# Healthpeak Properties, Inc.: Form 10-Q for the period ended Jun 30, 2017

- Company: [Healthpeak Properties, Inc.](/companies/doc.md) (CIK 765880)
- Form: 10-Q
- Filed: 2017-08-01
- Accepted by EDGAR: Aug 1, 2017, 08:13 ET
- Period: 2017-06-30
- Accession: 0001628280-17-007720
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/765880/000162828017007720/hcp-10q6302017.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/765880/000162828017007720/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2017-04-01 to 2017-06-30 | $458.9m | us-gaap:Revenues |
| Revenue | 6 months, 2017-01-01 to 2017-06-30 | $951.1m | us-gaap:Revenues |
| Interest expense | 3 months, 2017-04-01 to 2017-06-30 | $77.8m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2017-01-01 to 2017-06-30 | $164.5m | us-gaap:InterestExpense |
| Income tax | 3 months, 2017-04-01 to 2017-06-30 | −$3.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2017-01-01 to 2017-06-30 | −$9.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-04-01 to 2017-06-30 | $19.4m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2017-01-01 to 2017-06-30 | $480.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2017-04-01 to 2017-06-30 | $0.04 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2017-01-01 to 2017-06-30 | $1.02 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2017-04-01 to 2017-06-30 | $0.04 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2017-01-01 to 2017-06-30 | $1.02 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2017-04-01 to 2017-06-30 | 468,839,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2017-01-01 to 2017-06-30 | 473,366,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2017-01-01 to 2017-06-30 | $431.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Dividends paid | 6 months, 2017-01-01 to 2017-06-30 | $347.1m | us-gaap:PaymentsOfDividends |
| Share repurchases | 6 months, 2017-01-01 to 2017-06-30 | $4.4m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2017-06-30 | $392.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2017-06-30 | $14.10bn | us-gaap:Assets |
| Total liabilities | at 2017-06-30 | $8.07bn | us-gaap:Liabilities |
| Long-term debt | at 2017-06-30 | $7.39bn | us-gaap:LongTermDebt |
| Shareholders' equity | at 2017-06-30 | $5.70bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 77,684 characters.

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

### Cautionary Language Regarding Forward-Looking Statements

Statements in this Quarterly Report on Form 10-Q that are not historical factual statements are “forward-looking statements.” We intend to have our forward-looking statements covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with those provisions. Forward-looking statements include, among other things, statements regarding our and our officers’ intent, belief or expectation as identified by the use of words such as “may,” “will,” “project,” “expect,” “believe,” “intend,” “anticipate,” “seek,” “forecast,” “plan,” “potential,” “estimate,” “could,” “would,” “should” and other comparable and derivative terms or the negatives thereof. Forward-looking statements reflect our current expectations and views about future events and are subject to known and unknown risks and uncertainties that could significantly affect our future financial condition and results of operations. While forward-looking statements reflect our good faith belief and assumptions we believe to be reasonable based upon current information, we can give no assurance that our expectations or forecasts will be attained. As more fully set forth under “Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, and Part II, Item 1A. “Risk Factors” in our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2017, risks and uncertainties that may cause our actual results to differ materially from the expectations contained in the forward-looking statements include, among other things:

- our reliance on a concentration of a small number of tenants and operators for a significant portion of our revenues, with our concentration in Brookdale Senior Living, Inc. ("Brookdale") increasing as a result of the consummation of the Spin-Off of Quality Care Properties, Inc. (“QCP”) on October 31, 2016;
- the financial condition of our existing and future tenants, operators and borrowers, including potential bankruptcies and downturns in their businesses, and their legal and regulatory proceedings, which results in uncertainties regarding our ability to continue to realize the full benefit of such tenants’ and operators’ leases and borrowers’ loans;
- the ability of our existing and future tenants, operators and borrowers to conduct their respective businesses in a manner sufficient to maintain or increase their revenues and to generate sufficient income to make rent and loan payments to us and our ability to recover investments made, if applicable, in their operations;
- competition for tenants and operators, including with respect to new leases and mortgages and the renewal or rollover of existing leases;
- our concentration in the healthcare property sector, particularly in life sciences, medical office buildings and hospitals, which makes our profitability more vulnerable to a downturn in a specific sector that if we were investing in multiple industries;
- availability of suitable properties to acquire at favorable prices, the competition for the acquisition and financing of those properties, and the costs of associated property development;
- our ability to negotiate the same or better terms with new tenants or operators if existing leases are not renewed or we exercise our right to foreclose on loan collateral or replace an existing tenant or operator upon default;
- the risks associated with our investments in joint ventures and unconsolidated entities, including our lack of sole decision making authority and our reliance on our partners’ financial condition and continued cooperation;
- our ability to achieve the benefits of investments within expected time frames or at all, or within expected cost projections;
- operational risks associated with third party management contracts, including the additional regulation and liabilities of our RIDEA lease structures;
- the potential impact on us and our tenants, operators and borrowers from current and future litigation matters, including the possibility of larger than expected litigation costs, adverse results and related developments;
- the effect on our tenants and operators of legislation and other legal requirements, including the Affordable Care Act and licensure, certification and inspection requirements, as well as laws addressing entitlement programs and related services, including Medicare and Medicaid, which may result in future reductions in reimbursements;
- changes in federal, state or local laws and regulations, including those affecting the healthcare industry that affect our costs of compliance or increase the costs, or otherwise affect the operations, of our tenants and operators;
- volatility or uncertainty in the capital markets, the availability and cost of capital as impacted by interest rates, changes in our credit ratings, and the value of our common stock, and other conditions that may adversely impact our ability to fund our obligations or consummate transactions, or reduce the earnings from potential transactions;
- changes in global, national and local economic conditions, and currency exchange rates;
- our ability to manage our indebtedness level and changes in the terms of such indebtedness;
- competition for skilled management and other key personnel; and
- our ability to maintain our qualification as a REIT.

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

The information set forth in this Item 2 is intended to provide readers with an understanding of our financial condition, changes in financial condition and results of operations. We will discuss and provide our analysis in the following order:

- Executive Summary
- 2017 Transaction Overview
- Dividends
- Results of Operations
- Liquidity and Capital Resources
- Off-Balance Sheet Arrangements
- Inflation
- Non-GAAP Financial Measures Reconciliations
- Critical Accounting Policies
- Recent Accounting Pronouncements

### Executive Summary

HCP, Inc., a Standard & Poor’s (“S&P”) 500 company, invests primarily in real estate serving the healthcare industry in the United States. We are a Maryland corporation organized in 1985 and qualify as a self-administered REIT. We acquire, develop, lease, manage and dispose of healthcare real estates. At June 30, 2017, our portfolio of investments, including properties in our unconsolidated joint ventures (“JVs”), consisted of interests in 799 properties.

We invest and manage our real estate portfolio for the long-term to maximize the benefit to our stockholders and support the growth of our dividends. The core elements of our strategy are: (i) to acquire, develop, lease, own and manage a diversified portfolio of quality healthcare properties across multiple geographic locations and business segments including senior housing, medical office, and life science, among others; (ii) to align ourselves with leading healthcare companies, operators and service providers, which over the long-term, should result in higher relative rental rates, net operating cash flows and appreciation of property values; (iii) to maintain adequate liquidity with long-term fixed rate debt financing with staggered maturities, which supports the longer-term nature of our investments, while reducing our exposure to interest rate volatility and refinancing risk at any point in the interest rate or credit cycles; and (iv) to continue to manage our balance sheet with a targeted financial leverage of 40% relative to our assets.

We believe that our real estate portfolio holds the potential for increased future cash flows as it is well-maintained and in desirable locations within markets where new supply is generally limited by the lack of available sites and the difficulty of obtaining the necessary licensing, other approvals and/or financing. Our strategy for maximizing the benefits from these opportunities is to: (i) work with new or existing tenants and operators to address their space and capital needs and (ii) provide high-quality property management services in order to motivate tenants to renew, expand or relocate into our properties.

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

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

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

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

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

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

### 2017 Transaction Overview

### Acquisition Transactions

In June 2017, we acquired Wateridge, a 124,000 square foot campus in the Sorrento Mesa submarket of San Diego for $26 million. Upon acquisition, we commenced repositioning one of the buildings into class-A lab space following an office-to-lab conversion strategy.

