# Healthpeak Properties, Inc.: Form 10-K for the period ended Dec 31, 2017 - Company: [Healthpeak Properties, Inc.](/companies/doc.md) (CIK 765880) - Form: 10-K - Filed: 2018-02-13 - Accepted by EDGAR: Feb 13, 2018, 16:45 ET - Period: 2017-12-31 - Accession: 0001628280-18-001552 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/765880/000162828018001552/hcp10-k12312017.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/765880/000162828018001552/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2017-12-31. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Revenue | 3 months, 2017-10-01 to 2017-12-31 | $443.3m | us-gaap:Revenues | | Interest expense | 12 months, 2017-01-01 to 2017-12-31 | $307.7m | us-gaap:InterestExpense | | Income tax | 12 months, 2017-01-01 to 2017-12-31 | −$1.3m | us-gaap:IncomeTaxExpenseBenefit | | Net income | 3 months, 2017-10-01 to 2017-12-31 | −$58.7m | us-gaap:NetIncomeLoss | | Net income | 12 months, 2017-01-01 to 2017-12-31 | $414.2m | us-gaap:NetIncomeLoss | | Diluted EPS | 3 months, 2017-10-01 to 2017-12-31 | −$0.13 | us-gaap:EarningsPerShareDiluted | | Diluted EPS | 12 months, 2017-01-01 to 2017-12-31 | $0.88 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 3 months, 2017-10-01 to 2017-12-31 | −$0.13 | us-gaap:EarningsPerShareBasic | | Basic EPS | 12 months, 2017-01-01 to 2017-12-31 | $0.88 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 12 months, 2017-01-01 to 2017-12-31 | 468,935,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 12 months, 2017-01-01 to 2017-12-31 | $847.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 12 months, 2017-01-01 to 2017-12-31 | $471.8m | us-gaap:PaymentsToAcquireProductiveAssets | | Dividends paid | 12 months, 2017-01-01 to 2017-12-31 | $695.0m | us-gaap:PaymentsOfDividends | | Share repurchases | 12 months, 2017-01-01 to 2017-12-31 | $4.8m | us-gaap:PaymentsForRepurchaseOfCommonStock | | Cash and equivalents | at 2017-12-31 | $55.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue | | Total assets | at 2017-12-31 | $14.09bn | us-gaap:Assets | | Total liabilities | at 2017-12-31 | $8.49bn | us-gaap:Liabilities | | Long-term debt | at 2017-12-31 | $7.79bn | us-gaap:LongTermDebt | | Shareholders' equity | at 2017-12-31 | $5.30bn | us-gaap:StockholdersEquity | ## Business As filed, 38,083 characters. ### 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 (“REIT”). 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, 2017, we had 190 full-time employees. On October 31, 2016, we completed the spin-off (the “Spin-Off”) of Quality Care Properties, Inc. (“QCP”) (NYSE: QCP). The Spin-Off included 338 properties, primarily comprised of the HCR ManorCare, Inc. (“HCRMC”) direct financing lease (“DFL”) investments and an equity investment in HCRMC. QCP is an independent, publicly-traded, self-managed and self-administrated REIT. See Note 5 to the Consolidated Financial Statements for further information on the Spin-Off. For a description of our significant activities during 2017, see Item 7 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: (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; and (iii) to maintain an investment grade balance sheet with adequate liquidity and 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. #### 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 don’t 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 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 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 joint venture partners. ### Segments The following table summarizes our revenues by segment (dollars in thousands): | | Year Ended December 31, | | | | --- | ---: | ---: | ---: | | **Segment** | **2017%** | **2016%** | **2015%** | | Senior housing triple-net | $313,547 17 | $423,118 20 | $428,269 22 | | SHOP | 525,473 29 | 686,822 32 | 518,264 27 | | Life science | 358,816 19 | 358,537 17 | 342,984 18 | | Medical office | 477,459 26 | 446,280 21 | 415,351 21 | | Other non-reportable segments | 173,083 9 | 214,537 10 | 235,621 12 | | Total revenues | $1,848,378 100 | $2,129,294 100 | $1,940,489 100 | *Senior housing (triple-net and SHOP).* Our senior housing facilities are managed utilizing triple-net leases and RIDEA structures, which are permitted by the Housing and Economic Recovery Act of 2008 (commonly referred to as “RIDEA”), and include independent living facilities (“ILFs”), assisted living facilities (“ALFs”), and memory care facilities (“MCFs”), and continuing care retirement communities ("CCRCs") which cater to different segments of the elderly population based upon their personal needs. Services provided by our tenants or operators in these facilities 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. We have entered into long-term agreements with operators to manage properties under a RIDEA structure. Under the provisions of RIDEA, a REIT may lease a “qualified healthcare property” on an arm’s length basis to a taxable REIT subsidiary (“TRS”), if the property is managed on behalf of such subsidiary by a person who qualifies as an “eligible independent contractor.” RIDEA structures allow us to own the risks and rewards of the operations of healthcare facilities (as compared to leasing the property for contractual triple-net rents) in a tax efficient manner. We view RIDEA as a structure primarily to be used on properties that present attractive valuation entry points and/or growth profiles by: (i) transitioning the asset to a new operator that can bring scale, operating efficiencies, and/or ancillary services; or (ii) investing capital to reposition the asset. Our operators provide comprehensive facility management and accounting services for a majority of our senior housing RIDEA properties, for which we pay annual management fees pursuant to the aforementioned agreements. Most of the management agreements have terms ranging from 10 to 15 years, with three to four 5-year renewals. The base management fees are 4.5% to 5.0% of gross revenues (as defined) generated by the RIDEA facilities. In addition, there are incentive management fees payable to our operators if operating results of the RIDEA properties exceed pre-established EBITDAR (defined as earnings before interest, taxes, depreciation and amortization, and rent) 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 our 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 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, 2017: | Tenant | Percentage of Segment Revenues | Percentage of Total Revenues | | --- | ---: | ---: | | Brookdale Senior Living, Inc. (“Brookdale”)(1) | 47% | 8% | (1) Excludes facilities operated by Brookdale in our SHOP segment, as discussed below. Our concentration with respect to Brookdale as a tenant is expected to decrease with the completion of the transaction with Brookdale (see Note 3 in the Consolidated Financial Statements for additional information). As of December 31, 2017, Brookdale operated, in our SHOP segment, approximately 13% of our real estate investments based on total assets. Our concentration with respect to Brookdale as an operator in our SHOP segment is expected to decrease with the completion of the transaction with Brookdale (see Note 3 in the Consolidated Financial Statements for additional information) and the sale of our remaining 40% ownership interest in RIDEA II (see Note 5 in the Consolidated Financial Statements for additional information). Because operators manage our facilities in exchange for the receipt of a management fee, we are not directly exposed to the credit risk of the operators in the same manner or to the same extent as our triple-net tenants. However, adverse developments in their business and affairs or financial condition could impair their ability to efficiently and effectively manage our facilities. *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 (“HVAC”) 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 (63%) and San Diego (25%), California, Boston, Massachusetts, and Durham, North Carolina (based on square feet). At December 31, 2017, 93% 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, 2017: | Tenants | Percentage of Segment Revenues | Percentage of Total Revenues | | --- | ---: | ---: | | Amgen, Inc. | 15% | 3% | | Google LLC | 10% | 2% | *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 81% of our MOBs, based on square feet, located on hospital campuses and 94% affiliated with hospital systems. Occasionally, we invest in MOBs located on hospital campuses, which may be subject to ground leases. At December 31, 2017, approximately 54% of our medical office buildings 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, 2017: | Tenant | Percentage of Segment Revenues | Percentage of Total Revenues | | --- | ---: | ---: | | Hospital Corporation of America ("HCA")(1) | 17% | 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, 2017, we had interests in 14 hospitals, 61 care homes in the United Kingdom (“U.K.”), one post-acute/skilled nursing facilities (“SNF”) and debt investments. Additionally, we had interests in 72 senior housing facilities, four life science facilities, 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 regulations. 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 has 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. 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 (“ACO”), 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, or non-renewal of the facility’s license, 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. #### Life Science Facilities 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, 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, primary for our SHOP, life science and medical office segments. 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. See Note 16 to the Consolidated Financial Statements for further information relating to casualty-related losses and recoveries incurred as a result of the hurricanes in the third quarter of 2017. 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 team leads our local philanthropic and volunteer activities, and our transparent corporate governance initiatives incorporate sustainability as a critical component to achieving our business objectives and properly managing risks. Our 2017 sustainability achievements include being named an ENERGY STAR Partner of the Year and constituency in the FTSE4Good Index series for the sixth consecutive year. We also earned the Green Star designation from the Global Real Estate Sustainability Benchmark, or GRESB, and were named to the Leadership Band by CDP for outstanding ESG performance. We achieved constituency in the North America Dow Jones Sustainability Index (“DJSI”) for the fifth consecutive year, as well as the World DJSI for the third time. Additionally, we were included in The Sustainability Yearbook 2018, a listing of the world’s most sustainable companies. The list is compiled according to the results of RobecoSAM’s annual Corporate Sustainability Assessment, which also determines constituency for the Dow Jones Sustainability Index (“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”). ## Risk factors As filed, 92,411 characters. **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 manage our facilities utilizing RIDEA and triple-net lease structures. As of December 31, 2017, Brookdale leased or managed 78 senior housing facilities that we own and 62 SHOP facilities owned by our unconsolidated joint venture pursuant to long-term leases and management agreements. These properties represent a substantial portion of our portfolio, revenues and operating income. Properties managed by Brookdale in our SHOP segment as of December 31, 2017, accounted for 13% of our total assets. Although we have various rights as the property owner under our management agreements, we rely on Brookdale’s personnel, expertise, technical resources and information systems, proprietary information, good faith and judgment to manage our related senior living operations efficiently and effectively. We also rely on Brookdale to set appropriate resident fees, manage occupancy, provide accurate and complete property-level financial results for these senior housing communities in a timely manner and otherwise operate them in compliance with the terms of our management agreements and all applicable laws and regulations. Properties leased by Brookdale accounted for 8% of our revenues for the year ended December 31, 2017. In its capacity as a triple-net tenant, we depend on Brookdale 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, inability or unwillingness by Brookdale to do so would have a material adverse effect on us. In addition, we depend on Brookdale’s adequate 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 would likely lead to a significant reduction in occupancy rates and market rents and have a materially adverse effect on us. Brookdale has experienced significant challenges in recent years, including poor operational performance, ongoing class action litigation, stockholder activism and portfolio restructuring execution, among others. Brookdale has been adversely affected by increased competition that has negatively impacted occupancy rates and, in certain cases, Brookdale has offered additional discounts and incentives to residents. Brookdale, as well as our other operators, have also experienced labor expense pressure and increased labor turnover. Additionally, Brookdale has announced that it is considering corporate strategic alternatives. Brookdale’s operational, legal and financial challenges and its pursuit of strategic alternatives could significantly divert management’s attention, increase employee turnover, and impair its ability to manage our properties or its operations 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, acceleration of Brookdale’s indebtedness, impairment of its continued access to capital, the enforcement of default remedies by its counterparties or the commencement of insolvency proceedings by or against it under the U.S. Bankruptcy Code. In addition, Brookdale depends on private sources for its revenues and the ability of its patients and residents to pay its fees. For example, costs associated with independent and assisted living services are not generally reimbursable under governmental reimbursement programs such as Medicare and Medicaid. Accordingly, Brookdale depends on attracting seniors with appropriate levels of income and assets, which may be affected by many factors including prevailing economic and market trends, consumer confidence and demographics. Consequently, if Brookdale fails to effectively conduct its operations, or to maintain and improve our properties, it would adversely affect its business reputation and its ability to attract and retain patients and residents in our properties, which would have a materially adverse effect on its and our business, results of operations and financial condition. Brookdale also relies on reimbursements from governmental programs for a portion of its revenues. Changes in reimbursement policies and other governmental regulation, such as potential changes to, or repeal of, the Patient Protection and Affordable Care Act, along with the Health Care and Education Reconciliation Act of 2010 (the “Affordable Care Act”), that may result from actions by Congress or executive orders, may result in reductions in Brookdale’s revenues, operations and cash flows and affect its ability to meet its obligations to us. For a further discussion of the legislation and regulation that are applicable to us and our tenants, operators and borrowers, see “The requirements of, or changes to, governmental reimbursement programs such as Medicare or Medicaid, may adversely affect our tenants’, operators’ and borrowers’ ability to meet their financial and other contractual obligations to us.” While Brookdale generally has also agreed to indemnify us for various claims, litigation and liabilities arising in connection with its business, it may have insufficient assets, income, access to financing and/or insurance coverage to enable them to satisfy its indemnification obligations. We are currently 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--2017 Transaction Overview--Master Transactions and Cooperation Agreement with Brookdale” for more information). However, we may not be able to sell or transition assets managed or leased by Brookdale according to our plans or within our anticipated timeframe. In addition, the sale and transition process may divert Brookdale’s attention from the performance of the properties we are selling or transitioning, or from our properties Brookdale will continue to manage or lease from us following the contemplated transactions. This could result in further operational challenges and/or declining financial performance of our properties during or after the transition period. The inability, unwillingness or other failure of Brookdale to pursue the optimal 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. **The bankruptcy, insolvency or financial deterioration of one or more of our major tenants, operators or borrowers may materially adversely affect our business, results of operations and financial condition.