ability to replace the VIE manager and/or liquidate the entity.

For its investments in joint ventures that are not considered to be VIEs, the Company evaluates the type of ownership rights held by the limited partner(s) that may preclude consolidation in circumstances in which the sole general partner would otherwise consolidate the limited partnership. The assessment of limited partners’ rights and their impact on the presumption of control over a limited partnership by the sole general partner should be made when an investor becomes the sole general partner and should be reassessed if (i) there is a change to the terms or in the exercisability of the limited partner rights, (ii) the sole general partner increases or decreases its ownership interest in the limited partnership, or (iii) there is an increase or decrease in the number of outstanding limited partnership interests. The Company similarly evaluates the rights of managing members of limited liability companies.

Revenue Recognition

At the inception of a new lease arrangement, including new leases that arise from amendments, the Company assesses its terms and conditions to determine the proper lease classification. A lease arrangement is classified as an operating lease if none of the following criteria are met: (i) transfer of ownership to the lessee prior to or shortly after the end of the lease term, (ii) lessee has a bargain purchase option during or at the end of the lease term, (iii) the lease term is equal to 75% or

more of the underlying property’s economic life, or (iv) the present value of future minimum lease payments (excluding executory costs) is equal to 90% or more of the excess fair value (over retained tax credits) of the leased property. If one of the four criteria is met and the minimum lease payments are determined to be reasonably predictable and collectible, the lease arrangement is generally accounted for as a direct financing lease (“DFL”).

The Company utilizes the direct finance method of accounting to record DFL income. For a lease accounted for as a DFL, the net investment in the DFL represents receivables for the sum of future minimum lease payments and the estimated residual value of the leased property, less the unamortized unearned income. Unearned income is deferred and amortized to income over the lease term to provide a constant yield when collectibility of the lease payments is reasonably assured.

The Company recognizes rental revenue for operating lease arrangements when the tenant has taken possession or controls the physical use of a leased asset; the tenant is not considered to have taken physical possession or have control of the leased asset until the Company-owned tenant improvements are substantially completed. If a lease arrangement provides for tenant improvements, the Company determines whether the tenant improvements are owned by the tenant or the Company. When the Company is the owner of the tenant improvements, any tenant improvements funded by the tenant are treated as lease payments which are deferred and amortized into income over the lease term. When the tenant is the owner of the tenant improvements, any tenant improvement allowance that is funded by the Company is treated as a lease incentive and amortized as a reduction of revenue over the lease term. Ownership of tenant improvements is determined based on various factors including, but not limited to, the following criteria:

	·		lease stipulations of how and on what a tenant improvement allowance may be spent;

	·		which party to the arrangement retains legal title to the tenant improvements upon lease expiration;

	·		whether the tenant improvements are unique to the tenant or general purpose in nature; and

	·		if the tenant improvements are expected to have significant residual value at the end of the lease term.

Certain leases provide for additional rents that are contingent upon a percentage of the facility’s revenue in excess of specified base amounts or other thresholds. Such revenue is recognized when actual results reported by the tenant, or estimates of tenant results, exceed the base amount or other thresholds, and only after any contingency has been removed (when the related thresholds are achieved). This may result in the recognition of rental revenue in periods subsequent to when such payments are received.

Tenant recoveries subject to operating leases generally relate to the reimbursement of real estate taxes, insurance and repairs and maintenance expense. These expenses are recognized as revenue in the period they are incurred. The reimbursements of these expenses are recognized and presented gross, as the Company is generally the primary obligor and, with respect to purchasing goods and services from third party suppliers, has discretion in selecting the supplier and bears the associated credit risk.

For operating leases with minimum scheduled rent increases, the Company recognizes income on a straight line basis over the lease term when collectibility is reasonably assured. Recognizing rental income on a straight line basis results in a difference in the timing of revenue amounts from what is contractually due from tenants. If the Company determines that collectibility of straight line rents is not reasonably assured, future revenue recognition is limited to amounts contractually owed and paid, and, when appropriate, an allowance for estimated losses is established.

Resident fee revenue is recorded when services are rendered and includes resident room and care charges, community fees and other resident charges. Residency agreements are generally for a term of 30 days to one year, with resident fees billed monthly. Revenue for certain care related services is recognized as services are provided and is billed monthly in arrears.

Loans receivable are classified as held-for-investment based on management’s intent and ability to hold the loans for the foreseeable future or to maturity. Loans held-for-investment are carried at amortized cost and are reduced by a valuation allowance for estimated credit losses as necessary. The Company recognizes interest income on loans, including the amortization of discounts and premiums, loan fees paid and received, using the interest method. The interest method is applied on a loan-by-loan basis when collectibility of the future payments is reasonably assured. Premiums and discounts are recognized as yield adjustments over the term of the related loans. Loans are transferred from held-for-investment to

held-for-sale when management’s intent is to no longer hold the loans for the foreseeable future. Loans held-for-sale are recorded at the lower of cost or fair value.

The Company recognizes gain on sales of real estate upon the closing of a transaction with the purchaser. Gains on real estate sold are recognized using the full accrual method when collectibility of the sales price is reasonably assured, the Company is not obligated to perform additional activities that may be considered significant, the initial investment from the buyer is sufficient and other profit recognition criteria have been satisfied. Gain on sales of real estate may be deferred in whole or in part until the requirements for gain recognition have been met.

The Company receives investment management fees from certain joint venture entities for various services it provides as the managing member. Management fees are recorded as revenue when management services have been performed. Intercompany profit for management fees is eliminated.

Allowance for Doubtful Accounts

The Company evaluates the liquidity and creditworthiness of its tenants, operators and borrowers on a monthly and quarterly basis. The Company’s evaluation considers industry and economic conditions, individual and portfolio property performance, credit enhancements, liquidity and other factors. The Company’s tenants, borrowers and operators furnish property, portfolio and guarantor/operator-level financial statements, among other information, on a monthly or quarterly basis; the Company utilizes this financial information to calculate the lease or debt service coverages that it uses as a primary credit quality indicator. Lease and debt service coverage information is evaluated together with other property, portfolio and operator performance information, including revenue, expense, net operating income, occupancy, rental rate, reimbursement trends, capital expenditures and EBITDA (defined as earnings before interest, tax, and depreciation and amortization), along with other liquidity measures. The Company evaluates, on a monthly basis or immediately upon a significant change in circumstance, its tenants’, operators’ and borrowers’ ability to service their obligations with the Company.

The Company maintains an allowance for doubtful accounts for straight-line rent receivables resulting from tenants’ inability to make contractual rent and tenant recovery payments or lease defaults. For straight-line rent receivables, the Company’s assessment is based on amounts estimated to be recoverable over the lease term.

In connection with the Company’s quarterly review process or upon the occurrence of a significant event, loans receivable and DFLs (collectively, “Finance Receivables”), are reviewed and assigned an internal rating of Performing, Watch List or Workout. Finance Receivables that are deemed Performing meet all present contractual obligations, and collection and timing, of all amounts owed is reasonably assured. Watch List Finance Receivables are defined as Finance Receivables that do not meet the definition of Performing or Workout. Workout Finance Receivables are defined as Finance Receivables in which the Company has determined, based on current information and events, that it is probable (i) it will be unable to collect all amounts due according to the contractual terms of the agreement, (ii) the tenant, operator, or borrower is delinquent on making payments under the contractual terms of the agreement and (iii) the Company has commenced action or anticipates pursuing action in the near term to seek recovery of its investment.

Finance Receivables are placed on nonaccrual status when management determines that the collectibility of contractual amounts is not reasonably assured (the asset will have an internal rating of either Watch List or Workout). Further, the Company performs a credit analysis to support the tenant’s, operator’s, borrower’s and/or guarantor’s repayment capacity and the underlying collateral values. The Company uses the cash basis method of accounting for Finance Receivables placed on nonaccrual status unless one of the following conditions exist whereby it utilizes the cost recovery method of accounting: (i) if the Company determines that it is probable that it will only recover the recorded investment in the Finance Receivable, net of associated allowances or charge-offs (if any), or (ii) the Company cannot reasonably estimate the amount of an impaired Finance Receivable. For cash basis method of accounting the Company applies payments received, excluding principal paydowns, to interest income so long as that amount does not exceed the amount that would have been earned under the original contractual terms. For cost recovery method of accounting any payment received is applied to reduce the recorded investment. Generally, the Company returns a Finance Receivable to accrual status when all delinquent payments become current under the terms of the loan or lease agreements and collectibility of the remaining contractual loan or lease payments is reasonably assured.

Allowances are established for Finance Receivables on an individual basis utilizing an estimate of probable losses, if they are determined to be impaired. Finance Receivables are impaired when it is deemed probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the loan or lease. An allowance is based upon the Company’s assessment of the lessee’s or borrower’s overall financial condition, economic resources, payment record, the prospects for support from any financially responsible guarantors and, if appropriate, the net realizable value of any collateral. These estimates consider all available evidence, including the expected future cash flows discounted at the Finance Receivable’s effective interest rate, fair value of collateral, general economic conditions and trends, historical and industry loss experience, and other relevant factors, as appropriate. Should a Finance Receivable be deemed partially or wholly uncollectible, the uncollectible balance is charged off against the allowance in the period in which the uncollectible determination has been made.

Real Estate

The Company’s real estate assets, consisting of land, buildings and improvements are recorded at fair value upon acquisition and/or consolidation. Any assumed liabilities, other acquired tangible assets or identifiable intangibles are also recorded at fair value upon acquisition and/or consolidation. The Company assesses fair value based on available market information, such as capitalization and discount rates, comparable sale transactions and relevant per square foot or unit cost information. A real estate asset’s fair value may be determined utilizing cash flow projections that incorporate appropriate discount and/or capitalization rates or other available market information. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, as well as market and economic conditions. The fair value of tangible assets of an acquired property is based on the value of the property as if it is vacant. Transaction costs related to acquisitions of businesses, including properties, are expensed as incurred.

The Company records acquired “above and below market” leases at fair value using discount rates which reflect the risks associated with the leases acquired. The amount recorded is based on the present value of the difference between (i) the contractual amounts paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each in-place lease, measured over a period equal to the remaining term of the lease for above market leases and the initial term plus the extended term for any leases with bargain renewal options. Other intangible assets acquired include amounts for in-place lease values that are based on an evaluation of the specific characteristics of each property and the acquired tenant lease(s). Factors considered include estimates of carrying costs during hypothetical expected lease-up periods, market conditions and costs to execute similar leases. In estimating carrying costs, the Company includes estimates of lost rents at market rates during the hypothetical expected lease-up periods, which are dependent on local market conditions and expected trends. In estimating costs to execute similar leases, the Company considers leasing commissions, legal and other related costs.

The Company capitalizes direct construction and development costs, including predevelopment costs, interest, property taxes, insurance and other costs directly related and essential to the development or construction of a real estate asset. The Company capitalizes construction and development costs while substantive activities are ongoing to prepare an asset for its intended use. The Company considers a construction project as substantially complete and held available for occupancy upon the completion of Company-owned tenant improvements, but no later than one year from cessation of significant construction activity. Costs incurred after a project is substantially complete and ready for its intended use, or after development activities have ceased, are expensed as incurred. For redevelopment of existing operating properties, the Company capitalizes certain costs based on the net carrying value of the property under redevelopment plus the cost for the construction and improvement incurred in connection with the redevelopment.

Costs previously capitalized related to abandoned developments/redevelopments are charged to earnings. Expenditures for repairs and maintenance are expensed as incurred. The Company considers costs incurred in conjunction with re-leasing properties, including tenant improvements and lease commissions, to represent the acquisition of productive assets and, accordingly, such costs are reflected as investing activities in the Company’s consolidated statement of cash flows.

The Company computes depreciation on properties using the straight-line method over the assets’ estimated useful lives. Depreciation is discontinued when a property is identified as held for sale. Buildings and improvements are depreciated over useful lives ranging up to 60 years. Market lease intangibles are amortized primarily to revenue over the remaining noncancellable lease terms and bargain renewal periods, if any. In-place lease intangibles are amortized to expense over the remaining noncancellable lease term and bargain renewal periods, if any.

Impairment of Long-Lived Assets and Goodwill

The Company assesses the carrying value of real estate assets and related intangibles (“real estate assets”) when events or changes in circumstances indicate that the carrying value may not be recoverable. The Company tests its real estate assets for impairment by comparing the sum of the expected future undiscounted cash flows to the carrying value of the real estate assets. The expected future undiscounted cash flows are calculated utilizing the lowest level of identifiable cash flows that are largely independent of the cash flows of other assets and liabilities. If the carrying value exceeds the expected future undiscounted cash flows, an impairment loss will be recognized to the extent that the carrying value of the real estate assets is greater than their fair value.

Goodwill is tested for impairment at least annually based on certain qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value. Potential impairment indicators include a significant decline in real estate values, restructuring plans, current macroeconomic conditions, state of the equity and capital markets or a significant decline in the Company’s market capitalization. If the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company applies the required two-step quantitative approach. The quantitative procedures of the two-step approach (i) compare the fair value of a reporting unit with its carrying value, including goodwill, and, if necessary, (ii) compare the implied fair value of reporting unit goodwill with the carrying value as if it had been acquired in a business combination at the date of the impairment test. The excess fair value of the reporting unit over the fair value of assets and liabilities, excluding goodwill, is the implied value of goodwill and is used to determine the impairment amount, if any. The Company has selected the fourth quarter of each fiscal year to perform its annual impairment test.

Assets Held for Sale and Discontinued Operations

Prior to the Company’s adoption of Accounting Standards Update (“ASU”) No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”), a discontinued operation was a component of an entity that had either been disposed of or was deemed to be held for sale and, (i) the operations and cash flows of the component had been or was to be eliminated from ongoing operations as a result of the disposal transaction, and (ii) the entity was not to have any significant continuing involvement in the operations of the component after the disposal transaction. Accordingly, certain long-lived assets were classified as held for sale and reported at the lower of their carrying value or fair value less costs to sell and were no longer depreciated. Subsequent to the Company’s adoption of ASU 2014-08 on April 1, 2014, a discontinued operation must further represent that a disposal is a strategic shift that has (or will have) a major effect on the Company’s operations and financial results.

Investments in Unconsolidated Joint Ventures

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

The initial carrying value of investments in unconsolidated joint ventures is based on the amount paid to purchase the joint venture interest or the fair value of the assets prior to the sale of interests in the joint venture. To the extent that the Company’s cost basis is different from the basis reflected at the joint venture level, the basis difference is generally amortized over the lives of the related assets and liabilities, and such amortization is included in the Company’s share of equity in earnings of the joint venture. The Company evaluates its equity method investments for impairment based upon a comparison of the fair value of the equity method investment to its carrying value. When the Company determines a decline in the fair value of an investment in an unconsolidated joint venture below its carrying value is other-than-temporary, an impairment is recorded. The Company recognizes gains on the sale of interests in joint ventures to the extent the economic substance of the transaction is a sale.

The Company’s fair values of its equity method investments are based on discounted cash flow models that include all estimated cash inflows and outflows over a specified holding period and, where applicable, any estimated debt premiums or discounts. Capitalization rates, discount rates and credit spreads utilized in these valuation models are based upon assumptions that the Company believes to be within a reasonable range of current market rates for the respective investments.

Share-Based Compensation

Compensation expense for share-based awards granted to employees, including grants of employee stock options, are recognized in the consolidated statements of operations based on their grant date fair market value. Compensation expense for awards with graded vesting schedules is generally recognized ratably over the period from the grant date to the date when the award is no longer contingent on the employee providing additional services.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand and short-term investments with maturities of three months or less when purchased.

Restricted Cash

Restricted cash primarily consists of amounts held by mortgage lenders to provide for (i) real estate tax expenditures, tenant improvements and capital expenditures, (ii) security deposits, and (iii) net proceeds from property sales that were executed as tax-deferred dispositions.

Derivatives and Hedging

During its normal course of business, the Company uses certain types of derivative instruments for the purpose of managing interest rate and foreign currency risk. To qualify for hedge accounting, derivative instruments used for risk management purposes must effectively reduce the risk exposure that they are designed to hedge. In addition, at inception of a qualifying cash flow hedging relationship, the underlying transaction or transactions, must be, and are expected to remain, probable of occurring in accordance with the Company’s related assertions.

The Company recognizes all derivative instruments, including embedded derivatives that are required to be bifurcated, as assets or liabilities in the consolidated balance sheets at fair value. Changes in fair value of derivative instruments that are not designated in hedging relationships or that do not meet the criteria of hedge accounting are recognized in earnings. For derivative instruments designated in qualifying cash flow hedging relationships, changes in fair value related to the effective portion of the derivative instruments are recognized in accumulated other comprehensive income (loss), whereas changes in fair value of the ineffective portion are recognized in earnings.