In July 2017, we acquired a portfolio of three medical office buildings in Texas for $48 million.

### Disposition and Loan Repayment Transactions

In January 2017, we sold four life science facilities in Salt Lake City, Utah for $76 million, resulting in a net gain on sale of $45 million.

In January 2017, we completed the contribution of our ownership interest in RIDEA II to an unconsolidated JV owned by HCP and an investor group led by Columbia Pacific Advisors, LLC (“the HCP/CPA JV”). In addition, RIDEA II was recapitalized with $602 million of debt, of which $360 million was provided by a third-party and $242 million was provided by HCP. In return, we received $480 million in cash proceeds from the HCP/CPA JV and $242 million in note receivables and retained an approximate 40% beneficial interest in RIDEA II (the note receivable and 40% beneficial interest are herein referred to as the “RIDEA II Investments”). This transaction resulted in HCP deconsolidating the net assets of RIDEA II and recognizing a net gain on sale of $99 million.

In March 2017, we sold 64 senior housing triple-net assets, previously under triple-net leases with Brookdale, for $1.125 billion to affiliates of Blackstone Real Estate Partners VIII, L.P., resulting in a net gain on sale of $170 million.

In March 2017, we sold our aggregate £138.5 million par value Four Seasons senior notes (“Four Seasons Notes”) for £83 million ($101 million). The disposition of the Four Seasons Notes generated a £42 million ($51 million) gain on sale as the sales price was above the previously-impaired carrying value of £41 million ($50 million). In addition, we sold our Four Seasons senior secured term loan at par plus accrued interest for £29 million ($35 million).

In February 2017, we sold a hospital within one of our DFLs in Palm Beach Gardens, Florida for $43 million to the current tenant.

In April 2017, we sold a land parcel in San Diego, California for $27 million and one life science building in San Diego, California for $5 million.

In June 2017, we received £283 million ($367 million) from the repayment of our HC-One Facility.

### Financing Activities

During the six months ended June 30, 2017, we had net repayments of $781 million on our revolving line of credit primarily using proceeds from the RIDEA II joint venture disposition, the sale of our Four Seasons Notes and the repayment of our HC-One Facility.

In March 2017, we repaid our £137 million unsecured term loan (the “2012 Term Loan”) and $472 million of mortgage debt.

In May 2017, we repaid $250 million of maturing senior unsecured notes.

In June 2017, we paid down £51 million of our £220 million unsecured term loan (the “2015 Term Loan”).

In July 2017, we repurchased $500 million of our 5.375% senior notes due 2021 and expect to record approximately $54 million of loss on debt extinguishment in the third quarter of 2017.

### Developments and Redevelopments

During the second quarter of 2017 and through July 2017, we added $116 million of new projects to our development and redevelopment pipelines including:

- Commenced $22 million of redevelopment projects at two recently-acquired life science assets in the Sorrento Mesa submarket of San Diego.
- Commenced a $40 million redevelopment of a medical office building located in the University City submarket in Philadelphia near the University of Pennsylvania.
- Entered into a joint venture agreement and commenced development on a 111 unit senior housing facility in Otay Ranch, California (San Diego MSA) for $31 million. Our share of the total construction cost is approximately $28 million with an estimated completion in the second half of 2018.
- In June, commenced development on a 79 unit senior housing facility in Waldwick, New Jersey (New York MSA) for $31 million. Our share of the total construction costs is approximately $26 million with an estimated completion in late 2018.

### Dividends

The following table summarizes our common stock cash dividends declared in 2017:

| Declaration Date | Record Date | Amount Per Share | Dividend Payable Date |
| --- | --- | ---: | --- |
| February 2 | February 15 | $0.37 | March 2 |
| April 27 | May 8 | 0.37 | May 23 |
| July 27 | August 7 | 0.37 | August 22 |

### Results of Operations

We evaluate our business and allocate resources among our reportable business segments: (i) senior housing triple-net; (ii) senior housing operating portfolio (“SHOP”); (iii) life science; and (iv) medical office. Under the medical office segment, we invest through the acquisition and development of medical office buildings (“MOBs”), which generally require a greater level of property management. Otherwise, we primarily invest, through the acquisition and development of real estate, in single tenant and operator properties. We have other non-reportable segments that are comprised primarily of our U.K. care homes, debt investments and hospitals. We evaluate performance based upon (i) property net operating income from continuing operations (“NOI”) and (ii) adjusted NOI (cash NOI) of the combined consolidated and unconsolidated investments in each segment. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 2 of our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the U.S. Securities and Exchange Commission (“SEC”), as updated by Note 2 herein.

### Non-GAAP Financial Measures

#### Net Operating Income (“NOI”)

NOI and adjusted NOI are non-U.S. generally accepted accounting principles (“GAAP”) supplemental financial measures used to evaluate the operating performance of real estate. We include properties from our consolidated portfolio, as well as our pro-rata share of properties owned by our unconsolidated joint ventures, in our NOI and adjusted NOI. We believe providing this information assists investors and analysts in estimating the economic interest in our total portfolio of real estate. Our pro-rata share information is prepared on a basis consistent with the comparable consolidated amounts, is intended to reflect our proportionate economic interest in the operating results of properties in our portfolio and is calculated by applying our actual ownership percentage for the period. We do not control the unconsolidated joint ventures, and the pro-rata presentations of revenues and expenses included in NOI (see below) do not represent our legal claim to such items. The joint venture members or partners are entitled to profit or loss allocations and distributions of cash flows according to the joint venture agreements, which provide for such allocations generally according to their invested capital.

The presentation of pro-rata information has limitations, which include, but are not limited to, the following: (i) the amounts shown on the individual line items were derived by applying our overall economic ownership interest percentage determined when applying the equity method of accounting and do not necessarily represent our legal claim to the assets and liabilities, or the revenues and expenses and (ii) other companies in our industry may calculate their pro-rata interest differently, limiting the usefulness as a comparative measure. Because of these limitations, the pro-rata financial information should not be considered independently or as a substitute for our financial statements as reported under GAAP. We compensate for these limitations by relying primarily on our GAAP financial statements, using the pro-rata financial information as a supplement.

NOI is defined as rental and related revenues, including tenant recoveries, resident fees and services, and income from DFLs, less property level operating expenses; NOI excludes all other financial statement amounts included in net income (loss) as presented in Note 13 to the Consolidated Financial Statements. Management believes NOI provides relevant and useful information because it reflects only income and operating expense items that are incurred at the property level and presents them on an unleveraged basis. Adjusted NOI is calculated as NOI after eliminating the effects of straight-line rents, DFL non-cash interest, amortization of market lease intangibles, non-refundable entrance fees, net of entrance fee amortization and lease termination fees and the impact of deferred community fee income and expense (“Adjustments to NOI”). The Adjustments to NOI and resulting Adjusted NOI for SHOP have been restated for prior periods presented to conform to the current period presentation for the adjustment to exclude the impact of deferred community fee income and expense, resulting in recognition as cash is received and expenses are paid. Adjusted NOI is oftentimes referred to as “cash NOI.” We use NOI and adjusted NOI to make decisions about resource allocations, to assess and compare property level performance, and to evaluate our same property portfolio (“SPP”), as described below. We believe that net income (loss) is the most directly comparable GAAP measure to NOI. NOI should not be viewed as an alternative measure of operating performance to net income (loss) as defined by GAAP since it does not reflect various excluded items. Further, our definition of NOI may not be comparable to the definition used by other REITs or real estate companies, as they may use different methodologies for calculating NOI. For a reconciliation of NOI and Adjusted NOI to net income (loss) by segment, refer to Note 13 to the Consolidated Financial Statements.

Operating expenses generally relate to leased medical office and life science properties and SHOP facilities. We generally recover all or a portion of our leased medical office and life science property expenses through tenant recoveries. We present expenses as operating or general and administrative based on the underlying nature of the expense. Periodically, we review the classification of expenses between categories and make revisions based on changes in the underlying nature of the expenses.