** We lease our properties directly to operators in most cases, and in certain other cases, we lease to third party tenants who enter into long-term management agreements with operators to manage the properties. We are also a direct or indirect lender to various tenants and operators and separately provide loans to certain third parties. We have very limited control over the success or failure of our tenants’, operators’ and borrowers’ businesses. Any of our tenants or operators may experience a downturn in their business that materially weakens their financial condition. As a result, they may fail to make payments when due. For example, one of our borrowers, Tandem Health Care (“Tandem”), has failed to make its required interest payments to us since November 10, 2017, which resulted in an event of default and adversely affected our revenues. Although we generally have arrangements and other agreements that give us the right under specified circumstances to terminate a lease, evict a tenant or operator, or demand immediate repayment of outstanding loan amounts or other obligations to us, we may determine not to do so if we believe that enforcement of our rights would be more detrimental to our business than seeking alternative approaches. A downturn in any of our tenants’, operators’ or borrowers’ businesses could ultimately lead to bankruptcy if it is unable to timely resolve the underlying causes, which may be largely outside of its control. Bankruptcy and insolvency laws afford certain rights to a party that has filed for bankruptcy or reorganization that may render certain of these remedies unenforceable, or, at the least, delay our ability to pursue such remedies and realize any recoveries in connection therewith. For example, we cannot evict a tenant or operator solely because of its bankruptcy filing. A debtor has the right to assume, or to assume and assign to a third party, or to reject its executory contracts and unexpired leases in a bankruptcy proceeding. If a debtor were to reject its leases with us, obligations under such rejected leases would cease. The claim against the rejecting debtor would be an unsecured claim, which would be limited by the statutory cap set forth in the U.S. Bankruptcy Code. This statutory cap may be substantially less than the remaining rent actually owed under the lease. In addition, a debtor may also assert in bankruptcy proceedings that leases should be re-characterized as financing agreements, which could result in our being deemed a lender instead of a landlord. A lender’s rights and remedies, as compared to a landlord’s, generally are materially less favorable, and our rights as a lender may be subordinated to other creditors’ rights. Furthermore, the automatic stay provisions of the U.S. Bankruptcy Code would preclude us from enforcing our remedies unless we first obtain relief from the court having jurisdiction over the bankruptcy case. This would effectively limit or delay our ability to collect unpaid rent or interest payments, and we may ultimately not receive any payment at all. In addition, we would likely be required to fund certain expenses and obligations (e.g., real estate taxes, insurance, debt costs and maintenance expenses) to preserve the value of our properties, avoid the imposition of liens on our properties or transition our properties to a new tenant, operator or manager. Additionally, we lease many of our facilities to healthcare providers who provide long-term custodial care to the elderly. Evicting these operators for failure to pay rent while the facility is occupied may involve specific procedural or regulatory requirements and may not be successful. Even if eviction is possible, we may determine not to do so due to reputational or other risks. Bankruptcy or insolvency proceedings typically also result in increased costs to the operator, significant management distraction and performance declines. If we are unable to transition affected properties, they would likely experience prolonged operational disruption, leading to lower occupancy rates and further depressed revenues. Publicity about the operator’s financial condition and insolvency proceeds may also negatively impact their and our reputations, decreasing customer demand and revenues. Any or all of these risks could have a material adverse effect on our revenues, results of operations and cash flows. These risks would be magnified where we lease multiple properties to a single operator under a master lease, as an operator failure or default under a master lease would expose us to these risks across multiple properties. Additionally, the financial weakness or other inability of our tenants, operators or borrowers to make payments or comply with certain other lease obligations may affect our compliance with certain covenants contained in our debt securities, credit facilities and the mortgages on the properties leased or managed by such borrowers, tenants and operators, or otherwise adversely affect our results of operations. Under certain conditions, defaults under the underlying mortgages may result in cross default under our other indebtedness. Although we may be able to secure amendments under the applicable agreements in those circumstances, the bankruptcy of a borrower, tenant or operator may result in less favorable borrowing terms than currently available, delays in the availability of funding or other materially adverse consequences. **Increased competition and market and legislative changes have resulted and may further result in lower net revenues for some of our tenants, operators and borrowers and may affect their ability to meet their financial and other contractual obligations to us.** The healthcare industry is highly competitive. The occupancy levels at, and rental income from, our facilities are dependent on our ability and the ability of our tenants, operators and borrowers to compete with other tenants and operators on a number of different levels, including the quality of care provided, reputation, the physical appearance of a facility, price, the range of services offered, family preference, alternatives for healthcare delivery, the supply of competing properties, physicians, staff, referral sources, location, and the size and demographics of the population in the surrounding area. In addition, our tenants, operators and borrowers face an increasingly competitive labor market for skilled management personnel and nurses. An inability to attract and retain skilled management personnel and nurses and other trained personnel could negatively impact the ability of our tenants, operators and borrowers to meet their obligations to us. A shortage of nurses or other trained personnel or general inflationary pressures on wages may force tenants, operators and borrowers to enhance pay and benefits packages to compete effectively for skilled personnel, or to use more expensive contract personnel, but they be unable to offset these added costs by increasing the rates charged to residents. Any increase in labor costs and other property operating expenses or any failure by our tenants, operators or borrowers to attract and retain qualified personnel could adversely affect our cash flow and have a materially adverse effect on our business, results of operations and financial condition. Our tenants, operators and borrowers also compete with numerous other companies providing similar healthcare services or alternatives such as home health agencies, life care at home, community-based service programs, retirement communities and convalescent centers. This competition, which is due, in part, to over-development in some segments in which we invest, has caused the occupancy rate of newly constructed buildings to slow and the monthly rate that many newly built and previously existing facilities were able to obtain for their services to decrease. Our tenants, operators and borrowers may be unable to achieve occupancy and rate levels, and to manage their expenses, in a way that will enable them to meet all of their obligations to us. Further, many competing companies may have resources and attributes that are superior to those of our tenants, operators and borrowers. Our tenants, operators and borrowers may encounter increased competition that could limit their ability to maintain or attract residents or expand their businesses or to manage their expenses, either of which could materially adversely affect their ability to meet their financial and other contractual obligations to us, potentially decreasing our revenues and impairing our assets and/or increasing collection and dispute costs. In addition, our operators’ revenues are determined by a number of factors, including licensed bed capacity, occupancy, the healthcare needs of residents, the rate of reimbursement, and the income and assets of seniors in the regions in which we operate. For example, due to generally increased vulnerability to illness, a severe flu season, an epidemic or any other widespread illness could result in early move-outs or delayed move-ins during quarantine periods, which would reduce our operators’ revenues. Additionally, new and evolving payor and provider programs in the United States, including but not limited to Medicare Advantage, Dual Eligible, Accountable Care Organizations, and Bundled Payments, have resulted in reduced reimbursement rates, average length of stay and average daily census, particularly for higher acuity patients. Furthermore, potential executive orders and legislation have introduced uncertainty in the direction of the healthcare regulatory landscape and we cannot predict the impact of any regulatory or legislative changes on the industry or our ability to compete effectively therein. See the risks described under “Legislation and Regulation-The requirements of, or changes to, governmental reimbursement programs such as Medicare or Medicaid, may adversely affect our tenants’, operators’ and borrowers’ ability to meet their financial and other contractual obligations to us.” **Competition may make it difficult to identify and purchase, or develop, suitable healthcare facilities to grow our investment portfolio, to finance acquisitions on favorable terms, or to retain or attract tenants and operators.** We face significant competition from other REITs, investment companies, private equity and hedge fund investors, sovereign funds, healthcare operators, lenders, developers and other institutional investors, some of whom may have greater 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 business goals and could improve the bargaining power of property owners seeking to sell, thereby impeding our investment, acquisition and development activities. Similarly, our properties face competition for tenants and operators from other properties in the same market, which may affect our ability to attract and retain tenants and operators, or may reduce the rents we are able to charge. If we cannot capitalize on our development pipeline, identify and purchase a sufficient quantity of healthcare facilities at favorable prices, finance acquisitions on commercially favorable terms, or attract and retain profitable tenants and operators, our business, results of operations and financial condition may be materially adversely affected. **We depend on investments in the healthcare property sector, making our profitability more vulnerable to a downturn or slowdown in that specific sector than if we were investing in multiple industries.** We concentrate our investments in the healthcare property sector. As a result, we are subject to risks inherent to investments in a single industry. A downturn or slowdown in the healthcare property sector would have a greater adverse impact on our business than if we had investments in multiple industries. Specifically, a downturn in the healthcare property sector could negatively impact the ability of our tenants, operators and borrowers to meet their obligations to us, as well as the ability to maintain rental and occupancy rates. This could adversely affect our business, financial condition and results of operations. In addition, a downturn in the healthcare property sector could adversely affect the value of our properties and our ability to sell properties at prices or on terms acceptable to us. In addition, we are exposed to the risks inherent in concentrating our investments in real estate, which investments are relatively illiquid. Our ability to quickly sell or transition any of our properties in response to changes in the performance of our properties or economic and other conditions is limited. We may be unable to recognize full value for any property that we seek to sell for liquidity reasons. Our inability to respond rapidly to changes in the performance of our investments could adversely affect our financial condition and results of operations. **Changes within the life science industry may adversely impact our revenues and results of operations.** Our life science investments could be adversely affected if the life science industry is impacted by an economic, financial, or banking crisis or if the life science industry migrates from the U.S. to other countries or to areas outside of primary life science markets in South San Francisco, San Diego and greater Boston. Also, some of our properties may be better suited for a particular life science industry client tenant and could require modification before we are able to re-lease vacant space to another life science industry client tenant. Generally, our properties may not be suitable for lease to traditional office client tenants without significant expenditures on renovations. Our ability to negotiate contractual rent escalations on future leases and to achieve increases in rental rates will depend upon market conditions and the demand for life science properties at the time the leases are negotiated and the increases are proposed. Many life science entities have completed mergers or consolidations. Future mergers or consolidations of life science entities could reduce the amount of rentable square footage requirements of our client tenants and prospective client tenants, which may adversely impact our revenues from lease payments and results of operations. **Our tenants in the life science industry face high levels of regulation, expense and uncertainty.** Life science tenants, particularly those involved in developing and marketing pharmaceutical products, are subject to certain unique risks, including the following: - some of our tenants require significant outlays of funds for the research, development, clinical testing and manufacture of their products and technologies. If private investors, the government or other sources of funding are unavailable to support such activities, a tenant’s business may be adversely affected or fail; - the research, development, clinical testing, manufacture and marketing of some of our tenants’ products require federal, state and foreign regulatory approvals which may be costly or difficult to obtain, may take several years and be subject to delay, may not be obtained at all, require valuation through clinical trials and the use of substantial resources, and may often be unpredictable; - even after a life science tenant gains regulatory approval and market acceptance, the product may still present significant regulatory and liability risks, including, among others, the possible later discovery of safety concerns and other defects and potential loss of approvals, competition from new products and the expiration of patent protection for the product; - our tenants with marketable products may be adversely affected by healthcare reform and the reimbursement policies of government or private healthcare payors; - dependence on the commercial success of certain products, which may be reliant on the efficacy of the products, acceptance of the products among doctors and patients, negative publicity and the negative results or safety signals from the clinical trials of competitors which may reduce demand or prompt regulatory actions; and - our tenants may be unable to adapt to the rapid technological advances in the industry and to adequately protect their intellectual property under patent, copyright or trade secret laws and defend against third party claims of intellectual property violations. If our tenants’ businesses are adversely affected, they may have difficulty making payments to us, which could materially adversely affect our business, results of operations and financial condition. **The hospitals on whose campuses our MOBs are located and their affiliated healthcare systems could fail to remain competitive or financially viable, which could adversely impact their ability to attract physicians and physician groups to our MOBs and our other facilities that serve the healthcare industry.** Our MOBs and other facilities that serve the healthcare industry depend on the viability of the hospitals on whose campuses our MOBs are located and their affiliated healthcare systems in order to attract physicians and other healthcare-related users. The viability of these hospitals, in turn, depends on factors such as the quality and mix of healthcare services provided, competition, demographic trends in the surrounding community, market position and growth potential, as well as the ability of the affiliated healthcare systems to provide economies of scale and access to capital. If a hospital whose campus is located on or near one of our MOBs is unable to meet its financial obligations, and if an affiliated healthcare system is unable to support that hospital, the hospital may not be able to compete successfully or could be forced to close or relocate, which could adversely impact its ability to attract physicians and other healthcare-related users. Because we rely on our proximity to and affiliations with these hospitals to create tenant demand for space in our MOBs, their inability to remain competitive or financially viable, or to attract physicians and physician groups, could adversely affect our MOB operations and have a materially adverse effect on us. In addition, the potential repeal of the Affordable Care Act and related regulations and uncertainty regarding potential replacement legislation, could result in significant changes to the scope of insurance coverage and reimbursement policies, which could put negative pressure on the operations and revenues of our MOBs. **We may be unable to maintain or expand our relationships with our existing and future hospital and health system clients.