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objectives and strategy for undertaking various hedge transactions. This process includes designating all derivative instruments that are part of a hedging relationship to specific forecasted transactions as well as recognized obligations or assets in the consolidated balance sheets. The Company also assesses and documents, both at inception of the hedging relationship and on a quarterly basis thereafter, whether the derivative instruments are highly effective in offsetting the designated risks associated with the respective hedged items. If it is determined that a derivative instrument ceases to be highly effective as a hedge, or that it is probable the underlying forecasted transaction will not occur, the Company discontinues hedge accounting prospectively and records the appropriate adjustment to earnings based on the current fair value of the derivative instrument.

Income Taxes

HCP, Inc. elected REIT status and believes it has always operated so as to continue to qualify as a REIT under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended (the “Code”). Accordingly, HCP, Inc. will not be subject to U.S. federal income tax, provided that it continues to qualify as a REIT and makes distributions to stockholders equal to or in excess of its taxable income. In addition, the Company has formed several consolidated subsidiaries, which have elected REIT status. HCP, Inc. and its consolidated REIT subsidiaries are each subject to the REIT qualification requirements under the Code. If any REIT fails to qualify as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates and may be ineligible to qualify as a REIT for four subsequent tax years.

HCP, Inc. and its consolidated REIT subsidiaries are subject to state, local and foreign income taxes in some jurisdictions, and in certain circumstances each REIT may also be subject to federal excise taxes on undistributed income. In addition, certain activities that the Company undertakes may be conducted by entities which have elected to be treated as taxable REIT subsidiaries (“TRS”). TRSs are subject to both federal and state income taxes. The Company recognizes tax penalties relating to unrecognized tax benefits as additional income tax expense. Interest relating to unrecognized tax benefits is recognized as interest expense.

Marketable Securities

The Company classifies its marketable equity securities as available‑for‑sale. These securities are carried at fair value with unrealized gains and losses recognized in stockholders’ equity as a component of accumulated other comprehensive income (loss). Gains or losses on securities sold are determined based on the specific identification method. The Company classifies its marketable debt securities as held‑to‑maturity, because the Company has the positive intent and ability to hold the securities to maturity. Held‑to‑maturity securities are recorded at amortized cost and adjusted for the amortization of premiums and discounts through maturity. When the Company determines declines in fair value of marketable securities are other‑than‑temporary, a loss is recognized in earnings.

Capital Raising Issuance Costs

Costs incurred in connection with the issuance of common shares are recorded as a reduction of additional paid-in capital. Debt issuance costs related to debt instruments excluding line of credit arrangements are deferred, recorded as a reduction of the related debt liability, and amortized to interest expense over the remaining term of the related debt liability utilizing the interest method. Debt issuance costs related to line of credit arrangements are deferred, included in other assets, and amortized to interest expense over the remaining term of the related line of credit arrangement utilizing the interest method.

Segment Reporting

The Company’s segments are based on its internal method of reporting which classifies business operations by healthcare sector as follows: (i) senior housing, (ii) post-acute/skilled nursing, (iii) life science, (iv) medical office and (v) hospital.

Noncontrolling Interests

Arrangements with noncontrolling interest holders are reported as a component of equity separate from the Company’s equity. Net income attributable to a noncontrolling interest is included in net income on the consolidated statements of operations and, upon a gain or loss of control, the interest purchased or sold, and any interest retained, is recorded at fair value with any gain or loss recognized in earnings. The Company accounts for purchases or sales of equity interests that do not result in a change in control as equity transactions.

The Company consolidates non-managing member limited liability companies (“DownREITs”) because it exercises control, and the noncontrolling interests in these entities are carried at cost. The non-managing member limited liability company (“LLC”) units (“DownREIT units”) are exchangeable for an amount of cash approximating the then-current market value of shares of the Company’s common stock or, at the Company’s option, shares of the Company’s common stock (subject to certain adjustments, such as stock splits and reclassifications). Upon exchange of DownREIT units for the Company’s common stock, the carrying amount of the DownREIT units is reclassified to stockholders’ equity.

Foreign Currency Translation and Transactions

Assets and liabilities denominated in foreign currencies that are translated into U.S. dollars use exchange rates in effect at the end of the period, and revenues and expenses denominated in foreign currencies that are translated into U.S. dollars use average rates of exchange in effect during the related period. Gains or losses resulting from translation are included in accumulated other comprehensive income (loss), a component of stockholders’ equity on the consolidated balance sheets. Gains or losses resulting from foreign currency transactions are translated into U.S. dollars at the rates of exchange prevailing at the dates of the transactions. The effects of transaction gains or losses are included in other income, net in the consolidated statements of operations.

Life Care Bonds Payable

Certain of the Company’s continuing care retirement communities (“CCRCs”) issue non-interest bearing life care bonds payable to certain residents of the CCRCs. Generally, the bonds are refundable to the resident or to the resident’s estate upon termination or cancellation of the CCRC agreement or upon the successful resale of the unit. Proceeds from the issuance of new bonds are used to retire existing bonds, and since the maturity of the obligations for the facilities is not determinable, no interest is imputed. These amounts are included in other debt in the Company’s consolidated balance sheets.

Fair Value Measurement

The Company measures and discloses the fair value of nonfinancial and financial assets and liabilities utilizing a hierarchy of valuation techniques based on whether the inputs to a fair value measurement are considered to be observable or unobservable in a marketplace. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. This hierarchy requires the use of observable market data when available. These inputs have created the following fair value hierarchy:

	·		Level 1—quoted prices for identical instruments in active markets;

	·		Level 2—quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and

	·		Level 3—fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

The Company measures fair value using a set of standardized procedures that are outlined herein for all assets and liabilities which are required to be measured at fair value. When available, the Company utilizes quoted market prices from an independent third party source to determine fair value and classifies such items in Level 1. In instances where a market price is available, but the instrument is in an inactive or over-the-counter market, the Company consistently applies the dealer (market maker) pricing estimate and classifies the asset or liability in Level 2.

If quoted market prices or inputs are not available, fair value measurements are based upon valuation models that utilize current market or independently sourced market inputs, such as interest rates, option volatilities, credit spreads and/or market capitalization rates. Items valued using such internally-generated valuation techniques are classified according to the lowest level input that is significant to the fair value measurement. As a result, the asset or liability could be classified in either Level 2 or Level 3 even though there may be some significant inputs that are readily observable. Internal fair value models and techniques used by the Company include discounted cash flow and Black-Scholes valuation models. The Company also considers its counterparty’s and own credit risk for derivative instruments and other liabilities measured at fair value. The Company has elected the mid-market pricing expedient when determining fair value.

Earnings per Share

Basic earnings per common share is computed by dividing net income applicable to common shares by the weighted average number of shares of common stock outstanding during the period. The Company accounts for unvested share-based payment awards that contain non-forfeitable dividend rights or dividend equivalents (whether paid or unpaid) as participating securities, which are included in the computation of earnings per share pursuant to the two-class method. Diluted earnings per common share is calculated by including the effect of dilutive securities.

Recent Accounting Pronouncements

In January 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). This update requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. This update also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. ASU 2016-01 is effective for fiscal years, and interim periods within, beginning after December 15, 2017. Early adoption is permitted only for certain disclosure requirements. The Company is evaluating the impact of the adoption of ASU 2016-01 on January 1, 2018 to its consolidated financial position or results of operations.

In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”). ASU 2015-16 simplifies the accounting for adjustments made to provisional amounts recognized in a business combination by requiring the acquirer to (i) recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined, (ii) record, in the same period, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date, and (iii) present separately or disclose the portion of the amount recorded in current-period earnings by line item that would have

been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for fiscal years, and interim periods within, beginning after December 15, 2015. Early adoption is permitted. The Company adopted ASU 2015-16 on January 1, 2016; the adoption of which did not have a material impact on its consolidated financial position or results of operations.

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 simplifies the presentation of debt issuance costs and requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability (consistent with debt discounts). In August 2015, the FASB issued ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting) (“ASU 2015-15”). ASU 2015-15 allows debt issuance costs related to line-of-credit agreements to be presented in the balance sheet as an asset. ASU 2015-03 and ASU 2015-15 are effective for fiscal years, and interim periods within, beginning after December 15, 2015. Early adoption is permitted. The Company early adopted ASU 2015-03 and ASU 2015-15 as of December 31, 2015 using the full retrospective method as required by these ASUs. As a result, $39 million of total debt issuance costs previously reported within “other assets, net” were reclassified to their respective debt liability financial statement line items on the Company’s consolidated balance sheet as of December 31, 2014.

In February 2015, the FASB issued ASU No. 2015-2, Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 requires amendments to both the VIE and voting interest entity (“VOE”) consolidation accounting models. The amendments (i) rescind the indefinite deferral of certain aspects of accounting standards relating to consolidations and provide a permanent scope exception for registered money market funds and similar unregistered money market funds, (ii) modify (a) the identification of variable interests (fees paid to a decision maker or service provider), (b) the VIE characteristics for a limited partnership or similar entity and (c) the primary beneficiary determination under the VIE model, and (iii) eliminate the presumption within the current VOE model that a general partner controls a limited partnership or similar entity. ASU 2015-02 is effective for fiscal years, and interim periods within, beginning after December 15, 2015. Early adoption is permitted. A reporting entity may apply the amendments in ASU 2015-02 using either a modified retrospective or retrospective method by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. The Company adopted ASU 2015-02 on January 1, 2016; the adoption of which did not have a material impact to its consolidated financial position or results of operations.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). This update changes the requirements for recognizing revenue. ASU 2014-09 provides guidance for revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued Accounting Standards Update No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”). ASU 2015-14 defers the effective date of ASU 2014-09 by one year to fiscal years and interim periods beginning after December 15, 2017. Early adoption is permitted for annual periods, and interim periods within, beginning after December 15, 2016. The Company is evaluating the impact of the adoption of ASU 2014-09 on January 1, 2018 to its consolidated financial position or results of operations.

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

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

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

	·		terminated existing lease agreements on 49 HCP-owned senior housing properties previously leased and operated by Emeritus, that included the termination of embedded purchase options in these leases relating to 19 properties. At closing, the Company contributed 48 of these properties to newly formed consolidated partnerships that are operated under a structure permitted by the Housing and Economic Recovery Act of 2008 (commonly referred to as “RIDEA”)

(“RIDEA II”); the 49th property was contributed on January 1, 2015. Brookdale owns a 20% noncontrolling equity interest in the RIDEA II and manages the facilities on behalf of the partnership; and

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

Leases Amended on 153 Properties (“NNN Lease Restructuring”)

The Company and Brookdale entered into amended and restated triple-net master leases for 153 properties formerly leased to Emeritus. As part of the lease amendments, Brookdale forfeited purchase option rights related to 30 of these properties. The master leases have weighted average initial terms of 15 years, with two extension options that average 10 years each. While the total base rent for 2014 remained unchanged, these leases provide for reduced escalators beginning in 2015 compared to those which were in-place; the leases contain reduced rent payments of $6.5 million in 2016 and $7.5 million each subsequent year thereafter. All obligations under the amended and restated leases are guaranteed by Brookdale. In addition, the new leases include a purchase option in favor of Brookdale that was exercised with nine communities sold during 2015 for $60 million in proceeds.

Effectively, the Company paid consideration of $129 million to terminate the existing purchase options and received consideration of: (i) $76 million for lower rent payments and escalators discussed above and (ii) $53 million to settle the amount that the Company owed to Brookdale for the RIDEA II transaction discussed below. See the Fair Value Measurement Techniques and Quantitative Information section below for additional information.

The Company amortizes the $53 million of net consideration paid to Brookdale for the NNN Lease Restructuring as a reduction in rental income on a straight-line basis over the term of the new leases. Additionally, the lease-related intangibles, initial direct costs and straight-line rent receivables associated with the previous leases will be amortized prospectively over the new (or amended) lease terms.

Lease Terminations of 49 Properties that were contributed to a RIDEA Structure (RIDEA II)

The Company and Brookdale terminated leases for a 49 property portfolio, which resulted in Brookdale forfeiting its purchase option rights to 19 of these properties; the net value of the terminated leases and forfeited purchase options was $108 million ($131 million for the value of the terminated leases, less $23 million for the value of the forfeited purchase options). At closing, the Company contributed the properties into partnerships, with Brookdale owning a 20% noncontrolling equity interest in each of the RIDEA II (“SH PropCo” and “SH OpCo”). Brookdale’s 20% interest in the RIDEA II was valued at $47 million. Brookdale also manages the properties on behalf of the RIDEA II under long-term management contracts. See the Fair Value Measurement Techniques and Quantitative Information section below for additional information.

As consideration for the net value of $108 million for the terminated leases and the $47 million sale to Brookdale of the 20% noncontrolling interest in the RIDEA II, the Company received the following: (i) a $34 million short-term receivable recorded in other assets; (ii) a $68 million note from Brookdale (the “Brookdale Receivable”) recorded in loans receivable (see Note 7) that was repaid in November 2014; and (iii) an effective offset for the $53 million associated with the additional consideration owed by the Company to Brookdale for the NNN Lease Restructuring transaction discussed above. The fair values of the short-term receivable and Brookdale Receivable were estimated based on similar instruments available in the marketplace and are considered to be Level 2 measurements within the fair value hierarchy.

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

The Company has identified the SH PropCo and SH OpCo entities as VIEs (see Note 21 for additional information).

Continuing Care Retirement Communities Joint Venture

HCP and Brookdale formed new unconsolidated joint ventures, that owned 14 CCRC campuses at formation, in a RIDEA structure (“CCRC PropCo” and “CCRC OpCo”). HCP and Brookdale own 49% and 51%, respectively, of CCRC PropCo and CCRC OpCo, based on each company’s respective contributions. At closing, CCRC PropCo owned eight campuses

that are leased to CCRC OpCo; CCRC OpCo owned six campuses and the operations of the campuses leased from CCRC PropCo. Brookdale manages the campuses of the CCRC JV under long-term management contracts.

At closing, Brookdale contributed eight of its owned campuses; the Company contributed two campuses previously leased to Brookdale valued at $162 million (carrying value of $92 million) and $370 million of cash (includes amounts used to fund the purchase of properties and working capital), which was primarily used to acquire four additional campuses from third parties. At closing, the CCRC JV campuses were encumbered by $569 million of mortgage and entrance fee obligations.

The Company has identified the CCRC OpCo entity as a VIE (see Note 21 for additional information).

Fair Value Measurement Techniques and Quantitative Information

The fair values of the forfeited rental payments and purchase option rights related to the NNN Lease Restructuring and the RIDEA II were based on the income approach and are considered Level 3 measurements within the fair value hierarchy. The Company utilized discounted cash flow models with observable and unobservable valuation inputs. These fair value measurements, or valuation techniques, were based on current market participant expectations and information available as of the close of the transaction on August 29, 2014.

A summary of the quantitative information about fair value measurements for the NNN Lease Restructuring and RIDEA II transactions follows (dollars in thousands):

		Fair Value			Valuation Technique		Valuation Inputs		Input Average or Range
NNN Lease Restructuring
Rental payment concessions by HCP		$	76,000		Discounted Cash Flow		NNN Rent Coverage Ratio		1.20x
(benefiting Brookdale)							NNN Rent Growth Rate		3.0%
							Discount Rate		8.00%-8.50%
Forfeited purchase options by		$	(129,000)		Discounted Cash Flow		Capitalization Rates		7.50%-9.25%
Brookdale (benefiting HCP)							Discount Rate		10.50%-11.00%
							Exercise Probability		100.00%
RIDEA II
Forfeited rental payments by HCP		$	131,000		Discounted Cash Flow		NNN Rent Coverage Ratio		1.20x
(benefiting Brookdale)							NNN Rent Growth Rate		3.0%
							EBITDAR Growth Rate		5.5%
							Discount Rate		8.00%-11.00%
Forfeited purchase options by		$	(23,000)		Discounted Cash Flow		Capitalization Rates		7.50%-9.25%
Brookdale (benefiting HCP)							Discount Rate		10.50%-11.00%
							Exercise Probability		100.00%

In determining which valuation technique would be utilized to calculate fair value for the multiple elements of this transaction, the Company considered the market approach, obtaining published investor survey and sales transaction data, where available. The information obtained was consistent with the valuation inputs and assumptions utilized by the selected income approach that was applied to this transaction. Investor survey and sales transaction data reviewed for similar transactions in similar marketplaces, included, but were not limited to, sales price per unit, rent coverage ratios, rental rate growth as well as capitalization and discount rates.

Rental Payment Concessions. The fair value of the rental payment concessions related to the NNN Lease Restructuring Transaction was determined as the present value of the difference between (i) the remaining contractual rental payments of the in-place leases, limited to the first purchase option date (where available) and market rents to complete the initial lease term of the amended Brookdale leases thereafter and (ii) the contractual rental payments under the amended Brookdale leases.

Forfeited Rental Payments. The fair value of the forfeited rental payments related to the RIDEA II transaction was calculated as the present value of the difference between (i) the remaining contractual rental payments of the terminated in-place leases, limited to first purchase option date, where available and (ii) the forecasted cash flows of the facility-level operating results of the RIDEA II.