#### Same Property Portfolio

SPP NOI and adjusted NOI information allows us to evaluate the performance of our property portfolio under a consistent population by eliminating changes in the composition of our portfolio of properties. We include properties from our consolidated portfolio, as well as properties owned by our unconsolidated joint ventures in our SPP NOI and adjusted NOI (see NOI above for further discussion regarding our use of pro-rata share information and its limitations). We identify our SPP as stabilized properties that remained in operations and were consistently reported as leased properties or RIDEA properties for the duration of the year-over-year comparison periods presented, excluding assets held for sale. Accordingly, it takes a stabilized property a minimum of 12 months in operations under a consistent reporting structure to be included in our SPP. Newly acquired operating assets are generally considered stabilized at the earlier of lease-up (typically when the tenant(s) control(s) the physical use of at least 80% of the space) or 12 months from the acquisition date. Newly completed developments and redevelopments are considered stabilized at the earlier of lease-up or 24 months from the date the property is placed in service. SPP NOI excludes (i) certain non-property specific operating expenses that are allocated to each operating segment on a consolidated basis and (ii) entrance fees and related activity such as deferred expenses, reserves and management fees related to entrance fees. A property is removed from our SPP when it is classified as held for sale, sold, placed into redevelopment or changes its reporting structure. For a reconciliation of SPP to total portfolio adjusted NOI and other relevant disclosures by segment, refer to our Segment Analysis below.

#### Funds From Operations (“FFO”)

We believe FFO applicable to common shares, diluted FFO applicable to common shares, and diluted FFO per common share are important supplemental non-GAAP measures of operating performance for a REIT. Because the historical cost accounting convention used for real estate assets utilizes straight-line depreciation (except on land), such accounting presentation implies that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen and fallen with market conditions, presentations of operating results for a REIT that use historical cost accounting for depreciation could be less informative. The term FFO was designed by the REIT industry to address this issue.

FFO, as defined by the National Association of Real Estate Investment Trusts (“NAREIT”), is net income (loss) applicable to common shares (computed in accordance with GAAP), excluding gains or losses from sales of depreciable property, including any current and deferred taxes directly associated with sales of depreciable property, impairments of, or related to, depreciable real estate, plus real estate and other depreciation and amortization, and adjustments to compute our share of FFO and FFO as adjusted (see below) from joint ventures. Adjustments for joint ventures are calculated to reflect our pro-rata share of both our consolidated and unconsolidated joint ventures. We reflect our share of FFO for unconsolidated joint ventures by applying our actual ownership percentage for the period to the applicable reconciling items on an entity by entity basis. We reflect our share for consolidated joint ventures in which we do not own 100% of the equity by adjusting our FFO to remove the third party ownership share of the applicable reconciling items based on actual ownership percentage for the applicable periods. Our pro-rata share information is prepared on a basis consistent with the comparable consolidated amounts, is intended to reflect our proportionate economic interest in the operating results of properties in our portfolio and is calculated by applying our actual ownership percentage for the period. We do not control the unconsolidated joint ventures, and the pro-rata presentations of reconciling items included in FFO (see above) do not represent our legal claim to such items. The joint venture members or partners are entitled to profit or loss allocations and distributions of cash flows according to the joint venture agreements, which provide for such allocations generally according to their invested capital. See NOI above for further discussion regarding our use of pro-rata share information and its limitations.

FFO does not represent cash generated from operating activities in accordance with GAAP, is not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to net income (loss). We compute FFO in accordance with the current NAREIT definition; however, other REITs may report FFO differently or have a different interpretation of the current NAREIT definition from ours.

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

#### Funds Available for Distribution (“FAD”)

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

### Comparison of the Three and Six Months Ended June 30, 2017 to the Three and Six Months Ended June 30, 2016

### Overview

#### Three Months Ended June 30, 2017 and 2016

The following table summarizes results for the three months ended June 30, 2017 and 2016 (dollars in thousands, except per share data):

|  | Three Months Ended June 30, 2017 Amount | Diluted Per Share | Three Months Ended June 30, 2016 Amount | Diluted Per Share | Per Share Change |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net income applicable to common shares | $19,283 | $0.04 | $301,375 | $0.64 | $(0.60) |
| FFO | 164,650 | 0.35 | 333,218 | 0.71 | (0.36) |
| FFO as adjusted | 224,770 | 0.48 | 347,876 | 0.74 | (0.26) |
| FAD | 200,157 |  | 337,866 |  |  |

Net income applicable to common shares ("EPS") decreased primarily as a result of the following:

- a reduction in net income from discontinued operations due to the spinoff of QCP on October 31, 2016;
- a reduction in gains on sales of real estate during the second quarter of 2017 compared to the second quarter of 2016;
- a reduction in resident fees and services, partially offset by a reduction in operating expenses due to the partial sale and deconsolidation of RIDEA II during the first quarter of 2017;
- a reduction in incremental interest income due to the payoff of two participating development loans during the second quarter of 2016; and
- an impairment of our Tandem Health Care Loan in the second quarter of 2017.

The decrease in EPS was partially offset by:

- increased NOI from our 2016 acquisitions, annual rent escalations and developments placed in service; and
- a reduction in interest expense as a result of debt repayments in the second half of 2016 and the second quarter of 2017.

FFO decreased primarily as a result of the aforementioned events impacting EPS, excluding gains on sales of real estate, which is an adjustment to our calculation of FFO.

FFO as adjusted decreased primarily as a result of the aforementioned events impacting FFO, except for the impairment of our Tandem Health Care Loan in the second quarter of 2017 which is excluded from FFO as adjusted.

FAD decreased primarily as a result of the aforementioned events impacting FFO as adjusted and increased leasing costs and tenant capital improvements and lower lease restructure payments.

#### Six Months Ended June 30, 2017 and 2016

The following table summarizes results for the six months ended June 30, 2017 and 2016 (dollars in thousands, except per share data):

|  | Six Months Ended June 30, 2017 Amount | Diluted Per Share | Six Months Ended June 30, 2016 Amount | Diluted Per Share | Per Share Change |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net income applicable to common shares | $479,854 | $1.02 | $417,185 | $0.89 | $0.13 |
| FFO | 452,882 | 0.96 | 652,483 | 1.40 | (0.44) |
| FFO as adjusted | 464,925 | 0.99 | 669,659 | 1.43 | (0.44) |
| FAD | 418,702 |  | 646,906 |  |  |

Earnings per share (“EPS”) increased primarily as a result of the following:

- increased gains on sales of real estate during the first half of 2017 compared to the first half of 2016;
- a gain on sale of our Four Seasons Notes in the first quarter of 2017;
- a reduction in interest expense as a result of debt repayments during the second half of 2016 and the second quarter of 2017; and
- increased NOI from our 2016 acquisitions, annual rent escalations and developments placed in service.

The increase in EPS was partially offset by the following:

- a reduction in net income from discontinued operations due to the spinoff of QCP on October 31, 2016;
- a reduction in resident fees and services, partially offset by a reduction in operating expenses due to the partial sale and deconsolidation of RIDEA II during the first quarter of 2017;
- a reduction in incremental interest income due to the payoff of two participating development loans during the second quarter of 2016; and
- an impairment of our Tandem Health Care Loan in the second quarter of 2017;

FFO decreased primarily as a result of the aforementioned events impacting EPS, excluding gains on sales of real estate, which is an adjustment to our calculation of FFO.

FFO as adjusted decreased primarily as a result of the aforementioned events impacting FFO, except for the gain on sale of our Four Seasons Notes in the first quarter of 2017 offset by the impairment of our Tandem Health Care Loan in the second quarter of 2017 both of which are excluded from FFO as adjusted.

FAD decreased primarily as a result of the aforementioned events impacting FFO as adjusted, increased leasing costs and tenant capital improvements and lower lease restructure payments.

#### Segment Analysis

The tables below provide selected operating information for our SPP and total property portfolio for each of our business segments. Our SPP for the three months ended June 30, 2017 consists of 744 properties representing properties acquired or placed in service and stabilized on or prior to April 1, 2016 and that remained in operation under a consistent reporting structure through June 30, 2017. Our SPP for the six months ended June 30, 2017 consists of 737 properties representing properties acquired or placed in service and stabilized on or prior to January 1, 2016 and that remained in operation under a consistent reporting structure through June 30, 2017. Our total property portfolio consists of 799 and 853 properties at June 30, 2017 and 2016, respectively.