** The success of our medical office portfolio depends, to a large extent, on past, current and future relationships with hospitals and their affiliated health systems. We invest significant amounts of time in developing relationships with both new and existing clients. If we fail to maintain these relationships, including through a lack of responsiveness, failure to adapt to the current market and employment of individuals with adequate experience, our reputation and relationships will be harmed and we may lose business to competitors. If our relationships with hospitals and their affiliated health systems deteriorate, it could have a materially adverse effect on us. **Economic and other conditions that negatively affect geographic areas from which a greater percentage of our revenue is recognized could materially adversely affect our business, results of operations and financial condition.** For the year ended December 31, 2017, 26% of our revenue was derived from properties located in California, which is also where substantially all of our life science portfolio is located. As a result, we are subject to increased exposure to adverse conditions affecting the state, including downturns in the local economies or changes in local real estate conditions, increased competition or decreased demand, changes in state-specific legislation and local climate events and natural disasters (such as earthquakes, wildfires and hurricanes), which could cause significant disruption in our businesses in the region, harm our ability to compete effectively, result in increased costs and divert more management attention, any or all of which could adversely affect our business and results of operations. **If we must replace any of our tenants or operators, we may have difficulty identifying replacements and we may be required to incur substantial renovation costs to make certain of our healthcare properties suitable for other tenants and operators.** We cannot predict whether our tenants will renew existing leases beyond their current term. If we or our tenants terminate or do not renew the leases for our properties, we would attempt to reposition those properties with another tenant or operator. We may also voluntarily change operators for a variety of reasons. For example, in November 2017, we announced a plan to transition a significant number of properties managed by Brookdale to other operators as part of our strategic plan to reduce our concentration of assets managed or leased by Brookdale. Healthcare facilities are typically highly customized. The improvements generally required to conform a property to healthcare use, such as upgrading electrical, gas and plumbing infrastructure, are costly and at times tenant-specific and are typically subject to regulatory requirements. A new or replacement tenant or operator may require different features in a property, depending on that tenant’s or operator’s particular business. In addition, infrastructure improvements for life science facilities typically are significantly more costly than improvements to other property types, and we may be unable to recover part or all of these higher costs. Therefore, if a current tenant or operator is unable to pay rent and/or vacates a property, we may incur substantial expenditures to modify a property and experience delays before we are able to secure another tenant or operator or to accommodate multiple tenants or operators. These expenditures or renovations and delays may materially adversely affect our business, results of operations and financial condition. Additionally, we may fail to identify suitable replacements or enter into leases or other arrangements with new tenants or operators on a timely basis or on terms as favorable to us as our current leases, if at all. Furthermore, during transition periods to new tenants or operators, we anticipate that the attention of existing tenants or operators will be diverted from the performance of the properties, which would cause the financial and operational performance at these properties to further decline. We also may be required to fund certain expenses and obligations such as real estate taxes, debt costs and maintenance expenses, to preserve the value of, and avoid the imposition of liens on, our properties while they are being repositioned. In addition, we may incur certain obligations and liabilities, including obligations to indemnify the replacement tenant or operator, which could have a materially adverse effect on our business, results of operations and financial condition. **We face additional risks associated with property development and redevelopment that can render a project less profitable or not profitable at all and, under certain circumstances, prevent completion of development activities once undertaken.** Property development is a component of our growth strategy. At December 31, 2017, our actual investment and estimated commitments under our development and redevelopment platforms, including land held for development, represented approximately $682 million, or 5% of our total assets. Large-scale, ground-up development of healthcare properties presents additional risks for us, including risks that: - a development opportunity may be abandoned after expending significant resources resulting in the loss of deposits or failure to recover expenses already incurred; - the development and construction costs of a project may exceed original estimates due to increased interest rates and higher materials, transportation, labor, leasing or other costs, which could make the completion of the development project less profitable; - the project may not be completed on schedule as a result of a variety of factors that are beyond our control, including natural disasters, labor conditions, material shortages, regulatory hurdles, civil unrest and acts of war, which result in increases in construction costs and debt service expenses or provide tenants or operators with the right to terminate pre-construction leases; and - occupancy rates and rents at a newly completed property may not meet expected levels and could be insufficient to make the property profitable. Any of the foregoing risks could materially adversely affect our business, results of operations and financial condition. **Our use of joint ventures may limit our flexibility with jointly owned investments.** We have and may continue to develop and/or acquire properties in joint ventures with other persons or entities when circumstances warrant the use of these structures. Our participation in joint ventures is subject to risks that may not be present with other methods of ownership, including: - we could experience an impasse on certain decisions because we do not have sole decision-making authority, which could require us to expend additional resources on resolving such impasses or potential disputes, including litigation or arbitration; - our joint venture partners could have investment and financing goals that are not consistent with our objectives, including the timing, terms and strategies for any investments, and what levels of debt to incur or carry; - our ability to transfer our interest in a joint venture to a third party may be restricted and the market for our interest may be limited; - our joint venture partners may be structured differently than us for tax purposes, and this could create conflicts of interest and risks to our REIT status; - our joint venture partners might become insolvent, fail to fund their share of required capital contributions or fail to fulfill their obligations as a joint venture partner, which may require us to infuse our own capital into the venture on behalf of the partner despite other competing uses for such capital; and - our joint venture partners may have competing interests in our markets that could create conflict of interest issues. Any of the foregoing risks could materially adversely affect our business, results of operations and financial condition. In addition, in some instances, we and/or our joint venture partner will have the right to cause us to sell our interest, or acquire our partner’s interest, at a time when we otherwise would not have initiated such a transaction. Our ability to acquire our partner’s interest will be limited if we do not have sufficient cash, available borrowing capacity or other capital resources. This would require us to sell our interest in the joint venture when we would otherwise prefer to retain it. **From time to time we have made, and we may seek to make, one or more material acquisitions, which may involve the expenditure of significant funds.** We regularly review potential transactions in order to maximize stockholder value. Our review process may require significant management attention and a potential transaction could be abandoned or rejected by us or the other parties involved after we expend significant resources and time. In addition, future acquisitions may require the issuance of securities, the incurrence of debt, assumption of contingent liabilities or incurrence of significant expenditures, each of which could materially adversely impact our business, financial condition or results of operations. In addition, the financing required for acquisitions may not be available on commercially favorable terms or at all. **From time to time, we acquire other companies, and if we are unable to successfully integrate these operations, our business, results of operations and financial condition may be materially adversely affected.** Acquisitions require the integration of companies that have previously operated independently. Successful integration of the operations of these companies depends primarily on our ability to consolidate operations, systems, procedures, properties and personnel, and to eliminate redundancies and costs. We may encounter difficulties in these integrations. Potential difficulties associated with acquisitions include our ability to effectively monitor and manage our expanded portfolio of properties, the loss of key employees, the disruption of our ongoing business or that of the acquired entity, possible inconsistencies in standards, controls, procedures and policies, and the assumption of unexpected liabilities, including: - liabilities relating to the cleanup or remediation of undisclosed environmental conditions; - unasserted claims of vendors, residents, patients or other persons dealing with the seller; - liabilities, claims and litigation, whether or not incurred in the ordinary course of business, relating to periods prior to our acquisition; - claims for indemnification by general partners, directors, officers and others indemnified by the seller; - claims for return of government reimbursement payments; and - liabilities for taxes relating to periods prior to our acquisition. In addition, the acquired companies and their properties may fail to perform as expected, including in respect of estimated cost savings. Inaccurate assumptions regarding future rental or occupancy rates could result in overly optimistic estimates of future revenues. Similarly, we may underestimate future operating expenses or the costs necessary to bring properties up to standards established for their intended use or for property improvements. If we have difficulties with any of these areas, or if we later discover additional liabilities or experience unforeseen costs relating to our acquired companies, we might not achieve the economic benefits we expect from our acquisitions, and this may materially adversely affect our business, results of operations and financial condition. **Our tenants, operators and borrowers face litigation and may experience rising liability and insurance costs.** In some states, advocacy groups have been created to monitor the quality of care at healthcare facilities, and these groups have brought litigation against the tenants and operators of such facilities. Also, in several instances, private litigation by patients, residents or “whistleblowers” has sought, and sometimes resulted in, large damage awards. See “The requirements of, or changes to, governmental reimbursement programs such as Medicare or Medicaid, may adversely affect our tenants’, operators’ and borrowers’ ability to meet their financial and other contractual obligations to us.” The effect of this litigation and other potential litigation may materially increase the costs incurred by our tenants, operators and borrowers for monitoring and reporting quality of care compliance. In addition, their cost of liability and medical malpractice insurance can be significant and may increase or not be available at a reasonable cost so long as the present healthcare litigation environment continues. Cost increases could cause our tenants and operators to be unable to make their lease or mortgage payments or fail to purchase the appropriate liability and malpractice insurance, or cause our borrowers to be unable to meet their obligations to us, potentially decreasing our revenues and increasing our collection and litigation costs. In addition, as a result of our ownership of healthcare facilities, we may be named as a defendant in lawsuits arising from the alleged actions of our tenants or operators. While our operators generally have agreed to indemnify us for various claims, litigation and liabilities arising in connection with their operation of our properties, they may have insufficient assets, income, access to financing and/or insurance coverage to enable them to satisfy their indemnification obligations, in which case we would incur unanticipated expenditures. Furthermore, although our leases and agreements provide us with certain information rights with respect to our tenants and operators, one or more of our tenants may be or become party to pending litigation or investigation to which we are unaware or do not have a right to participate or evaluate. In such cases, we would be unable to determine the potential impact of such litigation or investigation on our tenants or our business or results. Moreover, negative publicity of any of our operators’ or tenants’ litigation, other legal proceedings or investigations may also negatively impact their and our reputation, resulting in lower customer demand and revenues, which could have a material adverse effect on our financial condition, results of operations and cash flow. **We, through our subsidiaries, enter into management contracts with third party eligible independent contractors to manage some of our facilities whereby we assume additional operational risks and are subject to additional regulation and liability.** RIDEA structures at the year ended December 31, 2017, accounted for 12% of our total assets. RIDEA permits REITs, such as us, to lease healthcare facilities that we own or partially own to a TRS, provided that our TRS hires an independent qualifying management company to operate the facility. Under the RIDEA lease structure, the independent qualifying management company receives a management fee from our TRS for operating the facility as an independent contractor. As the owner of the facility contracting out operational responsibility, we assume most of the operational risk relative to other structures because we lease our facility to our own partially- or wholly-owned subsidiary rather than a third party operator. Our resulting revenues therefore depend most on occupancy rates, the rates charged to residents and the ability to control operating expenses. Our TRS, and hence we, are responsible for any operating deficits incurred by the facility. The operator, which would be our TRS when we use a RIDEA lease structure, of a healthcare facility is generally required to be the holder of the applicable healthcare license. This licensing requirement subjects our TRS and us (through our ownership interest in our TRS) to various regulatory laws, including those described above. Most states regulate and inspect healthcare facility operations, patient care, construction and the safety of the physical environment. If one or more of our healthcare real estate facilities fails to comply with applicable laws, our TRS, if it holds the healthcare license and is the entity enrolled in government health care programs, would be subject to penalties including loss or suspension of license, certification or accreditation, exclusion from government healthcare programs (i.e., Medicare, Medicaid), administrative sanctions, civil monetary penalties, and in certain instances, criminal penalties. Additionally, when we receive individually identifiable health information relating to residents of our TRS-operated healthcare facilities, we are subject to federal and state data privacy and confidentiality laws and rules, and could be subject to liability in the event of an audit, complaint, or data breach. Furthermore, if our TRS holds the healthcare license, it could have exposure to professional liability claims arising out of an alleged breach of the applicable standard of care rules. In addition, rents from this TRS structure are treated as qualifying rents from real property if (i) they are paid pursuant to an arms-length lease of a “qualified healthcare property” with the TRS and (ii) the manager qualifies as an “eligible independent contractor,” as defined in the Internal Revenue Code of 1986, as amended (the “Code”). If either of these conditions is not satisfied, then the rents will not be qualifying rents. **The requirements of, or changes to, governmental reimbursement programs such as Medicare or Medicaid, may adversely affect our tenants’, operators’ and borrowers’ ability to meet their financial and other contractual obligations to us.