Healthpeak Properties 10-K 2018-12-31

Filed 2019-02-14. 22 sections, 709K characters. Original on sec.gov · Markdown · JSON

What changed since the 2017-12-31 10-KNew, removed and reworded risk factor headings, then every item sentence by sentence.

Cover and table of contents

10-K 1 hcp10-k12312018.htm 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2018

or

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

For the transition period from to

Commission file number 001-08895

HCP, Inc.

(Exact name of registrant as specified in its charter)

Maryland33-0091377
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
1920 Main Street, Suite 1200 Irvine, California92614 (Zip Code)
(Address of principal executive offices)

Registrant’s telephone number, including area code (949) 407-0700

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

Title of each className of each exchange on which registered
Common StockNew York Stock Exchange

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

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

Indicate by check mark whether the registrant; (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒Accelerated filer ☐Non-accelerated filer ☐Smaller reporting company ☐Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $8.7 billion.

As of February 11, 2019 there were 477,771,756 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the registrant’s 2019 Annual Meeting of Stockholders have been incorporated by reference into Part III of this Report.

HCP, Inc.

Form 10-K

For the Fiscal Year Ended December 31, 2018

Table of Contents

Cautionary Language Regarding Forward-Looking Statements1
Part I3
Item 1.Business3
Item 1A.Risk Factors10
Item 1B.Unresolved Staff Comments28
Item 2.Properties28
Item 3.Legal Proceedings33
Item 4.Mine Safety Disclosures33
Part II34
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities34
Item 6.Selected Financial Data36
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations37
Item 7A.Quantitative and Qualitative Disclosures About Market Risk65
Item 8.Financial Statements and Supplementary Data66
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure128
Item 9A.Controls and Procedures129
Item 9B.Other Information131
Part III132
Item 10.Directors, Executive Officers and Corporate Governance132
Item 11.Executive Compensation132
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters132
Item 13.Certain Relationships and Related Transactions, and Director Independence132
Item 14.Principal Accounting Fees and Services132
Part IV133
Item 15.Exhibits, Financial Statement Schedules133
Item 16.Form 10-K Summary137

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

Cautionary Language Regarding Forward-Looking Statements

Statements in this Annual Report on Form 10-K that are not historical factual statements are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include, among other things, statements regarding our and our officers’ intent, belief or expectation as identified by the use of words such as “may,” “will,” “project,” “expect,” “believe,” “intend,” “anticipate,” “seek,” “target,” “forecast,” “plan,” “potential,” “estimate,” “could,” “would,” “should” and other comparable and derivative terms or the negatives thereof. Forward-looking statements reflect our current expectations and views about future events and are subject to risks and uncertainties that could significantly affect our future financial condition and results of operations. While forward-looking statements reflect our good faith belief and assumptions we believe to be reasonable based upon current information, we can give no assurance that our expectations or forecasts will be attained. Further, we cannot guarantee the accuracy of any such forward-looking statement contained in this Annual Report, and such forward-looking statements are subject to known and unknown risks and uncertainties that are difficult to predict. As more fully set forth under “Item 1A, Risk Factors” in this report, these risks and uncertainties include, among other things:

•our reliance on a concentration of a small number of tenants and operators for a significant percentage of our revenues and net operating income;
•the financial condition of our existing and future tenants, operators and borrowers, including potential bankruptcies and downturns in their businesses, and their legal and regulatory proceedings, which results in uncertainties regarding our ability to continue to realize the full benefit of such tenants’ and operators’ leases and borrowers’ loans;
•the ability of our existing and future tenants, operators and borrowers to conduct their respective businesses in a manner sufficient to maintain or increase their revenues and manage their expenses in order to generate sufficient income to make rent and loan payments to us and our ability to recover investments made, if applicable, in their operations;
•our concentration in the healthcare property sector, particularly in senior housing, life sciences and medical office buildings, which makes our profitability more vulnerable to a downturn in a specific sector than if we were investing in multiple industries;
•operational risks associated with third party management contracts, including the additional regulation and liabilities of our RIDEA lease structures;
•the effect on us and our tenants and operators of legislation, executive orders and other legal requirements, including compliance with the Americans with Disabilities Act, fire, safety and health regulations, environmental laws, the Affordable Care Act, licensure, certification and inspection requirements, and laws addressing entitlement programs and related services, including Medicare and Medicaid, which may result in future reductions in reimbursements or fines for noncompliance;
•our ability to identify replacement tenants and operators and the potential renovation costs and regulatory approvals associated therewith;
•the risks associated with property development and redevelopment, including costs above original estimates, project delays and lower occupancy rates and rents than expected;
•the potential impact of uninsured or underinsured losses;
•the risks associated with our investments in joint ventures and unconsolidated entities, including our lack of sole decision making authority and our reliance on our partners’ financial condition and continued cooperation;
•competition for the acquisition and financing of suitable healthcare properties as well as competition for tenants and operators, including with respect to new leases and mortgages and the renewal or rollover of existing leases;
•our ability to achieve the benefits of acquisitions or other investments within expected time frames or at all, or within expected cost projections;
•the potential impact on us and our tenants, operators and borrowers from current and future litigation matters, including the possibility of larger than expected litigation costs, adverse results and related developments;
•changes in federal, state or local laws and regulations, including those affecting the healthcare industry that affect our costs of compliance or increase the costs, or otherwise affect the operations, of our tenants and operators;
•our ability to foreclose on collateral securing our real estate-related loans;
•volatility or uncertainty in the capital markets, the availability and cost of capital as impacted by interest rates, changes in our credit ratings, and the value of our common stock, and other conditions that may adversely impact our ability to fund our obligations or consummate transactions, or reduce the earnings from potential transactions;
•changes in global, national and local economic and other conditions, including currency exchange rates;
•our ability to manage our indebtedness level and changes in the terms of such indebtedness;
•competition for skilled management and other key personnel;
•our reliance on information technology systems and the potential impact of system failures, disruptions or breaches; and
•our ability to maintain our qualification as a real estate investment trust (“REIT”).

Except as required by law, we do not undertake, and hereby disclaim, any obligation to update any forward-looking statements, which speak only as of the date on which they are made.

PART I

Item 1. Business

General Overview

HCP, an S&P 500 company, invests primarily in real estate serving the healthcare industry in the United States (“U.S.”). We are a Maryland corporation organized in 1985 and qualify as a self-administered real estate investment trust. We are headquartered in Irvine, California, with offices in Nashville and San Francisco. Our diverse portfolio is comprised of investments in the following reportable healthcare segments: (i) senior housing triple-net, (ii) senior housing operating portfolio (“SHOP”), (iii) life science and (iv) medical office. At December 31, 2018, we had 201 full-time employees.

For a description of our significant activities during 2018, see “Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations—2018 Transaction Overview” in this report.

Business Strategy

We invest and manage our real estate portfolio for the long-term to maximize the benefit to our stockholders and support the growth of our dividends. The core elements of our strategy are to:

•Acquire, develop, lease, own and manage a diversified portfolio of quality healthcare properties across multiple geographic locations and business segments, including senior housing, life science, and medical office, among others;
•Maintain an investment grade balance sheet with adequate liquidity and long-term fixed rate debt financing with staggered maturities in order to support the longer-term nature of our investments, while reducing our exposure to interest rate volatility and refinancing risk at any point in the interest rate or credit cycles;
•Align ourselves with leading healthcare companies, operators and service providers which, over the long-term, should result in higher relative rental rates, net operating cash flows and appreciation of property values; and
•Pursue operational excellence to maximize the value of our investments.

Internal Growth Strategies

We believe our real estate portfolio holds the potential for increased future cash flows as it is well-maintained and in desirable locations. Our strategy for maximizing the benefits from these opportunities is to: (i) work with new or existing tenants and operators to address their space and capital needs; and (ii) provide high-quality property management services in order to motivate tenants to renew, expand or relocate into our properties.

We expect to continue our internal growth as a result of our ability to:

•Build and maintain long-term leasing and management relationships with quality tenants and operators. In choosing locations for our properties, we focus on their physical environment, adjacency to established businesses (e.g., hospital systems) and educational centers, proximity to sources of business growth and other local demographic factors.
•Replace tenants and operators at the best available market terms and lowest possible transaction costs. We believe that we are well-positioned to attract new tenants and operators and achieve attractive rental rates and operating cash flow as a result of the location, design and maintenance of our properties, together with our reputation for high-quality building services and responsiveness to tenants, and our ability to offer space alternatives within our portfolio.
•Extend and modify terms of existing leases prior to expiration. We structure lease extensions, early renewals or modifications, which reduce the cost associated with lease downtime or the re-investment risk resulting from the exercise of tenants’ purchase options, while securing the tenancy and relationship of our high quality tenants and operators on a long-term basis.

Investment Strategies

The delivery of healthcare services requires real estate and, as a result, tenants and operators depend on real estate, in part, to maintain and grow their businesses. We believe that the healthcare real estate market provides investment opportunities due to the: (i) compelling long-term demographics driving the demand for healthcare services; (ii) specialized nature of healthcare real estate investing; and (iii) ongoing consolidation of the fragmented healthcare real estate sector.

While we emphasize healthcare real estate ownership, we may also provide real estate secured financing to, or invest in equity or debt securities of, healthcare operators or other entities engaged in healthcare real estate ownership. We may also acquire all or substantially all of the securities or assets of other REITs, operating companies or similar entities where such investments would be consistent with our investment strategies. We may co-invest alongside institutional or development investors through partnerships or limited liability companies.

We monitor, but do not limit, our investments based on the percentage of our total assets that may be invested in any one property type, investment vehicle or geographic location, the number of properties that may be leased to a single tenant or operator, or loans that may be made to a single borrower. In allocating capital, we target opportunities with the most attractive risk/reward profile for our portfolio as a whole. We may take additional measures to mitigate risk, including diversifying our investments (by sector, geography, tenant or operator), structuring transactions as master leases, requiring tenant or operator insurance and indemnifications, and obtaining credit enhancements in the form of guarantees, letters of credit or security deposits.