### Senior Housing Triple-Net

The following table summarizes results at and for the three months ended June 30, 2017 and 2016 (dollars in thousands, except per unit data):

|  | SPP Three Months Ended June 30, 2017 | 2016 | Change | Total Portfolio Three Months Ended June 30, 2017 | 2016 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Rental revenues(1) | $78,079 | $76,890 | $1,189 | $78,079 | $108,841 | $(30,762) |
| Operating expenses | (157) | (169) | 12 | (882) | (1,642) | 760 |
| NOI | 77,922 | 76,721 | 1,201 | 77,197 | 107,199 | (30,002) |
| Adjustments to NOI | (407) | (1,200) | 793 | (406) | (2,022) | 1,616 |
| Adjusted NOI | $77,515 | $75,521 | $1,994 | 76,791 | 105,177 | (28,386) |
| Non-SPP adjusted NOI |  |  |  | 724 | (29,656) | 30,380 |
| SPP adjusted NOI |  |  |  | $77,515 | $75,521 | $1,994 |
| Adjusted NOI % change |  |  | 2.6% |  |  |  |
| Property count(2) | 209 | 209 |  | 209 | 298 |  |
| Average capacity (units)(3) | 20,566 | 20,567 |  | 20,566 | 29,153 |  |
| Average annual rent per unit | $15,107 | $14,721 |  | $15,107 | $14,657 |  |

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

(2) From our 2016 presentation of SPP, we removed 71 senior housing properties from SPP that were sold and 18 senior housing properties that we transitioned to SHOP.

(3) Represents average capacity as reported by the respective tenants or operators for the 12-month period and a quarter in arrears from the periods presented.

SPP adjusted NOI increased primarily as a result of the following:

- annual rent escalations; and
- higher cash rent received from our portfolio of assets leased to Sunrise Senior Living.

Total Portfolio NOI and adjusted NOI decreased primarily as a result of the following Non-SPP impacts:

- senior housing triple-net facilities sold during 2016 and 2017; and
- the transition of 18 senior housing triple-net facilities to a RIDEA structure during the second half of 2016 and first quarter of 2017 (reported in our SHOP segment).

The decrease to Total Portfolio NOI and adjusted NOI is partially offset by the aforementioned increases to SPP.

The following table summarizes results at and for the six months ended June 30, 2017 and 2016 (dollars in thousands, except per unit data):

|  | SPP Six Months Ended June 30, 2017 | 2016 | Change | Total Portfolio Six Months Ended June 30, 2017 | 2016 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Rental revenues(1) | $152,153 | $150,518 | $1,635 | $178,112 | $215,731 | $(37,619) |
| Operating expenses | (309) | (343) | 34 | (1,993) | (3,716) | 1,723 |
| NOI | 151,844 | 150,175 | 1,669 | 176,119 | 212,015 | (35,896) |
| Adjustments to NOI | (1,922) | (5,791) | 3,869 | (2,245) | (7,466) | 5,221 |
| Adjusted NOI | $149,922 | $144,384 | $5,538 | 173,874 | 204,549 | (30,675) |
| Non-SPP adjusted NOI |  |  |  | (23,952) | (60,165) | 36,213 |
| SPP adjusted NOI |  |  |  | $149,922 | $144,384 | $5,538 |
| Adjusted NOI % change |  |  | 3.8% |  |  |  |
| Property count(2) | 204 | 204 |  | 209 | 298 |  |
| Average capacity (units)(3) | 20,167 | 20,168 |  | 23,481 | 29,100 |  |
| Average annual rent per unit | $14,899 | $14,352 |  | $14,980 | $14,314 |  |

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

(2) From our 2016 presentation of SPP, we removed 71 senior housing properties from SPP that were sold and 18 senior housing properties that we transitioned to SHOP.

(3) Represents average capacity as reported by the respective tenants or operators for the 12-month period and a quarter in arrears from the periods presented.

SPP adjusted NOI increased primarily as a result of the following:

- annual rent escalations; and
- higher cash rent received from our portfolio of assets leased to Sunrise Senior Living.

Total Portfolio NOI and adjusted NOI decreased primarily as a result of the following Non-SPP impacts:

- senior housing triple-net facilities sold during 2016 and 2017; and
- the transition of 18 senior housing triple-net facilities to a RIDEA structure during the second half of 2016 and first quarter of 2017 (reported in our SHOP segment).

The decrease to Total Portfolio NOI and adjusted NOI is partially offset by (i) increased non-SPP income from five senior housing triple-net facilities acquired in the first quarter of 2016 and (ii) the aforementioned increases to SPP.

### Senior Housing Operating Portfolio

The following table summarizes results at and for the three months ended June 30, 2017 and 2016 (dollars in thousands, except per unit data):

|  | SPP Three Months Ended June 30, 2017 | 2016 | Change | Total Portfolio Three Months Ended June 30, 2017 | 2016 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Rental revenues(1) | $92,187 | $91,478 | $709 | $125,416 | $164,202 | $(38,786) |
| HCP share of unconsolidated JV revenues | 77,681 | 75,464 | 2,217 | 81,368 | 52,855 | 28,513 |
| Operating expenses | (59,759) | (57,945) | (1,814) | (85,866) | (115,443) | 29,577 |
| HCP share of unconsolidated JV operating expenses | (64,699) | (61,803) | (2,896) | (65,487) | (42,473) | (23,014) |
| NOI | 45,410 | 47,194 | (1,784) | 55,431 | 59,141 | (3,710) |
| Adjustments to NOI | 143 | (922) | 1,065 | 4,523 | 4,248 | 275 |
| Adjusted NOI | $45,553 | $46,272 | $(719) | 59,954 | 63,389 | (3,435) |
| Non-SPP adjusted NOI |  |  |  | (14,401) | (17,117) | 2,716 |
| SPP adjusted NOI |  |  |  | $45,553 | $46,272 | $(719) |
| Adjusted NOI % change |  |  | (1.6)% |  |  |  |
| Property count(2) | 124 | 124 |  | 153 | 107 |  |
| Average capacity (units)(3) | 22,334 | 16,959 |  | 25,484 | 23,411 |  |
| Average annual rent per unit | $50,592 | $49,696 |  | $52,345 | $56,237 |  |

(1) Represents rental and related revenues.

(2) From our past presentation of SPP, we have recast the components of SPP to reflect our retained 40% equity interest in RIDEA II within HCP share of unconsolidated JV revenues and operating expenses resulting from our deconsolidation of RIDEA II during the first quarter of 2017.

(3) Represents average capacity as reported by the respective tenants or operators for the 12-month period and a quarter in arrears from the periods presented.

SPP NOI and adjusted NOI decreased primarily as a result of the following:

- higher expense growth and occupancy declines; partially offset by
- increased rates for resident fees and services.

Total Portfolio NOI and adjusted NOI decreased primarily as a result of the aforementioned decreases to SPP and the following impacts to non-SPP:

- decreased non-SPP income from our partial sale of RIDEA II; partially offset by
- non-SPP income for 18 senior housing triple-net assets transitioned to SHOP during the second half of 2016 and first quarter of 2017.

The following table summarizes results at and for the six months ended June 30, 2017 and 2016 (dollars in thousands, except per unit data):

|  | SPP Six Months Ended June 30, 2017 | 2016 | Change | Total Portfolio Six Months Ended June 30, 2017 | 2016 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Rental revenues(1) | $185,855 | $183,830 | $2,025 | $265,644 | $329,964 | $(64,320) |
| HCP share of unconsolidated JV revenues | 154,362 | 150,255 | 4,107 | 157,731 | 103,284 | 54,447 |
| Operating expenses | (118,340) | (115,729) | (2,611) | (180,405) | (229,446) | 49,041 |
| HCP share of unconsolidated JV operating expenses | (126,588) | (122,698) | (3,890) | (125,014) | (83,668) | (41,346) |
| NOI | 95,289 | 95,658 | (369) | 117,956 | 120,134 | (2,178) |
| Adjustments to NOI | (193) | (1,304) | 1,111 | 7,679 | 8,642 | (963) |
| Adjusted NOI | $95,096 | $94,354 | $742 | 125,635 | 128,776 | (3,141) |
| Non-SPP adjusted NOI |  |  |  | (30,539) | (34,422) | 3,883 |
| SPP adjusted NOI |  |  |  | $95,096 | $94,354 | $742 |
| Adjusted NOI % change |  |  | 0.8% |  |  |  |
| Property count(2) | 123 | 123 |  | 153 | 107 |  |
| Average capacity (units)(3) | 21,703 | 16,829 |  | 25,491 | 23,386 |  |
| Average annual rent per unit | $51,532 | $49,939 |  | $53,712 | $56,119 |  |

(1) Represents rental and related revenues.