** Certain of our tenants, operators and borrowers are affected, directly or indirectly, by an extremely complex set of federal, state and local laws and regulations pertaining to governmental reimbursement programs. These laws and regulations are subject to frequent and substantial changes that are sometimes applied retroactively. See “Item 1—Business—Government Regulation, Licensing and Enforcement.” For example, to the extent that our tenants, operators or borrowers receive a significant portion of their revenues from governmental payors, primarily Medicare and Medicaid, they are generally subject to, among other things: - statutory and regulatory changes; - retroactive rate adjustments; - recovery of program overpayments or set-offs; - federal, state and local litigation and enforcement actions; - administrative proceedings; - policy interpretations; - payment or other delays by fiscal intermediaries or carriers; - government funding restrictions (at a program level or with respect to specific facilities); and - interruption or delays in payments due to any ongoing governmental investigations and audits at such properties. The failure to comply with the extensive laws, regulations and other requirements applicable to their business and the operation of our properties could result in, among other challenges: (i) becoming ineligible to receive reimbursement from governmental reimbursement programs; (ii) bans on admissions of new patients or residents; (iii) civil or criminal penalties; and (iv) significant operational changes. These laws and regulations are enforced by a variety of federal, state and local agencies and 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. For example, we have provided a loan to Tandem Health Care (“Tandem”), a property company that owns and operates 32 post-acute/skilled nursing facilities, in addition to operating nine leasehold interests, totaling 4,766 beds (the “Tandem Portfolio”) (see Note 7 to the Consolidated Financial Statements for additional information). Affiliates of the sole tenant and operator of Tandem’s facilities, Consulate, were named in a qui tam or “whistleblower” action that alleged that Consulate overbilled the federal government and the State of Florida (United States of America v. CMC II, LLC, et al, U.S. District Court, M.D. Florida). In February, 2017, a jury returned an adverse verdict against five Consulate entities as defendants, resulting in a $348 million judgment against all defendants. As a result of these legal and financial challenges, Consulate has failed to fully pay its contractual rent to Tandem since April 1, 2017, which has impacted Tandem’s ability to service its debt obligations to us. Since November 10, 2017, Tandem has failed to make its required interest payment to us, resulting in an event of default and adversely impacting our results of operations. On January 11, 2018, the Court overturned the jury verdict against Consulate and vacated the judgment. The plaintiff has provided notice that it will appeal the ruling, and we cannot predict the outcome. It is also possible that the parties could reach an out-of-court settlement. An unfavorable ruling against Consulate on appeal would have a materially adverse effect on its financial condition, cash flows and results of operations. This would cause additional declines in the Tandem Portfolio’s operating performance and would likely negatively affect Consulate’s and Tandem’s ability to raise capital, which would further adversely affect Tandem’s ability to meet its debt service obligations to us. We are currently evaluating our options in respect of the Tandem mezzanine loan. Regardless of the ultimate outcome, our tenants, operators and borrowers could be adversely affected by the resources required to respond to an investigation or other enforcement action. In such event, the results of operations and financial condition of our tenants and the results of operations of our properties operated by those entities could be materially adversely affected, which, in turn, could have a materially adverse effect on us. We are unable to predict future federal, state and local regulations and legislation, including the Medicare and Medicaid statutes and regulations, or the intensity of enforcement efforts with respect to such regulations and legislation, and any changes in the regulatory framework could have a materially adverse effect on our tenants and operators, which, in turn, could have a materially adverse effect on us. Sometimes, governmental payors freeze or reduce payments to healthcare providers, or provide annual reimbursement rate increases that are smaller than expected, due to budgetary and other pressures. Healthcare reimbursement will likely continue to be of significant importance to federal and state authorities. We cannot make any assessment as to the ultimate timing or the effect that any future legislative reforms may have on our tenants’, operators’ and borrowers’ costs of doing business and on the amount of reimbursement by government and other third-party payors. The failure of any of our tenants, operators or borrowers to comply with these laws and regulations, and significant limits on the scope of services reimbursed and on reimbursement rates and fees, could materially adversely affect their ability to meet their financial and contractual obligations to us. Furthermore, executive orders and legislation may amend or repeal the Affordable Care Act and related regulations in whole or in part. We also anticipate that Congress, state legislatures, and third-party payors may continue to review and assess alternative healthcare delivery and payment systems and may propose and adopt legislation or policy changes or implementations effecting additional fundamental changes in the healthcare system. We cannot quantify or predict the likely impact of these possible changes on our business model, prospects, financial condition or results of operations. **Legislation to address federal government operations and administration decisions affecting the Centers for Medicare and Medicaid Services could have a materially adverse effect on our tenants’, operators’ and borrowers’ liquidity, financial condition or results of operations.** Congressional consideration of legislation pertaining to the federal debt ceiling, the Affordable Care Act, tax reform and entitlement programs, including reimbursement rates for physicians, could have a materially adverse effect on our tenants’, operators’ and borrowers’ liquidity, financial condition or results of operations. In particular, reduced funding for entitlement programs such as Medicare and Medicaid would result in increased costs and fees for programs such as Medicare Advantage Plans and additional reductions in reimbursements to providers. Amendments to or repeal of the Affordable Care Act and decisions by the Centers for Medicare and Medicaid Services could impact the delivery of services and benefits under Medicare, Medicaid or Medicare Advantage Plans and could affect our tenants and operators and the manner in which they are reimbursed by such programs. Such changes could have a materially adverse effect on our tenants’, operators’ and borrowers’ liquidity, financial condition or results of operations, which could adversely affect their ability to satisfy their obligations to us and could have a materially adverse effect on us. **Compliance with the Americans with Disabilities Act and fire, safety and other regulations may require us to make expenditures that adversely affect our cash flows.** Our properties must comply with applicable ADA and any similar state and local laws. This may require removal of barriers to access by persons with disabilities in public areas of our properties. Noncompliance could result in imposition of fines or an award of damages to private litigants and the incurrence of additional costs associated with bringing the properties into compliance. While the tenants to whom we lease our properties are obligated to comply with the ADA and similar state and local provisions, and typically under tenant leases are obligated to cover costs associated with compliance, if required changes involve greater expenditures than anticipated, or if the changes must be made on a more accelerated basis than anticipated, the ability of these tenants to cover costs could be adversely affected. As a result, we could be required to expend funds to comply with the provisions of the ADA and similar state and local laws on behalf of tenants, which could adversely affect our results of operations and financial condition. In addition, we are required to operate our properties in compliance with fire and safety regulations, building codes and other land use regulations. New and revised regulations and codes may be adopted by governmental agencies and bodies and become applicable to our properties. Compliance could require substantial capital expenditures, and may restrict our ability to renovate our properties. These expenditures and restrictions could have a material adverse effect on our ability to meet our financial obligations. **Tenants and operators that fail to comply with federal, state, local and international laws and regulations, including licensure, certification and inspection requirements, may cease to operate or be unable to meet their financial and other contractual obligations to us.** Our tenants, operators and borrowers are subject to or impacted by extensive, frequently changing federal, state, local and international laws and regulations. These laws and regulations include, among others: laws protecting consumers against deceptive practices; laws relating to the operation of our properties and how our tenants and operators conduct their business, such as fire, health and safety, data security and privacy laws; federal and state laws affecting hospitals, clinics and other healthcare communities that participate in both Medicare and Medicaid that mandate allowable costs, pricing, reimbursement procedures and limitations, quality of services and care, food service and physical plants, and similar foreign laws regulating the healthcare industry; resident rights laws (including abuse and neglect laws) and fraud laws; anti-kickback and physician referral laws; the ADA and similar state and local laws; and safety and health standards set by the Occupational Safety and Health Administration or similar foreign agencies. Certain of our properties may also require a license, registration and/or certificate of need to operate. Our tenants’, operators’ or borrowers’ failure to comply with any of these laws, regulations or requirements could result in loss of accreditation, denial of reimbursement, imposition of fines, suspension or decertification from government healthcare programs, civil liability, loss of license or closure of the facility and/or the incurrence of considerable costs arising from an investigation or regulatory action, which may have an adverse effect on facilities owned by or mortgaged to us, and therefore may materially adversely impact us. See “Item 1—Business—Government Regulation, Licensing and Enforcement—Healthcare Licensure and Certificate of Need” above. **We may be unable to successfully foreclose on the collateral securing our real estate-related loans, and even if we are successful in our foreclosure efforts, we may be unable to successfully operate, occupy or reposition the underlying real estate, which may adversely affect our ability to recover our investments.** If a tenant or operator defaults under one of our mortgages or mezzanine loans, we may have to foreclose on the loan or protect our interest by acquiring title to the collateral and thereafter making substantial improvements or repairs in order to maximize the property’s investment potential. In some cases, the collateral consists of the equity interests in an entity that directly or indirectly owns the applicable real property or interests in operating facilities and, accordingly, we may not have full recourse to assets of that entity, or that entity may have incurred unexpected liabilities. Tenants, operators or borrowers may contest enforcement of foreclosure or other remedies, seek bankruptcy protection against our exercise of enforcement or other remedies and/or bring claims for lender liability in response to actions to enforce mortgage obligations. Foreclosure-related costs, high loan-to-value ratios or declines in the value of the facility may prevent us from realizing an amount equal to our mortgage or mezzanine loan upon foreclosure, and we may be required to record a valuation allowance for such losses. Even if we are able to successfully foreclose on the collateral securing our real estate-related loans, we may inherit properties for which we may be unable to expeditiously secure tenants or operators, if at all, or we may acquire equity interests that we are unable to immediately resell due to limitations under the securities laws, either of which would adversely affect our ability to fully recover our investment. **Required regulatory approvals can delay or prohibit transfers of our healthcare facilities.** Transfers of healthcare facilities to successor tenants or operators are typically subject to regulatory approvals or ratifications, including, but not limited to, change of ownership approvals and Medicare and Medicaid provider arrangements that are not required for transfers of other types of commercial operations and other types of real estate. The replacement of any tenant or operator could be delayed by the regulatory approval process of any federal, state or local government agency necessary for the transfer of the facility or the replacement of the operator licensed to manage the facility. If we are unable to find a suitable replacement tenant or operator upon favorable terms, or at all, we may take possession of a facility, which could expose us to successor liability, require us to indemnify subsequent operators to whom we transfer the operating rights and licenses, or require us to spend substantial time and funds to preserve the value of the property and adapt the facility to other uses, all of which may materially adversely affect our business, results of operations and financial condition. ### Risks Related to Our Capital Structure and Market Conditions **Interest rate increases could result in a decrease in our stock price and increased interest costs on new debt and existing variable rate debt, which could materially adversely impact our ability to refinance existing debt, sell assets and conduct acquisition, investment and development activities.** An increase in interest rates could reduce the amount investors are willing to pay for our common stock. Because REIT stocks are often perceived as high-yield investments, investors may perceive less relative benefit to owning REIT stocks as interest rates and the yield on government treasuries and other bonds increase. Additionally, we have existing debt obligations that are variable rate obligations with interest and related payments that vary with the movement of certain indices. If interest rates increase, so would our interest costs for any variable rate debt and for new debt. This increased cost would make the financing of any acquisition and development activity more costly. Rising interest rates could limit our ability to refinance existing debt when it matures, or cause us to pay higher interest rates upon refinancing and increase interest expense on refinanced indebtedness. In addition, an increase in interest rates could decrease the amount third parties are willing to pay for our assets, thereby limiting our ability to reposition our portfolio promptly in response to changes in economic or other conditions. We manage a portion of our exposure to interest rate risk by accessing debt with staggered maturities and through the use of derivative instruments, primarily interest rate swap agreements. However, no amount of hedging activity can fully insulate us from the risks associated with changes in interest rates. Swap agreements involve risk, including that counterparties may fail to honor their obligations under these arrangements, that these arrangements may not be effective in reducing our exposure to interest rate changes, that the amount of income we earn from hedging transactions may be limited by federal tax provisions governing REITs and that these arrangements may cause us to pay higher interest rates on our debt obligations than would otherwise be the case. Failure to hedge effectively against interest rate risk could adversely affect our results of operations and financial condition. **We rely on external sources of capital to fund future capital needs, and if access to such capital is unavailable on acceptable terms or at all, it could have a materially adverse effect on our ability to meet commitments as they become due or make future investments necessary to grow our business.