Forfeited Purchase Option Rights. The fair value of the forfeited purchase option rights was determined as the present value of the difference between (i) the fair value of the underlying property as of the initial exercise date and (ii) the exercise price for purchase option rights as defined in the lease agreement. To determine the fair value of the underlying property as of the initial exercise date, the Company utilized a cash flow model that incorporated growth rates to forecast the underlying property’s operating results and applied capitalization rates to establish its expected fair value. The Company utilized an appropriate risk-adjusted discount rate to estimate the present value as of the closing date of the transaction.

NOTE 4. Other Real Estate Property Investments

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

On June 30, 2015, the Company and Brookdale acquired a portfolio of 35 private pay senior housing communities from Chartwell Retirement Residences, including two leasehold interests, representing 5,025 units. The portfolio was acquired in a RIDEA structure (“RIDEA III”), with Brookdale owning a 10% noncontrolling interest. Brookdale has operated these communities since 2011 and continues to manage the communities under a long-term management agreement, which is cancellable under certain conditions (subject to a fee if terminated within seven years from the acquisition date). The Company paid $770 million in cash consideration, net of cash assumed, and assumed $32 million of net liabilities and $29 million of noncontrolling interests to acquire: (i) real estate with a fair value of $771 million, (ii) lease-up intangible assets with a fair value of $53 million and (iii) working capital of $7 million. As a result of the acquisition, the Company recognized a net termination fee of $8 million in rental and related revenues, which represents the termination value of the two leasehold interests. The lease-up intangible assets recognized were attributable to the value of the acquired underlying operating resident leases of the senior housing communities that were stabilized or nearly stabilized (i.e., resident occupancy above 80%). From the acquisition date to December 31, 2015, the Company recognized revenues and earnings of $94 million and $1 million, respectively, from RIDEA III. As of December 31, 2015, the purchase price allocation is preliminary and may be subject to change.

Pro Forma Results of Operations (Unaudited)

The following unaudited pro forma consolidated results of operations assume that the RIDEA III acquisition was completed as of January 1, 2013 (in thousands, except per share amounts):

		December 31, 2015			December 31, 2014			December 31, 2013
Revenues		$	2,638,192		$	2,454,039		$	2,287,638
Net (loss) income			(531,464)			954,540			996,976
Net (loss) income applicable to HCP, Inc.			(545,776)			938,387			981,610
Basic earnings per common share		$	(1.18)		$	2.04		$	2.15
Diluted earnings per common share			(1.18)			2.04			2.15

2015 Other Real Estate Acquisitions

In addition to the RIDEA III acquisition discussed above, a summary of other real estate acquisitions for the year ended December 31, 2015 follows (in thousands):

		Consideration									Assets Acquired(1)
		Cash Paid/			Liabilities			Noncontrolling						Net
Segment		Debt Settled			Assumed			Interest			Real Estate			Intangibles
Senior housing(2)		$	268,782		$	8,298		$	4,255		$	253,802			27,533
Post-acute/skilled nursing(2)			178,707			—			—			142,528			36,179
Life science			80,946			2,054			—			68,988			14,012
Medical office(3)			384,114			12,866			—			305,091			91,889
		$	912,549		$	23,218		$	4,255		$	770,409		$	169,613

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

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

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

2014 Real Estate Acquisitions

A summary of other real estate acquisitions for the year ended December 31, 2014 follows (in thousands):

		Consideration									Assets Acquired
					Debt and Other
					Liabilities			Noncontrolling						Net
Segment		Cash Paid			Assumed			Interest			Real Estate			Intangibles
Senior housing(1)		$	233,797		$	3,351		$	6,321	(2)	$	215,255			28,214
Life science			43,500			250			—			41,281			2,469
Medical office			226,173			33,677			—			226,510			33,340
		$	503,470		$	37,278		$	6,321		$	483,046		$	64,023

	(1)		Includes the acquisition of a $147 million (£88 million) portfolio of 23 care homes in the UK.

	(2)		Includes $5 million of non-managing member limited liability company units

Completed Developments

During the year ended December 31, 2014, the Company placed in service the following: (i) two life science facilities, (ii) a MOB and (iii) a post-acute/skilled nursing facility. These completed developments represented $41 million of gross real estate on the Company’s consolidated balance sheets as of the date they were placed in service. There were no completed developments placed in service during the year ended December 31, 2015.

Construction, Tenant and Other Capital Improvements

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

		Year Ended December 31,
Segment		2015			2014
Senior housing		$	131,405		$	45,586
Post-acute/skilled nursing			3,369			2,533
Life science			122,319			133,164
Medical office			131,021			90,027
Hospital			37			1,688
		$	388,151		$	272,998

NOTE 5. Dispositions of Real Estate and Discontinued Operations

During the year ended December 31, 2015, the Company sold the following: (i) nine senior housing facilities for $60 million resulting from Brookdale’s exercise of its purchase option received as part of the Brookdale Transaction, (ii) two parcels of land in its life science segment for $51 million and (iii) a MOB for $400,000.

During the year ended December 31, 2014, the Company sold the following: (i) two post-acute/skilled nursing facilities for $22 million, (ii) a hospital for $17 million, (iii) a senior housing facility for $16 million and (iv) a MOB for $145,000.

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

The Company separately presented as discontinued operations the results of operations for all consolidated assets disposed of and all properties held for sale, if any, prior to the adoption of ASU 2014-08 on April 1, 2014. The amounts included in discontinued operations, for the year ended December 31, 2014 represent the activity for properties sold prior to the adoption date. No properties sold subsequent to the adoption date met the new criteria for reporting discontinued operations (see Note 2).

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

		Year Ended December 31,
		2014			2013
Rental and related revenues		$	1,810		$	16,649
Depreciation and amortization expenses			—			5,862
Operating expenses			54			3,929
Other expense, net			20			979
Income before impairment losses and gain on sales of real estate, net of income taxes		$	1,736		$	5,879
Impairment losses on real estate		$	—		$	(1,372)
Gain on sales of real estate, net of income taxes		$	28,010		$	69,866
Number of properties included in discontinued operations			3			16

NOTE 6. Net Investment in Direct Financing Leases

The components of net investment in DFLs consisted of the following (dollars in thousands):

		December 31,
		2015			2014
Minimum lease payments receivable		$	26,283,392		$	24,182,525
Estimated residual values			3,900,679			4,126,426
Less unearned income			(23,462,022)			(21,028,617)
Net investment in direct financing leases before allowance			6,722,049			7,280,334
Allowance for DFL losses			(817,040)			—
Net investment in direct financing leases		$	5,905,009		$	7,280,334
Properties subject to direct financing leases			348			363

HCR ManorCare, Inc.

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

As part of the Company’s fourth quarter 2015 review process, including its internal rating evaluation, it assessed the collectibility of all contractual rent payments under the HCRMC amended master lease (the “Amended Master Lease”). The Company’s evaluation included, but was not limited to, consideration of: (i) the continued decline in HCRMC’s operating performance and fixed charge coverage ratio during the second half of 2015, with the most significant deterioration occurring during the fourth quarter, (ii) the reduced growth outlook for the post-acute/skilled nursing business and (iii) HCRMC’s 2015 audited financial statements. The Company determined that the timing and amounts owed under the HCRMC DFL investments are no longer reasonably assured and assigned an internal rating of “Watch List” as of December 31, 2015. Further, the Company placed the HCRMC DFL investments on nonaccrual and will utilize the cash method of accounting in accordance with its policy (see Note 2).

As a result of assigning an internal rating of “Watch List” for its HCRMC DFL investments during the quarterly review process, the Company further evaluated the carrying amount of its HCRMC DFL investments. As a result of the significant decline in HCRMC’s fixed charge coverage ratio in the fourth quarter of 2015, combined with a lower growth outlook for the post-acute/skilled nursing business, the Company determined that it is probable that its HCRMC DFL investments are

impaired and the amount of the loss can be reasonably estimated. In the fourth quarter of 2015, the Company recorded an allowance for DFL losses (impairment charge) of $817 million, reducing the carrying amount of its HCRMC DFL investments from $6.0 billion to $5.2 billion. See Note 17 for additional discussion of the impairment charge and related valuation assumptions.

In December 2015, the Company reduced the carrying amount of its equity investment in HCRMC to zero, and income will be recognized only if cash distributions are received from HCRMC; as a result, the Company will no longer recharacterize (eliminate) its proportional ownership share of income from DFLs to equity income from unconsolidated joint ventures (see Note 8).

The Company recognized HCRMC DFL income and HCRMC equity income as follows (in thousands):

		Year Ended
		December 31,
		2015			2014			2013
Cash income		$	482,770		$	519,280		$	502,354
DFL accretion, net			90,065			79,349			82,688
Total DFL income from HCRMC		$	572,835		$	598,629		$	585,042
DFL accretion income recharacterized to equity income		$	58,047		$	62,445		$	62,061
Equity loss from HCRMC			(7,324)			(9,270)			(6,460)
Total equity income from HCRMC		$	50,723		$	53,175		$	55,601

During the years ended December 31, 2015, 2014 and 2013, the Company recognized a total of $148 million, $142 million and $145 million of accretion, net, respectively, related to its HCRMC DFL investments.

During the quarter ended March 31, 2015, the Company and HCRMC agreed to market for sale the real estate and operations associated with 50 non-strategic facilities that were under the Master Lease. HCRMC receives an annual rent reduction under the Master Lease based on 7.75% of the net sales proceeds received by HCP. During the year ended December 31, 2015, the Company completed sales of 22 non-strategic HCRMC facilities for $219 million. Subsequent to December 31, 2015, the Company sold an additional 11 facilities, bringing the total facilities sold through February 8, 2016 to 33, with the remaining facility sales expected to close by mid-2016.

On March 29, 2015, certain subsidiaries of the Company entered into an amendment to the Master Lease (the “HCRMC Lease Amendment”) effective April 1, 2015. The HCRMC Lease Amendment reduced initial annual rent by a net $68 million from $541 million to $473 million. Commencing on April 1, 2016, the minimum rent escalation shall be reset to 3.0% for each lease year through the expiration of the initial term of each applicable pool of facilities. Prior to the HCRMC Lease Amendment, rent payments would have increased 3.5% on April 1, 2015 and 2016 and 3.0% thereafter. The initial term was extended five years to an average of 16 years, and the extension options’ aggregate terms remained the same.

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

Additionally, HCRMC agreed to sell, and HCP agreed to purchase, nine post-acute facilities for an aggregate purchase price of $275 million. The proceeds from the nine facilities are to be used to reduce the Tranche A DRO as the purchases are consummated. The closing of the purchases of these facilities are subject to certain customary conditions and approvals.

Through December 31, 2015, HCRMC and HCP completed seven of the nine facility purchases for $184 million. The purchases of the remaining two facilities are expected to occur by mid-2016. Following the purchase of a facility, the Lessee leases such facility from the Company pursuant to the Amended Master Lease. The nine facilities will contribute an aggregate of $19 million of annual rent (subject to escalation) under the Amended Master Lease.

In March 2015, the Company recorded an impairment charge of $478 million related to its HCRMC DFL investments. The impairment charge reduced the carrying value of the HCRMC DFL investments from $6.6 billion to $6.1 billion, based on the present value of the future lease payments effective April 1, 2015 under the Amended Master Lease discounted at the original DFL investments’ effective lease rate (see Note 17).

See Note 8 for additional discussion of the Company’s equity interest in HCRMC and the U.S. Department of Justice (“DOJ”) action related to HCRMC.

During the year ended December 31, 2014, the Company received a $13 million payoff from the sale of a HCRMC post-acute/skilled nursing facility that collateralized this DFL.

Direct Financing Lease Internal Ratings

The following table summarizes the Company’s internal ratings for net investment in DFLs at December 31, 2015 (dollars in thousands):

		Carrying			Percentage of		Internal Ratings
Investment Type		Amount			DFL Portfolio		Performing DFLs			Watch List DFLs			Workout DFLs
Senior housing		$	1,788,764		30		$	261,261		$	1,527,503		$	—
Post-acute/skilled nursing			3,992,354		68			—			3,992,354			—
Hospital			123,891		2			123,891			—			—
		$	5,905,009		100		$	385,152		$	5,519,857		$	—

Beginning September 30, 2013, the Company placed a 14 property senior housing DFL (the “DFL Portfolio”) on nonaccrual status and classified the DFL Portfolio on “Watch List” status. The Company determined that the collection of all rental payments was and continues to be no longer reasonably assured; therefore, rental revenue for the DFL Portfolio has been recognized on a cash basis. The Company re-assessed the DFL Portfolio for impairment on December 31, 2015 and determined that the DFL Portfolio was not impaired based on its belief that: (i) it was not probable that it will not collect all of the rental payments under the terms of the lease; and (ii) the fair value of the underlying collateral exceeded the DFL Portfolio’s carrying amount. The fair value of the DFL Portfolio was estimated based on a discounted cash flow model, the inputs to which are considered to be a Level 3 measurement within the fair value hierarchy. Inputs to this valuation model include real estate capitalization rates, industry growth rates and operating margins, some of which influence the Company’s expectation of future cash flows from the DFL Portfolio and, accordingly, the fair value of its investment. During the years ended December 31, 2015, 2014 and 2013, the Company recognized DFL income of $15 million, $19 million and $24 million, respectively, and received cash payments of $20 million, $24 million and $24 million, respectively, from the DFL Portfolio. The carrying value of the DFL Portfolio was $366 million and $370 million at December 31, 2015 and 2014, respectively.

Certain leases contain provisions that allow the tenants to elect to purchase the properties during or at the end of the lease terms for the aggregate initial investment amount plus adjustments, if any, as defined in the lease agreements. Certain leases also permit the Company to require the tenants to purchase the properties at the end of the lease terms.

Future minimum lease payments contractually due under DFLs at December 31, 2015, were as follow (in thousands):

Year		Amount
2016		$	552,985
2017			545,307
2018			559,979
2019			576,206
2020			586,229
Thereafter			23,462,686
		$	26,283,392

NOTE 7. Loans Receivable

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

		December 31,
		2015									2014
		Real Estate			Other						Real Estate			Other
		Secured			Secured			Total			Secured			Secured			Total
Mezzanine		$	—		$	660,138		$	660,138		$	—		$	799,064		$	799,064
Other			114,322			—			114,322			135,363			—			135,363
Unamortized premiums (discounts), fees and costs, net			961			(6,678)			(5,717)			—			(14,056)			(14,056)
Allowance for loan losses			—			—			—			—			(13,410)			(13,410)
		$	115,283		$	653,460		$	768,743		$	135,363		$	771,598		$	906,961

The following table summarizes the Company’s internal ratings for loans receivable at December 31, 2015 (dollars in thousands):

					Percentage		Internal Ratings
		Carrying			of Loan		Performing			Watch List			Workout
Investment Type		Amount			Portfolio		Loans			Loans			Loans
Real estate secured		$	115,283		15		$	115,283		$	—		$	—
Other secured			653,460		85			653,460			—			—
		$	768,743		100		$	768,743		$	—		$	—

Real Estate Secured Loans

Following is a summary of loans receivable secured by real estate at December 31, 2015 (dollars in thousands):

Final		Number
Maturity		of				Principal			Carrying
Date		Loans		Payment Terms		Amount			Amount
2016		1		aggregate monthly interest-only payments, accrues interest at 8.5%, and secured by a senior housing facility in Pennsylvania(1)		$	15,135		$	15,244
2017		3		aggregate monthly interest-only payments, accrues interest at 8.5%, and secured by two senior housing facilities in New Jersey and Pennsylvania;(1) and aggregate monthly interest-only payments, accrues interest at LIBOR plus 6.0%, and secured by, among other things, the issuer's real estate assets			78,329			79,291
2018		1		monthly interest-only payments, accrues interest at 8.0% and secured by a senior housing facility in Pennsylvania(1)			20,078			20,748
		5				$	113,542		$	115,283

	(1)		Represents commitments to fund an aggregate of $2 million for four development projects that are at or near completion as of December 31, 2015.

At December 31, 2015, future contractual principal payments to be received on loans receivable secured by real estate are $15 million in 2016, $79 million in 2017 and $20 million in 2018. During the year ended December 31, 2015, the Company recognized $27 million in interest income related to loans secured by real estate. At December 31, 2015, the Company accrued $1 million of interest receivables related to real estate secured loans.

In December 2015, the Company purchased £28 million ($42 million) of Four Seasons Health Care’s (“Four Seasons”) £40 million senior secured term loan. The loan is secured by, among other things, the real estate assets of Four Seasons, and represents the most senior debt tranche. The loan bears interest at a rate of LIBOR plus 6.0% per annum and matures in December 2017.