(2) From our past presentation of SPP, we have recast the components of SPP to reflect our retained 40% equity interest in RIDEA II within HCP share of unconsolidated JV revenues and operating expenses resulting from our deconsolidation of RIDEA II during the first quarter of 2017.

(3) Represents average capacity as reported by the respective tenants or operators for the 12-month period and a quarter in arrears from the periods presented.

SPP adjusted NOI increased primarily as a result of the following:

- increased rates for resident fees and services; partially offset by
- higher expense growth and a decline in occupancy.

Total Portfolio NOI and adjusted NOI decreased primarily as a result of decreased non-SPP income from our partial sale of RIDEA II, partially offset by the aforementioned increases to SPP and increases to non-SPP income from the transition of 18 senior housing triple-net assets to SHOP.

### Life Science

The following table summarizes results at and for the three months ended June 30, 2017 and 2016 (dollars and square feet in thousands, except per square foot data):

|  | SPP Three Months Ended June 30, 2017 | 2016 | Change | Total Portfolio Three Months Ended June 30, 2017 | 2016 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Rental revenues(1) | $81,740 | $79,247 | $2,493 | $86,730 | $90,201 | $(3,471) |
| HCP share of unconsolidated JV revenues | 1,975 | 1,870 | 105 | 2,004 | 1,898 | 106 |
| Operating expenses | (16,559) | (15,355) | (1,204) | (18,744) | (17,961) | (783) |
| HCP share of unconsolidated JV operating expenses | (429) | (400) | (29) | (429) | (400) | (29) |
| NOI | 66,727 | 65,362 | 1,365 | 69,561 | 73,738 | (4,177) |
| Adjustments to NOI | 1,022 | 1 | 1,021 | (91) | (544) | 453 |
| Adjusted NOI | $67,749 | $65,363 | $2,386 | 69,470 | 73,194 | (3,724) |
| Non-SPP adjusted NOI |  |  |  | (1,721) | (7,831) | 6,110 |
| SPP adjusted NOI |  |  |  | $67,749 | $65,363 | $2,386 |
| Adjusted NOI % change |  |  | 3.7% |  |  |  |
| Property count(2) | 116 | 116 |  | 119 | 117 |  |
| Average occupancy | 96.2% | 98.2% |  | 96.4% | 98.4% |  |
| Average occupied square feet | 6,695 | 6,825 |  | 6,948 | 7,620 |  |
| Average annual total revenues per occupied square foot | $52 | $48 |  | $52 | $49 |  |
| Average annual base rent per occupied square foot | $42 | $39 |  | $42 | $40 |  |

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

(2) From our past presentation of SPP for the three months ended June 30, 2016, we removed five life science facilities that were sold.

SPP NOI and adjusted NOI increased primarily as a result of the following:

- mark-to-market lease renewals;
- new leasing activity; and,
- specific to adjusted NOI, annual rent escalations.

Total Portfolio NOI and adjusted NOI decreased primarily as a result of the following impacts to Non-SPP:

- decreased income from the sale of life science facilities in 2016 and 2017; partially offset by
- increased income from (i) increased occupancy in portions of a development placed in operations in 2016 and 2017 and (ii) life science acquisitions in 2016 and 2017.

The decrease in Total Portfolio NOI and adjusted NOI was also partially offset by the aforementioned increases to SPP.

The following table summarizes results at and for the six months ended June 30, 2017 and 2016 (dollars and square feet in thousands, except per square foot data):

|  | SPP Six Months Ended June 30, 2017 | 2016 | Change | Total Portfolio Six Months Ended June 30, 2017 | 2016 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Rental revenues(1) | $162,360 | $156,232 | $6,128 | $172,050 | $179,149 | $(7,099) |
| HCP share of unconsolidated JV revenues | 3,887 | 3,665 | 222 | 3,944 | 3,708 | 236 |
| Operating expenses | (31,723) | (29,359) | (2,364) | (36,064) | (34,704) | (1,360) |
| HCP share of unconsolidated JV operating expenses | (800) | (774) | (26) | (800) | (774) | (26) |
| NOI | 133,724 | 129,764 | 3,960 | 139,130 | 147,379 | (8,249) |
| Adjustments to NOI | 1,350 | (73) | 1,423 | (345) | (1,217) | 872 |
| Adjusted NOI | $135,074 | $129,691 | $5,383 | 138,785 | 146,162 | (7,377) |
| Non-SPP adjusted NOI |  |  |  | (3,711) | (16,471) | 12,760 |
| SPP adjusted NOI |  |  |  | $135,074 | $129,691 | $5,383 |
| Adjusted NOI % change |  |  | 4.2% |  |  |  |
| Property count(2) | 116 | 116 |  | 119 | 117 |  |
| Average occupancy | 96.7% | 98.0% |  | 96.3% | 98.2% |  |
| Average occupied square feet | 6,726 | 6,808 |  | 6,976 | 7,640 |  |
| Average annual total revenues per occupied square foot | $51 | $48 |  | $51 | $48 |  |
| Average annual base rent per occupied square foot | $42 | $39 |  | $42 | $40 |  |

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

(2) From our past presentation of SPP for the six months ended June 30, 2016, we removed five life science facilities that were sold.

SPP NOI and adjusted NOI increased primarily as a result of the following:

- mark-to-market lease renewals;
- new leasing activity; and,
- specific to adjusted NOI, annual rent escalations.

Total Portfolio NOI and adjusted NOI decreased primarily as a result of the following impacts to Non-SPP:

- decreased income from the sale of life science facilities in 2016 and 2017; partially offset by
- increased income from (i) increased occupancy in portions of a development placed in operations in 2016 and 2017 and (ii) life science acquisitions in 2016 and 2017.

The decrease in Total Portfolio NOI and adjusted NOI was also partially offset by the aforementioned increases to SPP.

### Medical Office

The following table summarizes results at and for the three months ended June 30, 2017 and 2016 (dollars and square feet in thousands, except per square foot data):

|  | SPP Three Months Ended June 30, 2017 | 2016 | Change | Total Portfolio Three Months Ended June 30, 2017 | 2016 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Rental revenues(1) | $101,305 | $98,712 | $2,593 | $119,164 | $110,205 | $8,959 |
| HCP share of unconsolidated JV revenues | 473 | 468 | 5 | 496 | 524 | (28) |
| Operating expenses | (38,449) | (36,941) | (1,508) | (46,581) | (43,028) | (3,553) |
| HCP share of unconsolidated JV operating expenses | (145) | (154) | 9 | (146) | (155) | 9 |
| NOI | 63,184 | 62,085 | 1,099 | 72,933 | 67,546 | 5,387 |
| Adjustments to NOI | 568 | 29 | 539 | (769) | (753) | (16) |
| Adjusted NOI | $63,752 | $62,114 | $1,638 | 72,164 | 66,793 | 5,371 |
| Non-SPP adjusted NOI |  |  |  | (8,412) | (4,679) | (3,733) |
| SPP adjusted NOI |  |  |  | $63,752 | $62,114 | $1,638 |
| Adjusted NOI % change |  |  | 2.6% |  |  |  |
| Property count(2) | 215 | 215 |  | 239 | 227 |  |
| Average occupancy | 91.9% | 91.9% |  | 92.0% | 91.4% |  |
| Average occupied square feet | 14,502 | 14,519 |  | 16,833 | 15,728 |  |
| Average annual total revenues per occupied square foot | $28 | $27 |  | $28 | $28 |  |
| Average annual base rent per occupied square foot | $24 | $23 |  | $24 | $24 |  |

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

(2) From our past presentation of SPP, we removed two MOBs that were sold and seven MOBs that were placed into redevelopment.