** We may not be able to fund all future capital needs, including capital expenditures, debt maturities and other commitments, from cash retained from operations and dispositions. If we are unable to obtain enough internal capital, we may need to rely on external sources of capital (including debt and equity financing) to fulfill our capital requirements. Our access to capital depends upon a number of factors, some of which we have little or no control over, including but not limited to: - general availability of capital, including less favorable terms, rising interest rates and increased borrowing costs; - the market price of the shares of our equity securities and the credit ratings of our debt and any preferred securities we may issue; - the market’s perception of our growth potential and our current and potential future earnings and cash distributions; - our degree of financial leverage and operational flexibility; - the financial integrity of our lenders, which might impair their ability to meet their commitments to us or their willingness to make additional loans to us, and our inability to replace the financing commitment of any such lender on favorable terms, or at all; - the stability of the market value of our properties; - the financial performance and general market perception of our tenants and operators; - changes in the credit ratings on U.S. government debt securities or default or delay in payment by the United States of its obligations; - issues facing the healthcare industry, including, but not limited to, healthcare reform and changes in government reimbursement policies; and - the performance of the national and global economies generally. In 2017, we announced our plans to sell a significant number of assets managed or leased by Brookdale, our remaining interest in RIDEA II, our mezzanine loan facility to Tandem, and our U.K. portfolio. If these transactions are successful, our financial leverage is projected to decrease, which could improve our access to capital on favorable terms. However, these transactions may not be completed on a timely basis or at all, which would delay or impede our deleveraging plan. If access to capital is unavailable on acceptable terms or at all, it could have a materially adverse impact on our ability to fund operations, repay or refinance our debt obligations, fund dividend payments, acquire properties and make the investments needed to grow our business. **Adverse changes in our credit ratings could impair our ability to obtain additional debt and equity financing on favorable terms, if at all, and negatively impact the market price of our securities, including our common stock.** Our credit ratings can affect the amount and type of capital we can access, as well as the terms of any financing we may obtain. We may be unable to maintain our current credit ratings, and in the event that our current credit ratings deteriorate, we would likely incur higher borrowing costs, which would make it more difficult or expensive to obtain additional financing or refinance existing obligations and commitments. Also, a downgrade in our credit ratings would trigger additional costs or other potentially negative consequences under our current and future credit facilities and debt instruments. The credit ratings of our senior unsecured debt are based on, among other things, our operating performance, liquidity and leverage ratios, overall financial position, level of indebtedness and pending or future changes in the regulatory framework applicable to our operators and our industry. **Our level of indebtedness may increase and materially adversely affect our future operations.** Our outstanding indebtedness as of December 31, 2017, was approximately $7.9 billion. We may incur additional indebtedness, including in connection with the development or acquisition of assets, which may be substantial. Any significant additional indebtedness would likely negatively affect the credit ratings of our debt and require us to dedicate a substantial portion of our cash flow to interest and principal payments due on our indebtedness. Greater demands on our cash resources may reduce funds available to us to pay dividends, conduct development activities, make capital expenditures and acquisitions or carry out other aspects of our business strategy. Increased indebtedness can also make us more vulnerable to general adverse economic and industry conditions and create competitive disadvantages for us compared to other companies with relatively lower debt levels. Increased future debt service obligations may limit our operational flexibility, including our ability to finance or refinance our properties, contribute properties to joint ventures or sell properties as needed. **Covenants in our debt instruments limit our operational flexibility, and breaches of these covenants could materially adversely affect our business, results of operations and financial condition.** The terms of our current secured and unsecured debt instruments and other indebtedness that we may incur, require or will require us to comply with a number of customary financial and other covenants, such as maintaining leverage ratios, minimum tangible net worth requirements, REIT status and certain levels of debt service coverage. Our continued ability to incur additional debt and to conduct business in general is subject to compliance with these financial and other covenants, which limit our operational flexibility. For example, mortgages on our properties contain customary covenants such as those that limit or restrict our ability, without the consent of the lender, to further encumber or sell the applicable properties, or to replace the applicable tenant or operator. Breaches of certain covenants may result in defaults under the mortgages on our properties and cross-defaults under certain of our other indebtedness, even if we satisfy our payment obligations to the respective obligee. Covenants that limit our operational flexibility as well as defaults resulting from the breach of any of these covenants could materially adversely affect our business, results of operations and financial condition. **Cash available for distribution to stockholders may be insufficient to make dividend distributions at expected levels and are made at the discretion of our Board of Directors.** If cash available for distribution generated by our assets decreases as a result of our announced dispositions or otherwise, we may be unable to make dividend distributions at expected levels. Our inability to make expected distributions would likely result in a decrease in the market price of our common stock. All distributions are made at the discretion of our Board of Directors in accordance with Maryland law and depend on our earnings, our financial condition, debt and equity capital available to us, our expectations of our future capital requirements and operating performance, restrictive covenants in our financial or other contractual arrangements (including those in our credit facility agreement), maintenance of our REIT qualification, restrictions under Maryland law and other factors as our Board of Directors may deem relevant from time to time. Additionally, our ability to make distributions will be adversely affected if any of the risks described herein, or other significant adverse events, occur. **Volatility, disruption or uncertainty in the financial markets may impair our ability to raise capital, obtain new financing or refinance existing obligations and fund real estate and development activities.** We may be affected by general market and economic conditions. Increased or prolonged market disruption, volatility or uncertainty could materially adversely impact our ability to raise capital, obtain new financing or refinance our existing obligations as they mature and fund real estate and development activities. Market volatility could also lead to significant uncertainty in the valuation of our investments and those of our joint ventures, which may result in a substantial decrease in the value of our properties and those of our joint ventures. As a result, we may be unable to recover the carrying amount of such investments and the associated goodwill, if any, which may require us to recognize impairment charges in earnings. ### We may be adversely affected by fluctuations in currency exchange rates. We have certain investments in international markets where the U.S. dollar is not the denominated currency. The ownership of investments located outside of the United States subjects us to risk from fluctuations in exchange rates between foreign currencies and the U.S. dollar. A significant change in the value of the British pound sterling (“GBP”) may have a materially adverse effect on our financial position, debt covenant ratios, results of operations and cash flow. We may attempt to manage the impact of foreign currency exchange rate changes through the use of derivative contracts or other methods. For example, we currently utilize GBP denominated liabilities as a natural hedge against our GBP denominated assets. Additionally, we executed currency swap contracts to hedge the risk related to a portion of the forecasted interest receipts on these investments. However, no amount of hedging activity can fully insulate us from the risks associated with changes in foreign currency exchange rates, and the failure to hedge effectively against foreign currency exchange rate risk, if we choose to engage in such activities, could materially adversely affect our results of operations and financial condition. In addition, any international currency gain recognized with respect to changes in exchange rates may not qualify under the 75% gross income test or the 95% gross income test that we must satisfy annually in order to qualify and maintain our status as a REIT. ### Risks Related to Other Events **We are subject to certain provisions of Maryland law and our charter relating to business combinations which may prevent a transaction that may otherwise be in the interest of our stockholders.** The Maryland Business Combination Act provides that unless exempted, a Maryland corporation may not engage in business combinations, including a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities with an “interested stockholder” or an affiliate of an interested stockholder for five years after the most recent date on which the interested stockholder became an interested stockholder, and thereafter unless specified criteria are met. An interested stockholder is generally a person owning or controlling, directly or indirectly, 10% or more of the voting power of the outstanding voting stock of a Maryland corporation. Unless our Board of Directors takes action to exempt us, generally or with respect to certain transactions, from this statute, the Maryland Business Combination Act will be applicable to business combinations between us and other persons. In addition to the restrictions on business combinations contained in the Maryland Business Combination Act, our charter also contains restrictions on business combinations. Our charter requires that, except in certain circumstances, “business combinations,” including a merger or consolidation, and certain asset transfers and issuances of securities, with a “related person,” including a beneficial owner of 10% or more of our outstanding voting stock, be approved by the affirmative vote of the holders of at least 90% of our outstanding voting stock. The restrictions on business combinations provided under Maryland law and contained in our charter may delay, defer or prevent a change of control or other transaction even if such transaction involves a premium price for our common stock or our stockholders believe that such transaction is otherwise in their best interests. **Unfavorable resolution of litigation matters and disputes could have a material adverse effect on our financial condition.** From time to time, we are involved in legal proceedings, lawsuits and other claims. We may also be named as defendants in lawsuits arising out of our alleged actions or the alleged actions of our tenants and operators for which such tenants and operators have agreed to indemnify, defend and hold us harmless. An unfavorable resolution of any such litigation may have a materially adverse effect on our business, results of operations and financial condition. Regardless of the outcome, litigation or other legal proceedings may result in substantial costs, disruption of our normal business operations and the diversion of management attention. We may be unable to prevail in, or achieve a favorable settlement of, any pending or future legal action against us. See Item 3—Legal Proceedings of this Annual Report on Form 10-K. **Loss of our key personnel could temporarily disrupt our operations and adversely affect us.** We depend on the efforts of our executive officers, and competition for these individuals is intense. Although they are covered by our Executive Severance Plan and Change in Control Plan, which provide many of the benefits typically found in executive employment agreements, none of our executive officers have employment agreements with us. The loss or limited availability of the services of any of our executive officers, or our inability to recruit and retain qualified personnel, could, at least temporarily, have a materially adverse effect on our business, results of operations and financial condition and the value of our common stock. **We may experience uninsured or underinsured losses, which could result in a significant loss of the capital invested in a property, lower than expected future revenues or unanticipated expense.** We maintain and regularly review the comprehensive insurance coverage on our properties with terms, conditions, limits and deductibles that we believe are adequate and appropriate given the relative risk and costs of such coverage. However, a large number of our properties are located in areas exposed to earthquake, windstorm, flood and other natural disasters. In particular, our life science portfolio is concentrated in areas known to be subject to earthquake activity. While we purchase insurance coverage for earthquake, windstorm, flood and other natural disasters that we believe is adequate in light of current industry practice and analyses prepared by outside consultants, such insurance may not fully cover such losses. For example, we incurred uninsured losses of approximately $11 million during 2017 as a result of hurricane-related property damage. These losses can result in decreased anticipated revenues from a property and the loss of all or a portion of the capital we have invested in a property. Following these events, we may remain liable for any mortgage debt or other financial obligations related to the property. The insurance market for such exposures can be very volatile, and we may be unable to purchase the limits and terms we desire on a commercially reasonable basis. In addition, there are certain exposures for which we do not purchase insurance because we do not believe it is economically feasible to do so or where there is no viable insurance market. If one of our properties experiences a loss that is uninsured or that exceeds policy coverage limits, we could lose our investment in the damaged property as well as the anticipated future cash flows from such property. If the damaged property is subject to recourse indebtedness, we could continue to be liable for the indebtedness even if the property is irreparably damaged. In addition, even if damage to our properties is covered by insurance, a disruption of business caused by a casualty event may result in loss of revenues for us. Any business interruption insurance may not fully compensate the lender or us for such loss of revenue. **Environmental compliance costs and liabilities associated with our real estate-related investments may be substantial and may materially impair the value of those investments.** Federal, state and local laws, ordinances and regulations may require us, as a current or previous owner of real estate, to investigate and clean up certain hazardous or toxic substances or petroleum released at a property. We may be held liable to a governmental entity or to third parties for property damage and for investigation and cleanup costs incurred by the third parties in connection with the contamination. The costs of cleanup and remediation could be substantial. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and the costs it incurs in connection with the contamination. Although we currently carry environmental insurance on our properties in an amount that we believe is commercially reasonable and generally require our tenants and operators to indemnify us for environmental liabilities they cause, such liabilities could exceed the amount of our insurance, the financial ability of the tenant or operator to indemnify us or the value of the contaminated property. As the owner of a site, we may also be held liable to third parties for damages and injuries resulting from environmental contamination emanating from the site. We may also experience environmental liabilities arising from conditions not known to us. The cost of defending against these claims, complying with environmental regulatory requirements, conducting remediation of any contaminated property, or paying personal injury or other claims or fines could be substantial and could have a materially adverse effect on our business, results of operations and financial condition. In addition, the presence of contamination or the failure to remediate contamination may materially adversely affect our ability to use, sell or lease the property or to borrow using the property as collateral. **We rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could harm our business.