Other Secured Loans

HC-One Facility

In November 2014, the Company was the lead investor in the financing for Formation Capital and Safanad’s acquisition of NHP, a company that, at closing, owned 273 nursing and residential care homes representing over 12,500 beds in the U.K. principally operated by HC-One. The Company provided a loan facility (the “HC-One Facility”), secured by substantially all of NHP’s assets, totaling £395 million, with £363 million ($574 million) drawn at closing. The HC-One Facility has a five-year term and was funded by a £355 million draw on the Company’s revolving line of credit facility that is discussed in Note 11. In February 2015, the Company increased the HC-One Facility by £108 million ($164 million) to £502 million ($795 million), in conjunction with HC-One’s acquisition of Meridian Healthcare. In April 2015, the Company converted £174 million of the HC-One Facility into a sale-leaseback transaction for 36 nursing and residential care homes located throughout the U.K. (see Note 4). In September 2015, the Company amended and increased its commitment under the HC-One Facility by £11 million primarily for the funding of capital expenditures and a development project. As part of the amendments, the Company shortened the non-call period by 17 months and provided consent for (i) the pay down of £34 million from disposition proceeds without a prepayment premium and (ii) the spinoff of 36 properties into a separate joint venture. In return, the Company retained security over the spinoff properties for a period of two years. Through December 31, 2015, the Company received paydowns of £34 million ($52 million).

Brookdale Receivable

In conjunction with the Brookdale Transaction, on August 29, 2014, the Company provided a $68 million interest-only loan, which was repaid in full in November 2014. See additional information regarding the Brookdale Transaction in Note 3.

Barchester Loan

On May 2, 2013, the Company acquired £121 million of subordinated debt at a discount for £109 million ($170 million). The loans were secured by an interest in facilities leased and operated by Barchester Healthcare (“Barchester”). On September 6, 2013, the Company received £129 million ($202 million) for the par payoff of these debt investments, recognizing interest income of $24 million for the related unamortized loan discounts.

Tandem Health Care Loan

On July 31, 2012, the Company closed a mezzanine loan facility to lend up to $205 million to Tandem Health Care (“Tandem”), as part of the recapitalization of a post-acute/skilled nursing portfolio. The Company funded $100 million (the “First Tranche”) at closing and funded an additional $102 million (the “Second Tranche”) in June 2013. In May 2015, the Company increased and extended the mezzanine loan facility with Tandem to (i) fund $50 million (the “Third Tranche”) and $5 million (the “Fourth Tranche”), which proceeds were used to repay a portion of Tandem’s existing senior and mortgage debt, respectively; (ii) extend its maturity to October 2018; and (iii) extend the prepayment penalty period to January 2017. The loans bear interest at fixed rates of 12%, 14%, 6% and 6% per annum for the First, Second, Third and Fourth Tranches, respectively. At December 31, 2015, the facility had an outstanding balance of $256 million at an 11.5% blended interest rate and was subordinate to $381 million of senior mortgage debt.

Delphis Operations, L.P. Loan

Through October 2015, the Company held a secured term loan made to Delphis Operations, L.P. (“Delphis” or the “Borrower”) that was collateralized by all of the assets of the Borrower. In October 2015, the Company received $23 million in cash proceeds from the sale of Delphis’ collateral and recognized an impairment recovery of $6 million for

the amount received in excess of the loan’s carrying value. The carrying value of the loan, net of an allowance for loan losses, was $17 million at December 31, 2014. At December 31, 2014, the allowance related to the Company’s senior secured term loan to Delphis was $13 million with no additional allowances recognized during the year ended December 31, 2015. During the years ended December 31, 2015 and 2014, the Company received cash payments from the Borrower of $23 million and $1 million, respectively.

NOTE 8. Investments in and Advances to Unconsolidated Joint Ventures

The Company owns interests in the following entities that are accounted for under the equity method at December 31, 2015 (dollars in thousands):

Entity(1)		Segment		Carrying Amount			Ownership %
CCRC JV(2)		senior housing		$	465,179		49
HCRMC(3)		senior housing and post-acute/skilled nursing			—		9
MBK JV(4)		senior housing			34,131		50
HCP Ventures III, LLC		medical office			9,241		30
HCP Ventures IV, LLC		medical office and hospital			11,884		20
HCP Life Science(5)		life science			68,582		50-63
Vintage Park		senior housing			8,729		85
MBK Development JV(4)		senior housing			2,224		50
Suburban Properties, LLC		medical office			4,621		67
Advances to unconsolidated joint ventures, net					653
				$	605,244

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

	(2)		Includes two unconsolidated joint ventures in a RIDEA structure (CCRC PropCo and CCRC OpCo). See additional information regarding the CCRC JV and the Brookdale Transaction in Note 3.

	(3)		In December 2015, September 2015 and December 2014, the Company recognized impairment charges of $19 million, $27 million and $36 million, respectively. See Note 17 for additional information regarding the impairment charges; also, see Note 6 regarding the Company’s related HCRMC DFL investments.

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

	(5)		Includes three unconsolidated joint ventures between the Company and an institutional capital partner for which the Company is the managing member. HCP Life Science includes the following partnerships (and the Company’s ownership percentage): (i) Torrey Pines Science Center, LP (50%); (ii) Britannia Biotech Gateway, LP (55%); and (iii) LASDK, LP (63%).

Summarized combined financial information for the Company’s unconsolidated joint ventures follows (in thousands):

		December 31,
		2015(1)			2014
Real estate, net		$	4,470,249		$	4,537,553
Goodwill and other assets, net			4,935,343			4,920,604
Assets held for sale			94,866			662,740
Total assets		$	9,500,458		$	10,120,897
Capital lease obligations and mortgage debt		$	6,575,531		$	6,733,943
Accounts payable and other			1,111,350			974,206
Liabilities and mortgage debt held for sale			6,318			505,703
Other partners’ capital			1,163,501			1,281,413
HCP’s capital(2)			643,758			625,632
Total liabilities and partners’ capital		$	9,500,458		$	10,120,897

	(1)		Includes the financial information of Vintage Park, MBK JV and MBK Development JV, which were formed in January 2015, March 2015 and September 2015, respectively.

	(2)		The combined basis difference of the Company’s investments in these joint ventures of $39 million, as of December 31, 2015, is primarily attributable to goodwill, real estate, capital lease obligations, deferred tax assets and lease-related net intangibles.

		Year Ended December 31,
		2015(1)			2014(2)			2013
Total revenues		$	4,464,317		$	4,284,747		$	4,189,793
Income (loss) from discontinued operations			38,071			(24,422)			(22,030)
Net loss(3)			(83,277)			(411,385)			(354,079)
HCP’s share in earnings(3)			57,313			49,570			64,433
Fees earned by HCP			1,873			1,809			1,847
Distributions received by HCP			46,100			7,702			18,091

	(1)		Includes the financial information of Vintage Park, MBK JV and MBK Development JV, which were formed in January 2015, March 2015 and September 2015, respectively.

	(2)		Includes the financial information of the CCRC JV, which the Company formed in August 2014.

	(3)		The net loss in 2015 includes $79 million related to HCRMC’s goodwill that was allocated to disposal groups that were sold. The net loss in 2014 includes impairments, net of the related tax benefit, of $396 million related to HCRMC’s deferred tax assets and trademark intangible assets. The impairments at HCRMC were the result of a continued shift in patient payor sources from Medicare to Medicare Advantage, which negatively impact reimbursement rates and length of stay for HCRMC’s skilled nursing segment and a shift in HCRMC’s marketing and branding strategy. The net loss in 2013 includes a charge of $400 million related to recording of a valuation allowance that reduced the carrying value of HCRMC’s deferred tax assets to an amount that is more likely than not to be realized as determined by HCRMC’s management. HCRMC’s goodwill, intangible assets and deferred tax assets were not previously considered in the Company’s initial investments in the operations of HCRMC. Therefore, the related impairments and valuation allowance against the carrying value of the deferred tax assets do not impact the Company’s recorded investment or impact on the Company’s share of earnings from or its equity investment in HCRMC. However, the circumstances that led to HCRMC’s management to reach the determination that it was necessary to reduce the carrying value of their deferred tax and trademark intangible assets in 2014 are consistent with the Company’s determination that its equity investment in HCRMC was impaired in December 2014 (see Note 17). The Company’s joint venture interest in HCRMC is accounted for using the equity method and results in an ongoing reduction of DFL income, proportional to HCP’s ownership in HCRMC. The elimination of the respective proportional lease expense at the HCRMC level in substance results in $58 million, $62 million and $62 million of DFL income that is recharacterized to the Company’s share of earnings from HCRMC (equity income from unconsolidated joint ventures) for the years ended December 31, 2015, 2014 and 2013, respectively. See Note 6 for additional discussion.

CCRC JV

On August 29, 2014, as part of the Brookdale Transaction discussed in Note 3, HCP and Brookdale formed unconsolidated joint ventures in a RIDEA structure. At closing, Brookdale contributed eight of its owned campuses; the Company contributed two campuses previously leased to Brookdale valued at $162 million (carrying value of $92 million) and $370 million of cash. At closing, the CCRC JV campuses were encumbered by $569 million of mortgage and entrance fee obligations (see Notes 3 and 5).

HCRMC

On April 20, 2015, the DOJ unsealed a previously filed complaint in the U.S. District Court for the Eastern District of Virginia against HCRMC and certain of its affiliates in three consolidated cases following a civil investigation arising out of three lawsuits filed by former employees of HCRMC under the qui tam provisions of the federal False Claims Act. The DOJ’s complaint in intervention is captioned United States of America, ex rel. Ribik, Carson, and Slough v. HCR ManorCare, Inc., ManorCare Inc., HCR ManorCare Services, LLC and Heartland Employment Services, LLC (Civil Action Numbers: 1:09cv13; 1:11cv1054; 1:14cv1228 (CMH/TCB)). The complaint alleges that HCRMC submitted claims to Medicare for therapy services that were not covered by the skilled nursing facility benefit, were not medically reasonable and necessary, and were not skilled in nature, and therefore not entitled to Medicare reimbursement. While this litigation is at an early stage and HCRMC has indicated that it believes the claims are unjust and it will vigorously defend against them, a significant adverse judgment against HCRMC or significant settlement obligation could impact the carrying value of the Company’s investments in HCRMC’s operations and/or DFLs investment further (see Notes 6 and 17).

The Company concluded that its equity investment in HCRMC was other-than-temporarily impaired as of September 30, 2015 and recorded an impairment charge of $27 million (see Note 17). In December 2015, the Company concluded that its equity investment in HCRMC was other-than-temporarily impaired and recorded an impairment charge of $19 million, and, prospectively, income will be recognized only if cash distributions are received from HCRMC (see Notes 6 and 17).

MBK JVs

On March 30, 2015, the Company and MBK Senior Living (“MBK”), a subsidiary of Mitsui & Co. Ltd, formed a new RIDEA joint venture (“MBK JV”) that owns three senior housing facilities with the Company and MBK each owning a 50% equity interest. MBK manages these communities on behalf of the joint venture. The Company contributed $27

million of cash and MBK contributed the three senior housing facilities with a fair value of $126 million, which were encumbered by $78 million of mortgage debt at closing.

On September 25, 2015, the Company and MBK formed a new RIDEA joint venture (“MBK Development JV”) which acquired a $3 million parcel of land for the purpose of developing a 74-unit class A senior housing facility in Santa Rosa, California. The parcel of land is located adjacent to the Oakmont Gardens independent living facility currently owned and operated by the MBK JV.

HCP Ventures III, LLC and HCP Ventures IV, LLC

On December 30, 2015, HCP Ventures III, LLC and HCP Ventures IV, LLC (“HCP Ventures IV”) sold 61 MOBs, three hospitals and a re-development property for total proceeds of $634 million, recognizing gains on sales of real estate of $59 million, of which the Company’s share was $15 million. As part of these sales, the Company received aggregate distributions of $45 million, including repayment of its loan receivable.

NOTE 9. Intangibles

The Company’s intangible lease assets were (in thousands):

		December 31,
Intangible lease assets		2015			2014
Lease-up intangibles		$	801,513		$	608,323
Above market tenant lease intangibles			155,048			163,146
Below market ground lease intangibles			57,899			58,939
Gross intangible lease assets			1,014,460			830,408
Accumulated depreciation and amortization			(400,233)			(349,395)
Net intangible lease assets		$	614,227		$	481,013

The remaining weighted average amortization period of intangible assets was 14 years at both December 31, 2015 and 2014.

The Company’s intangible lease liabilities were (in thousands):

		December 31,
Intangible lease liabilities		2015			2014
Below market lease intangibles		$	204,662		$	203,374
Above market ground lease intangibles			6,121			6,121
Gross intangible lease liabilities			210,783			209,495
Accumulated depreciation and amortization			(135,510)			(124,772)
Net intangible lease liabilities		$	75,273		$	84,723

The remaining weighted average amortization period of intangible lease liabilities was nine years at both December 31, 2015 and 2014.

For the years ended December 31, 2015, 2014 and 2013, rental income includes additional revenues of $4 million, $3 million and $9 million, respectively, from the amortization of net below market lease intangibles. For the years ended December 31, 2015, 2014 and 2013, operating expenses include additional expense of $1 million each year from the amortization of net above market ground lease intangibles. For the years ended December 31, 2015, 2014 and 2013, depreciation and amortization expense includes additional expense of $76 million, $60 million and $59 million, respectively, from the amortization of lease-up and non-compete agreement intangibles.

Estimated aggregate amortization of intangible assets and liabilities for each of the five succeeding fiscal years and thereafter follows (in thousands):

		Intangible			Intangible
		Assets			Liabilities
2016		$	97,043		$	17,545
2017			84,552			15,118
2018			68,999			12,413
2019			55,730			9,758
2020			46,308			6,047
Thereafter			261,595			14,392
		$	614,227		$	75,273

NOTE 10. Other Assets

The Company’s other assets consisted of the following (in thousands):

		December 31,
		2015			2014
Straight-line rent receivables, net of allowance of $33,648 and $34,182, respectively		$	385,888		$	355,864
Marketable debt securities, net			102,958			231,442
Leasing costs and inducements, net			158,708			146,500
Goodwill			50,346			50,346
Other			119,965			117,516
Total other assets		$	817,865		$	901,668

At December 31, 2015 and 2014, within other assets is a non-interest bearing receivable of $9 million and $26 million, respectively, from Brookdale payable in eight quarterly installments (see Note 3). At December 31, 2014, other assets also include a loan receivable of $15 million from HCP Ventures IV, which was repaid as part of real estate asset sales in December 2015 (see Note 8).

During the year ended December 31, 2013, the Company realized gains from the sale of marketable equity securities of $11 million, which were included in other income, net.

Four Seasons Health Care Senior Unsecured Notes

Marketable debt securities, net are classified as held-to-maturity debt securities and primarily represent senior notes issued by Elli Investments Limited (“Elli”), a company beneficially owned by funds or limited partnerships managed by Terra Firma, as part of the financing for Elli’s acquisition of Four Seasons Health Care (the “Four Seasons Notes”). The Four Seasons Notes mature in June 2020, are non-callable through June 2016 and bear interest on their par value at a fixed rate of 12.25% per annum. The Company purchased an aggregate par value of £138.5 million of the Four Seasons Notes at a discount for £136.8 million ($215 million) in June 2012, representing 79% of the total £175 million issued and outstanding Four Seasons Notes. In June 2015 and September 2015, the Company determined that the Four Seasons Notes were other-than-temporarily impaired (see Note 17). In December 2015, the Company received its contractual interest payment of £8 million ($13 million), which was applied against the principal balance reducing the carrying amount to £58 million ($85 million).

NOTE 11. Debt

Bank Line of Credit and Term Loans

The Company’s $2.0 billion unsecured revolving line of credit facility (the “Facility”) matures on March 31, 2018 and contains a one-year extension option. Borrowings under the Facility accrue interest at LIBOR plus a margin that depends upon the Company’s credit ratings. The Company pays a facility fee on the entire revolving commitment that depends on its credit ratings. Based on the Company’s credit ratings at December 31, 2015, the margin on the Facility was 0.925%, and the facility fee was 0.15%. The Facility also includes a feature that allows the Company to increase the borrowing capacity by an aggregate amount of up to $500 million, subject to securing additional commitments from existing lenders or new lending institutions. At December 31, 2015, the Company had £270 million ($397 million), outstanding under the Facility with a weighted average effective interest rate of 1.72%.

On July 30, 2012, the Company entered into a credit agreement with a syndicate of banks for a £137 million ($202 million at December 31, 2015) four-year unsecured term loan (the “2012 Term Loan”). Based on the Company’s credit ratings at December 31, 2015, the 2012 Term Loan accrues interest at a rate of GBP LIBOR plus 1.20%. Concurrent with the closing of the 2012 Term Loan, the Company entered into a four-year interest rate swap contract that fixes the interest rate of the 2012 Term Loan at 1.81%, subject to adjustments based on the Company’s credit ratings. The 2012 Term Loan contains a one-year committed extension option.