SPP NOI and adjusted NOI increased primarily as a result of mark-to-market lease renewals and new leasing activity. Additionally, SPP adjusted NOI increased as a result of annual rent escalations.

Total Portfolio NOI and adjusted NOI increased primarily as a result of the aforementioned increases to SPP and the following impacts to Non-SPP:

- increased income from 2016 acquisitions; and
- increased occupancy in former redevelopment and development properties that have been placed into operations; partially offset by
- decreased income from the sale of four MOBs during 2016 and 2017 and the placement of an MOB into redevelopment.

The following table summarizes results at and for the six months ended June 30, 2017 and 2016 (dollars and square feet in thousands, except per square foot data):

|  | SPP Six Months Ended June 30, 2017 | 2016 | Change | Total Portfolio Six Months Ended June 30, 2017 | 2016 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Rental revenues(1) | $201,561 | $196,027 | $5,534 | $237,535 | $218,228 | $19,307 |
| HCP share of unconsolidated JV revenues | 940 | 937 | 3 | 985 | 1,003 | (18) |
| Operating expenses | (75,524) | (73,179) | (2,345) | (91,444) | (84,977) | (6,467) |
| HCP share of unconsolidated JV operating expenses | (288) | (304) | 16 | (288) | (304) | 16 |
| NOI | 126,689 | 123,481 | 3,208 | 146,788 | 133,950 | 12,838 |
| Adjustments to NOI | 745 | (495) | 1,240 | (1,739) | (1,548) | (191) |
| Adjusted NOI | $127,434 | $122,986 | $4,448 | 145,049 | 132,402 | 12,647 |
| Non-SPP adjusted NOI |  |  |  | (17,615) | (9,416) | (8,199) |
| SPP adjusted NOI |  |  |  | $127,434 | $122,986 | $4,448 |
| Adjusted NOI % change |  |  | 3.6% |  |  |  |
| Property count(2) | 215 | 215 |  | 239 | 227 |  |
| Average occupancy | 92.0% | 91.9% |  | 92.0% | 91.3% |  |
| Average occupied square feet | 14,522 | 14,511 |  | 16,797 | 15,669 |  |
| Average annual total revenues per occupied square foot | $28 | $27 |  | $28 | $28 |  |
| Average annual base rent per occupied square foot | $24 | $23 |  | $24 | $24 |  |

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

(2) From our past presentation of SPP, we removed two MOBs that were sold and seven MOBs that were placed into redevelopment.

SPP NOI and adjusted NOI increased primarily as a result of mark-to-market lease renewals and new leasing activity. Additionally, SPP adjusted NOI increased as a result of annual rent escalations.

Total Portfolio NOI and adjusted NOI increased primarily as a result of the aforementioned increases to SPP and the following impacts to Non-SPP:

- increased income from 2016 acquisitions; and
- increased occupancy in former redevelopment and development properties that have been placed into operations; partially offset by
- decreased income from the sale of four MOBs during 2016 and 2017 and the placement of an MOB into redevelopment.

### Other Income and Expense Items

The following table summarizes our other income and expense items results for the three and six months ended June 30, 2017 and 2016 (in thousands):

|  | Three Months Ended June 30, 2017 | 2016 | Change | Six Months Ended June 30, 2017 | 2016 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest income | $20,869 | $32,787 | $(11,918) | $39,200 | $50,816 | $(11,616) |
| Interest expense | 77,788 | 121,333 | (43,545) | 164,506 | 243,395 | (78,889) |
| Depreciation and amortization | 130,751 | 139,919 | (9,168) | 267,305 | 279,774 | (12,469) |
| General and administrative | 21,286 | 22,779 | (1,493) | 43,764 | 48,230 | (4,466) |
| Acquisition and pursuit costs | 867 | 823 | 44 | 1,924 | 3,298 | (1,374) |
| Impairment, net | 56,682 | — | 56,682 | 56,682 | — | 56,682 |
| Gain on sales of real estate, net | 412 | 119,614 | (119,202) | 317,670 | 119,614 | 198,056 |
| Other income, net | 71 | 2,340 | (2,269) | 51,279 | 3,632 | 47,647 |
| Income tax benefit (expense) | 2,987 | 2,179 | 808 | 9,149 | (1,525) | 10,674 |
| Equity income (loss) from unconsolidated joint ventures | 240 | (1,067) | 1,307 | 3,509 | (1,975) | 5,484 |
| Total discontinued operations | — | 107,375 | (107,375) | — | 175,783 | (175,783) |
| Noncontrolling interests’ share in earnings | (2,718) | (3,125) | 407 | (5,750) | (6,751) | 1,001 |

#### Interest income

Interest income decreased for the three and six months ended June 30, 2017 as a result of incremental interest income received during the second quarter of 2016 due to the payoff of two participating development loans.

#### Interest expense

Interest expense decreased for the three and six months ended June 30, 2017 as a result of senior unsecured notes and mortgage debt payoffs, which occurred primarily in the second half of 2016.

Over 95% and 90% of our total debt, inclusive of $44 million and $365 million of variable rate debt swapped to fixed through interest rate swaps, was fixed–rate debt as of June 30, 2017 and 2016, respectively. At June 30, 2017, our fixed-rate debt and variable rate debt had weighted average interest rates of 4.29% and 1.58%, respectively. At June 30, 2016, our fixed-rate debt and variable rate debt had weighted average interest rates of 4.73% and 1.89%, respectively. For a more detailed discussion of our interest rate risk, see “Quantitative and Qualitative Disclosures About Market Risk” in Item 3 below.

#### Depreciation and amortization expense

Depreciation and amortization expense decreased for the three and six months ended June 30, 2017 primarily as a result of the sale of 64 senior housing triple-net assets and the deconsolidation of RIDEA II during the first quarter of 2017, partially offset by depreciation and amortization of assets acquired during 2016.

#### General and administrative expenses

General and administrative expenses decreased for the three and six months ended June 30, 2017 primarily as a result of lower stock compensation expense.

#### Impairments

Impairments increased for the three and six months ended June 30, 2017 as a result of the impairment of our Tandem Health Care Loan in the second quarter of 2017. See Note 6 to the Consolidated Financial Statements for further information related to our Tandem Health Care Loan.

#### Gain on sales of real estate, net

During the six months ended June 30, 2017 (primarily in the first quarter of 2017), we sold 64 senior housing triple-net assets, five life science facilities and a 40% interest in RIDEA II and recognized total net gain on sales of real estate of $318 million. During the three months ended June 30, 2016, we sold five post-acute/skilled nursing and two senior housing facilities for $130 million, a life science facility for $74 million, two MOBs for $19 million and a senior housing facility for $6 million, recognizing a total net gain on sales of $120 million.

#### Other income, net

Other income, net, increased for the six months ended June 30, 2017 primarily as a result of the gain on sale of our Four Seasons Notes.

#### Income tax expense

The decrease in income taxes for the six months ended June 30, 2017 was primarily the result of: (i) a $5 million tax benefit from the sale of a 40% interest in RIDEA II in 2017 and (ii) a $4 million income tax expense associated with state built-in gain tax for the disposition of certain real estate assets during 2016.

#### Equity income (loss) from unconsolidated joint ventures

The increase in equity income from unconsolidated joint ventures for the three and six months ended June 30, 2017 was primarily the result of income from our investment in RIDEA II in our SHOP segment.

#### Total discontinued operations

For the three and six months ended June 30, 2017, there were no discontinued operations. Discontinued operations for the three and six months ended June 30, 2016 relates to income from the operations of QCP.

### Liquidity and Capital Resources

We anticipate that our cash flow from operations, available cash balances and cash from our various financing activities will be adequate for at least the next 12 months for purposes of: (i) funding recurring operating expenses; (ii) meeting debt service requirements, including principal payments and maturities; and (iii) satisfying our distributions to our stockholders and non-controlling interest members.