** We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and to manage or support a variety of business processes, including financial transactions and records, and maintaining personal identifying information and tenant and lease data. We purchase some of our information technology from vendors, on whom our systems depend. We rely on commercially available systems, software, tools and monitoring to provide security for the processing, transmission and storage of confidential tenant and customer data, including individually identifiable information relating to financial accounts. Although we have taken steps to protect the security of our information systems and the data maintained in those systems, it is possible that our safety and security measures will not prevent the systems’ improper functioning or damage, or the improper access or disclosure of personally identifiable information such as in the event of cyber-attacks. In addition, the pace and unpredictability of cyber threats generally quickly renders long-term implementation plans designed to address cybersecurity risks obsolete. Security breaches, including those caused by physical or electronic break-ins, computer viruses, malware, worms, attacks by hackers or foreign governments, disruptions from unauthorized access and tampering, including through social engineering such as phishing attacks, coordinated denial-of-service attacks and similar breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidential information. The risk of security breaches has generally increased as the number, intensity and sophistication of attacks and intrusions have increased. In some cases, it may be difficult to anticipate or immediately detect such incidents and the damage they cause. In addition, our technology infrastructure and information systems are vulnerable to damage or interruption from natural disasters, power loss and telecommunications failures. Any failure to maintain proper function, security and availability of our information systems and the data maintained in those systems could interrupt our operations, damage our reputation, subject us to liability claims or regulatory penalties and could have a materially adverse effect on our business, financial condition and results of operations. ### Risk Related to Tax, including REIT-Related Risks **Loss of our tax status as a REIT would substantially reduce our available funds and would have materially adverse consequences for us and the value of our common stock.** Qualification as a REIT involves the application of numerous highly technical and complex provisions of the Code, for which there are only limited judicial and administrative interpretations, as well as the determination of various factual matters and circumstances not entirely within our control. We intend to continue to operate in a manner that enables us to qualify as a REIT. However, our qualification and taxation as a REIT depend upon our ability to meet, through actual annual operating results, asset diversification, distribution levels and diversity of stock ownership, the various qualification tests imposed under the Code. For example, to qualify as a REIT, at least 95% of our gross income in any year must be derived from qualifying sources, and we must make distributions to our stockholders aggregating annually at least 90% of our REIT taxable income, excluding net capital gains. In addition, new legislation, regulations, administrative interpretations or court decisions could change the tax laws or interpretations of the tax laws regarding qualification as a REIT, or the federal income tax consequences of that qualification, in a manner that is materially adverse to our stockholders. Accordingly, there is no assurance that we have operated or will continue to operate in a manner so as to qualify or remain qualified as a REIT. If we lose our REIT status, we will face serious tax consequences that will substantially reduce the funds available to make payments of principal and interest on the debt securities we issue and to make distributions to stockholders. If we fail to qualify as a REIT: - we will not be allowed a deduction for distributions to stockholders in computing our taxable income; - we will be subject to corporate-level income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates; - we could be subject to increased state and local income taxes; and - unless we are entitled to relief under relevant statutory provisions, we will be disqualified from taxation as a REIT for the four taxable years following the year during which we fail to qualify as a REIT. As a result of all these factors, our failure to qualify as a REIT could also impair our ability to expand our business and raise capital and could materially adversely affect the value of our common stock. The present federal income tax treatment of REITs may be modified, possibly with retroactive effect, by legislative, judicial or administrative action at any time, which could affect the federal income tax treatment of an investment in us. The federal income tax rules dealing with REITs constantly are under review by persons involved in the legislative process, the U.S. Internal Revenue Service (the “IRS”) and the U.S. Treasury Department, which results in statutory changes as well as frequent revisions to regulations and interpretations. Revisions in federal tax laws and interpretations thereof could affect or cause us to change our investments and commitments and affect the tax considerations of an investment in us. **We could have potential deferred and contingent tax liabilities from corporate acquisitions that could limit, delay or impede future sales of our properties.** If, during the five-year period beginning on the date we acquire certain companies, we recognize a gain on the disposition of any property acquired, then, to the extent of the excess of (i) the fair market value of such property as of the acquisition date over (ii) our adjusted income tax basis in such property as of that date, we will be required to pay a corporate-level federal income tax on this gain at the highest regular corporate rate. There can be no assurance that these triggering dispositions will not occur, and these requirements could limit, delay or impede future sales of our properties. In addition, the IRS may assert liabilities against us for corporate income taxes for taxable years prior to the time that we acquire certain companies, in which case we will owe these taxes plus interest and penalties, if any. **There are uncertainties relating to the calculation of non-REIT tax earnings and profits (“E&P”) in certain acquisitions, which may require us to distribute E&P.** In order to remain qualified as a REIT, we are required to distribute to our stockholders all of the accumulated non-REIT E&P of certain companies that we acquire, prior to the close of the first taxable year in which the acquisition occurs. Failure to make such E&P distributions would result in our disqualification as a REIT. The determination of the amount to be distributed in such E&P distributions is a complex factual and legal determination. We may have less than complete information at the time we undertake our analysis, or we may interpret the applicable law differently from the IRS. We currently believe that we have satisfied the requirements relating to such E&P distributions. There are, however, substantial uncertainties relating to the determination of E&P, including the possibility that the IRS could successfully assert that the taxable income of the companies acquired should be increased, which would increase our non-REIT E&P. Moreover, an audit of the acquired company following our acquisition could result in an increase in accumulated non-REIT E&P, which could require us to pay an additional taxable distribution to our then-existing stockholders, if we qualify under rules for curing this type of default, or could result in our disqualification as a REIT. Thus, we might fail to satisfy the requirement that we distribute all of our non-REIT E&P by the close of the first taxable year in which the acquisition occurs. Moreover, although there are procedures available to cure a failure to distribute all of our E&P, we cannot now determine whether we will be able to take advantage of these procedures or the economic impact on us of doing so. **Changes to U.S. federal income tax laws could materially and adversely affect us and our stockholders.** The recently enacted Tax Cuts and Jobs Act (the ‘‘Act’’) makes substantial changes to the Code. Among those changes are a significant permanent reduction in the generally applicable corporate tax rate, changes in the taxation of individuals and other non-corporate taxpayers that generally but not universally reduce their taxes on a temporary basis subject to ‘‘sunset’’ provisions, the elimination or modification of various currently allowed deductions (including substantial limitations on the deductibility of interest and, in the case of individuals, the deduction for personal state and local taxes), certain additional limitations on the deduction of net operating losses, and preferential rates of taxation on most ordinary REIT dividends and certain business income derived by non-corporate taxpayers in comparison to other ordinary income recognized by such taxpayers. The effect of these, and the many other, changes made in the Act is highly uncertain, both in terms of their direct effect on the taxation of an investment in our common stock and their indirect effect on the value of our assets or market conditions generally. Furthermore, many of the provisions of the Act will require guidance through the issuance of Treasury regulations in order to assess their effect. There may be a substantial delay before such regulations are promulgated, increasing the uncertainty as to the ultimate effect of the statutory amendments on us. It is also likely that there will be technical corrections legislation proposed with respect to the Act next year, the effect of which cannot be predicted and may be adverse to us or our stockholders. **Our international investments and operations may result in additional tax-related risks.** We have investments and operations in the U.K., and may further expand internationally. International expansion presents tax-related risks that are different from those we face with respect to our domestic properties and operations. These risks include, but are not limited to: - international currency gain recognized with respect to changes in exchange rates may not always qualify under the 75% gross income test or the 95% gross income test that we must satisfy annually in order to qualify and maintain our status as a REIT; - challenges with respect to the repatriation of foreign earnings and cash; and - challenges of complying with foreign tax rules (including the possible revisions in tax treaties or other laws and regulations, including those governing the taxation of our international income). **Our charter contains ownership limits with respect to our common stock and other classes of capital stock.** Our charter contains restrictions on the ownership and transfer of our common stock and preferred stock that are intended to assist us in preserving our qualification as a REIT. Under our charter, subject to certain exceptions, no person or entity may own, actually or constructively, more than 9.8% (by value or by number of shares, whichever is more restrictive) of the outstanding shares of our common stock or any class or series of our preferred stock. Additionally, our charter has a 9.9% ownership limitation on the direct or indirect ownership of our voting shares, which may include common stock or other classes of capital stock. Our Board of Directors, in its sole discretion, may exempt a proposed transferee from either ownership limit. The ownership limits may delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or might otherwise be in the best interests of our stockholders. ## Properties As filed, 10,309 characters. 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; - the mix of revenues generated at healthcare facilities between privately paid and government reimbursed; - 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 leases ("DFL") investments as of and for the year ended December 31, 2017 (square feet and dollars in thousands): | Facility Location Senior housing triple-net—real estate: | Number of Facilities | Capacity (Units) | Gross Asset Value(1) | Rental Revenues(2) | Operating Expenses | | --- | ---: | ---: | ---: | ---: | ---: | | California | 17 | 1,727 | $416,949 | $53,589 | $(3,139) | | Virginia | 10 | 1,227 | 273,045 | 20,409 | — | | Florida | 13 | 1,683 | 258,538 | 25,691 | — | | Texas | 16 | 1,762 | 218,137 | 5,058 | — | | Washington | 14 | 953 | 190,674 | 16,361 | — | | Oregon | 13 | 1,118 | 162,628 | 17,082 | (243) | | New Jersey | 7 | 680 | 144,574 | 100 | 3 | | Other (25 States) | 64 | 6,063 | 1,082,775 | 138,144 | (392) | | | 154 | 15,213 | 2,747,320 | 276,434 | (3,771) | | Senior housing—DFLs(3): | | | | | | | Other (12 States) | 27 | 3,118 | 629,748 | 37,113 | (48) | | Total Senior Housing Triple-Net | 181 | 18,331 | $3,377,068 | $313,547 | $(3,819) | | SHOP: | | (Units) | | | | | Texas | 21 | 3,640 | $518,021 | $135,763 | $(98,929) | | Florida | 23 | 3,234 | 436,429 | 135,751 | (108,063) | | Colorado | 6 | 952 | 203,717 | 46,755 | (27,042) | | Illinois | 5 | 1,063 | 203,644 | 42,126 | (32,189) | | Maryland | 6 | 590 | 176,702 | 33,292 | (24,341) | | Other (16 States) | 41 | 4,265 | 680,298 | 131,786 | (105,927) | | Total SHOP | 102 | 13,744 | $2,218,811 | $525,473 | $(396,491) | 28 | Facility Location Life science: | Number of Facilities | Capacity (Sq. Ft.) | Gross Asset Value(1) | Rental Revenues(2) | Operating Expenses | | --- | ---: | ---: | ---: | ---: | ---: | | California | 121 | 6,818 | $3,618,619 | $338,668 | $(74,066) | | Other (3 States) | 10 | 909 | 359,157 | 20,148 | (3,935) | | Total life science | 131 | 7,727 | $3,977,776 | $358,816 | $(78,001) | | Medical office: | | (Sq. Ft.) | | | | | Texas | 67 | 5,867 | $1,078,259 | $135,349 | $(55,733) | | California | 18 | 1,031 | 324,021 | 35,418 | (18,532) | | Pennsylvania | 4 | 1,059 | 309,085 | 31,326 | (12,523) | | Florida | 23 | 1,329 | 235,550 | 31,227 | (12,317) | | Other (29 States) | 142 | 9,169 | 1,783,694 | 244,139 | (84,092) | | Total medical office | 254 | 18,455 | $3,730,609 | $477,459 | $(183,197) | | Other(4): | | (Beds) | | | | | Texas | 4 | 1,035 | $231,645 | $35,650 | $(4,489) | | California | 2 | 111 | 143,500 | 19,350 | (172) | | Other (7 States) | 8 | 988 | 154,558 | 28,813 | (82) | | | 14 | 2,134 | $529,703 | $83,813 | $(4,743) | | Other—U.K.: | | (Units) | | | | | Other (U.K.) | 61 | 3,183 | 337,179 | 31,798 | — | | Other—Post-acute/skilled nursing.: | | (Beds) | | | | | Virginia | 1 | 120 | 16,596 | 1,235 | — | | Total other non-reportable segments | 76 | | $883,478 | $116,846 | $(4,743) | | **Total properties** | 744 | | $14,187,742 | $1,792,141 | $(666,251) | (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. Includes real estate held for sale with an aggregate gross asset value of $485 million. (2) Represent the combined amount of rental and related revenues, tenant recoveries, 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. ### 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). Average annual rent is presented as a ratio of revenues comprised of rental and related revenues, tenant recoveries and income from DFLs divided by the average capacity or average occupied square feet of the facilities and annualized for mergers and acquisitions for the year in which they occurred. 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 and DFL non-cash interest). | Senior Housing Triple-Net: | 2017 | 2016 | 2015 | 2014 | 2013 | | --- | ---: | ---: | ---: | ---: | ---: | | Average annual rent per unit | $15,352 | $14,604 | $14,544 | $13,907 | $13,361 | | Average capacity (available units) | 21,536 | 28,455 | 28,777 | 33,917 | 35,932 | | SHOP: | | | | | | | Average annual rent per unit | $41,133 | $42,851 | $41,435 | $38,017 | $32,070 | | Average capacity (available units) | 12,758 | 16,028 | 12,704 | 6,408 | 4,620 | | Life science: | | | | | | | Average occupancy percentage | 96% | 98% | 97% | 93% | 92% | | Average annual rent per square foot | $52 | $48 | $46 | $46 | $44 | | Average occupied square feet | 6,841 | 7,332 | 7,179 | 6,637 | 6,480 | | Medical office: | | | | | | | Average occupancy percentage | 92% | 91% | 91% | 91% | 91% | | Average annual rent per square foot | $28 | $28 | $28 | $28 | $27 | | Average occupied square feet | 16,674 | 15,697 | 14,677 | 13,136 | 12,767 | | Other non-reportable segments: | | | | | | | Average annual rent per bed - Hospital | $38,017 | $39,076 | $39,834 | $38,756 | $38,089 | | Average capacity (available beds) - Hospital | 2,161 | 2,271 | 2,187 | 2,184 | 2,138 | | Average annual rent per unit - U.K. | 9,097 | 9,200 | 10,048 | 11,240 | — | | Average capacity (available units) - U.K. | 3,188 | 3,190 | 2,515 | 501 | — | | Average annual rent per bed - SNF | 10,298 | 10,803 | 8,292 | 8,062 | 7,537 | | Average capacity (available beds) - SNF | 120 | 426 | 1,047 | 1,022 | 974 | 30 ### 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 (dollars and square feet in thousands), and excludes properties in our SHOP segment and assets held for sale. See “Tenant Purchase Options” section of Note 11 to the Consolidated Financial Statements for additional information on leases subject to purchase options. | Segment Senior housing triple-net: | Expiration Year Total | 2018(1) | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Properties | 179 | 5 | 2 | 22 | 6 | 1 | 24 | 11 | 5 | 7 | 4 | 92 | | Base rent(2) | $304,452 | $6,191 | $2,238 | $39,646 | $10,191 | $1,513 | $44,926 | $18,052 | $9,618 | $5,746 | $12,090 | $154,241 | | % of segment base rent | 100 | 2 | 1 | 13 | 3 | — | 15 | 6 | 3 | 2 | 4 | 51 | | Life science: | | | | | | | | | | | | | | Square feet | 6,900 | 457 | 832 | 556 | 948 | 631 | 1,035 | 83 | 845 | 203 | 373 | 937 | | Base rent(2) | $291,683 | $15,081 | $31,693 | $19,598 | $50,307 | $22,656 | $60,929 | $4,618 | $34,653 | $8,991 | $15,328 | $27,829 | | % of segment base rent | 100 | 5 | 11 | 7 | 17 | 8 | 21 | 2 | 12 | 3 | 5 | 9 | | Medical office: | | | | | | | | | | | | | | Square feet | 16,945 | 2,939 | 2,172 | 2,280 | 1,548 | 1,670 | 719 | 809 | 1,926 | 758 | 722 | 1,402 | | Base rent(2) | $389,497 | $70,049 | $53,422 | $58,461 | $39,115 | $41,392 | $17,213 | $21,240 | $31,625 | $18,541 | $14,387 | $24,052 | | % of segment base rent | 100 | 18 | 14 | 15 | 10 | 11 | 4 | 5 | 8 | 5 | 4 | 6 | | Other non-reportable segments: | | | | | | | | | | | | | | Properties | 76 | — | 5 | 1 | 1 | 4 | — | 2 | 1 | — | — | 62 | | Base rent(2) | $105,051 | $— | $7,594 | $7,977 | $1,572 | $13,179 | $— | $15,375 | $20,619 | $— | $— | $38,735 | | % of segment base rent | 100 | — | 7 | 8 | 1 | 13 | — | 15 | 20 | — | — | 36 | | Total: | | | | | | | | | | | | | | Base rent(2) | $1,090,683 | $91,321 | $94,947 | $125,682 | $101,185 | $78,740 | $123,068 | $59,285 | $96,515 | $33,278 | $41,805 | $244,857 | | % of total base rent | 100 | 8 | 9 | 12 | 9 | 7 | 11 | 5 | 9 | 3 | 4 | 23 | (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 Schedule III: Real Estate and Accumulated Depreciation, included in this report, which information is incorporated by reference in this Item 2. ## Legal proceedings As filed, 422 characters. 