We believe we are well-positioned to achieve external growth through acquisitions, financing and development. Other factors that contribute to our competitive position include:

•our reputation gained through over 30 years of successful operations and the strength of our existing portfolio of properties;
•our relationships with leading healthcare operators and systems, investment banks and other market intermediaries, corporations, private equity firms, non-profits and public institutions seeking to monetize existing assets or develop new facilities;
•our relationships with institutional buyers and sellers of high-quality healthcare real estate;
•our track record and reputation for executing acquisitions responsively and efficiently, which provides confidence to domestic and foreign institutions and private investors who seek to sell healthcare real estate in our market areas;
•our relationships with nationally recognized financial institutions that provide capital to the healthcare and real estate industries; and
•our control of sites (including assets under contract with radius restrictions).

Financing Strategies

Our REIT qualification requires us to distribute at least 90% of our REIT taxable income (excluding net capital gains); therefore, we do not retain a significant amount of capital. As a result, we regularly access the public equity and debt markets to raise the funds necessary to finance acquisitions and debt investments, develop and redevelop properties, and refinance maturing debt.

We may finance acquisitions and other investments through the following vehicles:

•borrowings under our credit facility;
•issuance or origination of debt, including unsecured notes, term loans and mortgage debt;
•sale of ownership interests in properties or other investments; or
•issuance of common stock or preferred stock or its equivalent.

We maintain a disciplined balance sheet by actively managing our debt to equity levels and maintaining multiple sources of liquidity. Our debt obligations are primarily long-term fixed rate with staggered maturities.

We finance our investments based on our evaluation of available sources of funding. For short-term purposes, we may utilize our revolving line of credit facility, arrange for other short-term borrowings from banks or other sources, or issue equity securities pursuant to our at-the-market equity offering program. We arrange for longer-term financing by offering debt and equity securities, placing mortgage debt and obtaining capital from institutional lenders and joint venture partners.

Segments

Senior housing (triple-net and senior housing operating portfolio, or SHOP)

Our senior housing properties are owned either through triple-net leases with third party tenant-operators or through so-called RIDEA structures, which is permitted by the Housing and Economic Recovery Act of 2008, and includes most of the provisions previously proposed in the REIT Investment Diversification and Empowerment Act of 2007 (commonly referred to as “RIDEA”).

Our senior housing properties include independent living facilities (“ILFs”), assisted living facilities (“ALFs”), memory care facilities (“MCFs”), and continuing care retirement communities (“CCRCs”), which cater to different segments of the elderly population based upon their personal needs. The services provided by our third party tenant-operators under triple-net leases or by our third-party manager-operators under a RIDEA structure at our properties are primarily paid for by the residents directly or through private insurance and are less reliant on government reimbursement programs such as Medicare and Medicaid.

Our triple-net leases are typically long-term agreements with third party tenant-operators. Under triple-net leases, our tenant-operators are typically responsible for the ongoing expenses of the property, including real estate taxes, insurance, and maintenance, in addition to paying the rent and utilities. Additionally, operational risks and liabilities are the responsibility of our tenant-operator, including with respect to any employment matters, compliance with healthcare and other laws and liabilities relating to personal injury-tort matters, resident-patient quality of care claims and governmental reimbursement matters.

A RIDEA structure allows us, through a taxable REIT subsidiary (“TRS”), to receive cash flow from the operations of a healthcare facility (as compared to only receiving contractual rent from a third-party tenant-operator under a triple-net lease structure) in compliance with REIT tax requirements. The criteria for operating a healthcare facility through a RIDEA structure require us to lease the facility to an affiliate TRS under a triple-net lease, and for such affiliate TRS to engage an independent qualifying management company (also known as an eligible independent contractor or third-party operator) to manage and operate the day-to-day business of the facility in exchange for a management fee. As a result, under a RIDEA structure, we are required to rely on a third-party operator to hire and train all facility employees, enter into all third-party contracts for the benefit of the facility, including resident/patient agreements, comply with laws, including but not limited to healthcare laws, and provide resident care. We are substantially limited in our ability to control or influence day-to-day operations under a RIDEA structure, and thus rely on the third-party tenant-operator to manage and operate the business.

Unlike our triple-net leased properties, through our TRS, we bear all operational risks and liabilities associated with the operation of these properties, with limited exceptions, such as a third-party operator’s gross negligence or willful misconduct. These operational risks and liabilities include those relating to any employment matters of our operator, compliance with healthcare and other laws and liabilities relating to personal injury-tort matters, resident-patient quality of care claims, and any governmental reimbursement matters, even though we have limited ability to control or influence our third-party operators’ management of these risks.

We view RIDEA as an important structure for senior housing properties that present attractive valuation entry points and/or growth profiles, and this structure has become the preferred structure (as opposed to triple-net leases) among most high-quality operators in the senior housing industry. Many of the management agreements we have in RIDEA structured transactions have terms ranging from 5 to 15 years, with mutual renewal options. The base management fees are typically 4.5% to 5.0% of gross revenues (as defined) generated by the RIDEA properties. In addition, there are sometimes incentive management fees payable to our third-party operators if operating results of the RIDEA properties exceed pre-established thresholds. Conversely, there are sometimes provisions in the management agreements that reduce management fees payable to our third-party operators if operating results do not meet certain pre-established thresholds.

Our senior housing property types under both triple-net leases and RIDEA structures are further described below:

•Independent Living Facilities. ILFs are designed to meet the needs of seniors who choose to live in an environment surrounded socially by their peers with services such as housekeeping, meals and activities. Additionally, the programs and services may include transportation, social activities, exercise and fitness programs, beauty or barber shop access, hobby and craft activities, community excursions, meals in a dining room setting and other activities sought by residents. These residents generally do not need assistance with activities of daily living (“ADL”). However, in some of our facilities, residents have the option to contract for these services.
•Assisted Living Facilities. ALFs are licensed care facilities that provide personal care services, support and housing for those who need help with ADL, such as bathing, eating, dressing and medication management, yet require limited medical care. These facilities are often in apartment-like buildings with private residences ranging from single rooms to large apartments. Certain ALFs may have a dedicated portion of a facility that offers higher levels of personal assistance for residents requiring memory care as a result of Alzheimer’s disease or other forms of dementia. Levels of personal assistance are based in part on local regulations.
•Memory Care Facilities. MCFs address the unique challenges of residents with Alzheimer’s disease or other forms of dementia. Residents may live in semi-private apartments or private rooms and have structured activities delivered by staff members trained specifically on how to care for residents with memory impairment. These facilities offer programs that provide comfort and care in a secure environment.
•Continuing Care Retirement Communities. CCRCs offer several levels of service, including independent living, assisted living and skilled nursing home care. CCRCs are different from other housing and care options for seniors because they usually provide written agreements or long-term contracts between residents and the communities (frequently lasting the term

of the resident’s lifetime), which offer a continuum of housing, services and healthcare on one campus or site. CCRCs are appealing as they allow residents to “age in place.” CCRCs typically require the individual to be in relatively good health and independent upon entry.

The following table provides information about our senior housing triple-net tenant concentration for the year ended December 31, 2018:

TenantPercentage of Segment RevenuesPercentage of Total Revenues
Brookdale Senior Living, Inc. (“Brookdale”)(1)38%6%
(1)Excludes facilities operated by Brookdale in our SHOP segment, as discussed below. Percentages of segment and total revenues include partial-year revenue earned from senior housing triple-net facilities that were sold during 2018. Accordingly, the percentages of segment and total revenues are expected to decrease in 2019 (see Note 3 in the Consolidated Financial Statements).

As of December 31, 2018, Brookdale operated, in our SHOP segment, approximately 7% of our real estate investments based on total assets. Because third-party operators manage our RIDEA properties in exchange for the receipt of a management fee, we are not directly exposed to the credit risk of these operators in the same manner or to the same extent as our triple-net tenants.

Life science

These properties contain laboratory and office space primarily for biotechnology, medical device and pharmaceutical companies, scientific research institutions, government agencies and other organizations involved in the life science industry. While these properties have characteristics similar to commercial office buildings, they generally contain more advanced electrical, mechanical, and heating, ventilating and air conditioning systems. The facilities generally have specialty equipment including emergency generators, fume hoods, lab bench tops and related amenities. In many instances, life science tenants make significant investments to improve their leased space, in addition to landlord improvements, to accommodate biology, chemistry or medical device research initiatives.

Life science properties are primarily configured in business park or campus settings and include multiple buildings. The business park and campus settings allow us the opportunity to provide flexible, contiguous/adjacent expansion to accommodate the growth of existing tenants. Our properties are located in well-established geographical markets known for scientific research and drug discovery, including San Francisco (56%) and San Diego (31%), California, Boston, Massachusetts, and Durham, North Carolina (based on square feet). At December 31, 2018, 91% of our life science properties were triple-net leased (based on leased square feet).

The following table provides information about our life science tenant concentration for the year ended December 31, 2018:

TenantsPercentage of Segment RevenuesPercentage of Total Revenues
Amgen, Inc.14%3%

Medical office

Medical office buildings (“MOBs”) typically contain physicians’ offices and examination rooms, and may also include pharmacies, hospital ancillary service space and outpatient services such as diagnostic centers, rehabilitation clinics and day-surgery operating rooms. While these facilities are similar to commercial office buildings, they require additional plumbing, electrical and mechanical systems to accommodate multiple exam rooms that may require sinks in every room, and special equipment such as x-ray machines. In addition, MOBs are often built to accommodate higher structural loads for certain equipment and may contain vaults or other specialized construction. Our MOBs are typically multi-tenant properties leased to healthcare providers (hospitals and physician practices), with approximately 82% of our MOBs located on hospital campuses and 94% affiliated with hospital systems (based on square feet). Occasionally, we invest in MOBs located on hospital campuses, which may be subject to ground leases. At December 31, 2018, approximately 55% of our MOBs were net leased (based on leased square feet) with the remaining leased under gross or modified gross leases.