On January 12, 2015, the Company entered into a credit agreement with a syndicate of banks for a £220 million ($323 million at December 31, 2015) four-year unsecured term loan (the “2015 Term Loan”) that accrues interest at a rate

of GBP LIBOR plus 0.975%, subject to adjustments based on the Company’s credit ratings (the 2012 and 2015 Term Loans are collectively, the “Term Loans”). Concurrently, the Company entered into a three-year interest rate swap contract that fixes the rate of the 2015 Term Loan at 1.79% (see Note 24). Proceeds from the 2015 Term Loan were used to repay £220 million that partially funded the November 2014 HC-One Facility (see Note 7). The 2015 Term Loan contains a one-year committed extension option.

The Facility and Term Loans contain certain financial restrictions and other customary requirements, including cross-default provisions to other indebtedness. Among other things, these covenants, using terms defined in the agreements, (i) limit the ratio of Consolidated Total Indebtedness to Consolidated Total Asset Value to 60%, (ii) limit the ratio of Secured Debt to Consolidated Total Asset Value to 30%, (iii) limit the ratio of Unsecured Debt to Consolidated Unencumbered Asset Value to 60% and (iv) require a minimum Fixed Charge Coverage ratio of 1.5 times. The Facility and Term Loans also require a Minimum Consolidated Tangible Net Worth of $9.5 billion at December 31, 2015. At December 31, 2015, the Company was in compliance with each of these restrictions and requirements.

Senior Unsecured Notes

At December 31, 2015, the Company had senior unsecured notes outstanding with an aggregate principal balance of $9.2 billion. The senior unsecured notes contain certain covenants including limitations on debt, maintenance of unencumbered assets, cross-acceleration provisions and other customary terms. The Company believes it was in compliance with these covenants at December 31, 2015.

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

		Issuance
Period		Amount			Coupon Rate			Maturity Date			Net Proceeds
Year ended December 31, 2015:
January 21, 2015		$	600,000			3.400	%		2025		$	591,000
May 20, 2015		$	750,000			4.000	%		2025		$	739,000
December 1, 2015		$	600,000			4.000	%		2022		$	594,000
Year ended December 31, 2014:
February 21, 2014		$	350,000			4.200	%		2024		$	346,000
August 14, 2014		$	800,000			3.875	%		2024		$	792,000

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

Period		Amount			Coupon Rate
Year ended December 31, 2015:
March 1, 2015		$	200,000			6.000	%
June 8, 2015		$	200,000			7.072	%
Year ended December 31, 2014:
February 1, 2014		$	400,000			2.700	%
June 14, 2014		$	62,000			6.000	%
June 14, 2014		$	25,000			3 Month LIBOR+0.9	%

Mortgage Debt

At December 31, 2015, the Company had $933 million in aggregate principal amount of mortgage debt outstanding, which is secured by 62 healthcare facilities (including redevelopment properties) with a carrying value of $1.2 billion.

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

Debt Maturities

The following table summarizes the Company’s stated debt maturities and scheduled principal repayments at December 31, 2015 (dollars in thousands):

								Senior Unsecured Notes(3)						Mortgage Debt(4)
		Line of									Interest						Interest
Year		Credit(1)			Term Loans(2)			Amount			Rate			Amount			Rate		Total(5)
2016		$	—		$	202,034		$	900,000		5.09	%		$	279,194		6.84	%	$	1,381,228
2017			—			—			750,000		6.02	%			581,891		6.08	%		1,331,891
2018			397,432			—			600,000		6.81	%			6,583		5.90	%		1,004,015
2019			—			324,434			450,000		3.97	%			2,072		N/A			776,506
2020			—			—			800,000		2.79	%			2,078		5.14	%		802,078
Thereafter			—			—			5,700,000		4.54	%			61,092		4.98	%		5,761,092
			397,432			526,468			9,200,000		4.68	%			932,910		6.21	%		11,056,810
Discounts and debt costs, net			—			(1,661)			(79,893)						(698)					(82,252)
		$	397,432		$	524,807		$	9,120,107					$	932,212				$	10,974,558

	(1)		Represents £270 million translated into U.S. dollars (“USD”).

	(2)		Represents £357 million translated into USD.

	(3)		Interest rates on the notes ranged from 2.79% to 6.88% with a weighted average effective rate of 4.68% and a weighted average maturity of six years.

	(4)		Interest rates on the mortgage debt ranged from 3.14% to 8.35% with a weighted average effective interest rate of 6.21% and a weighted average maturity of two years.

	(5)		Excludes $94 million of other debt that represents Life Care Bonds and Demand Notes that have no scheduled maturities.

Other Debt

At December 31, 2015, the Company had $66 million of non-interest bearing life care bonds at two of its continuing care retirement communities and non-interest bearing occupancy fee deposits at two of its senior housing facilities, all of which 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.

At December 31, 2015, the Company had $28 million of on-demand notes (“Demand Notes”) from the CCRC JV. The Demand Notes bear interest at a rate of 4.5%.

NOTE 12. Commitments and Contingencies

Legal Proceedings

From time to time, the Company is a party to legal proceedings, lawsuits and other claims that arise in the ordinary course of the Company’s business. The Company is not aware of any legal proceedings or claims that it believes may have, individually or taken together, a material adverse effect on the Company’s business, prospects, financial condition, results of operations or cash flows. The Company’s policy is to accrue legal expenses as they are incurred.

DownREIT LLCs

In connection with the formation of certain DownREIT LLCs, members may contribute appreciated real estate to a DownREIT LLC in exchange for DownREIT units. These contributions are generally tax-deferred, so that the pre-contribution gain related to the property is not taxed to the member. However, if a contributed property is later sold by the DownREIT LLC, the unamortized pre-contribution gain that exists at the date of sale is specifically allocated and taxed to the contributing members. In many of the DownREITs, the Company has entered into indemnification agreements with those members who contributed appreciated property into the DownREIT LLC. Under these indemnification agreements, if any of the appreciated real estate contributed by the members is sold by the DownREIT LLC in a taxable transaction within a specified number of years, the Company will reimburse the affected members for the federal and state income taxes associated with the pre-contribution gain that is specially allocated to the affected member under the Code (“make-whole payments”). These make-whole payments include a tax gross-up provision. These indemnification agreements have expiration terms that range through 2033.

Commitments

The following table summarizes our material commitments, excluding debt servicing obligations (see Note 11), at December 31, 2015 (in thousands):

														More than
		Total			2016			2017-2018			2019-2020			Five Years
U.K. loan commitments(1)		$	56,915		$	34,099		$	22,816		$	—		$	—
Construction loan commitments(2)			2,060			2,060			—			—			—
Development commitments(3)			92,712			92,712			—			—			—
Ground and other operating leases			383,906			7,870			14,068			13,719			348,249
Total		$	535,593		$	136,741		$	36,884		$	13,719		$	348,249

	(1)		Represents £39 million translated into USD as of December 31, 2015 for commitments to fund the Company’s U.K. loan facilities.

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

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

Credit Enhancement Guarantee

Certain of the Company’s senior housing facilities serve as collateral for $98 million of debt (maturing May 1, 2025) that is owed by a previous owner of the facilities. This indebtedness is guaranteed by the previous owner who has an investment grade credit rating. These senior housing facilities, which are classified as DFLs, had a carrying value of $366 million as of December 31, 2015.

Environmental Costs

The Company monitors its properties for the presence of hazardous or toxic substances. The Company is not aware of any environmental liability with respect to the properties that would have a material adverse effect on the Company’s business, financial condition or results of operations. The Company carries environmental insurance and believes that the policy terms, conditions, limitations and deductibles are adequate and appropriate under the circumstances, given the relative risk of loss, the cost of such coverage and current industry practice.

General Uninsured Losses

The Company obtains various types of insurance to mitigate the impact of property, business interruption, liability, flood, windstorm, earthquake, environmental and terrorism related losses. The Company attempts to obtain appropriate policy terms, conditions, limits and deductibles considering the relative risk of loss, the cost of such coverage and current industry practice. There are, however, certain types of extraordinary losses, such as those due to acts of war or other events that may be either uninsurable or not economically insurable. In addition, the Company has a large number of properties that are exposed to earthquake, flood and windstorm occurrences for which the related insurances carry high deductibles.

Tenant Purchase Options

Certain leases, including DFLs, contain purchase options whereby the tenant may elect to acquire the underlying real estate. Annualized base rent from leases subject to purchase options, summarized by the year the purchase options are exercisable are as follows (dollars in thousands):

		Annualized			Number of
Year		Base Rent(1)			Properties
2016		$	32,062		12
2017			15,078		10
2018			19,352		4
2019			25,863		14
2020			13,647		4
Thereafter			54,009		32
		$	160,011		76

	(1)		Represents the most recent month’s base rent including additional rent floors and cash income from DFLs annualized for 12 months. Base rent does not include tenant recoveries, additional rents in excess of floors and non-cash revenue adjustments (i.e., straight- line rents, amortization of market lease intangibles, DFL interest accretion and deferred revenues).

Rental Expense

The Company’s rental expense attributable to continuing operations for the years ended December 31, 2015, 2014 and 2013 was approximately $10 million, $8 million and $8 million, respectively. These rental expense amounts include ground rent and other leases. Ground leases generally require fixed annual rent payments and may also include escalation clauses and renewal options. These leases have terms that are up to 99 years, excluding extension options. Future minimum lease obligations under non-cancelable ground and other operating leases as of December 31, 2015 were as follows (in thousands):

Year		Amount
2016		$	7,870
2017			7,160
2018			6,908
2019			7,063
2020			6,656
Thereafter			348,249
		$	383,906

NOTE 13. Equity

Common Stock

On January 28, 2016, the Company announced that its Board declared a quarterly cash dividend of $0.575 per share. The common stock cash dividend will be paid on February 23, 2016 to stockholders of record as of the close of business on February 8, 2016.

During the years ended December 31, 2015, 2014 and 2013, the Company declared and paid common stock cash dividends of $2.26, $2.18 and $2.10 per share.

In June 2015, the Company established an at-the-market equity offering program (“ATM Program”). Under this program, the Company may sell shares of its common stock from time to time having an aggregate gross sales price of up to $750 million through a consortium of banks acting as sales agents or directly to the banks acting as principals. During the year ended December 31, 2015, the Company issued 1.8 million shares of common stock at a weighted average price of $40.14 for proceeds of $73 million, net of fees and commissions of $1 million.

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

		Year Ended
		December 31,
		2015		2014		2013
Dividend Reinvestment and Stock Purchase Plan		2,762		2,299		2,441
Conversion of DownREIT units		104		27		100
Exercise of stock options		823		169		876
Vesting of restricted stock units		409		614		471
Repurchase of common stock		198		323		242

Accumulated Other Comprehensive Loss

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

		December 31,
		2015			2014
Cumulative foreign currency translation adjustment		$	(19,485)		$	(10,747)
Unrealized losses on cash flow hedges, net			(7,582)			(9,624)
Supplemental Executive Retirement Plan minimum liability			(3,411)			(3,537)
Unrealized gains on available for sale securities			8			13
Total accumulated other comprehensive loss		$	(30,470)		$	(23,895)

Noncontrolling Interests

On October 7, 2015, the Company issued a 49% noncontrolling interest in HCP Ventures V to an institutional capital investor for $110 million. HCP Ventures V owns a portfolio of 11 on-campus MOBs located in Texas acquired through a sale-leaseback transaction with Memorial Hermann in June 2015 (see Note 4).

At December 31, 2015, there were four million non-managing member units (six million shares of HCP common stock are issuable upon conversion) outstanding in five DownREIT LLCs, in all of which the Company is the managing member. At December 31, 2015, the carrying and market values of the four million DownREIT units were $186 million and $229 million, respectively.

See Note 20 for the supplemental schedule of non-cash financing activities.

NOTE 14. Segment Disclosures

The Company evaluates its business and makes resource allocations based on its five business segments: (i) senior housing, (ii) post-acute/skilled nursing, (iii) life science, (iv) medical office and (v) hospital. Under the medical office segment, the Company invests through the acquisition and development of MOBs, which generally require a greater level of property management. Otherwise, the Company primarily invests, through the acquisition and development of real estate, in single tenant and operator properties and debt issued by tenants and operators in these sectors. The accounting policies of the segments are the same as those described under Summary of Significant Accounting Policies (see Note 2). There were no intersegment sales or transfers during the years ended December 31, 2015, 2014 and 2013. The Company evaluates performance based upon (i) property net operating income from continuing operations (“NOI”), (ii) adjusted NOI (cash NOI), and (iii) adjusted NOI plus interest income (“Portfolio Income”) of the combined investments in each segment.

Non-segment assets consist primarily of corporate assets, including cash and cash equivalents, restricted cash, accounts receivable, net, marketable equity securities, deferred financing costs and, if any, real estate held for sale. Interest expense, depreciation and amortization, and non-property specific revenues and expenses are not allocated to individual segments in evaluating the Company’s segment-level performance. See Note 23 for other information regarding concentrations of credit risk.

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

For the year ended December 31, 2015:

		Senior			Post-acute/			Life			Medical
Segments		Housing			Skilled Nursing			Science			Office			Hospital			Total
Rental revenues(1)		$	519,102	(2)	$	535,111	(2)	$	342,984		$	419,225		$	88,380		$	1,904,802
Resident fees and services			525,453			—			—			—			—			525,453
Operating expenses			(374,617)			(2,002)			(70,217)			(163,550)			(3,989)			(614,375)
NOI			669,938			533,109			272,767			255,675			84,391			1,815,880
Non-cash adjustments to NOI(3)			(16,127)	(2)		(78,738)	(2)		(10,128)			(5,025)			1,060			(108,958)
Adjusted (cash) NOI			653,811			454,371			262,639			250,650			85,451			1,706,922
Interest income			28,718			83,466			—			—			—			112,184
Portfolio Income		$	682,529		$	537,837		$	262,639		$	250,650		$	85,451			1,819,106
Addback non-cash adjustments																		108,958
Investment management fee income																		1,873
Interest expense																		(479,596)
Depreciation and amortization																		(510,785)
General and administrative expenses																		(96,022)
Acquisition and pursuit costs																		(27,309)
Impairments																		(1,403,853)
Gain on sales of real estate																		6,377
Other income, net																		14,404
Income tax benefit																		9,011
Equity income in unconsolidated joint ventures																		57,313
Impairment of investments in unconsolidated joint ventures																		(45,895)
Net loss																	$	(546,418)

For the year ended December 31, 2014:

		Senior			Post-acute/			Life			Medical
Segments		Housing			Skilled Nursing			Science			Office			Hospital			Total
Rental revenues(1)		$	621,114		$	555,322		$	314,114		$	370,956		$	86,508		$	1,948,014
Resident fees and services			241,965			—			—			—			—			241,965
Operating expenses			(167,407)			(2,087)			(63,080)			(148,199)			(3,830)			(384,603)
NOI			695,672			553,235			251,034			222,757			82,678			1,805,376
Non-cash adjustments to NOI(3)			(78,197)			(69,141)			(10,075)			(1,406)			443			(158,376)
Adjusted (cash) NOI			617,475			484,094			240,959			221,351			83,121			1,647,000
Interest income			14,249			60,242			—			—			—			74,491
Portfolio Income		$	631,724		$	544,336		$	240,959		$	221,351		$	83,121			1,721,491
Addback non-cash adjustments																		158,376
Investment management fee income																		1,809
Interest expense																		(439,742)
Depreciation and amortization																		(459,995)
General and administrative expenses																		(82,175)
Acquisition and pursuit costs																		(17,142)
Gain on sales of real estate																		3,288
Other income, net																		7,528
Income tax expense																		(250)
Equity income in unconsolidated joint ventures																		49,570
Impairment of investments in unconsolidated joint ventures																		(35,913)
Total discontinued operations																		29,746
Net income																	$	936,591

For the year ended December 31, 2013:

		Senior			Post-acute/			Life			Medical
Segments		Housing			Skilled Nursing			Science			Office			Hospital			Total
Rental revenues(1)		$	602,506		$	541,805		$	296,879		$	352,334		$	72,060		$	1,865,584
Resident fees and services			146,288			—			—			—			—			146,288
Operating expenses			(95,603)			(2,485)			(56,956)			(139,376)			(3,862)			(298,282)
NOI			653,191			539,320			239,923			212,958			68,198			1,713,590
Non-cash adjustments to NOI(3)			(58,699)			(71,812)			(11,448)			(2,147)			11,554			(132,552)
Adjusted (cash) NOI			594,492			467,508			228,475			210,811			79,752			1,581,038
Interest income			11,621			73,595			—			—			943			86,159
Portfolio Income		$	606,113		$	541,103		$	228,475		$	210,811		$	80,695			1,667,197
Addback non-cash adjustments																		132,552
Investment management fee income																		1,847
Interest expense																		(435,252)
Depreciation and amortization																		(423,312)
General and administrative expenses																		(103,042)
Acquisition and pursuit costs																		(6,191)
Other income, net																		18,216
Income tax expense																		(5,815)
Equity income in unconsolidated joint ventures																		64,433
Total discontinued operations																		74,373
Net income																	$	985,006

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

	(2)		See Note 6 for discussion of the Company’s HCRMC DFL investments

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

The Company’s total assets by segment were (in thousands):

		December 31,
Segments		2015			2014
Senior housing		$	9,812,142		$	8,383,345
Post-acute/skilled nursing			5,162,947			6,875,122
Life science			4,267,373			4,154,789
Medical office			3,469,048			2,988,888
Hospital			622,820			640,253
Gross segment assets			23,334,330			23,042,397
Accumulated depreciation and amortization			(3,005,270)			(2,600,072)
Net segment assets			20,329,060			20,442,325
Other nonsegment assets			1,120,789			889,111
Total assets		$	21,449,849		$	21,331,436

At both December 31, 2015 and 2014, goodwill of $50 million was allocated to segment assets as follows: (i) senior housing—$31 million, (ii) post-acute/skilled nursing—$3 million, (iii) medical office—$11 million, and (iv) hospital—$5 million. The Company completed the required annual impairment test during the fourth quarter of 2015 and no impairment was recognized based on the results of the Company’s procedures.