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. ## Management's discussion and analysis As filed, 112,435 characters. 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: - 2017 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 ### 2017 Transaction Overview ### Master Transactions and Cooperation Agreement with Brookdale On November 1, 2017, HCP and Brookdale entered into a Master Transactions and Cooperation Agreement (the “MTCA”) to provide us with the ability to significantly reduce our concentration of assets leased to and/or managed by Brookdale (the "Brookdale Transaction"). Through a series of dispositions and transitions of assets currently leased to and/or managed by Brookdale, as contemplated by the MTCA, our exposure to Brookdale is expected to be significantly reduced. In connection with the overall transaction pursuant to the MTCA, HCP (through certain of its subsidiaries), and Brookdale (through certain of its subsidiaries) (the “Lessee”) entered into an Amended and Restated Master Lease and Security Agreement (the “Amended Master Lease”), which amended and restated the then-existing triple-net leases between the parties for 78 assets (before giving effect to the contemplated sale or transition of 34 assets discussed below), which account for primarily all of the assets subject to triple-net leases between HCP and the Lessee. Under the Amended Master Lease, we have the benefit of a guaranty from Brookdale of the Lessee’s obligations and, upon a change in control, will have various additional protections under the MTCA and the Amended Master Lease. The Amended Master Lease preserves the renewal terms and, with certain exceptions, the rents under the previously existing triple-net leases. In addition, HCP and Brookdale agreed to the following: - We have the right to sell, or transition to other operators, 32 triple-net assets. If such sale or transition does not occur within one year, the triple-net lease with respect to such assets will convert to a cash flow lease (under which we will bear the risks and rewards of operating the assets) with a term of two years, provided that we have the right to terminate the cash flow lease at any time during the term without penalty; - We have provided an aggregate $5 million annual reduction in rent on three assets, effective January 1, 2018; and - We will sell two triple-net assets to Brookdale or its affiliates for $35 million, which we anticipate completing during the first half of 2018. Also pursuant to the MTCA, HCP and Brookdale agreed to the following: - HCP, which owned 90% of the interests in its RIDEA I and RIDEA III joint ventures with Brookdale at the time the MTCA was executed, agreed to purchase Brookdale’s 10% noncontrolling interest in each joint venture for an aggregate purchase price of $95 million. These joint ventures collectively own and operate 58 independent living, assisted living, memory care and/or skilled nursing facilities (the “RIDEA Facilities”). We completed our acquisition of the RIDEA III noncontrolling interest in December 2017 and anticipate completing our acquisition of the RIDEA I noncontrolling interest during the first half of 2018; - We have the right to sell, or transition to other managers, 36 of the RIDEA Facilities and terminate related management agreements with an affiliate of Brookdale without penalty. If the related management agreements are not terminated within one year, the base management fee (5% of gross revenues) increases by 1% of gross revenues per year over the following two years to a maximum of 7% of gross revenues; - We will sell four of the RIDEA Facilities to Brookdale or its affiliates for $239 million, one of which was sold in January 2018 for $27 million. We anticipate completing the sale of the remaining three RIDEA Facilities during the first half of 2018; - A Brookdale affiliate continues to manage the remaining 18 RIDEA Facilities pursuant to amended and restated management agreements, which provide for extended terms on select assets, modified performance hurdles for extensions and incentive fees, and modified termination rights (including stricter performance-based termination rights, a staggered right to terminate seven agreements over a 10 year period beginning in 2021, and a right to terminate at will upon payment of a termination fee, in lieu of sale-related termination rights), and two other existing facilities managed in separate RIDEA structures; and - We have the right to sell, to certain permitted transferees, our 49% ownership interest in joint ventures that own and operate a portfolio of continuing care retirement communities and in which Brookdale owns the other 51% interest (the “CCRC JV”), subject to certain conditions and a right of first offer in favor of Brookdale. Brookdale will have a corresponding right to sell its 51% interest in the CCRC JV to certain permitted transferees, subject to certain conditions, a right of first offer and a right to terminate management agreements following such sale of Brookdale’s interest, each in favor of HCP. Following a change in control of Brookdale, we will have the right to initiate a sale of the CCRC portfolio, subject to certain rights of first offer and first refusal in favor of Brookdale. See Note 3 to the Consolidated Financial Statements for additional information. ### RIDEA II Sale Transaction 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 (“CPA”) (“HCP/CPA PropCo” and “HCP/CPA OpCo,” together, 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 for both transaction elements, we received combined proceeds of $480 million from the HCP/CPA JV and $242 million in loan receivables and retained an approximately 40% ownership interest in RIDEA II (the note receivable and 40% ownership interest are herein referred to as the “RIDEA II Investments”). This transaction resulted in us deconsolidating the net assets of RIDEA II and recognizing a net gain on sale of $99 million. The RIDEA II Investments are currently recognized and accounted for as equity method investments. On November 1, 2017, we entered into a definitive agreement with an investor group led by CPA to sell our remaining 40% ownership interest in RIDEA II. We expect the transaction to close in 2018. CPA has also agreed to refinance our $242 million loan receivables from RIDEA II within one year following the closing of the transaction. ### Investment Transactions During the second quarter of 2017, we acquired a 124,000 square foot campus in the Sorrento Mesa submarket of San Diego, California for $26 million. Upon acquisition, we commenced repositioning one of the buildings into class-A lab space following an office-to-lab conversion strategy. During the third quarter of 2017, we acquired a portfolio of three medical office buildings in Texas for $49 million and a life science facility in South San Francisco, California for $64 million. During the fourth quarter of 2017, we completed the following investments: - In November 2017, we acquired a 90-unit SHOP facility in a suburb of Boston, Massachusetts for $45 million. HCP owns a majority interest in this facility through a joint venture with LCB Senior Living. - In December 2017, we acquired a $228 million life science campus known as the Hayden Research Campus located in the Boston suburb of Lexington, Massachusetts. HCP owns a majority interest in this campus through a joint venture with King Street Properties (“King Street”). The campus includes two existing buildings totaling 400,000 square feet and was 66% leased at closing, anchored by major life science tenants including Shire US, Inc., a subsidiary of Shire plc, and Merck, Sharp and Dohme, a subsidiary of Merck and Co., Inc. Additionally, King Street is currently seeking entitlement approvals from local authorities for the joint venture to develop an additional 209,000 square feet of life science space on the campus. - In December 2017, we acquired a portfolio of 11 MOBs located throughout the United States, totaling approximately 378,000 square feet, for $151 million. - In December 2017, we entered into a participating debt financing arrangement with Columbia Pacific Advisors, LLC to fund the construction of 620 Terry, a $147 million, 243-unit senior living development located in Seattle. Upon expected completion in 2019, 620 Terry will be operated by Leisure Care, LLC, a leading senior housing operator, and offer a mix of independent-living, assisted-living and memory care units. We will provide up to $115 million of financing and earn 6.5% interest on the outstanding loan balance. Upon sale or refinancing, we will receive 20% of fair market value in excess of the total development cost. ### Disposition and Loan Repayment Transactions During the first quarter of 2017, we completed the following disposition and loan repayment transactions: - In January 2017, we sold four life science facilities in Salt Lake City, Utah for $76 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. - 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 (2015) 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). During the second quarter of 2017, we completed the following disposition and loan repayment transactions: - 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. During the third quarter of 2017, we sold two senior housing triple-net facilities for $15 million. During the fourth quarter 2017, we completed the following disposition transactions: - In October 2017, we sold two senior housing triple-net facilities for $12 million. - In November 2017, we sold a MOB for $11 million and a SHOP facility for $24 million. - In December 2017, we sold three SHOP assets for $17 million and two MOBs for $3 million. ### Financing Activities - During the year ended December 31, 2017, we had net debt repayments of $1.4 billion primarily using proceeds from the dispositions of real estate (primarily the sale of 64 senior housing triple-net assets), the partial sale of RIDEA II, the sale of our Four Seasons Notes and the repayment of our HC-One Facility. Debt repayments during the year ended December 31, 2017 consisted of the following: - During the first quarter of 2017, we repaid our £137 million unsecured term loan (the “2012 Term Loan”) and $472 million of mortgage debt. - During the second quarter of 2017, we repaid $250 million of maturing senior unsecured notes and paid down £51 million of our £220 million unsecured term loan (the “2015 Term Loan”). - During the third quarter of 2017, we repurchased $500 million of our 5.375% senior notes due 2021 and recorded a $54 million loss on debt extinguishment. - During the fourth quarter of 2017, we terminated our then existing bank line of credit facility (the "Facility") and entered into a new $2.0 billion unsecured revolving line of credit facility (the “New Facility”) maturing on October 19, 2021. Borrowings under the New Facility accrue interest at LIBOR plus a margin that depends on our credit ratings (1.00% initially). We pay a facility fee on the entire revolving commitment that depends on our credit ratings (0.20% initially and as of December 31, 2017). The New Facility contains two, six-month extension options and includes a feature that allows us to increase the borrowing capacity by an aggregate amount of up to $750 million, subject to securing additional commitments. ### Developments and Redevelopments The Cove Phase I and Phase II have reached 100% leased during the year ended December 31, 2017. During the year ended December 31, 2017, we added $384 million of new projects to our development and redevelopment pipelines including: - Commenced the $219 million Phase I development at Sierra Point, consisting of two buildings totaling 215,000 square feet of Class A life science and office space in South San Francisco, California, with an estimated completion in late 2019. - Commenced a $40 million redevelopment of a MOB located in the University City submarket of Philadelphia, near the University of Pennsylvania, with an estimated completion in the second quarter of 2018. - 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 estimated total construction cost is approximately $28 million, with an estimated completion in the second half of 2018. - Commenced development on a 79-unit senior housing facility in Waldwick, New Jersey (New York MSA) for $31 million in a joint venture. Our share of the estimated total construction costs is approximately $26 million, with an estimated completion in late 2018. - Commenced $22 million of redevelopment projects at two recently-acquired life science assets in the Sorrento Mesa submarket of San Diego, California, with an estimated completion in late 2018. - Commenced a $16 million life science development expansion project in the Sorrento Mesa submarket of San Diego, California, with an estimated completion in the second half of 2019. ### Dividends Quarterly cash dividends paid during 2017 aggregated to $1.48 per share. On February 1, 2018, our Board of Directors declared a quarterly cash dividend of $0.37 per common share. The dividend will be paid on March 2, 2018 to stockholders of record as of the close of business on February 15, 2018. ### 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 and life science segments, we invest through the acquisition and development of MOBs and life science facilities, which generally require a greater level of property management. Our senior housing facilities are managed utilizing triple-net leases and RIDEA structures. We have other non-reportable segments that are comprised primarily of our U.K. care homes, debt investments, unconsolidated joint ventures and hospitals. We evaluate performance based upon: (i) property net operating income from continuing operations (“NOI”) and (ii) adjusted NOI (cash NOI) in each segment. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2 to the Consolidated Financial Statements). ### Non-GAAP Financial Measures #### Net Operating Income 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. 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, termination fees and the impact of deferred community fee income and expense. The adjustments to NOI and resulting Adjusted NOI for SHOP have been recast for prior periods presented to conform to the current period presentation which excludes 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.” During the fourth quarter of 2017, as a result of a change in how operating results are reported to our chief operating decision makers for the purpose of evaluating performance and allocating resources, we began excluding unconsolidated joint ventures from the evaluation of our segments' operating results. Unconsolidated joint ventures are now reflected in other non-reportable segments, and as a result, excluded from NOI and Adjusted NOI. Prior period NOI and Adjusted NOI have also been recast to conform to current period presentation which excludes unconsolidated joint ventures. 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. #### 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 consolidated portfolio of properties. SPP NOI excludes certain non-property specific operating expenses that are allocated to each operating segment on a consolidated basis. SPP NOI for properties that undergo a change in ownership is reported based on the current ownership percentage. Properties are included in SPP once they are stabilized for the full period in both comparison periods. 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. Properties that experience a change in reporting structure, such as a transition from a triple-net lease to a RIDEA reporting structure, are considered stabilized after 12 months in operations under a consistent reporting structure. A property is removed from SPP when it is classified as held for sale, sold, placed into redevelopment, experiences a casualty event that significantly impacts operations or changes its reporting structure (such as triple-net to SHOP). 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 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. For consolidated joint ventures in which we do not own 100%, we reflect our share 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 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. 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, transaction-related items, impairments (recoveries) of non-depreciable assets, severance and related charges, prepayment costs (benefits) associated with early retirement or payment of debt, litigation costs, casualty-related charges (recoveries), foreign currency remeasurement losses (gains) and changes in tax legislation (“FFO as adjusted”). Transaction-related items include transaction expenses and gains/charges incurred as a result of mergers and acquisitions and lease amendment or termination activities. 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. 