The following table provides information about our medical office tenant concentration for the year ended December 31, 2018:

TenantPercentage of Segment RevenuesPercentage of Total Revenues
Hospital Corporation of America ("HCA")(1)16%6%
(1)Percentage of total revenues from HCA includes revenues earned from both our medical office and other non-reportable segments.

Other non-reportable segments. At December 31, 2018, we had interests in 14 hospitals, one post-acute/skilled nursing facility (“SNF”) and debt investments. Additionally, we had interests in 25 senior housing facilities, 68 care homes in the United Kingdom (“U.K.”), three MOBs and three SNFs owned and operated by our unconsolidated joint ventures. Services provided by our tenants and operators in hospitals are paid for by private sources, third-party payors (e.g., insurance and HMOs) or through Medicare and Medicaid programs. Our hospital property types include acute care, long-term acute care, and specialty and rehabilitation hospitals. Care homes offer personal care services, such as lodging, meal services, housekeeping and laundry services, medication management and assistance with ADL. Care homes are registered to provide different levels of services, ranging from personal care to nursing care. Some homes can be further registered for a specific care need, such as dementia or terminal illness. SNFs offer restorative, rehabilitative and custodial nursing care for people following a hospital stay or not requiring the more extensive and complex treatment available at hospitals. All of our care homes in the U.K., hospitals, and SNFs are triple-net leased.

Competition

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

Income from our investments depends on our tenants’ and operators’ ability to compete with other companies on multiple levels, including: the quality of care provided, reputation, success of product or drug development, the physical appearance of a facility, price and range of services offered, alternatives for healthcare delivery, the supply of competing properties, physicians, staff, referral sources, location, the size and demographics of the population in surrounding areas, and the financial condition of our tenants and operators. For a discussion of the risks associated with competitive conditions affecting our business, see “Item 1A, Risk Factors” in this report.

Government Regulation, Licensing and Enforcement

Overview

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

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

Fraud and Abuse Enforcement

There are various extremely complex U.S. federal and state laws and regulations (and in relation to our facilities located in the U.K., national laws and regulations of England, Scotland, Northern Ireland, and Wales) governing healthcare providers’ relationships and arrangements and prohibiting fraudulent and abusive practices by such providers. These laws include: (i) U.S. federal and state false claims acts and U.K. anti-fraud legislation and regulation, which, among other things, prohibit providers from filing false claims or making false statements to receive payment from Medicare, Medicaid or other U.S. federal or state or U.K. healthcare programs; (ii) U.S. federal and state anti-kickback and fee-splitting statutes, including the Medicare and Medicaid anti-kickback statute, which prohibit or restrict the payment or receipt of remuneration to induce referrals or recommendations of healthcare items or services, and U.K. legislation and regulations on financial inducements and vested interests; (iii) U.S. federal and state physician self-referral laws (commonly referred to as the “Stark Law”), which generally prohibit referrals by physicians to entities with which the physician or an immediate family member has a financial relationship; and (iv) the federal Civil Monetary Penalties Law, which prohibits, among other things, the knowing presentation of a false or fraudulent claim for certain healthcare services. Violations of U.S. and U.K. healthcare fraud and abuse laws carry civil, criminal and administrative sanctions, including punitive sanctions, monetary penalties, imprisonment, denial of Medicare and Medicaid reimbursement and potential exclusion from Medicare, Medicaid or other federal or state healthcare programs. These laws are enforced by a variety of federal, state and local agencies and in the U.S. can also be enforced by private litigants through, among other things, federal and state false claims acts, which allow private litigants to bring qui tam or “whistleblower” actions. Many of our tenants and operators are subject to these laws, and may become the subject of governmental enforcement actions or whistleblower actions if they fail to comply with applicable laws. Additionally, beginning in November 2019, the licensed operators of our U.S. long-term care facilities will be required to have compliance and ethics programs that meet the requirements of federal laws and regulations relating to the Social Security Act. We have begun the process of developing and implementing such programs.

Laws and Regulations Governing Privacy and Security

There are various U.S. federal and state and U.K. privacy laws and regulations, including the privacy and security rules contained in the Health Insurance Portability and Accountability Act of 1996 (commonly referred to as “HIPAA”) and the U.K. Data Protection Act 1998, which provide for the privacy and security of personal health information. An increasing focus of the U. S. Federal Trade Commission’s (“FTC’s”) consumer protection regulation is the impact of technological change on protection of consumer privacy. The FTC, as well as state attorneys general, have taken enforcement action against companies that do not abide by their representations to consumers regarding electronic security and privacy. To the extent we or our affiliated operating entities are a covered entity or business associate under HIPAA and the Health Information Technology for Economic and Clinical Health Act (the “HITECH Act”), compliance with those requirements would require us to, among other things, conduct a risk analysis, implement a risk management plan, implement policies and procedures, and conduct employee training. In most cases, we are dependent on our tenants and management companies to fulfill our compliance obligations, and we are in the process of developing programs to comply with aspects of these laws that cannot be delegated to third parties. Because of the far reaching nature of these laws, there can be no assurance that we would not be required to alter one or more of our systems and data security procedures to be in compliance with these laws. Our failure to protect health information could subject us to civil or criminal liability and adverse publicity, and could harm our business and impair our ability to attract new customers and residents. We may be required to notify individuals, as well as government agencies and the media, if we experience a data breach.

Reimbursement

Sources of revenue for some of our tenants and operators include, among others, governmental healthcare programs, such as the federal Medicare programs and state Medicaid programs and, in the U.K., the National Health Service (“NHS”) and local authority funding, and non-governmental third-party payors, such as insurance carriers and HMOs. As federal and state governments focus on healthcare reform initiatives, and as the federal government and many states face significant current and future budget deficits, efforts to reduce costs by these payors will likely continue, which may result in reduced or slower growth in reimbursement for certain services provided by some of our tenants and operators. Similarly, in the U.K., the NHS and the local authorities are undertaking efforts to reduce costs, which may result in reduced or slower growth in reimbursement for certain services provided by our U.K. tenants and operators. Additionally, new and evolving payor and provider programs in the U.S., including but not limited to Medicare Advantage, Dual Eligible, Accountable Care Organizations, and Bundled Payments could adversely impact our tenants’ and operators’ liquidity, financial condition or results of operations.

Healthcare Licensure and Certificate of Need

Certain healthcare facilities in our portfolio (including our facilities located in the U.K.) are subject to extensive national, federal, state and local licensure, certification and inspection laws and regulations. A healthcare facility’s failure to comply with these laws and regulations could result in a revocation, suspension, restriction or non-renewal of the facility’s license and loss of a certificate of need, which could adversely affect the facility’s operations and ability to bill for items and services provided at the facility. In addition, various licenses and permits are required to handle controlled substances (including narcotics), operate pharmacies, handle radioactive materials and operate equipment. Many states in the U.S. require certain healthcare providers to obtain a certificate of need, which requires prior approval for the construction, expansion or closure of certain healthcare facilities. The approval process related to state certificate of need laws may impact the ability of some of our tenants and operators to expand or change their businesses.

Product Approvals

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

Senior Housing Entrance Fee Communities

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

Americans with Disabilities Act (the “ADA”)

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

Environmental Matters

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

Insurance

We obtain various types of insurance to mitigate the impact of property, business interruption, liability, flood, windstorm, earthquake, fire, environmental and terrorism-related losses. We attempt 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, we have a large number of properties that are exposed to earthquake, flood and windstorm occurrences which carry higher deductibles.

We maintain property insurance for all of our properties. Tenants under triple-net leases, primarily in our senior housing triple-net segment, are required to provide primary property, business interruption and liability insurance. We maintain separate general and professional liability insurance for our SHOP facilities. Additionally, our corporate general liability insurance program also extends coverage for all of our properties beyond the aforementioned. We periodically review whether we or our RIDEA operators will bear responsibility for maintaining the required insurance coverage for the applicable SHOP properties, but the costs of such insurance are facility expenses paid from the revenues of those properties, regardless of who maintains the insurance.

We also maintain directors and officers liability insurance which provides protection for claims against our directors and officers arising from their responsibilities as directors and officers. Such insurance also extends to us in certain situations.

Sustainability

We believe that sustainability initiatives are a vital part of corporate responsibility, which supports our primary goal of increasing stockholder value through profitable growth. We continue to advance our commitment to sustainability, with a focus on achieving goals in each of the environmental, social and governance (“ESG”) dimensions of sustainability.

Our environmental management programs strive to capture cost efficiencies that ultimately benefit our investors, tenants, operators, employees and other stakeholders, while providing a positive impact on the communities in which we operate. Our social responsibility committee leads our local philanthropic and volunteer activities, and our transparent corporate governance initiatives incorporate sustainability as a critical component in achieving our business objectives and properly managing risks.

Our 2018 sustainability achievements include being recognized by the CDP (formerly the Carbon Disclosure Project) 2018 Climate Change Program. We completed CDP’s annual investor survey for the seventh consecutive year, received a score of A- for our disclosure and were named to the Leadership Band. CDP collects and publishes the environmental data on behalf of more than 650 investors. We were also named a constituent in the FTSE4Good Index for the seventh consecutive year. We achieved the Green Star designation from the Global Real Estate Sustainability Benchmark (GRESB). We were named a constituent in the North America Dow Jones Sustainability Index (“DJSI”) for the sixth consecutive year. The list is compiled according to the results of RobecoSAM’s annual Corporate Sustainability Assessment, which also determines constituency for the DJSI series. For additional information regarding our ESG sustainability initiatives and our approach to climate change, please visit our website at www.hcpi.com/sustainability.

Available Information

Our website address is www.hcpi.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) are available on our website, free of charge, as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the U.S. Securities and Exchange Commission (“SEC”). Additionally, the SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us, at www.sec.gov.

Item 1A. Risk Factors

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

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

•risks related to our business and operations;
•risks related to our capital structure and market conditions;
•risks related to other events; and
•risks related to tax, including REIT-related risks.