NOTE 15. Future Minimum Rents

Future minimum lease payments to be received, excluding operating expense reimbursements, from tenants under non-cancelable operating leases as of December 31, 2015, are as follow (in thousands):

Year		Amount
2016		$	1,140,375
2017			1,062,781
2018			989,886
2019			842,278
2020			695,268
Thereafter			3,601,248
		$	8,331,836

NOTE 16. Compensation Plans

Stock Based Compensation

On May 11, 2006, the Company’s stockholders approved the 2006 Performance Incentive Plan, which was amended and restated in 2009 (“the 2006 Plan”). On May 1, 2014, the Company’s stockholders approved the 2014 Performance Incentive Plan (“the 2014 Plan”) (collectively, “the Plans”). Following the adoption of the 2014 Plan, no new awards will be issued under the 2006 Plan. The Plans provide for the granting of stock-based compensation, including stock options, restricted stock and restricted stock units to officers, employees and directors in connection with their employment with or services provided to the Company. The maximum number of shares reserved for awards under the 2014 Plan is 33 million shares; as of December 31, 2015, approximately 32.4 million of the reserved shares under the 2014 Plan are available for future awards, and approximately 21.6 million shares may be issued as restricted stock and restricted stock units.

Stock Options

Stock options are granted with an exercise price per share equal to the closing market price of the Company’s common stock on the grant date. Stock options generally vest ratably over a three- to five-year period and have a 10-year contractual

term. Vesting of certain stock options may accelerate, as provided in the Plans or in the applicable award agreement, upon retirement, a change in control or other specified events. Upon the exercise, a participant is required to pay the exercise price of the stock options being exercised and the related tax withholding obligation.

A summary of the stock option activity during 2015 is presented in the following table (dollars and shares in thousands, except per share amounts):

							Weighted
				Weighted			Average
				Average			Remaining		Aggregate
		Shares		Exercise			Contractual		Intrinsic
		Under Options		Price			Term (Years)		Value
Outstanding as of January 1, 2015		2,587		$	37.00		5.0		$	19,581
Exercised		(823)			33.52
Cancelled		(2)			42.69
Forfeited		(24)			41.25
Outstanding as of December 31, 2015		1,738			38.58		4.4			4,521
Exercisable as of December 31, 2015		1,368			37.88		3.5			4,521

The following table summarizes additional information concerning outstanding and exercisable stock options at December 31, 2015 (shares in thousands):

									Currently Exercisable
							Weighted
				Weighted			Average				Weighted
				Average			Remaining				Average
Range of		Shares Under		Exercise			Contractual		Shares Under		Exercise
Exercise Price		Options		Price			Term (Years)		Options		Price
$23.34 - $25.52		166		$	23.34		2.1		166		$	23.34
27.11 - 28.35		156			28.35		2.8		156			28.35
31.95 - 46.92		1,416			41.72		4.8		1,046			41.60
		1,738			38.58				1,368			37.88

The following table summarizes additional information concerning unvested stock options at December 31, 2015 (shares in thousands):

				Weighted
		Shares		Average
		Under		Grant Date Fair
		Options		Value
Unvested at January 1, 2015		906		$	4.85
Vested		(512)			5.06
Forfeited		(24)			4.58
Unvested at December 31, 2015		370			4.59

There were no grants of stock options for the fiscal year 2015. The weighted average fair value per share at the date of grant for stock options awarded during the years ended December 31, 2014 and 2013 was $3.80 and $5.89, respectively. The total vesting date intrinsic value (at vesting) of shares under stock options vested during the years ended December 31, 2015, 2014 and 2013 was $1 million, $7 million and $12 million, respectively. The total intrinsic value of vested shares under stock options at December 31, 2015 was $5 million.

Proceeds received from stock options exercised under the Plans for the years ended December 31, 2015, 2014 and 2013 were $28 million, $5 million and $18 million, respectively. The total intrinsic value (at exercise) of stock options exercised during the years ended December 31, 2015, 2014 and 2013 was $10 million, $3 million and $25 million, respectively.

The fair value of the stock options granted during the years ended December 31, 2014 and 2013 was determined on the grant date utilizing a Black-Scholes valuation model, incorporating the market assumptions described below. The risk-free rate is based on the U.S. Treasury yield curve effective at the grant date. The expected life (estimated period of time outstanding) of the stock options granted was determined using the historical exercise behavior of employees and turnover rates. For stock options granted in 2014 and 2013, the expected volatility was based on the average of the Company’s: (i) historical volatility of the adjusted closing prices of its common stock for a period equal to the stock option’s expected life, ending on the grant date, calculated on a weekly basis and (ii) the implied volatility of traded options on its common stock for a period equal to 30 days ending on the grant date. The following table summarizes the Company’s stock option valuation assumptions used with respect to stock options awarded in 2014 and 2013:

		2014		2013
Risk-free rate		1.34	%	0.78	%
Expected life (in years)		4.5		4.5
Expected volatility		22.9	%	28.9	%
Expected dividend yield		5.4	%	5.8	%

Restricted Stock and Performance Restricted Stock Units

Under the Plans, restricted stock and performance restricted stock units generally have a contractual life or vest over one- to five-year periods. The vesting of certain restricted stock and performance restricted stock units may accelerate, as provided in the Plans or in the applicable award agreement, upon retirement, a change in control or other specified events. When vested, each restricted stock and performance restricted stock unit is convertible into one share of common stock. The restricted stock units are valued on the grant date based on the closing market price of the Company’s common stock on that date. The performance restricted stock units are valued utilizing a lattice-binomial option-pricing model based on Monte Carlo simulations as described below. Generally, the Company recognizes the fair value of the awards over the applicable vesting period as compensation expense. Upon exercise or payment of restricted stock and performance restricted stock units, the participant is required to pay the related tax withholding obligation. Participants can generally elect to have the Company reduce the number of common stock shares delivered to pay the employee tax withholding obligation. The value of the shares withheld is dependent on the closing market price of the Company’s common stock on the trading date prior to the relevant transaction occurring. During 2015, 2014 and 2013, the Company withheld 200,000, 323,000 and 242,000 shares, respectively, to offset tax withholding obligations with respect to the restricted stock and performance restricted stock unit awards.

The following table summarizes additional information concerning restricted stock and performance restricted stock units at December 31, 2015 (units and shares in thousands):

				Weighted					Weighted
		Restricted		Average					Average
		Stock		Grant Date			Restricted		Grant Date
		Units		Fair Value			Shares		Fair Value
Unvested at January 1, 2015		900		$	40.54		112		$	38.69
Granted		402			48.56		—			—
Vested		(409)			44.79		(76)			37.26
Forfeited		(26)			43.74		—			—
Unvested at December 31, 2015		867			43.34		36			41.77

At December 31, 2015, the weighted average remaining vesting period of restricted stock and performance restricted stock units was one year. The total fair values (at vesting) of restricted stock and performance restricted stock units which vested for the years ended December 31, 2015, 2014 and 2013 were $21 million, $24 million and $22 million, respectively.

Long-Term Incentive Plan Units (“LTIP”)

2015

Pursuant to the 2014 Plan and effective February 2, 2015, certain officers were granted 128,762 performance based units with three-year and one-year performance periods (“2015 3-Year LTIP Awards” and “2015 1-Year LTIP Awards,” respectively, and collectively, “the Awards”). The Awards had a grant date fair value of $6.9 million (fair value of the awards per target share for the 2015 3-Year LTIP Awards and the 2015 1-Year LTIP Awards were $54.97 and $50.82, respectively). The fair value on the grant date was determined utilizing a lattice-binomial option-pricing model based on Monte Carlo simulations. The Awards vest based upon the total shareholder return (“TSR”) of the Company’s common stock relative to the TSRs of each of the other companies in the FTSE NAREIT Equity Health Care Index (the “NAREIT Index”). TSR for the Awards is measured over the performance periods: January 1, 2015 through December 31, 2015 for the 2015 1-Year LTIP Awards and January 1, 2015 through December 31, 2017 for the 2015 3-Year LTIP Awards.

2014

Pursuant to the 2006 Plan and effective February 3, 2014, certain officers were granted 176,088 performance based units (“2014 3-Year LTIP Awards”). The 2014 3-Year LTIP Awards had a grant date fair value of $7.2 million (fair value of the awards per target share of $40.68) as determined by a lattice-binomial option-pricing model based on a Monte Carlo simulation. Seventy percent of the 2014 3-Year LTIP Awards vest based upon the three-year TSR of the Company’s common stock relative to the TSRs of the MSCI US REIT Index (25% weight) and the NAREIT Index (75% weight). TSR for the 2014 3-Year LTIP Awards is measured over the performance period: January 1, 2014 through December 31, 2016. Thirty percent of the 2014 3-Year LTIP Awards vest based upon the Company’s Net Debt to Adjusted Pro Forma EBITDA over the performance period.

The following table summarizes the Company’s performance based restricted stock valuation assumptions used with respect to awards issued in 2015 and 2014:

		2015		2014
Expected volatility		17.94	%	21.74	%
Risk-free rate		0.33	%	0.22	%
Expected dividend yield		4.79	%	5.61	%

Compensation expense is charged to earnings on a straight-line basis over the performance period. Following the end of the respective performance period, each participant will be issued shares of the Company’s common stock equal to the number of units granted to the participant multiplied by a percentage, ranging from zero to 200%, based on the outcome of the performance metrics for the applicable performance period, as described above. The participants will also be entitled to dividend equivalents for shares issued, which dividend equivalents represent any dividends that would have been paid with respect to such issued shares after the grant date of the awards and prior to the date of settlement.

As the Company pays dividends on its outstanding common stock, holders of restricted stock awards are generally entitled to dividends on the underlying restricted shares, and holders of performance restricted stock units generally have the right to a cash payment equal to the dividends that would be paid on a number of shares of Company common stock equal to the number of outstanding units subject to the award.

In 2012, the Company implemented a clawback policy that is retroactive to prior years pursuant to which its Board of Directors or Compensation Committee shall, in such circumstances as they determine to be appropriate, require reimbursement or cancellation of all or a portion of any short- or long-term cash or equity incentive awards or payments to an officer (or former officer, as the case may be) of the Company where: (i) the amount of, or number of shares included in, any such payment or award was determined based on the achievement of financial results that were subsequently the subject of an accounting restatement due to noncompliance with any financial reporting requirement under the securities laws; (ii) a lesser payment or award of cash or shares would have been made to the individual based upon the restated financial results; and (iii) the payment or award of cash or shares was received by the individual prior to or during the 12-month period following the first public issuance or filing of the financial results that were subsequently restated.

Total share-based compensation expense recognized during the years ended December 31, 2015, 2014 and 2013 was $26 million, $22 million and $40 million, respectively; included in 2013 is a $27 million charge recognized in general and

administrative expenses resulting from the termination of the Company’s former chief executive officer (“CEO”) that was comprised of: (i) the acceleration of $17 million of deferred compensation for restricted stock units and stock options that vested upon termination; and (ii) severance payments and other costs of approximately $10 million; these vestings and severance payments were in accordance with the terms of the former CEO’s employment agreement. As of December 31, 2015, there was $19 million of deferred compensation cost associated with future employee services, related to unvested share-based compensation arrangements granted under the Company’s incentive plans, which is expected to be recognized over a weighted average period of three years.

Employee Benefit Plan

The Company maintains a 401(k) and profit sharing plan that allows for eligible participants to defer compensation, subject to certain limitations imposed by the Code. The Company provides a matching contribution of up to 4% of each participant’s eligible compensation. During the years ended December 31, 2015, 2014 and 2013, the Company’s matching contributions were approximately $1 million for each of the years then ended.

NOTE 17. Impairments

HCRMC

During the three months ended December 31, 2015, the Company recorded an allowance for credit losses and impairment charge of $817 million related to its HCRMC DFL investments. The allowance for credit losses reduced the net carrying value of the HCRMC DFL investments from $6.0 billion to $5.2 billion, and was determined as the present value of expected future (i) in-place lease payments under the HCRMC Amended Master Lease and (ii) estimated market rate lease payments, each discounted at the original HCRMC DFL investments’ effective lease rate. Impairments related to an allowance for credit losses are included in impairments, net.

The market rate lease payments were based on an income approach utilizing a discounted cash flow valuation model. The significant inputs to this valuation model included forecasted EBITDAR (defined as earnings before interest, taxes, depreciation and amortization, and rent), rent coverage ratios and real estate capitalization rates and are summarized as follows (dollars in thousands):

					Post-acute/
		Senior Housing			Skilled nursing
Description of Input(s) to the Valuation		DFL Valuation Inputs			DFL Valuation Inputs
Range of EBITDAR		$75,000-$85,000			$385,000-$435,000
Range of rent coverage ratio		1.05x-1.15x			1.25x-1.35x
Range of real estate capitalization rate		6.25%-7.25%			7.50%-8.50%

In determining which technique would be utilized to estimate fair value for the multiple elements of this valuation, the Company also considered the market approach, obtaining published investor survey and sales transaction data, where available. Investor survey and sales transaction data reviewed for similar transactions in similar marketplaces, included, but were not limited to, sales price per unit/bed, rent coverage ratios, revenue and operating expense growth rates, rent per unit/bed per month and real estate capitalization rates. The information obtained was consistent with the inputs and assumptions utilized by the selected income approach that was applied to this valuation.

As of December 31, 2015, the Company concluded that its equity investment in HCRMC was other-than-temporarily impaired and recorded an impairment charge of $19 million, reducing its carrying value to zero (see Notes 6 and 8).

As of September 30, 2015, the Company concluded that its equity investment in HCRMC was other-than-temporarily impaired and recorded an impairment charge of $27 million. The impairment charge reduced the carrying amount of the Company’s equity investment in HCRMC from $48 million to its fair value of $21 million. The impairment determination primarily resulted from the Company’s review of HCRMC operating results and market and industry data which, among other factors, showed a declining trend in admissions from hospitals and continuing trends in mix and length of stay driven by Medicare Advantage and other Managed Care plans.

The fair value of the Company’s equity investment in HCRMC was based on a discounted cash flow valuation model and inputs were considered to be Level 3 measurements within the fair value hierarchy. Inputs to this valuation model included

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

The following is a summary of the quantitative information about fair value measurements for the impairment related to the Company’s equity ownership interest in HCRMC using a discounted cash flow valuation model:

Description of Input(s) to the Valuation		Valuation Inputs
Range of revenue growth rates(1)		(1.8%)-3.0%
Range of occupancy growth rates(1)		(0.8%)-0.2%
Range of operating expense growth rates(1)		(1.1%)-3.1%
Discount rate		15.20%
Range of earnings multiples		6.0x-7.0x

	(1)		For growth rates, the value ranges provided represent the highest and lowest input utilized in the valuation model for any forecasted period.

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

During the year ended December 31, 2014, the Company concluded that its equity investment in HCRMC was other-than-temporarily impaired and recorded an impairment charge of $36 million. The impairment charge reduced the carrying amount of the Company’s equity investment in HCRMC from $75 million to its fair value of $39 million. The impairment determination primarily resulted from the Company’s review of HCRMC’s preliminary base financial forecast for 2015, received in December 2014, together with HCRMC’s year-to-date operating results through November 2014. The preliminary base financial forecast and operating results primarily reflected a continued shift in patient payor sources from Medicare to Medicare Advantage, which negatively impacts reimbursement rates and length of stay for HCRMC’s skilled nursing segment. The fair value of the Company’s equity investment was based on an income approach utilizing a discounted cash flow valuation model, and inputs were considered to be Level 3 measurements within the fair value hierarchy. Inputs to this valuation model included earnings multiples, discount rate, industry growth rates of revenue, operating expenses and facility occupancy, some of which influence the Company’s expectation of future cash flows from its equity investment in HCRMC and, accordingly, the fair value of its investment.