Our principal investing needs for the next 12 months are to:

- fund capital expenditures, including tenant improvements and leasing costs; and
- fund future acquisition, transactional and development activities.

We anticipate satisfying these future investing needs using one or more of the following:

- issuance of common or preferred stock;
- issuance of additional debt, including unsecured notes and mortgage debt;
- draws on our credit facilities; and/or
- sale or exchange of ownership interests in properties.

Access to capital markets impacts our cost of capital and ability to refinance maturing indebtedness, as well as our ability to fund future acquisitions and development through the issuance of additional securities or secured debt. Credit ratings impact our ability to access capital and directly impact our cost of capital as well. For example, as noted below, our revolving line of credit facility accrues interest at a rate per annum equal to LIBOR plus a margin that depends upon our credit ratings. We also pay a facility fee on the entire revolving commitment that depends upon our credit ratings. At July 28, 2017, we had a credit rating of BBB from Fitch, Baa2 from Moody’s and BBB from S&P Global on our senior unsecured debt securities.

### Cash Flow Summary

The following summary discussion of our cash flows is based on the consolidated statements of cash flows and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below.

Cash and cash equivalents were $392 million and $95 million at June 30, 2017 and December 31, 2016, respectively, representing an increase of $297 million. The following table sets forth changes in cash flows (in thousands):

|  | Six Months Ended June 30, 2017 | 2016 | Change |
| --- | ---: | ---: | ---: |
| Net cash provided by operating activities | $431,589 | $666,912 | $(235,323) |
| Net cash provided by (used in) investing activities | 1,957,586 | (153,618) | 2,111,204 |
| Net cash used in financing activities | (2,092,167) | (742,748) | (1,349,419) |

The decrease in operating cash flow is primarily the result of (i) decreased Adjusted NOI related to the QCP Spin-Off and dispositions in the second half of 2016 and first half of 2017 and (ii) decreased interest received from loan repayments during the first half of 2017; partially offset by (i) 2016 acquisitions, (ii) annual rent increases, and (iii) decreased interest paid as a result of lower balances on our senior unsecured notes, term loans and line of credit. Our cash flow from operations is dependent upon the occupancy levels of our buildings, rental rates on leases, our tenants’ performance on their lease obligations, the level of operating expenses and other factors.

The following are significant investing and financing activities for the six months ended June 30, 2017:

- received net proceeds of $1.7 billion from the sale of real estate, including the sale and recapitalization of RIDEA II;
- received net proceeds of $550 million primarily from the sale of our Four Seasons investments, the repayment of our HC-One Facility, and a DFL repayment;
- made investments of $233 million primarily for the development of real estate;
- repaid $1.7 billion under our bank line of credit, 2012 Term Loan, 2015 Term Loan, senior unsecured notes and mortgage debt; and
- paid dividends on common stock of $347 million.

### Debt

See Note 10 in the Consolidated financial Statements for information about our outstanding debt.

See “2017 Transaction Overview” for further information regarding our significant financing activities through August 1, 2017.

### Equity

At June 30, 2017, we had 469 million shares of common stock outstanding, equity totaled $6.0 billion, and our equity securities had a market value of $15.2 billion.

At June 30, 2017, non-managing members held an aggregate of 4 million units in five limited liability companies (“DownREITs”) for which we are the managing member. The DownREIT units are exchangeable for an amount of cash approximating the then-current market value of shares of our common stock or, at our option, shares of our common stock (subject to certain adjustments, such as stock splits and reclassifications). At June 30, 2017 the DownREIT units were convertible into 7 million shares of our common stock.

#### At-The-Market Program

In June 2015, we established an at-the-market program, in connection with the renewal of our Shelf Registration Statement. Under this program, we may sell shares of our common stock from time to time having an aggregate gross sales price of up to $750 million through a consortium of banks acting as sales agents or directly to the banks acting as principals. There was no activity during the six months ended June 30, 2017 and, at June 30, 2017, shares of our common stock having an aggregate gross sales price of $676 million were available for sale under the at-the-market program. Actual future sales will depend upon a variety of factors, including but not limited to market conditions, the trading price of our common stock and our capital needs. We have no obligation to sell the remaining shares available for sale under our program.

#### Shelf Registration

We filed a prospectus with the SEC as part of a registration statement on Form S-3ASR, using a shelf registration process, which expires in June 2018. Under the “shelf” process, we may sell any combination of the securities described in the prospectus through one or more offerings. The securities described in the prospectus include common stock, preferred stock, depositary shares, debt securities and warrants.

### Off-Balance Sheet Arrangements

We own interests in certain unconsolidated joint ventures as described in Note 7 to the Consolidated Financial Statements. Except in limited circumstances, our risk of loss is limited to our investment in the joint venture and any outstanding loans receivable. In addition, we have certain properties which serve as collateral for debt that is owed by a previous owner of certain of our facilities. Our risk of loss for these certain properties is limited to the outstanding debt balance plus penalties, if any. We have no other material off-balance sheet arrangements that we expect would materially affect our liquidity and capital resources except those included in our Annual Report on Form 10-K for the year ended December 31, 2016 in “Contractual Obligations” under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

### Non-GAAP Financial Measures Reconciliations

The following is a reconciliation from net income applicable to common shares, the most directly comparable financial measure calculated and presented in accordance with GAAP, to FFO, FFO as adjusted and FAD (in thousands, except per share data):

|  | Three Months Ended June 30, 2017 | 2016 | Six Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Net income applicable to common shares | $19,283 | $301,375 | $479,854 | $417,185 |
| Real estate related depreciation and amortization | 130,751 | 141,386 | 267,305 | 282,708 |
| Other depreciation and amortization(1) | 2,347 | 2,974 | 5,358 | 5,936 |
| Gain on sales of real estate, net | (412) | (119,614) | (317,670) | (119,614) |
| Taxes associated with real estate dispositions(2) | 1 | — | (5,498) | 53,177 |
| Equity (income) loss from unconsolidated joint ventures | (240) | 1,067 | (3,509) | 1,975 |
| FFO from unconsolidated joint ventures | 16,554 | 11,172 | 34,862 | 21,550 |
| Noncontrolling interests’ and participating securities’ share in earnings | 2,818 | 3,467 | 6,424 | 7,402 |
| Noncontrolling interests’ and participating securities’ share in FFO | (6,452) | (8,609) | (14,244) | (17,836) |
| FFO applicable to common shares | 164,650 | 333,218 | 452,882 | 652,483 |
| Distributions on dilutive convertible units and other | — | 3,525 | 3,654 | 7,109 |
| Diluted FFO applicable to common shares | $164,650 | $336,743 | $456,536 | $659,592 |
| Weighted average shares used to calculate diluted FFO per common share | 468,839 | 473,149 | 473,366 | 472,667 |
| Impact of adjustments to FFO: |  |  |  |  |
| Transaction-related items(3) | $840 | $14,658 | $1,896 | $17,176 |
| Other impairment, net(4) | 56,682 | — | 5,787 | — |
| Litigation costs | 3,366 |  | 5,205 | — |
| Foreign currency remeasurement gains | (768) | — | (845) | — |
|  | $60,120 | $14,658 | $12,043 | $17,176 |
| FFO as adjusted applicable to common shares | $224,770 | $347,876 | $464,925 | $669,659 |
| Distributions on dilutive convertible units and other | 1,738 | 3,503 | 3,632 | 7,083 |
| Diluted FFO as adjusted applicable to common shares | $226,508 | $351,379 | $468,557 | $676,742 |
| Diluted FFO as adjusted per common share | $0.48 | $0.74 | $0.99 | $1.43 |
| Weighted average shares used to calculate diluted FFO as adjusted per common share | 473,528 | 473,149 | 473,366 | 472,667 |