Risks Related to Our Business and Operations

We depend on one tenant and operator, Brookdale, for a significant percentage of our revenues and net operating income. Continuing adverse developments, including operational challenges, in Brookdale’s business and affairs or financial condition would likely have a materially adverse effect on us.

We own our senior housing properties utilizing triple-net lease and RIDEA structures. As of December 31, 2018, Brookdale (i) leased 43 properties in our senior housing triple-net segment, (ii) managed on our behalf 35 properties in our SHOP segment, and (iii) managed 15 CCRCs and one additional SHOP property owned by our unconsolidated joint ventures with Brookdale in our Other segment. These properties represent a significant portion of our portfolio, revenues and operating income.

Properties managed by Brookdale in our SHOP segment as of December 31, 2018, accounted for 7% of our real estate investments based on total assets. Under RIDEA, we are required to engage a third-party operator, such as Brookdale, that meets the requirements of an “eligible independent contractor” to manage and operate the day-to-day business of the properties. As required under RIDEA, the operator provides comprehensive property management and accounting services for these properties and we are limited in our ability to control or influence operations. Accordingly, we rely on the operator’s personnel, expertise, technical resources, regulatory compliance programs, information systems, proprietary information, good faith and judgment to manage and operate these properties efficiently and effectively. We also must rely on the operator to set appropriate resident fees, manage occupancy, provide accurate and complete property-level financial results for these properties in a timely manner and otherwise operate them in compliance with the terms of our management agreements and all applicable laws and regulations. However, as the owner of the property under a RIDEA structure, we are ultimately responsible for any operating deficits and other liabilities resulting from the operation of these properties, subject to limited exceptions such as gross negligence or willful misconduct by our operators. See, “—We assume operational risks with respect to our SHOP properties managed in RIDEA structures that could have a material adverse effect our business, results of operations and financial condition.”

Properties leased by Brookdale in our triple-net segment accounted for 6% of our total revenues for the year ended December 31, 2018. In its capacity as a triple-net tenant, Brookdale is contractually obligated to pay all insurance, tax, utilities, maintenance and repair expenses in connection with the leased properties. Brookdale may not have sufficient assets, income and access to financing to enable it to satisfy its obligations to us, and any failure by Brookdale to do so would have a material adverse effect on us. In addition, we depend on Brookdale’s maintenance and repair of the properties to remain competitive and attract and retain patients and residents. Adverse developments in Brookdale’s business and related declining rent coverage ratios have increased its credit risk. If these adverse developments result in prolonged inadequate property maintenance or improvements, or impair Brookdale’s access to capital necessary for maintenance or improvements, it could lead to a reduction in occupancy rates and market rents and have a materially adverse effect on us.

Brookdale has experienced challenges in recent years, including with respect to operational performance and stockholder activism, among others. Brookdale, as well as other operators, have been adversely affected by increased competition that has negatively impacted occupancy rates, as well as by increases in expenses, including increased labor costs. Brookdale’s challenges could divert management’s attention, increase employee turnover, and impair its ability to operate our properties efficiently and effectively. These challenges and any adverse developments in Brookdale’s business, affairs and financial results could result in, among other adverse events, declining operational and financial performance of our properties.

We have been in the process of reducing our exposure to Brookdale through asset sales and transitions to other operators (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—2018 Transaction Overview—Brookdale Transactions Update” for more information). If we determine to sell or transition additional properties currently leased to or managed by Brookdale, we may experience operational challenges and/or significantly declining financial performance for those properties, as we did with Brookdale properties sold or transitioned in 2018. Any failure of Brookdale to maintain the performance of our properties or to meet its obligations to us under its leases and management agreements could materially reduce our cash flow, net operating income and results of operations and have other materially adverse effects on our business, results of operations and financial condition.

We assume operational risks with respect to our SHOP properties managed in RIDEA structures that could have a material adverse effect on our business, results of operations and financial condition.

RIDEA permits REITs, such as us, to own or partially own qualified healthcare properties in a structure through which we can participate directly in the cash flow of the properties’ operations (as compared to receiving only contractual rent payments under a triple-net lease) in compliance with REIT requirements. The criteria for operating a qualified healthcare property in a RIDEA structure requires us to lease the property to an affiliate TRS and for such affiliate TRS to engage an independent qualifying management company, or operator (also known as an eligible independent contractor) to manage and operate the day-to-day business of the property. The operator performs its services in exchange for a management fee. As a result, under a RIDEA structure,

we are required to rely on our operator to manage and operate the property, including hiring and training all employees, entering into all third-party contracts for the benefit of the property, including resident/patient agreements, complying with laws, including but not limited to healthcare laws, and providing resident care. However, as the owner of the property under a RIDEA structure, our TRS, and hence we, are ultimately responsible for all operational risks and other liabilities of the property, other than those arising out of certain actions by our operator, such as gross negligence or willful misconduct. Operational risks include, and our resulting revenues therefore depend on, among other things: occupancy rates; the entrance fees and rental rates charged to residents; Medicare and Medicaid reimbursement rates, to the extent applicable; our operator’s reputation and ability to attract and retain residents; general economic conditions and market factors that impact seniors; competition from other senior housing providers; compliance with federal, state, local and industry-regulated licensure, certification and inspection laws, regulations and standards; litigation involving our properties or residents/patients; the availability and cost

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Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

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

•location, construction quality, age, condition and design of the property;
•geographic area, proximity to other healthcare facilities, type of property and demographic profile, including new competitive supply;
•whether the expected risk-adjusted return exceeds the incremental cost of capital;
•whether the rent or operating income provides a competitive market return to our investors;
•duration, rental rates, tenant and operator quality and other attributes of in-place leases, including master lease structures and coverage;
•current and anticipated cash flow and its adequacy to meet our operational needs;
•availability of security such as letters of credit, security deposits and guarantees;
•potential for capital appreciation;
•expertise and reputation of the tenant or operator;
•occupancy and demand for similar healthcare facilities in the same or nearby communities;
•availability of qualified operators or property managers and whether we can manage the property;
•potential alternative uses of the facilities;
•the regulatory and reimbursement environment in which the properties operate;
•tax laws related to REITs;
•prospects for liquidity through financing or refinancing; and
•our access to and cost of capital.

Property and Direct Financing Lease Investments

The following table summarizes our consolidated property and direct financing lease ("DFL") investments as of and for the year ended December 31, 2018 (square feet and dollars in thousands):

Facility LocationNumber of FacilitiesCapacityGross Asset Value(1)Real Estate Revenues(2)Operating Expenses
Senior housing triple-net—real estate:(Units)
California161,572$389,349$36,979$(3,219)
Virginia91,157257,29825,041—
Florida111,418228,04725,453(8)
Texas131,323189,14421,535—
Pennsylvania2623144,64513,832—
Washington10670137,71314,552(1)
Oregon10955137,18013,821(123)
Other (18 States)484,157772,10186,953(197)
11911,8752,255,477238,166(3,548)
Senior housing—DFLs(3):
Other (12 States)273,126629,21437,925(70)
Total senior housing triple-net14615,001$2,884,691$276,091$(3,618)
SHOP:(Units)
Texas193,171$479,786$136,560$(94,433)
Florida172,090338,843109,289(86,380)
Colorado5687206,59235,414(20,849)
Maryland7644185,98234,768(26,261)
Illinois4771143,92438,960(28,447)
Other (18 States)414,345707,302192,985(157,942)
Total SHOP9311,708$2,062,429$547,976$(414,312)
Facility LocationNumber of FacilitiesCapacityGross Asset Value(1)Real Estate Revenues(2)Operating Expenses
Life science:(Sq. Ft.)
California1135,805$3,765,565$357,868$(79,714)
Other (3 States)11910417,62937,196(12,028)
Total life science1246,715$4,183,194$395,064$(91,742)
Medical office:(Sq. Ft.)
Texas675,910$1,103,777$143,567$(59,163)
Pennsylvania41,054329,05428,875(12,364)
South Carolina201,028314,30410,758(1,601)
California17955302,72535,862(16,234)
Other (29 States)15910,3012,042,081289,957(100,497)
Total medical office26719,248$4,091,941$509,019$(189,859)
Other—Hospital(4):(Beds)
Texas41,077$232,715$39,196$(5,240)
California2111143,50019,406(127)
Other (7 States)8988150,96528,778(140)
142,176$527,180$87,380$(5,507)
Other—U.K.:(Units)
Other (U.K.)(5)———19,492—
Other—SNF:(Beds)
Virginia112016,7801,261—
Total other non-reportable segments15$543,960$108,133$(5,507)
Total properties645$13,766,215$1,836,283$(705,038)
(1)Represents gross real estate and the carrying value of DFLs. Gross real estate represents the carrying amount of real estate after adding back accumulated depreciation and amortization. Excludes real estate held for sale with an aggregate gross asset value of $131 million.
(2)Represent the combined amount of rental and related revenues, resident fees and services and income from DFLs.
(3)Represents leased properties that are classified as DFLs.
(4)Includes leased properties that are classified as DFLs.
(5)Represents real estate revenues generated from real estate assets that were deconsolidated in June 2018 (see Note 5 to the Consolidated Financial Statements).

Occupancy and Annual Rent Trends

The following table summarizes occupancy and average annual rent trends for our consolidated property and DFL investments for the years ended December 31 (average occupied square feet in thousands):

20182017201620152014
Senior housing triple-net:
Average annual rent per unit(1)$16,449$15,352$14,604$14,544$13,907
Average capacity (available units)16,91421,53628,45528,77733,917
SHOP:
Average annual rent per unit(1)$48,433$41,133$42,851$41,435$38,017
Average capacity (available units)11,24812,75816,02812,7046,408
Life science:
Average occupancy percentage95%96%98%97%93%
Average annual rent per square foot(1)$54$52$48$46$46
Average occupied square feet7,0786,8417,3327,1796,637
Medical office:
Average occupancy percentage92%92%91%91%91%
Average annual rent per square foot(1)$29$28$28$28$28
Average occupied square feet17,28016,67415,69714,67713,136
Other non-reportable segments:
Average annual rent per bed - Hospital(1)$39,246$38,017$39,076$39,834$38,756
Average capacity (available beds) - Hospital2,1472,1612,2712,1872,184
Average annual rent per unit - U.K.(1)(2)—9,0979,20010,04811,240
Average capacity (available units) - U.K.(2)—3,1883,1902,515501
Average annual rent per bed - SNF(1)10,50410,29810,8038,2928,062
Average capacity (available beds) - SNF1201204261,0471,022
(1)Average annual rent is presented as a ratio of revenues comprised of rental and related revenues and income from DFLs divided by the average capacity or average occupied square feet of the facilities. Average annual rent for leased properties (including DFLs) excludes termination fees and non-cash revenue adjustments (i.e., straight-line rents, amortization of market lease intangibles, DFL non-cash interest and the impact of deferred community fee income).
(2)Our investments in the U.K. were deconsolidated in June 2018 (see Note 5 to the Consolidated Financial Statements).