The following is a summary of the quantitative information about fair value measurements for the impairment related to the Company’s equity ownership interest in HCRMC using a discounted cash flow valuation model:

Description of Input(s) to the Valuation		Valuation Inputs
Range of revenue growth rates(1)		(0.2%)-3.5%
Range of occupancy growth rates(1)		(0.3%)-0.2%
Range of operating expense growth rates(1)		0.6%-2.8%
Discount rate		13.7%
Range of earnings multiples		6.0x-7.0x

	(1)		For growth rates, the value ranges provided represent the highest and lowest input utilized in the valuation model for any forecasted period.

In determining the fair value of our interest in HCRMC, the Company applied the above valuation inputs, which resulted in a range of fair values of its equity investment in HCRMC of $35 million to $44 million based on the range of earnings multiples. The Company elected to use the mid-point of the valuation results and recorded an impairment to reduce the carrying value of its equity investment in HCRMC to $39.5 million.

Other

In June 2015 and September 2015, the Company determined that its Four Seasons Notes (see Note 10) were other-than-temporarily impaired resulting from a continued decrease in the fair value of its investment. Although the Company does not intend to sell and does not believe it will be required to sell the Four Seasons Notes before their maturity, the Company determined that a credit loss existed resulting from several factors including: (i) deterioration in Four Seasons’ operating performance since the fourth quarter of 2014 and (ii) credit downgrades received during the first half of 2015. Accordingly, the Company recorded impairment charges during the three months ended June 30, 2015 and September 30, 2015 of $42

million and $70 million, respectively, reducing the carrying value of the Four Seasons Notes at September 30, 2015 to $100 million (£66 million). Elli remains obligated to repay the aggregate par value at maturity and interest payments due June 15 and December 15 each year. When the remaining semi-annual interest payments are received, the Company expects to reduce the carrying value of the Four Seasons Notes during the related fiscal period.

The fair value of the Four Seasons Notes used to calculate the impairment charge was based on quoted market prices. However, because the Four Seasons Notes are not actively traded, these prices are considered to be Level 2 measurements within the fair value hierarchy. When calculating the fair value and determining whether a credit loss existed, the Company also evaluated Four Season’s ability to repay the Four Seasons Notes according to their contractual terms based on its estimate of future cash flows. The estimated future cash flow inputs included forecasted revenues, capital expenditures, operating expenses, care home occupancy and continued implementation of Four Seasons’ business plan which includes executing on its business line segmentation and continuing to invest in its core real estate portfolio. This information was consistent with the results of the valuation technique used by the Company to determine if a credit loss existed and to calculate the fair value of the Four Seasons Notes during its impairment review.

In June 2015, the Company determined a MOB was impaired and recognized an impairment charge of $3 million, which reduced the carrying value of the Company’s investment to $400,000. The fair value of the MOB was based on its projected sales prices, which was considered to be a Level 2 measurement within the fair value hierarchy. In July 2015, the Company sold the MOB for $400,000 (see Note 5).

During the year ended December 31, 2013, the Company placed two medical office buildings into assets held for sale. As a result, the Company recognized impairment charges of $1 million, which reduced the carrying value of the Company’s aggregate investments from $7 million to the $6 million sales price. The fair value of the Company’s medical office buildings were based on the projected sales prices from the pending dispositions. The sales prices of the MOBs were considered to be a Level 2 measurement within the fair value hierarchy.

NOTE 18. Income Taxes

The Company has elected to be taxed as a REIT under the applicable provisions of the Code for every year beginning with the year ended December 31, 1985. The Company has also elected for certain of its subsidiaries to be treated as taxable REIT subsidiaries (“TRS” or “TRS entities”) which are subject to federal and state income taxes. All entities other than the TRS entities are collectively referred to as the “REIT” within this Note 18. Certain REIT entities are also subject to state, local and foreign income taxes.

The TRS entities subject to tax reported losses before income taxes of $22 million and $2 million for the years ended December 31, 2015 and 2014, respectively, and income before income taxes of $10 million for the year ended December 31, 2013. The REIT’s losses before income taxes from the U.K. were $15 million and $4 million for the years ended December 31, 2015, and 2014, respectively.

The total income tax (benefit) expense from continuing operations consists of the following components (in thousands):

		Year Ended December 31,
		2015			2014			2013
Current
Federal		$	4,948		$	1,833		$	130
State			2,784			2,773			2,195
Foreign			828			223			—
Total current		$	8,560		$	4,829		$	2,325
Deferred
Federal		$	(11,317)		$	(3,278)		$	3,045
State			(1,382)			(347)			445
Foreign			(4,872)			(954)			—
Total deferred		$	(17,571)		$	(4,579)		$	3,490
Total income tax (benefit) expense		$	(9,011)		$	250		$	5,815

The Company’s income tax expense from discontinued operations was insignificant for the years ended December 31, 2014 and 2013.

The following table reconciles the income tax expense at statutory rates to the actual income tax expense recorded (in thousands):

		Year Ended December 31,
		2015			2014			2013
Tax (benefit) expense at U.S. federal statutory income tax rate on income or loss subject to tax		$	(12,630)		$	(2,131)		$	3,582
State income tax expense, net of federal tax			93			764			928
Gross receipts and margin taxes			1,480			1,699			1,553
Foreign rate differential			2,269			554			—
Effect of permanent differences			(298)			(196)			(221)
Return to provision adjustments			(368)			(528)			(27)
Increase in valuation allowance			443			88			—
Total income tax (benefit) expense		$	(9,011)		$	250		$	5,815

Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):

		December 31,
		2015			2014			2013
Investments and property, primarily differences in investment basis, depreciation and amortization, the basis of land assets, and the treatment of interest and certain costs		$	19,862		$	3,418		$	707
Net operating loss carryforward			3,703			484			749
Expense accruals and other			(753)			462			(4)
Valuation allowance			(531)			(88)			—
Net deferred tax assets		$	22,281		$	4,276		$	1,452

Deferred tax assets and liabilities are included in other assets, net and accounts payable and accrued liabilities.

At December 31, 2015 the Company had a net operating loss (“NOL”) carryforward of $10 million related to the TRS entities. These amounts can be used to offset future taxable income, if any. The NOL carryforwards begin to expire in 2033 with respect to the TRS entities.

The Company records a valuation allowance against deferred tax assets in certain jurisdictions when it cannot sustain a conclusion that it is more likely than not that it can realize the deferred tax assets during the periods in which these temporary differences become deductible. The deferred tax asset valuation allowance is adequate to reduce the total deferred tax assets to an amount that the Company estimates will “more-likely-than-not” be realized.

The Company files numerous U.S. federal, state and local income and franchise tax returns. With a few exceptions, the Company is no longer subject to U.S. federal, state, or local tax examinations by taxing authorities for years prior to 2012.

For each of the years ended December 31, 2015 and 2014, the tax basis of the Company’s net assets is less than the reported amounts by $6.5 billion. The difference between the reported amounts and the tax basis is primarily related to the Slough Estates USA, Inc. (“SEUSA”) and HCRMC acquisitions, which occurred in 2007 and 2011, respectively. Both SEUSA and HCRMC were corporations subject to federal and state income taxes. As a result of these acquisitions, the Company succeeded to the tax attributes of SEUSA and HCRMC, including the tax basis in the acquired companies’ assets and liabilities. The Company generally will be subject to a federal corporate-level tax on any taxable disposition of HCRMC pre-acquisition assets that occur within five years after its April 7, 2011 acquisition.

The corporate-level tax associated with the disposition of assets acquired in connection with the HCRMC acquisition would be assessed only to the extent of the built-in gain that existed on the date of the acquisition, based on the fair market value of the assets on April 7, 2011. The Company has not and does not expect to dispose of any assets that would result in the imposition of a material tax liability. As a result, the Company has not recorded a deferred tax liability associated with this corporate-level tax. Gains from asset dispositions occurring more than five years after the acquisition will not be subject to a federal corporate-level tax. However, gains from asset dispositions occurring within ten years after the SEUSA and HCRMC acquisitions may be subject to corporate-level tax in some states. From time to time, the Company may dispose of SEUSA or HCRMC assets before the applicable built-in gain holding period if it is able to effect a tax deferred exchange.

In connection with the HCRMC acquisition, the Company assumed unrecognized tax benefits of $2 million. For each of the years ended December 31, 2014 and 2013, the Company had a decrease in unrecognized tax benefits of $1 million. There were no unrecognized tax benefits balances at December 31, 2015 and 2014.

A reconciliation of the Company’s beginning and ending unrecognized tax benefits follows (in thousands):

		Amount
Balance at January 1, 2013		$	1,977
Reductions based on prior years’ tax positions			(890)
Additions based on 2013 tax positions			—
Balance at December 31, 2013			1,087
Reductions based on prior years’ tax positions			(1,087)
Additions based on 2014 tax positions			—
Balance at December 31, 2014		$	—

During the year ended December 31, 2014, the Company reversed the entire balance of the interest expense associated with the unrecognized tax benefits assumed in connection with the acquisition of HCRMC. The amount reversed was insignificant and it was due to the lapse in the statute of limitations. For the year ended December 31, 2013, the Company recorded insignificant net increases to interest expense associated with the unrecognized tax benefits.

NOTE 19. Earnings Per Common Share

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

		Year Ended December 31,
		2015			2014			2013
Numerator
(Loss) income from continuing operations		$	(546,418)		$	906,845		$	910,633
Noncontrolling interests’ share in continuing operations			(12,817)			(13,181)			(14,110)
(Loss) income from continuing operations applicable to HCP, Inc.			(559,235)			893,664			896,523
Participating securities’ share in continuing operations			(1,317)			(2,437)			(1,734)
(Loss) income from continuing operations applicable to common shares			(560,552)			891,227			894,789
Discontinued operations			—			29,746			74,373
Noncontrolling interests’ share in discontinued operations			—			(1,177)			(59)
Net (loss) income applicable to common shares		$	(560,552)		$	919,796		$	969,103
Denominator
Basic weighted average common shares			462,795			458,425			455,002
Dilutive potential common shares			—			371			700
Diluted weighted average common shares			462,795			458,796			455,702
Basic earnings per common share
(Loss) income from continuing operations		$	(1.21)		$	1.94		$	1.97
Discontinued operations			—			0.07			0.16
Net (loss) income applicable to common stockholders		$	(1.21)		$	2.01		$	2.13
Diluted earnings per common share
(Loss) income from continuing operations		$	(1.21)		$	1.94		$	1.97
Discontinued operations			—			0.06			0.16
Net (loss) income applicable to common shares		$	(1.21)		$	2.00		$	2.13

Restricted stock and certain performance restricted stock units are considered participating securities, because dividend payments are not forfeited even if the underlying share-based award does not vest, and require the use of the two-class method when computing basic and diluted earnings per share.

For the year ended December 31, 2015, the Company generated a net loss. The weighted-average basic shares outstanding was used in calculating diluted loss per share from continuing operations, as using diluted shares would be anti-dilutive to loss per share. Options to purchase approximately 1.4 million and 800,000 shares of common stock that had exercise prices in excess of the average market price of the common stock during the years ended December 31, 2014 and 2013, respectively, were not included because they are anti-dilutive. Additionally, six million shares issuable upon conversion of four million DownREIT units during the years ended December 31, 2014 and 2013 were not included because they are anti-dilutive.

NOTE 20. Supplemental Cash Flow Information

Supplemental cash flow information follows (in thousands):

		Year Ended December 31,
		2015			2014			2013
Supplemental cash flow information:
Interest paid, net of capitalized interest		$	451,615		$	410,286		$	412,011
Income taxes paid			6,959			5,071			114
Capitalized interest			8,798			10,314			13,494
Supplemental disclosure of non-cash investing activities:
Accrued construction costs			52,511			37,178			15,187
Settlement of loans receivable as consideration for real estate acquisition			299,297			—			—
Loan originated in connection with Brookdale Transaction			—			67,640			—
Real estate contributed to CCRC JV			—			91,603			—
Fair value of real estate acquired in exchange for sale of real estate			—			32,000			15,204
Tenant funded tenant improvements owned by HCP			28,850			21,863			—
Reclassification of the in-place leases from real estate to DFLs			—			—			123,891
Supplemental disclosure of non-cash financing activities:
Vesting of restricted stock units			409			614			471
Cancellation of restricted stock			—			1			20
Conversion of non-managing member units into common stock			2,979			473			3,583
Noncontrolling interest and other liabilities, net assumed in connection with the RIDEA III acquisition			61,219			—			—
Noncontrolling interest issued in connection with Brookdale Transaction			—			46,751			—
Noncontrolling interests issued in connection with real estate and other acquisitions			10,971			6,321			—
Noncontrolling interest assumed in connection with real estate disposition			—			1,671			—
Mortgages and other liabilities assumed with real estate acquisitions			23,218			37,149			12,767
Foreign currency translation adjustment			(8,738)			(9,967)			47
Unrealized gains on available-for-sale securities and derivatives designated as cash flow hedges, net			1,889			2,271			7,790

See discussions related to the Brookdale Transaction discussed in Note 3.

NOTE 21. Variable Interest Entities

Unconsolidated Variable Interest Entities

At December 31, 2015, the Company had investments in: (i) three unconsolidated VIE joint ventures; (ii) 366 properties leased to VIE tenants; and (iii) marketable debt securities of two VIE borrowers. The Company has determined that it is not the primary beneficiary of these VIEs. The Company does not consolidate these VIEs because it does not have the ability to control the activities that most significantly impact their economic performance. Except for the Company’s equity interest in the unconsolidated joint ventures (CCRC OpCo, HCRMC OpCo and Vintage Park discussed below), the Company has no formal involvement in these VIEs beyond its investments.

The Company leased 318 properties to, and has an equity ownership investment in, HCRMC that has been identified as a VIE upon a reconsideration event in the fourth quarter of 2015. HCRMC has experienced continued operational declines and is a “thinly capitalized” entity that relies on the operating cash flows generated from its senior housing and post-acute facilities to fund operating expenses, including the rent obligations under the Amended Master Lease (see Notes 6, 8 and 17).

The Company leases 48 properties to a total of seven tenants that have been identified as VIEs (“VIE tenants”).These VIE tenants are “thinly capitalized” entities that rely on the operating cash flows generated from the senior housing facilities to pay operating expenses, including the rent obligations under their leases.

The Company holds a 49% ownership interest in CCRC OpCo, a joint venture entity formed in August 2014 that operates senior housing properties in a RIDEA structure, that has been identified as a VIE (see Notes 3 and 8). The equity members of CCRC OpCo “lack power” because they share certain operating rights with Brookdale as manager of the CCRCs. The assets of CCRC OpCo primarily consist of the CCRCs that it owns and leases, resident fees receivable, notes receivable, and cash and cash equivalents; its obligations primarily consist of operating lease obligations to CCRC PropCo and accounts payable and expense accruals associated with the cost of its CCRCs’ operations. Assets generated by the CCRC operations (primarily rents from CCRC residents) of CCRC OpCo may only be used to settle its contractual obligations (primarily the rental costs and operating expenses incurred to manage such facilities).

The Company holds an 85% ownership interest in Vintage Park (see Note 8) that has been identified as a VIE. Although power is shared among equity members, one equity member does not have a substantive investment in the entity. The assets of Vintage Park primarily consist of an in-progress independent living facility development project that it owns and cash and cash equivalents; its obligations primarily consist of accounts payable and expense accruals associated with the cost of the development obligations. Any assets generated by Vintage Park may only be used to settle its contractual obligations (primarily development expenses and debt service payments).

The Company holds Four Seasons Notes (see Note 10) and a portion of Four Season’s senior secured term loan (see Note 7). In the second quarter of 2015, upon the occurrence of a reconsideration event, it was determined that the issuer of the Four Seasons Notes was a VIE because the entity was “thinly capitalized” (see Note 17).

The Company holds commercial mortgage-backed securities (“CMBS”) issued by Federal Home Loan Mortgage Corporation (“Freddie MAC”) through a special purpose entity that has been identified as a VIE because it is “thinly capitalized.” The CMBS issued by the VIE are backed by mortgage debt obligations on real estate assets.

The classification of the related assets and liabilities and their maximum loss exposure as a result of the Company’s involvement with these VIEs at December 31, 2015 are presented below (in thousands):

		Maximum Loss					Carrying
VIE Type		Exposure(1)			Asset/Liability Type		Amount
HCRMC		$	5,154,315		Net investment in DFLs and investments in unconsolidated joint ventures		$	5,154,315
VIE tenants—DFLs			599,652		Net investment in DFLs			599,652
VIE tenants—operating leases			10,727		Lease intangibles, net and straight-line rent receivables			10,727
CCRC OpCo			232,404		Investments in unconsolidated joint ventures			232,404
Vintage Park			8,729		Investments in unconsolidated joint ventures			8,729
Four Seasons			127,435		Loans and marketable debt securities			127,435
CMBS			17,930		Marketable debt securities			17,930

	(1)		The Company’s maximum loss exposure related to VIE tenants, CCRC OpCo, Vintage Park, and loans and marketable debt securities to VIE borrowers represents the aggregate carrying amount of such investments (including accrued interest). The Company’s maximum loss exposure may be mitigated by re-leasing the underlying properties to new tenants upon an event of default.