52

|  | Three Months Ended June 30, 2017 | 2016 | Six Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| FFO as adjusted applicable to common shares | $224,770 | $347,876 | $464,925 | $669,659 |
| Amortization of deferred compensation | 3,327 | 4,160 | 7,092 | 9,505 |
| Amortization of deferred financing costs | 3,843 | 5,281 | 7,702 | 10,561 |
| Straight-line rents | (3,168) | (3,541) | (8,176) | (11,117) |
| Other depreciation and amortization | (2,347) | (2,974) | (5,358) | (5,935) |
| Leasing costs and tenant and capital improvements(5) | (27,834) | (21,872) | (51,121) | (42,354) |
| Lease restructure payments | 314 | 6,318 | 854 | 12,612 |
| CCRC entrance fees(6) | 4,713 | 6,046 | 8,362 | 11,549 |
| Deferred income taxes | (4,342) | (2,604) | (6,716) | (5,546) |
| Other FAD adjustments | 881 | (824) | 1,138 | (2,028) |
| FAD applicable to common shares | $200,157 | $337,866 | $418,702 | $646,906 |
| Distributions on dilutive convertible units and other | 1,738 | 3,525 | — | 7,109 |
| Diluted FAD applicable to common shares | $201,895 | $341,391 | $418,702 | $654,015 |

The following is a reconciliation, on a per share basis, from net income (loss) applicable to common shares, the most directly comparable financial measure calculated and presented in accordance with GAAP, to FFO and FFO as adjusted:

|  | Three Months Ended June 30, 2017 | 2016 | Six Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Diluted earnings per common share | $0.04 | $0.64 | $1.02 | $0.89 |
| Depreciation and amortization | 0.28 | 0.30 | 0.56 | 0.61 |
| Other depreciation and amortization | — | 0.01 | 0.01 | 0.01 |
| Gain on sales of real estate, net | — | — | (0.67) | — |
| Taxes associated with real estate dispositions | — | (0.25) | (0.01) | (0.14) |
| Joint venture and participating securities FFO adjustments | 0.03 | 0.01 | 0.05 | 0.03 |
| Diluted FFO per common shares | $0.35 | $0.71 | $0.96 | $1.40 |
| Transaction-related items(3) | — | 0.03 | 0.01 | 0.03 |
| Other impairment, net(4) | 0.12 | — | 0.01 | — |
| Litigation costs | 0.01 | — | 0.01 | — |
| Diluted FFO as adjusted per common shares | $0.48 | $0.74 | $0.99 | $1.43 |

(1) Other depreciation and amortization includes DFL depreciation and lease incentive amortization (reduction of straight-line rents) for the consideration given to terminate the 30 purchase options on the 153-property amended lease portfolio in the 2014 Brookdale transaction.

(2) For the six months ended June 30, 2017, represents income tax benefit associated with the disposition of real estate assets in our RIDEA II transaction. For the six months ended June 30, 2016, represents income tax expense associated with the state built-in gain tax payable upon the disposition of specific real estate assets, of which $49 million relates to the HCR ManorCare, Inc. real estate portfolio.

(3) On January 1, 2017, we early adopted the Financial Accounting Standards Board Accounting Standards Update No. 2017-01, *Clarifying the Definition of a Business (“*ASU 2017-01”) which prospectively results in recognizing the majority of our real estate acquisitions as asset acquisitions rather than business combinations. Acquisition and pursuit costs relating to completed asset acquisitions are capitalized, including those costs incurred prior to January 1, 2017. Real estate acquisitions completed prior to January 1, 2017 were deemed business combinations and the related acquisition and pursuit costs were expensed as incurred. For the three and six months ended June 30, 2016, primarily relates to the QCP spin-off.

(4) For the three months ended June 30, 2017, relates to the impairment of our Tandem Health Care Loan. For the six months ended June 30, 2017, relates to the impairment of our Tandem Health Care Loan, net of the impairment recovery upon the sale of our Four Seasons Notes in the first quarter of 2017.

(5) Includes our share of leasing costs and tenant and capital improvements from unconsolidated joint ventures.

(6) Represents our 49% share of non-refundable entrance fees as the fees are collected by our CCRC JV, net of reserves and CCRC JV entrance fee amortization.

### Critical Accounting Policies

The preparation of financial statements in conformity with U.S. GAAP requires our management to use judgment in the application of accounting policies, including making estimates and assumptions. We base estimates on the best information available to us at the time, our experience and on various other assumptions believed to be reasonable under the circumstances. These estimates affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, it is possible that different accounting would have been applied, resulting in a different presentation of our consolidated financial statements. From time to time, we re- evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2016 in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 2 to the Consolidated Financial Statements. There have been no significant changes to our critical accounting policies during 2017.

### Recent Accounting Pronouncements

See Note 2 to the Consolidated Financial Statements for the impact of new accounting standards.

## Market risk

As filed, 4,669 characters.

We are exposed to various market risks, including the potential loss arising from adverse changes in interest rates and foreign currency exchange rates, specifically the GBP. We use derivative financial instruments in the normal course of business to mitigate interest rate and foreign currency risk. We do not use derivative financial instruments for speculative or trading purposes. Derivatives are recorded on the consolidated balance sheets at fair value (see Note 19 to the Consolidated Financial Statements).

To illustrate the effect of movements in the interest rate and foreign currency markets, we performed a market sensitivity analysis on our hedging instruments. We applied various basis point spreads to the underlying interest rate curves and foreign currency exchange rates of the derivative portfolio in order to determine the change in fair value. Assuming a one percentage point change in the underlying interest rate curve, the estimated change in fair value of each of the underlying derivative instruments would not exceed $3 million. Assuming a one percentage point change in the underlying foreign currency exchange rates, the estimated change in fair value of each of the underlying derivative instruments would not exceed $2 million.

*Interest Rate Risk.* At June 30, 2017, we are exposed to market risks related to fluctuations in interest rates primarily on variable rate debt. At June 30, 2017, $44 million of our variable-rate debt was hedged by interest rate swap transactions. The interest rate swaps are designated as cash flow hedges, with the objective of managing the exposure to interest rate risk by converting the interest rates on our variable-rate debt to fixed interest rates.

Interest rate fluctuations will generally not affect our future earnings or cash flows on our fixed rate debt and assets until their maturity or earlier prepayment and refinancing. If interest rates have risen at the time we seek to refinance our fixed rate debt, whether at maturity or otherwise, our future earnings and cash flows could be adversely affected by additional borrowing costs. Conversely, lower interest rates at the time of refinancing may reduce our overall borrowing costs. However, interest rate changes will affect the fair value of our fixed rate instruments. A one percentage point increase in interest rates would change the fair value of our fixed rate debt and investments by approximately $270 million and $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 increase in the interest rate related to the variable-rate debt and variable-rate investments, and assuming no other changes in the outstanding balance at June 30, 2017, our annual interest expense and interest income would increase by approximately $4 million and $1 million, respectively.

*Foreign Currency Risk.* At June 30, 2017, our exposure to foreign currencies primarily relates to U.K. investments in leased real estate, senior notes and related GBP denominated cash flows. Our foreign currency exposure is partially mitigated through the use of GBP denominated borrowings and foreign currency swap contracts. Based solely on our operating results for the three months ended June 30, 2017, including the impact of existing hedging arrangements, if the value of the GBP relative to the U.S. dollar were to increase or decrease by 10% compared to the average exchange rate during the quarter ended June 30, 2017, our cash flows would have decreased or increased, as applicable, by less than $1 million.

*Market Risk.* We have investments in marketable debt securities classified as held-to-maturity because we have the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are recorded at amortized cost and adjusted for the amortization of premiums and discounts through maturity. We consider a variety of factors in evaluating an other-than-temporary decline in value, such as: the length of time and the extent to which the market value has been less than our current adjusted carrying value; the issuer’s financial condition, capital strength and near-term prospects; any recent events specific to that issuer and economic conditions of its industry; and our investment horizon in relationship to an anticipated near-term recovery in the market value, if any. At June 30, 2017, both the fair value and carrying value of marketable debt securities was $18 million.

## Controls and procedures

As filed, 2,062 characters.

*Disclosure Controls and Procedures.* We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2017. Based upon that evaluation, our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer) concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2017.

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

## Risk factors

As filed, 267 characters.

There are no material changes to the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016, as updated by Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017.

Filed Aug 1, 2017.
Source: SEC EDGAR, the filing index for accession 0001628280-17-007720. Last ingested by Listed: Nov 14, 2026, 21:09 ET. No prices; not investment advice.