Tenant Lease Expirations

The following table shows tenant lease expirations, including those related to DFLs, for the next 10 years and thereafter at our consolidated properties, assuming that none of the tenants exercise any of their renewal or purchase options, unless otherwise noted below, and excludes properties in our SHOP segment and assets held for sale as of and for the year ended December 31, 2018 (dollars and square feet in thousands):

Expiration Year
SegmentTotal2019(1)202020212022202320242025202620272028Thereafter
Senior housing triple-net:
Properties146222612495641552
Base rent(2)$263,173$2,305$40,753$7,969$1,548$46,215$13,445$9,354$4,316$12,359$36,949$87,960
% of segment base rent100115311854251432
Life science:
Square feet6,4886045468506326391111,035379489338865
Base rent(2)$285,294$24,653$19,890$50,365$21,345$36,210$6,213$46,238$17,955$22,898$15,079$24,448
% of segment base rent10097187132166859
Medical office:
Square feet17,7312,8062,4441,9231,7961,5308882,0847957351,3251,405
Base rent(2)$415,123$69,775$63,355$48,606$45,566$39,366$24,008$36,526$20,040$15,229$28,161$24,491
% of segment base rent100171512119695475
Other non-reportable segments:
Properties15—115—61———1
Base rent(2)$75,370$—$8,145$1,619$14,099$—$22,972$20,051$—$—$—$8,484
% of segment base rent100—11219—3027———11
Total:
Base rent(2)$1,038,960$96,733$132,143$108,559$82,558$121,791$66,638$112,169$42,311$50,486$80,189$145,383
% of total base rent1009131081261145814
(1)Includes month-to-month leases.
(2)The most recent month’s (or subsequent month’s, if acquired in the most recent month) base rent, including additional rent floors and cash income from 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 non-cash interest and deferred revenues).

See the “Tenant Purchase Options” section of Note 6 to the Consolidated Financial Statements for additional information on leases subject to purchase options. See Schedule III: Real Estate and Accumulated Depreciation, included in this report, which information is incorporated by reference in this Item 2.

Item 3. Legal Proceedings

Except as described below, we are not aware of any legal proceedings or claims that we believe could have, individually or taken together, a material adverse effect on our financial condition, results of operations or cash flows.

See “Legal Proceedings” section of Note 11 to the Consolidated Financial Statements for information regarding legal proceedings, which information is incorporated by reference in this Item 3.

Item 4. Mine Safety Disclosures

None.

PART II

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

Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “HCP.”

At January 31, 2019, we had 8,945 stockholders of record, and there were 184,033 beneficial holders of our common stock.

Dividends (Distributions)

It has been our policy to declare quarterly dividends to common stockholders so as to comply with applicable provisions of the Code governing REITs. All distributions are made at the discretion of our Board of Directors in accordance with Maryland law. Distributions with respect to our common stock can be characterized for federal income tax purposes as ordinary dividends, capital gains, nondividend distributions or a combination thereof. The following table shows the characterization of our annual common stock distributions per share:

Year Ended December 31,
201820172016
Ordinary dividends(1)$0.9578$1.4800$1.5561
Capital gains0.5222——
Nondividend distributions——6.7089
$1.4800$1.4800$8.2650(2)
(1)The 2018 amount includes $0.0164 of qualified dividend income for purposes of Code Section 1(h)(11), and $0.9414 of qualified business income for purposes of Code Section 199A.
(2)Consists of $2.095 per common share of quarterly cash dividends and $6.17 per common share of stock dividends related to the spin-off (the “Spin-Off”) of Quality Care Properties, Inc. (“QCP”) (discussed below).

HCP common stockholders on October 24, 2016, the record date for the Spin-Off (the “Record Date”), received upon the Spin-Off on October 31, 2016 one share of QCP common stock for every five shares of HCP common stock they held as of the Record Date (the “Distributed Shares”) and cash in lieu of fractional shares of QCP. For U.S. federal income tax purposes, HCP reported the fair market value of the QCP common stock distributed per each share of HCP common stock outstanding on the Record Date was $6.17, or $30.85 for each share of QCP common stock. Accordingly, every HCP common stockholder who received a Distributed Share has a tax cost basis of $30.85 per Distributed Share.

On January 31, 2019, we announced that our Board of Directors declared a quarterly common stock cash dividend of $0.37 per share. The common stock dividend will be paid on February 28, 2019 to stockholders of record as of the close of business on February 19, 2019.

Issuer Purchases of Equity Securities

The table below sets forth the information with respect to purchases of our common stock made by or on our behalf during the quarter ended December 31, 2018.

Period CoveredTotal Number of Shares Purchased(1)Average Price Paid per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsMaximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Programs
October 1-31, 2018448$27.35——
November 1-30, 2018————
December 1-31, 20182,79827.88——
Total3,246$27.81——
(1)Represents restricted shares withheld under our equity incentive plans to offset tax withholding obligations that occur upon vesting of restricted shares. The value of the shares withheld is based on the closing price of our common stock on the last trading day prior to the date the relevant transaction occurred.

Performance Graph

The graph and table below compare the cumulative total return of HCP, the S&P 500 Index and the Equity REIT Index of NAREIT, from January 1, 2014 to December 31, 2018. Total cumulative return is based on a $100 investment in HCP common stock and in each of the indices at the close of trading on December 31, 2013 and assumes quarterly reinvestment of dividends before consideration of income taxes. Stockholder returns over the indicated periods should not be considered indicative of future stock prices or stockholder returns.

COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN

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

RATE OF RETURN TREND COMPARISON

JANUARY 1, 2014–DECEMBER 31, 2018

(JANUARY 1, 2014 = $100)

Performance Graph Total Stockholder Return

chart-002c677a81025d988e5a01.jpg

December 31,
20142015201620172018
FTSE NAREIT Equity REIT Index$128.03$131.65$143.32$155.75$149.42
S&P 500113.68115.24129.02157.17150.27
HCP, Inc.127.80117.53106.5298.26111.71

Item 6. Selected Financial Data

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

Year Ended December 31,
20182017201620152014
Statement of operations data:
Total revenues$1,846,689$1,848,378$2,129,294$1,940,489$1,636,833
Income (loss) from continuing operations1,073,474422,634374,171152,668271,315
Net income (loss) applicable to common shares1,058,424413,013626,549(560,552)919,796
Basic earnings per common share:
Continuing operations2.250.880.770.300.56
Discontinued operations——0.57(1.51)1.45
Net income (loss) applicable to common shares2.250.881.34(1.21)2.01
Diluted earnings per common share:
Continuing operations2.240.880.770.300.56
Discontinued operations——0.57(1.51)1.44
Net income (loss) applicable to common shares2.240.881.34(1.21)2.00
Balance sheet data:
Total assets12,718,55314,088,46115,759,26521,449,84921,331,436
Debt obligations(1)5,567,9087,880,4669,189,49511,069,0039,721,269
Total equity6,512,5915,594,9385,941,3089,746,31710,997,099
Other data:
Dividends paid696,913694,955979,5421,046,6381,001,559
Dividends paid per common share(2)1.4801.4802.0952.2602.180
Funds from operations (“NAREIT FFO”)(3)780,189661,1131,119,153(10,841)1,381,634
Diluted NAREIT FFO per common share(3)1.661.412.39(0.02)3.00
FFO as adjusted(3)857,233918,4021,282,3901,470,1671,398,691
Diluted FFO as adjusted per common share(3)1.821.952.743.163.04
Funds available for distribution (“FAD”)(3)746,397803,7201,215,6961,261,8491,178,822
(1)Includes bank line of credit, term loans, senior unsecured notes, mortgage debt and other debt.
(2)Represents cash dividends. Additionally, in October 2016 we issued $6.17 per common share of stock dividends related to the Spin-Off.
(3)For a more detailed discussion and reconciliation of NAREIT FFO, FFO as adjusted and FAD, see "Results of Operations" and “Non-GAAP Financial Measure Reconciliations” in Item 7 of this report.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

•2018 Transaction Overview
•Dividends
•Results of Operations
•Liquidity and Capital Resources
•Contractual Obligations
•Off-Balance Sheet Arrangements
•Inflation
•Non-GAAP Financial Measure Reconciliations
•Critical Accounting Policies
•Recent Accounting Pronouncements

2018 Transaction Overview

Mountain View Campus Sale

•In November 2018, we sold our Shoreline Technology Center life science campus located in Mountain View, California for $1.0 billion and recognized a gain on sale of $726 million.

MSREI MOB JV

•In August 2018, HCP and Morgan Stanley Real Estate Investment (“MSREI”) formed a joint venture (the “MSREI JV”) to own a portfolio of MOBs, which HCP owns 51% of and consolidates. To form the MSREI JV, MSREI contributed cash of $298 million and HCP contributed nine wholly-owned MOBs (the “Contributed Assets”). The Contributed Assets are primarily located in Texas and Florida and were valued at approximately $320 million at the time of contribution. The MSREI JV used substantially all of the cash contributed by MSREI to acquire an additional portfolio of 16 MOBs in Greenville, South Carolina (the “Greenville Portfolio”) for $285 million. Concurrent with acquiring the additional MOBs, the MSREI JV entered into 10-year leases with an anchor tenant on each MOB in the Greenville Portfolio, which accounts for approximately 93% of the total leasable space in the portfolio.