As of December 31, 2015, the Company has not provided, and is not required to provide, financial support through a liquidity arrangement or otherwise, to its unconsolidated VIEs, including circumstances in which it could be exposed to further losses (e.g., cash shortfalls). See Notes 3, 6, 7, 8, 10 and 12 for additional descriptions of the nature, purpose and operating activities of the Company’s unconsolidated VIEs and interests therein.

Consolidated Variable Interest Entities

RIDEA I. The Company holds a 90% ownership interest in a joint venture entity formed in September 2011 that operates senior housing properties in a RIDEA structure (“RIDEA I OpCo”). The Company consolidates RIDEA I OpCo as the primary beneficiary because it has the ability to control the activities that most significantly impact the VIE’s economic performance. The assets of RIDEA I OpCo primarily consist of leasehold interests in senior housing facilities (operating leases), resident fees receivable, and cash and cash equivalents; its obligations primarily consist of lease payments to a non-VIE consolidated subsidiary of the Company and operating expenses of its senior housing facilities (accounts payable and accrued expenses). Assets generated by the senior housing operations (primarily from senior housing resident rents)

of RIDEA I OpCo may only be used to settle its contractual obligations (primarily from the rental costs and operating expenses incurred to manage such facilities).

RIDEA II. The Company holds an 80% ownership interest in joint venture entities formed in August 2014 that own and operate senior housing properties in a RIDEA structure (“RIDEA II”). The Company consolidates RIDEA II (“SH PropCo” and “SH OpCo”) as the primary beneficiary because it has the ability to control the activities that most significantly impact these VIEs’ economic performance. The assets of SH PropCo primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; its obligations primarily consist of a note payable to a non-VIE consolidated subsidiary of the Company. The assets of SH OpCo primarily consist of leasehold interests in senior housing facilities (operating leases), resident fees receivable, and cash and cash equivalents; its obligations primarily consist of lease payments to SH PropCo and operating expenses of its senior housing facilities (accounts payable and accrued expenses). Assets generated by the senior housing operations (primarily from senior housing resident rents) of the RIDEA II structure may only be used to settle its contractual obligations (primarily from the rental costs and operating expenses incurred to manage such facilities).

RIDEA III. The Company holds a 90% ownership interest in a joint venture entity formed in June 2015 that operates senior housing properties in a RIDEA structure (“RIDEA III OpCo”). The Company consolidates RIDEA III OpCo as the primary beneficiary because it has the ability to control the activities that most significantly impact the VIE’s economic performance. The assets of RIDEA III OpCo primarily consist of leasehold interests in senior housing facilities (operating leases), resident fees receivable, and cash and cash equivalents; its obligations primarily consist of lease payments to a non-VIE consolidated subsidiary of the Company and operating expenses of its senior housing facilities (accounts payable and accrued expenses). Assets generated by the senior housing operations (primarily from senior housing resident rents) of RIDEA III OpCo may only be used to settle its contractual obligations (primarily from the rental costs and operating expenses incurred to manage such facilities).

Other consolidated VIEs. The Company made a loan to an entity that entered into a tax credit structure (“Tax Credit Subsidiary”) and a loan to an entity that made an investment in a development joint venture (“Development JV”) both of which are considered VIEs. The Company consolidates the Tax Credit Subsidiary and Development JV because it is the primary beneficiary as it has the ability to control the activities that most significantly impact the VIEs’ economic performance. The assets and liabilities of the Tax Credit Subsidiary and Development JV substantially consist of development in progress, notes receivable, prepaid expenses, notes payable, and accounts payable and accrued liabilities generated from their operating activities. Any assets generated by the operating activities of the Tax Credit Subsidiary and Development JV may only be used to settle their contractual obligations.

NOTE 22. Fair Value Measurements

The following table illustrates the Company’s financial assets and liabilities measured at fair value on a recurring basis at December 31, 2015 in the consolidated balance sheets (in thousands):

Financial assets and liabilities		Fair Value			Level 1			Level 2			Level 3
Marketable equity securities		$	39		$	39		$	—		$	—
Interest-rate swap asset(1)			196			—			196			—
Interest-rate swap liabilities(1)			6,251			—			6,251			—
Currency swap assets(1)			1,551			—			1,551			—
Warrants(1)			55			—			—			55

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

Recognized gains and losses are recorded in other income, net on the Company’s consolidated statements of operations. In September 2015, the Company exercised $2 million of warrants classified as Level 3 within the fair value hierarchy in exchange for marketable equity securities classified as Level 1. During the year ended December 31, 2015, there were no other transfers of financial assets or liabilities within the fair value hierarchy.

Disclosures About Fair Value of Financial Instruments

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

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

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

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

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

Bank line of credit, term loans and other debt. The carrying values are a reasonable estimate of fair value because the borrowings are primarily based on market interest rates and the Company’s current credit ratings.

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

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

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

		December 31,
		2015						2014
		Carrying						Carrying
		Amount			Fair Value			Amount			Fair Value
Loans receivable, net(2)		$	768,743		$	770,052		$	906,961		$	898,522
Marketable debt securities(2)			102,958			102,958			231,442			252,125
Marketable equity securities(1)			39			39			43			43
Warrants(3)			55			55			2,220			2,220
Bank line of credit(2)			397,432			397,432			838,516			838,516
Term loans(2)			524,807			524,807			212,986			212,986
Senior unsecured notes(1)			9,120,107			9,390,668			7,589,960			8,187,458
Mortgage debt(2)			932,212			963,786			982,785			1,025,091
Other debt(2)			94,445			94,445			97,022			97,022
Interest-rate swap asset(2)			196			196			178			178
Interest-rate swap liabilities(2)			6,251			6,251			7,663			7,663
Currency swap assets(2)			1,551			1,551			929			929

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

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

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

NOTE 23. Concentration of Credit Risk

Concentrations of credit risk arise when one or more tenants, operators or obligors related to the Company’s investments are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to the Company, to be similarly affected by changes in economic conditions. The Company regularly monitors various segments of its portfolio to assess potential concentrations of risks. The Company does not have significant foreign operations.

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

		Percentage of				Percentage of
		Senior Housing Gross Assets				Senior Housing Revenues
		December 31,				Year Ended December 31,
Operators		2015		2014		2015		2014		2013
Brookdale(1)		28		36		23		37		46
HCRMC		12		11		7		8		10

		Percentage of Post-Acute/				Percentage of Post-Acute/
		Skilled Nursing Gross Assets				Skilled Nursing Revenues
		December 31,				Year Ended December 31,
Operators		2015		2014		2015		2014		2013
HCRMC		64		82		80		85		83

		Percentage of Total				Percentage of
		Company Gross Assets				Total Company Revenues
		December 31,				Year Ended December 31,
Operators		2015		2014		2015		2014		2013
HCRMC		23		31		23		26		28
Brookdale (1)		12		13		10		14		17

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

For discussions of significant HCRMC updates and performance during 2015, see Notes 6, 8 and 17.

As of December 31, 2015, Brookdale provided comprehensive facility management and accounting services with respect to 108 of the Company’s senior housing facilities and 15 CCRCs owned by the CCRC JV, for which the Company or joint venture pay annual management fees pursuant to long-term management agreements. Most of the management agreements have terms ranging from 10 to 15 years, with three to four 5-year renewals. The base management fees are 4.5% to 5.0% of gross revenues (as defined) generated by the RIDEA facilities. In addition, there are incentive management fees payable to Brookdale if operating results of the RIDEA properties exceed pre-established EBITDAR (as defined) thresholds.

Brookdale is subject to the registration and reporting requirements of the U.S. Securities and Exchange Commission (“SEC”) and is required to file with the SEC annual reports containing audited financial information and quarterly reports containing unaudited financial information. The information related to Brookdale contained or referred to in this report has been derived from SEC filings made by Brookdale or other publicly available information, or was provided to the Company by Brookdale, and the Company has not verified this information through an independent investigation or otherwise. The Company has no reason to believe that this information is inaccurate in any material respect, but the Company cannot assure the reader of its accuracy. The Company is providing this data for informational purposes only, and encourages the reader to obtain Brookdale’s publicly available filings, which can be found at the SEC’s website at www.sec.gov.

To mitigate the credit risk of leasing properties to certain senior housing and post-acute/skilled nursing operators, leases with operators are often combined into portfolios that contain cross-default terms, so that if a tenant of any of the properties in a portfolio defaults on its obligations under its lease, the Company may pursue its remedies under the lease with respect to any of the properties in the portfolio. Certain portfolios also contain terms whereby the net operating profits of the properties are combined for the purpose of securing the funding of rental payments due under each lease.

At December 31, 2015 and 2014, the Company’s gross real estate assets in the state of California represented approximately 24% and 23% of the Company’s total gross assets, respectively. At December 31, 2015 and 2014, the Company’s gross real estate assets in the state of Texas represented approximately 11% and 13% of the Company’s total gross assets, respectively. For the years ended December 31, 2015, 2014 and 2013, the Company’s revenues derived from properties located in the states of California represented approximately 22%, 23% and 21% of the Company’s total revenues, respectively. For the years ended December 31, 2015, 2014 and 2013, the Company’s revenues derived from properties located in the state of Texas represented approximately 13%, 12% and 11% of the Company’s total revenues, respectively.

NOTE 24. Derivative Financial Instruments

The following table summarizes the Company’s outstanding interest-rate and foreign currency swap contracts as of December 31, 2015 (dollars and GBP in thousands):

						Fixed
				Hedge		Rate/Buy					Notional/Sell
Date Entered		Maturity Date		Designation		Amount			Floating/Exchange Rate Index		Amount			Fair Value (1)
Interest rate:
July 2005(2)		July 2020		Cash Flow			3.82	%	BMA Swap Index		$	45,600		$	(5,430)
November 2008(3)		October 2016		Cash Flow			5.95	%	1 Month LIBOR+1.50%		$	25,100			(761)
July 2012(4)		June 2016		Cash Flow			1.81	%	1 Month GBP LIBOR+1.20%		£	137,000			(60)
January 2015(4)		October 2017		Cash Flow			1.79	%	1 Month GBP LIBOR+0.975%		£	220,000			196
Foreign currency:
July 2012(5)		June 2016		N/A		$	11,400		Buy USD/Sell GBP		£	7,200			685
January 2015(6)		October 2017		Cash Flow		$	35,100		Buy USD/Sell GBP		£	23,200			866

	(1)		Derivative assets are recorded in other assets, net and derivative liabilities are recorded in accounts payable and accrued liabilities on the consolidated balance sheets.

	(2)		Represents three interest-rate swap contracts, which hedge fluctuations in interest payments on variable-rate secured debt due to overall changes in hedged cash flows.

	(3)		Represents an interest-rate swap contract, that hedges the fluctuation in interest payments on variable-rate secured debt due to overall changes in hedged cash flows

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

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

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

The Company uses derivative instruments to mitigate the effects of interest rate and foreign currency fluctuations on specific forecasted transactions as well as recognized financial obligations or assets. Utilizing derivative instruments allows the Company to manage the risk of fluctuations in interest and foreign currency rates related to the potential impact these changes could have on future earnings and forecasted cash flows. The Company does not use derivative instruments for speculative or trading purposes.

The primary risks associated with derivative instruments are market and credit risk. Market risk is defined as the potential for loss in value of a derivative instrument due to adverse changes in market prices. Credit risk is the risk that one of the parties to a derivative contract fails to perform or meet their financial obligation. The Company does not obtain collateral associated with its derivative contracts, but monitors the credit standing of its counterparties on a regular basis. Should a counterparty fail to perform, the Company would incur a financial loss to the extent that the associated derivative contract was in an asset position. At December 31, 2015, the Company does not anticipate non-performance by the counterparties to its outstanding derivative contracts.

As of December 31, 2015, the Company designated £268 million of its GBP-denominated borrowings under the Facility and 2012 term loan as a hedge of a portion of the Company’s net investments in GBP-functional subsidiaries to mitigate its exposure to fluctuations in the GBP to USD exchange rate. For instruments that are designated and qualify as net investment hedges, the variability in the foreign currency to USD exchange rate of the instrument is recorded as part of the cumulative translation adjustment component of accumulated other comprehensive income (loss). Accordingly, the remeasurement value of the designated £268 million GBP-denominated borrowings due to fluctuations in the GBP to USD exchange rate are reported in accumulated other comprehensive income (loss) as the hedging relationship is considered to be effective. The cumulative balance of the remeasurement value will be reclassified to earnings when the hedged investment is sold or substantially liquidated.

In December 2010, the Company assumed a cash flow hedge as part of a real estate acquisition. During the years ended December 31, 2015 and 2014, the Company determined a portion of the hedge was ineffective and reclassified $500,000 and $2 million, respectively, of unrealized gains related to this interest-rate swap contract into other income, net.

On July 27, 2012, the Company entered into a foreign currency swap contract to hedge the foreign currency exchange risk related to a portion of the forecasted interest receipts from its GBP denominated Four Seasons Notes (see Note 10). The cash flow hedge has a fixed USD/GBP exchange rate of 1.5695 (buy $11 million and sell £7 million semi-annually) for a portion of its forecasted semi-annual interest receipts denominated in GBP. The foreign currency swap contract matures in June 2016 (the end of the non-call period of the Four Seasons Notes). In September 2015, the Company ceased hedge accounting on this foreign currency swap contract and reclassified $0.5 million from accumulated other comprehensive income (loss) to other income, net, and all future changes in fair value of the foreign currency swap contract will be recognized in earnings. The fair value of the contract at December 31, 2015 was $0.7 million and is included in other assets, net.

On July 27, 2012, the Company entered into an interest-rate swap contract that is designated as hedging the interest payments on its GBP denominated 2012 Term Loan due to fluctuations in the underlying benchmark interest rate (see Note 11). The cash flow hedge has a notional amount of £137 million and expires in June 2016.

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

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

For the year ended December 31, 2015, the Company earned reduced interest income of $0.1 million and recognized additional interest expense of $4 million, resulting from its cash flow hedging relationships. At December 31, 2015, the Company expects that the hedged forecasted transactions for each of the outstanding qualifying cash flow hedging relationships remain probable of occurring, and as a result, no gains or losses recorded to accumulated other comprehensive income (loss) are expected to be reclassified to earnings. During year ended December 31, 2015, there were no ineffective portions related to outstanding hedges, other than those discussed above.

To illustrate the effect of movements in the interest rate and foreign currency markets, the Company performed a market sensitivity analysis on its outstanding derivative financial instruments. The Company applied various basis point spreads to the underlying interest rate curves and foreign currency exchange rates of the derivative portfolio in order to determine the instruments’ change in fair value. The following table summarizes the results of the analysis performed (dollars in thousands):

				Effects of Change in Interest and
				Foreign Currency Rates
				+50 Basis			−50 Basis			+100 Basis			−100 Basis
Date Entered		Maturity Date		Points			Points			Points			Points
Interest rates:
July 2005		July 2020		$	1,034		$	(933)		$	2,017		$	(1,916)
November 2008		October 2016			102			(96)			201			(195)
July 2012		June 2016			469			(452)			937			(906)
January 2015		October 2017			2,982			(2,916)			5,931			(5,866)
Foreign currency:
July 2012		June 2016			(44)			63			(97)			116
January 2015		October 2017			(95)			246			(265)			417

NOTE 25. Selected Quarterly Financial Data (Unaudited)

Selected quarterly information for the years ended December 31, 2015 and 2014 is as follows (in thousands, except per share amounts):

		Three Months Ended During 2015
		March 31			June 30			September 30			December 31
Total revenues		$	610,791		$	607,532		$	657,953		$	668,036
(Loss) income before income taxes and equity income from and impairments of investments in unconsolidated joint ventures			(251,181)			151,184			134,894			(601,744)
Net (loss) income			(237,503)			167,748			117,954			(594,617)
Net (loss) income applicable to HCP, Inc.			(240,614)			164,885			115,362			(598,868)
Dividends paid per common share			0.565			0.565			0.565			0.565
Basic earnings per common share			(0.52)			0.36			0.25			(1.29)
Diluted earnings per common share			(0.52)			0.36			0.25			(1.29)

		Three Months Ended During 2014
		March 31			June 30			September 30			December 31
Total revenues		$	529,992		$	536,121		$	596,638		$	603,528
Income before income taxes and equity income from and impairments of investments in unconsolidated joint ventures			220,795			208,926			240,946			222,771
Total discontinued operations			29,746			—			—			—
Net income			263,623			222,279			251,059			199,630
Net income applicable to HCP, Inc.			259,111			218,885			247,654			196,583
Dividends paid per common share			0.545			0.545			0.545			0.545
Basic earnings per common share			0.56			0.48			0.54			0.43
Diluted earnings per common share			0.56			0.48			0.54			0.43