Brookdale Transactions Update

•In 2018, we sold six agreed upon facilities to Brookdale for $275 million.
•In March 2018, we completed the acquisition of Brookdale’s noncontrolling interest in RIDEA I for $63 million.
•During the fourth quarter of 2018, we completed the sale of 11 senior housing triple-net and eight SHOP facilities previously leased to Brookdale for $377 million.
•As of December 31, 2018, we had completed the transition of 38 assets previously operated by Brookdale to other operators.

See Note 3 to the Consolidated Financial Statements for additional information.

U.K. Investment Update

•In June 2018, we entered into a joint venture with an institutional investor (the “U.K. JV”) through which we sold a 51% interest in U.K. assets previously owned by us (the "U.K. Portfolio”) based on a total value of £382 million ($507 million). We retained a 49% noncontrolling interest in the joint venture and received gross proceeds of $402 million, including proceeds from the refinancing of our previously held intercompany loans. Upon closing the U.K. JV, we deconsolidated the U.K. Portfolio, recognized our retained noncontrolling interest investment at fair value ($105 million) and recognized a gain on sale of $11 million. We expect to sell our remaining 49% interest by no later than 2020.

Other Real Estate and Loan Transactions

•In March 2018, we sold our Tandem Health Care mezzanine loan (“Tandem Mezzanine Loan”) to a third party for approximately $112 million, resulting in an impairment recovery, net of transaction costs and fees, of $3 million.
•In June 2018, we sold our remaining 40% ownership interest in RIDEA II for $91 million and caused Columbia Pacific Advisors, LLC to refinance our $242 million of loans receivable from RIDEA II, which resulted in total proceeds of $332 million.
•In 2016, we provided a £105 million ($131 million at closing) bridge loan (the “U.K. Bridge Loan”) to Maria Mallaband Care Group Ltd. ("MMCG") to fund the acquisition of a portfolio of seven care homes in the U.K. Under the bridge loan, we retained a call option to acquire those seven care homes at a future date for £105 million. In March 2018, in conjunction with MMCG and HCP satisfying the conditions necessary to exercise our call option to acquire the seven care homes, we began consolidating the real estate. In June 2018, we completed the process of exercising the call option. The seven care homes acquired through the call option were included in the U.K. JV transaction (see U.K. Investment Update above). See Notes 5, 7 and 19 to the Consolidated Financial Statements for additional information.
•In November 2018, we acquired the outstanding equity interests in three life science joint ventures (which owned four buildings) for $92 million, bringing our equity ownership to 100% for all three joint ventures. As a result, we recognized a gain on consolidation of $50 million.
•Additionally, during the year ended December 31, 2018, we sold: (i) 19 SHOP facilities, (ii) four life science assets, (iii) four MOBs and (iv) an undeveloped land parcel for a total of $451 million.
•In November 2018, we entered into definitive agreements to acquire two life science buildings in South San Francisco, California, adjacent to The Shore at Sierra Point development, for $245 million. We made a $15 million nonrefundable deposit upon completing due diligence and expect to close the transaction during the first half of 2019.
•In January and February 2019, we acquired a life science facility for $71 million and development rights at an adjacent undeveloped land parcel for consideration of up to $27 million. The existing facility and land parcel are located in Cambridge, Massachusetts.

Financing Activities

•On July 3, 2018, we exercised our right to repay the outstanding £169 million balance under our term loan and re-borrow $224 million with all other key terms unchanged. We repaid the full balance of our term loan in November 2018.
•On July 16, 2018, we repaid all $700 million outstanding of our 5.375% senior unsecured notes due 2021 and recorded a loss on debt extinguishment of approximately $44 million.
•On November 8, 2018, we repaid all $450 million outstanding of our 3.75% senior unsecured notes due in 2019 at par.
•During the fourth quarter of 2018, we issued 5.4 million shares of common stock under our at-the-market equity offering program for total net proceeds of $154 million.
•In December 2018, we issued two million shares for total net proceeds of $57 million and entered into a forward equity sales agreement to sell up to an aggregate of 15.25 million additional shares on or before December 13, 2019 at an initial net price of $28.60 per share, after underwriting discounts and commissions.
•During 2018, we used proceeds from dispositions primarily to repay $933 million of outstanding net borrowings under our revolving line of credit facility.

Developments and Redevelopments

•In March 2018, we acquired the rights to develop a new 214,000 square foot life science facility on our existing Hayden Research Campus in Lexington, Massachusetts for $21 million. The development, 75 Hayden, will be a four-story, purpose-built Class A life science facility and parking garage.
•In September and October 2018, we signed two leases totaling 222,000 square feet at The Shore at Sierra Point in South San Francisco, bringing the $224

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to various market risks, including the potential loss arising from adverse changes in interest rates and foreign currency exchange rates, specifically GBP. We use derivative and other financial instruments in the normal course of business to mitigate interest rate and foreign currency risk. We do not use derivative financial instruments for speculative or trading purposes. Derivatives are recorded on the consolidated balance sheets at fair value (see Note 22 to the Consolidated Financial Statements).

To illustrate the effect of movements in the interest rate markets, we performed a market sensitivity analysis on our hedging instruments. We applied various basis point spreads to the underlying interest rate curves of the hedging portfolio in order to determine the change in fair value. Assuming a one percentage point change in the underlying interest rate curve, the estimated change in fair value of each of the underlying hedging instruments would not exceed $1 million.

Interest Rate Risk

At December 31, 2018, we are exposed to market risks related to fluctuations in interest rates primarily on variable rate debt. As of December 31, 2018, $43 million of our variable-rate debt was hedged by interest rate swap transactions. The interest rate swaps are designated as cash flow hedges, with the objective of managing the exposure to interest rate risk by converting the interest rates on our variable-rate debt to fixed interest rates.

Interest rate fluctuations will generally not affect our future earnings or cash flows on our fixed rate debt and assets until their maturity or earlier prepayment and refinancing. If interest rates have risen at the time we seek to refinance our fixed rate debt, whether at maturity or otherwise, our future earnings and cash flows could be adversely affected by additional borrowing costs. Conversely, lower interest rates at the time of refinancing may reduce our overall borrowing costs. However, interest rate changes will affect the fair value of our fixed rate instruments. At December 31, 2018, a one percentage point increase or decrease in interest rates would change the fair value of our fixed rate debt by approximately $252 million and $272 million, respectively, and would not materially impact earnings or cash flows. Additionally, a one percentage point increase or decrease in interest rates would change the fair value of our fixed rate debt investments by approximately $3 million and less than $1 million, respectively, and would not materially impact earnings or cash flows. Conversely, changes in interest rates on variable rate debt and investments would change our future earnings and cash flows, but not materially impact the fair value of those instruments. Assuming a one percentage point change in the interest rate related to our variable-rate debt and variable-rate investments, and assuming no other changes in the outstanding balance as of December 31, 2018, our annual interest expense and interest income would change by approximately $1 million and $1 million, respectively.

Foreign Currency Exchange Rate Risk

At December 31, 2018, our exposure to foreign currencies primarily relates to U.K. investments in leased real estate, loans receivable and related GBP denominated cash flows. Our foreign currency exposure is partially mitigated through the use of GBP-denominated borrowings. Based solely on our operating results for the year ended December 31, 2018, including the impact of existing hedging arrangements, if the value of the GBP relative to the U.S. dollar were to increase or decrease by 10% compared to the average exchange rate during the year ended December 31, 2018, the increase or decrease to our cash flows would not be material.

Market Risk

We have investments in marketable debt securities classified as held-to-maturity because we have the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are recorded at amortized cost and adjusted for the amortization of premiums and discounts through maturity. We consider a variety of factors in evaluating an other-than-temporary decline in value, such as: the length of time and the extent to which the market value has been less than our current adjusted carrying value; the issuer’s financial condition, capital strength and near-term prospects; any recent events specific to that issuer and economic conditions of its industry; and our investment horizon in relationship to an anticipated near-term recovery in the market value, if any. At December 31, 2018, both the fair value and carrying value of marketable debt securities were $19 million.

Item 8. Financial Statements and Supplementary Data

HCP, Inc.

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm67
Consolidated Balance Sheets—December 31, 2018 and 201768
Consolidated Statements of Operations—for the years ended December 31, 2018, 2017 and 201669
Consolidated Statements of Comprehensive Income (Loss)—for the years ended December 31, 2018, 2017 and 201670
Consolidated Statements of Equity—for the years ended December 31, 2018, 2017 and 201671
Consolidated Statements of Cash Flows—for the years ended December 31, 2018, 2017 and 201672
Notes to Consolidated Financial Statements73

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and the Board of Directors of HCP, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of HCP, Inc. and subsidiaries (the "Company") as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows, for each of the three years in the period ended December 31, 2018, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 14, 2019, expressed an unqualified opinion on the Company's internal control over financial reporting.

Changes in Accounting Principles

As discussed in Note 2, Summary of Significant Accounting Policies—Recent Accounting Pronouncements, to the financial statements, the Company has changed its method of derecognizing real estate from partial sales effective January 1, 2018 due to the adoption of Accounting Standards Update (“ASU”) No. 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets on a modified retrospective basis. Further, as discussed in Note 2, Summary of Significant Accounting Policies—Recent Accounting Pronouncements, to the financial statements, the Company changed its method of accounting for real estate acquisitions effective January 1, 2017 due to the adoption of ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business on a prospective basis.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ DELOITTE & TOUCHE LLP

Los Angeles, California

February 14, 2019

We have served as the Company's auditor since 2010.

HCP, Inc.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

December 31,
20182017
ASSETS
Real estate:
Buildings and improvements$10,877,248$11,239,732
Development costs and construction in progress537,643447,976
Land1,637,5061,785,865
Accumulated depreciation and amortization(2,842,947)(2,741,695)
Net real estate10,209,45010,731,878
Net investment in direct financing leases713,818714,352
Loans receivable, net62,998313,326
Investments in and advances to unconsolidated joint ventures540,088800,840
Accounts receivable, net of allowance of $5,127 and $4,425, respectively48,17140,733
Cash and cash equivalents110,79055,306
Restricted cash29,05626,897
Intangible assets, net305,079410,082
Assets held for sale, net108,086417,014
Other assets, net591,017578,033
Total assets$12,718,553$14,088,461
LIABILITIES AND EQUITY
Bank line of credit$80,103$1,017,076
Term loan—228,288
Senior unsecured notes5,258,5506,396,451
Mortgage debt138,470144,486
Other debt90,78594,165
Intangible liabilities, net54,66352,579
Liabilities of assets held for sale, net1,12514,031
Accounts payable and accrued liabilities391,583401,738
Deferred revenue190,683144,709
Total liabilities6,205,9628,493,523
Commitments and contingencies
Common stock, $1.00 par value: 750,000,000 shares authorized; 477,496,499 and 469,435,678 shares issued and outstanding, respectively477,496469,436
Additional paid-in capital8,398,8478,226,113
Cumulative dividends in excess of earnings(2,927,196)(3,370,520)
Accumulated other comprehensive income (loss)(4,708)(24,024)
Total stockholders' equity5,944,4395,301,005
Joint venture partners391,401117,045
Non-managing member unitholders176,751176,888
Total noncontrolling interests568,152293,933
Total equity6,512,5915,594,938
Total liabilities and equity$12,718,553$14,088,461

See accompanying Notes t

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2018. Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective, as of December 31, 2018, at the reasonable assurance level.

Management’s Annual Report on Internal Control over Financial Reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2018.

The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report, which is included herein.

Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2018 to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and the Board of Directors of HCP, Inc.

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of HCP, Inc. and subsidiaries (the “Company”) as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2018, of the Company and our report dated February 14, 2019, expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s adoption of Accounting Standards Update (“ASU”) No. 2017-05 and ASU No. 2017-01.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ DELOITTE & TOUCHE LLP

Los Angeles, California

February 14, 2019

Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

We have adopted a Code of Business Conduct and Ethics that applies to all of our directors and employees, including our Chief Executive Officer and all senior financial officers, including our principal financial officer, principal accounting officer and controller. We have also adopted a Vendor Code of Business Conduct and Ethics applicable to our vendors and business partners. Current copies of our Code of Business Conduct and Ethics and Vendor Code of Business Conduct and Ethics are posted on our website at www.hcpi.com/codeofconduct. In addition, waivers from, and amendments to, our Code of Business Conduct and Ethics that apply to our directors and executive officers, including our principal executive officer, principal financial officer, principal accounting officer or persons performing similar functions, will be timely posted in the Investor Relations section of our website at www.hcpi.com.

We hereby incorporate by reference the information appearing under the captions “Proposal No. 1 Election of Directors,” “Our Executive Officers,” “Board of Directors and Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the our definitive proxy statement relating to our 2019 Annual Meeting of Stockholders to be held on April 25, 2019.

Item 11. Executive Compensation

We hereby incorporate by reference the information under the caption “Executive Compensation” in our definitive proxy statement relating to our 2019 Annual Meeting of Stockholders to be held on April 25, 2019.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

We hereby incorporate by reference the information under the captions “Security Ownership of Principal Stockholders, Directors and Management” and “Equity Compensation Plan Information” in our definitive proxy statement relating to our 2019 Annual Meeting of Stockholders to be held on April 25, 2019.

Item 13. Certain Relationships and Related Transactions, and Director Independence

We hereby incorporate by reference the information under the caption “Board of Directors and Corporate Governance” in our definitive proxy statement relating to our 2019 Annual Meeting of Stockholders to be held on April 25, 2019.

Item 14. Principal Accounting Fees and Services

We hereby incorporate by reference under the caption “Audit and Non-Audit Fees” in our definitive proxy statement relating to our 2019 Annual Meeting of Stockholders to be held on April 25, 2019.

PART IV

Item 15. Exhibits, Financial Statement Schedules

(a) 1. Financial Statement Schedules

The following Consolidated Financial Statements are included in Part II, Item 8-Financial Statements and Supplementary Data of this Annual Report on Form 10-K.

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets - December 31, 2018 and 2017

Consolidated Statements of Operations - for the years ended December 31, 2018, 2017 and 2016

Consolidated Statements of Comprehensive Income (Loss) - for the years ended December 31, 2018, 2017 and 2016

Consolidated Statements of Equity - for the years ended December 31, 2018, 2017 and 2016

Consolidated Statements of Cash Flows - for the years ended December 31, 2018, 2017 and 2016

Notes to Consolidated Financial Statements

(a) 2. Financial Statement Schedules

The following Consolidated Financial Statements are included in Part II, Item 8-Financial Statements and Supplementary Data of this Annual Report on Form 10-K.

Schedule II: Valuation and Qualifying Accounts

Schedule III: Real Estate and Accumulated Depreciation

(a) 3.Exhibits
ExhibitIncorporated by reference herein
NumberDescriptionFormDate Filed
3.1Articles of Restatement of HCP, dated June 1, 2012, as supplemented by the Articles Supplementary, dated July 31, 2017.Quarterly Report on Form 10-Q (File No. 001-08895)November 2, 2017
3.2Fifth Amended and Restated Bylaws of HCP, as amended through July 27, 2017.Quarterly Report on Form 10-Q (File No. 001-08895)November 2, 2017
4.1Indenture, dated as of September 1, 1993, between HCP and The Bank of New York, as Trustee.Registration Statement on Form S‑3/A (Registration No. 333‑86654)May 21, 2002
4.1.1First Supplemental Indenture dated as of January 24, 2011, to the Indenture, dated as of September 1, 1993, by and between HCP and The Bank of New York Mellon Trust Company, N.A., as Trustee.Current Report on Form 8‑K (File No. 001‑08895)January 24, 2011
4.2Indenture, dated November 19, 2012, between HCP and The Bank of New York Mellon Trust Company, N.A., as trustee.Current Report on Form 8‑K (File No. 001‑ 08895)November 19, 2012
4.2.1First Supplemental Indenture, dated November 19, 2012, between HCP and The Bank of New York Mellon Trust Company, N.A., as trustee.Current Report on Form 8‑K (File No. 001‑08895)November 19, 2012
4.2.2Second Supplemental Indenture, dated November 12, 2013, between HCP and The Bank of New York Mellon Trust Company, N.A., as trustee.Current Report on Form 8‑K (File No. 001‑08895)November 13, 2013
4.2.3Third Supplemental Indenture dated February 21, 2014, between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee.Current Report on Form 8‑K (File No. 001‑08895)February 24, 2014
4.2.4Fourth Supplemental Indenture, dated August 14, 2014, between HCP and The Bank of New York Mellon Trust Company, N.A., as trustee.Current Report on Form 8‑K (File No. 001‑08895)August 14, 2014
4.2.5Fifth Supplemental Indenture, dated January 21, 2015, between HCP and The Bank of New York Mellon Trust Company, N.A., as trustee.Current Report on Form 8‑K (File No. 001‑08895)January 21, 2015
4.2.6Sixth Supplemental Indenture, dated May 20, 2015, between HCP and The Bank of New York Mellon Trust Company, N.A., as trustee.Current Report on Form 8‑K (File No. 001‑08895)May 20, 2015
4.2.7Seventh Supplemental Indenture dated December 1, 2015, between HCP and The Bank of New York Mellon Trust Company, N.A., as trustee.Current Report on Form 8‑K (File No. 001‑08895)December 1, 2015
4.3Form of 6.750% Senior Notes due 2041.Current Report on Form 8‑K (File No. 001‑08895)January 24, 2011
4.4Form of 3.15% Senior Notes due 2022.Current Report on Form 8‑K (File No. 001‑08895)July 23, 2012
4.5Form of 2.625% Senior Notes due 2020.Current Report on Form 8‑K (File No. 001‑08895)November 19, 2012
4.6Form of 4.250% Senior Notes due 2023.Current Report on Form 8‑K (File No. 001‑08895)November 13, 2013
4.7Form of 4.20% Senior Notes due 2024.Current Report on Form 8‑K (File No. 001‑08895)February 24, 2014
4.8Form of 3.875% Senior Notes due 2024.Current Report on Form 8‑K (File No. 001‑08895)August 14, 2014
4.9Form of 3.400% Senior Notes due 2025.Current Report on Form 8‑K (File No. 001‑08895)January 21, 2015
4.10Form of 4.000% Senior Notes due 2025.Current Report on Form 8‑K (File No. 001‑08895)May 20, 2015
4.11Form of 4.000% Senior Notes due 2022.Current Report on Form 8‑K (File No. 001‑08895)December 1, 2015
10.1Second Amended and Restated Director Deferred Compensation Plan.*Quarterly Report on Form 10‑Q (File No. 001‑08895)November 3, 2009
10.2Non-Employee Directors Stock-for-Fees Program.*Quarterly Report on Form 10-Q (File No. 001‑08895)August 5, 2014
10.3Executive Severance Plan.*Quarterly Report on Form 10-Q (File No. 001-08895)November 1, 2016
10.4Executive Change in Control Severance Plan (as Amended and Restated as of May 6, 2016).*Quarterly Report on Form 10-Q (File No. 001 08895)November 1, 2016
10.52006 Performance Incentive Plan, as amended and restated.*Annex 2 to HCP’s Proxy Statement (File No. 001‑08895)March 10, 2009
10.5.1Form of Employee 2006 Performance Incentive Plan Nonqualified Stock Option Agreement.*Quarterly Report on Form 10‑Q (File No. 001‑08895)May 1, 2012
10.6HCP, Inc. 2014 Performance Incentive Plan.*Current Report on Form 8‑K (File No. 001‑08895)May 6, 2014
10.6.1Amendment No. 1 to HCP, Inc. 2014 Performance Incentive Plan.*Quarterly Report on Form 10-Q (File No. 001-08895)May 3, 2018
10.6.2Form of 2014 Performance Incentive Plan Non-NEO Restricted Stock Unit Award Agreement (adopted 2014).*Quarterly Report on Form 10-Q (File No. 001‑08895)August 5, 2014
10.6.3Form of 2014 Performance Incentive Plan Non-NEO Option Agreement (adopted 2014).*Quarterly Report on Form 10-Q (File No. 001‑08895)August 5, 2014
10.6.4Form of 2014 Performance Incentive Plan CEO 3-Year LTIP RSU Agreement (adopted 2015).*Quarterly Report on Form 10-Q (File No. 001‑08895)May 5, 2015
10.6.5Form of 2014 Performance Incentive Plan CEO 1-Year LTIP RSU Agreement (adopted 2015).*Quarterly Report on Form 10-Q (File No. 001‑08895)May 5, 2015
10.6.6Form of 2014 Performance Incentive Plan CEO Retentive LTIP RSU Agreement (adopted 2015).*Quarterly Report on Form 10-Q (File No. 001‑08895)May 5, 2015
10.6.7Form of 2014 Performance Incentive Plan NEO 3-Year LTIP RSU Agreement (adopted 2015).*Quarterly Report on Form 10-Q (File No. 001‑08895)May 5, 2015
10.6.8Form of 2014 Performance Incentive Plan NEO 3-Year LTIP RSU Agreement (adopted 2018).*Quarterly Report on Form 10-Q (File No. 001‑08895)May 3, 2018
10.6.9Form of 2014 Performance Incentive Plan NEO 1-Year LTIP RSU Agreement (adopted 2015).*Quarterly Report on Form 10-Q (File No. 001‑08895)May 5, 2015
10.6.10Form of 2014 Performance Incentive Plan NEO Retentive LTIP RSU Agreement (adopted 2015).*Quarterly Report on Form 10-Q (File No. 001‑08895)May 5, 2015
10.6.11Form of 2014 Performance Incentive Plan NEO Retentive LTIP RSU Agreement (adopted 2018).*Quarterly Report on Form 10-Q (File No. 001‑08895)May 3, 2018
10.6.12Form of 2014 Performance Incentive Plan Non-Employee Director RSU Agreement.*Quarterly Report on Form 10-Q (File No. 001‑08895)May 5, 2015
10.7Form of Directors and Officers Indemnification Agreement.*Annual Report on Form 10‑K, as amended (File No. 001‑08895)February 12, 2008
10.8Amended and Restated Dividend Reinvestment and Stock Purchase Plan.Registration Statement on Form S‑3 (Registration No. 333‑49746)November 13, 2000
10.9Amended and Restated Limited Liability Company Agreement of HCPI/Utah, LLC, dated as of January 20, 1999.Annual Report on Form 10‑K (File No. 001‑ 08895)March 29, 1999
10.9.1Amendments No. 1-9 to Amended and Restated Limited Liability Company Agreement of HCPI/Utah, LLC, dated as of January 20, 1999.Annual Report on Form 10-K (File No. 001-08895)February 13, 2018
10.9.2Tax Matters Amendment to Amended and Restated Limited Liability Company Agreement of HCPI/Utah, LLC, effective as of December 31, 2018.†
10.10Amended and Restated Limited Liability Company Agreement of HCPI/Utah II, LLC, dated as of August 17, 2001, as amended.Current Report on Form 8‑K (File No. 001‑08895)November 9, 2012
10.10.1Tax Matters Amendment to Amended and Restated Limited Liability Company Agreement of HCPI/Utah II, LLC, effective as of December 31, 2018.†
10.11Amended and Restated Limited Liability Company Agreement of HCPI/Tennessee, LLC, dated as of October 2, 2003.Quarterly Report on Form 10‑Q (File No. 001‑ 08895)November 12, 2003
10.11.1Amendment No. 1 to Amended and Restated Limited Liability Company Agreement of HCPI/Tennessee, LLC, dated as of September 29, 2004.Quarterly Report on Form 10‑Q (File No. 001‑08895)November 8, 2004
10.11.2Amendment No. 2 to Amended and Restated Limited Liability Company Agreement of HCPI/Tennessee, LLC, dated as of October 27, 2004.Annual Report on Form 10‑K (File No. 001‑08895)March 15, 2005
10.11.3Amendment No. 3 to Amended and Restated Limited Liability Company Agreement of HCPI/Tennessee, LLC and New Member Joinder Agreement, dated as of October 19, 2005, by and among HCP, HCPI/Tennessee, LLC and A. Daniel Weyland.Quarterly Report on Form 10‑Q (File No. 001‑08895)November 1, 2005
10.11.4Amendment No. 4 to Amended and Restated Limited Liability Company Agreement of HCPI/Tennessee, LLC, effective as of January 1, 2007.Annual Report on Form 10‑K, as amended (File No. 001‑08895)February 12, 2008
10.11.5Tax Matters Amendment to Amended and Restated Limited Liability Company Agreement of HCPI/Tennessee, LLC, effective as of December 31, 2018.†
10.12Amended and Restated Limited Liability Company Agreement of HCP DR MCD, LLC, dated as of February 9, 2007.Current Report on Form 8-K (File No. 001‑08895)April 20, 2012
10.12.1Tax Matters Amendment to Amended and Restated Limited Liability Company Agreement of HCP DR MCD, LLC, effective as of December 31, 2018.†
10.13Amended and Restated Limited Liability Company Agreement of HCP DR California II, LLC, dated as of June 1, 2014.Quarterly Report on Form 10-Q (File No. 001‑08895)August 5, 2014
10.13.1Tax Matters Amendment to Amended and Restated Limited Liability Company Agreement of HCP DR California II, LLC, effective as of December 31, 2018.†
10.14Credit Agreement, dated October 19, 2017, by and among HCP, as borrower, the lenders referred to therein, and Bank of America, N.A., as administrative agent.Current Report on Form 8‑K (File No. 001‑08895)October 20, 2017
10.15At-the-Market Equity Offering Sales Agreement, dated May 31, 2018, among HCP, J.P. Morgan Securities LLC, BNY Mellon Capital Markets, LLC, Citigroup Global Markets Inc., Credit Agricole Securities (USA) Inc., Credit Suisse Securities (USA) LLC, Goldman Sachs & Co. LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, RBC Capital Markets, LLC and UBS Securities LLC.Current Report on Form 8-K (File No. 001-08895)May 31, 2018
10.16Amended and Restated Master Lease and Security Agreement, dated as of November 1, 2017, by and between subsidiaries and affiliates of HCP, as lessor, and subsidiaries and affiliates of Brookdale, as lessee.**Annual Report on Form 10-K (File No. 001-08895)February 13, 2018
10.16.1First Amendment to Amended and Restated Master Lease and Security Agreement, dated as of January 10, 2018, by and between subsidiaries and affiliates of HCP, as lessor, and subsidiaries and affiliates of Brookdale, as lessee.Annual Report on Form 10-K (File No. 001-08895)February 13, 2018
21.1Subsidiaries of the Company.†
23.1Consent of Independent Registered Public Accounting Firm—Deloitte & Touche LLP.†
31.1Certification by Thomas M. Herzog, HCP’s Principal Executive Officer, Pursuant to Securities Exchange Act Rule 13a‑14(a).†
31.2Certification by Peter A. Scott, HCP’s Principal Financial Officer, Pursuant to Securities Exchange Act Rule 13a‑14(a).†
32.1Certification by Thomas M. Herzog, HCP’s Principal Executive Officer, Pursuant to Securities Exchange Act Rule 13a‑14(b) and 18 U.S.C. Section 1350.†
32.2Certification by Peter A. Scott, HCP’s Principal Financial Officer, Pursuant to Securities Exchange Act Rule 13a‑14(b) and 18 U.S.C. Section 1350.†
101.INSXBRL Instance Document.†
101.SCHXBRL Taxonomy Extension Schema Document.†
101.CALXBRL Taxonomy Extension Calculation Linkbase Document.†
101.DEFXBRL Taxonomy Extension Definition Linkbase Document.†
101.LABXBRL Taxonomy Extension Labels Linkbase Document.†
101.PREXBRL Taxonomy Extension Presentation Linkbase Document.†
*Management Contract or Compensatory Plan or Arrangement.
**Portions of this exhibit have been omitted pursuant to a request for confidential treatment with the SEC.
†Filed herewith.

Item 16. Form 10-K Summary

None.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: February 14, 2019

HCP, Inc. (Registrant)
/s/ THOMAS M. HERZOG
Thomas M. Herzog, President and Chief Executive Officer (Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

SignatureTitleDate
/s/ THOMAS M. HERZOGPresident and Chief Executive OfficerFebruary 14, 2019
Thomas M. Herzog(Principal Executive Officer), Director
/s/ PETER A. SCOTTExecutive Vice President and Chief Financial OfficerFebruary 14, 2019
Peter A. Scott(Principal Financial Officer)
/s/ SHAWN G. JOHNSTONExecutive Vice President and Chief Accounting OfficerFebruary 14, 2019
Shawn G. Johnston(Principal Accounting Officer)
/s/ BRIAN G. CARTWRIGHTChairman of the BoardFebruary 14, 2019
Brian G. Cartwright
/s/ CHRISTINE N. GARVEYDirectorFebruary 14, 2019
Christine N. Garvey
/s/ R. KENT GRIFFIN, JR.DirectorFebruary 14, 2019
R. Kent Griffin, Jr.
/s/ DAVID B. HENRYDirectorFebruary 14, 2019
David B. Henry
/s/ LYDIA H. KENNARDDirectorFebruary 14, 2019
Lydia H. Kennard
/s/ PETER L. RHEINDirectorFebruary 14, 2019
Peter L. Rhein
/s/ KATHERINE M. SANDSTROMDirectorFebruary 14, 2019
Katherine M. Sandstrom
/s/ JOSEPH P. SULLIVANDirectorFebruary 14, 2019
Joseph P. Sullivan