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 certain other adjustments to net income (loss), in addition to adjustments made to arrive at the NAREIT defined measure of FFO. 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 is defined as FFO as adjusted after excluding the impact of the following: (i) amortization of deferred compensation expense, (ii) amortization of deferred financing costs, net, (iii) straight-line rents, (iv) amortization of acquired market lease intangibles, net, (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 prior period amounts in the “Non-GAAP Financial Measures Reconciliation” below for FAD have been reclassified 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 ("FAD capital expenditures") 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 Year Ended December 31, 2017 to the Year Ended December 31, 2016 and the Year Ended December 31, 2016 to the Year Ended December 31, 2015*** ### Overview(1) #### 2017 and 2016 The following table summarizes results for the years ended December 31, 2017 and 2016 (dollars in thousands except per share data): | | Year Ended December 31, 2017 Amount | Per Diluted Share | Year Ended December 31, 2016 Amount | Per Diluted Share | Per Share Change | | --- | ---: | ---: | ---: | ---: | ---: | | **Net income (loss) applicable to common shares** | $413,013 | $0.88 | $626,549 | $1.34 | $(0.46) | | **FFO** | 661,113 | 1.41 | 1,119,153 | 2.39 | (0.98) | | **FFO as adjusted** | 918,402 | 1.95 | 1,282,390 | 2.74 | (0.79) | | **FAD** | 803,720 | | 1,215,696 | | | (1) For the reconciliation of non-GAAP financial measures, see “Non-GAAP Financial Measure Reconciliations” section below. Net income (loss) applicable to common shares (“EPS”) decreased primarily as a result of the following: - a reduction in net income from discontinued operations due to the Spin-Off of QCP on October 31, 2016; - a loss on debt extinguishment in July 2017, representing a premium for early payment on the repurchase of our senior notes; - a reduction in rental and related revenues primarily as a result of assets sold during 2017, including the sale of 64 senior housing triple-net assets in the first quarter of 2017; - a reduction in NOI primarily related to the net impact of the Brookdale Transaction during the fourth quarter of 2017; - a reduction in earnings due to the partial sale and deconsolidation of RIDEA II during the first quarter of 2017; - impairments related to: (i) our mezzanine loan facility to Tandem Health Care (the “Tandem Mezzanine Loan”) and (ii) 11 underperforming senior housing triple-net facilities in the third quarter of 2017; - increased litigation-related costs, including costs from securities class action litigation, and a legal settlement in 2017; - casualty-related charges due to hurricanes in the third quarter of 2017; and - a reduction in interest income due to (i) the payoffs of our HC-One Facility in June 2017 and a participating development loan during the third quarter of 2016 and (ii) decreased interest received from our Tandem Mezzanine Loan during the fourth quarter of 2017, partially offset by additional interest income in 2017 from our $131 million loan to Maria Mallaband in November 2016. The decrease in EPS was partially offset by: - a reduction in interest expense as a result of debt repayments in the fourth quarter of 2016 and throughout 2017; - a reduction in severance and related charges primarily related to the departure of our former President and Chief Executive Officer ("CEO") in 2016 compared to severance and related charges primarily related to the departure of our former Executive Vice President and Chief Accounting Officer ("CAO") in 2017; - a larger net gain on sales of real estate during 2017 compared to 2016, primarily related to the sale of 64 senior housing triple-net assets and the partial sale of RIDEA II during 2017; - an increase in income tax benefit primarily from real estate dispositions during 2017, partially offset by an income tax expense related to the impact of tax rate legislation during the fourth quarter of 2017; and - an increase in other income, net primarily related to the gain on sale of our Four Seasons investments during 2017. FFO decreased primarily as a result of the aforementioned events impacting EPS, except for gain on sales of real estate and impairments of real estate, which are excluded from FFO. FFO as adjusted decreased primarily as a result of the following: - a reduction in net income from discontinued operations due to the Spin-Off of QCP on October 31, 2016; - a reduction in rental and related revenues primarily as a result of assets sold during 2017, including the sale of 64 senior housing triple-net assets; - a reduction in earnings due to the partial sale and deconsolidation of RIDEA II during the first quarter of 2017; and - a reduction in interest income due to (i) the payoffs of our HC-One Facility in June 2017 and a participating development loan during the third quarter of 2016 and (ii) decreased interest received from our Tandem Mezzanine Loan during the fourth quarter of 2017, partially offset by additional interest income in 2017 from our $131 million loan to Maria Mallaband in November 2016. The decrease in FFO as adjusted was partially offset by a reduction in interest expense as a result of debt repayments in the fourth quarter of 2016 and throughout 2017. FAD decreased primarily as a result of the aforementioned events impacting FFO as adjusted, (i) increased leasing costs and tenant capital improvements and (ii) decreased installment payments received from Brookdale for 2014 lease terminations that were paid over a period of three years and concluded in 2017. #### 2016 and 2015 The following table summarizes results for the years ended December 31, 2016 and 2015 (dollars in thousands except per share data): | | Year Ended December 31, 2016 Amount | Per Diluted Share | Year Ended December 31, 2015 Amount | Per Diluted Share | Per Share Change | | --- | ---: | ---: | ---: | ---: | ---: | | **Net income (loss) applicable to common shares** | $626,549 | $1.34 | $(560,552) | $(1.21) | $2.55 | | **FFO** | 1,119,153 | 2.39 | (10,841) | (0.02) | 2.41 | | **FFO as adjusted** | 1,282,390 | 2.74 | 1,470,167 | 3.16 | (0.42) | | **FAD** | 1,215,696 | | 1,261,849 | | | EPS increased primarily as a result of the following: - impairment charges during 2015, not repeated in 2016; - increased NOI from: (i) our 2015 and 2016 acquisitions, (ii) annual rent escalations and (iii) developments placed in service; - increased gain on sales of real estate due to a higher volume of disposition activity during 2016; - a reduction in interest expense as a result of debt repayments during 2015 and 2016; and - a net termination fee expense recognized in 2015, not repeated in 2016. The increase in EPS was partially offset by following: - a reduction in income from our HCR Manor Care, Inc. ("HCRMC") investments as a result of: (i) the HCRMC lease amendment effective April 1, 2015, (ii) the sale of non-strategic assets during the second half of 2015 and 2016, and (iii) a change in income recognition to a cash basis method beginning in January 2016; - the impact from the Spin-Off of QCP resulting in: (i) increased transaction costs and (ii) loss on debt extinguishment, representing penalties on the prepayment of debt using proceeds from the Spin-Off; - increased income tax expense related to our estimated exposure to state built-in gain tax; - a reduction in interest income from placing our Four Seasons Notes on cost recovery status in the third quarter of 2015 and loan repayments during 2015 and 2016; - increased severance-related charges during 2016 primarily related to the departure of our former CEO in July 2016; - increased depreciation and amortization from our 2015 and 2016 acquisitions; and - a reduction of foreign currency remeasurement gains recognized as a result of effective hedges designated in September 2015. FFO increased primarily as a result of the aforementioned events impacting EPS, except for depreciation and amortization and gain on sales of real estate, which are excluded from FFO. FFO as adjusted decreased primarily as a result of the following: - a reduction in income from our HCRMC investments as a result of: (i) the HCRMC lease amendment effective April 1, 2015, (ii) the sale of non-strategic assets during the second half of 2015 and 2016 and (iii) a change in income recognition to a cash basis method beginning in January 2016; - decreased income from the QCP assets included in the Spin-Off; and - a reduction in interest income from placing our Four Seasons Notes on cost recovery status in the third quarter of 2015 and loan repayments during 2015 and 2016. The decrease in FFO as adjusted was partially offset by the following: - increased NOI from: (i) our 2015 and 2016 consolidated acquisitions, (ii) annual rent escalations and (iii) developments placed in service; and - a reduction in interest expense as a result of debt repayments during 2015 and 2016. FAD decreased primarily as a result of the following: - decreased income from our HCRMC investments as a result of the HCRMC lease amendment effective April 1, 2015 and the sale of non-strategic assets during the second half of 2015 and the first half of 2016; - decreased income from the QCP assets included in the Spin-Off; - decreased interest income from placing our Four Seasons Notes on cost recovery status in the third quarter of 2015 and loan repayments during 2015 and 2016; and - increased leasing costs and second generation capital expenditures. The decrease in FAD was partially offset by the following: - increased NOI from: (i) our 2015 and 2016 consolidated acquisitions, (ii) annual rent escalations and (iii) developments placed in service; and - increased incremental interest income from the payoff of participating development loans. ### Segment Analysis The tables below provide selected operating information for our SPP and total property portfolio for each of our reportable segments. For the year ended December 31, 2017, our SPP consists of 617 properties representing properties acquired or placed in service and stabilized on or prior to January 1, 2016 and that remained in operations under a consistent reporting structure through December 31, 2017. For the year ended December 31, 2016, our SPP consisted of 621 properties acquired or placed in service and stabilized on or prior to January 1, 2015 and that remained in operations under a consistent reporting structure through December 31, 2017. Our total consolidated property portfolio consists of 744, 851 and 869 properties at December 31, 2017, 2016 and 2015, respectively, excluding properties in the Spin-Off. ### Senior Housing Triple-Net #### 2017 and 2016 The following table summarizes results at and for the years ended December 31, 2017 and 2016 (dollars in thousands except per unit data): | | SPP 2017 | 2016 | Change | Total Portfolio 2017 | 2016 | Change | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Rental revenues(1) | $249,347 | $273,984 | $(24,637) | $313,547 | $423,118 | $(109,571) | | Operating expenses | (495) | (197) | (298) | (3,819) | (6,710) | 2,891 | | NOI | 248,852 | 273,787 | (24,935) | 309,728 | 416,408 | (106,680) | | Adjustments to NOI | 38,760 | (1,374) | 40,134 | 17,098 | (7,566) | 24,664 | | Adjusted NOI | $287,612 | $272,413 | $15,199 | 326,826 | 408,842 | (82,016) | | Non-SPP adjusted NOI | | | | (39,214) | (136,429) | 97,215 | | SPP adjusted NOI | | | | $287,612 | $272,413 | $15,199 | | SPP Adjusted NOI % change | | | 5.6% | | | | | Property count(2) | 174 | 174 | | 181 | 274 | | | Average capacity (units)(3) | 17,724 | 17,741 | | 21,536 | 28,455 | | | Average annual rent per unit | $16,255 | $15,366 | | $15,352 | $14,604 | | (1) Represents rental and related revenues and income from DFLs. (2) From our 2016 presentation of SPP, we removed four senior housing triple-net properties that were sold, 25 senior housing triple-net properties that were transitioned to our SHOP segment and two senior housing triple-net properties that were classified as held for sale. Our 2016 Total Portfolio property count has been adjusted to include 64 properties classified as held for sale as of December 31, 2016. (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 decreased primarily as a result of the net impact of triple-net lease terminations from the Brookdale Transaction during the fourth quarter of 2017. 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. Additionally, 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 transfer of 42 senior housing triple-net facilities to 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 Adjusted NOI. #### 2016 and 2015 The following table summarizes results at and for the years ended December 31, 2016 and 2015 (dollars in thousands except per unit data): | | SPP 2016 | 2015 | Change | Total Portfolio 2016 | 2015 | Change | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Rental revenues(1) | $302,976 | $304,442 | $(1,466) | $423,118 | $428,269 | $(5,151) | | Operating expenses | (237) | (637) | 400 | (6,710) | (3,427) | (3,283) | | NOI | 302,739 | 303,805 | (1,066) | 416,408 | 424,842 | (8,434) | | Non-cash adjustments to NOI | (5,282) | (7,550) | 2,268 | (7,566) | (9,716) | 2,150 | | Adjusted NOI | $297,457 | $296,255 | $1,202 | 408,842 | 415,126 | (6,284) | | Non-SPP adjusted NOI | | | | (111,385) | (118,871) | 7,486 | | SPP adjusted NOI | | | | $297,457 | $296,255 | $1,202 | | Adjusted NOI % change | | | 0.4% | | | | | Property count(2) | 205 | 205 | | 274 | 295 | | | Average capacity (units)(3) | 20,269 | 20,268 | | 28,455 | 28,777 | | | Average annual rent per unit | $14,684 | $14,645 | | $14,604 | $14,544 | | (1) Represents rental and related revenues and income from DFLs. (2) From our 2015 presentation of SPP, we removed nine senior housing triple-net properties that were sold, 17 senior housing triple-net properties that were transitioned to a RIDEA structure in our SHOP segment and 64 senior housing triple-net properties that were classified as held for sale. Our 2016 Total Portfolio property count has been adjusted to include 64 properties classified as held for sale as of December 31, 2016. (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 decreased primarily as a result of lower rents in our portfolio of assets leased to Sunrise Senior Living (the “Sunrise Portfolio”). SPP adjusted NOI increased primarily as a result of annual rent escalations, partially offset by lower cash rent received from our Sunrise portfolio. Additionally, Total Portfolio NOI and adjusted NOI decreased primarily as a result of the following Non-SPP impacts: - nine senior housing triple-net facilities sold in 2016; and - the transition of 17 senior housing triple-net facilities to a RIDEA structure (reported in our SHOP segment); partially offset by - five senior housing triple-net facilities acquired in the first quarter of 2016. ### Senior Housing Operating Portfolio #### 2017 and 2016 The following table summarizes results at and for the years ended December 31, 2017 and 2016 (dollars in thousands, except per unit data): | | SPP 2017 | 2016 | Change | Total Portfolio 2017 | 2016 | Change | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Resident fees and services | $321,209 | $317,361 | $3,848 | $525,473 | $686,822 | $(161,349) | | Operating expenses | (239,702) | (202,624) | (37,078) | (396,491) | (480,870) | 84,379 | | NOI | 81,507 | 114,737 | (33,230) | 128,982 | 205,952 | (76,970) | | Adjustments to NOI | 32,863 | (1,297) | 34,160 | 33,227 | (2,686) | 35,913 | | Adjusted NOI | $114,370 | $113,440 | $930 | 162,209 | 203,266 | (41,057) | | Non-SPP adjusted NOI | | | | (47,839) | (89,826) | 41,987 | | SPP adjusted NOI | | | | $114,370 | $113,440 | $930 | | SPP Adjusted NOI % change | | | 0.8% | | | | | Property count(1) | 48 | 48 | | 102 | 130 | | | Average capacity (units)(2) | 8,128 | 8,136 | | 12,758 | 16,028 | | | Average annual rent per unit | $44,378 | $43,842 | | $41,133 | $42,851 | | (1) From our 2016 presentation of SPP, we removed a SHOP property that was placed into redevelopment, two SHOP properties that were classified as held for sale and 49 SHOP properties that were deconsolidated. Our 2016 Total Portfolio property count has been adjusted to include a property classified as held for sale as of December 31, 2016. (2) 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 decreased primarily as a result of increased operating expenses related to the management fee terminations from the Brookdale Transaction during the fourth quarter of 2017. 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. Additionally, Total Portfolio NOI and Adjusted NOI decreased primarily as a result of the following Non-SPP impacts: - decreased non-SPP income from our partial sale of RIDEA II; partially offset by - non-SPP income for 42 senior housing triple-net assets transferred to SHOP during the fourth quarter of 2016 and year-to-date 2017. #### 2016 and 2015 The following table summarizes results at and for the years ended December 31, 2016 and 2015 (dollars in thousands, except per unit data): | | SPP 2016 | 2015 | Change | Total Portfolio 2016 | 2015 | Change | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Resident fees and services | $439,607 | $419,217 | $20,390 | $686,822 | $518,264 | $168,558 | | Operating expenses | (311,278) | (298,648) | (12,630) | (480,870) | (371,016) | (109,854) | | NOI | 128,329 | 120,569 | 7,760 | 205,952 | 147,248 | 58,704 | | Adjustments to NOI | — | — | — | (2,686) | 8,145 | (10,831) | | Adjusted NOI | $128,329 | $120,569 | $7,760 | 203,266 | 155,393 | 47,873 | | Non-SPP adjusted NOI | | | | (74,937) | (34,824) | (40,113) | | SPP adjusted NOI | | | | $128,329 | $120,569 | $7,760 | | SPP Adjusted NOI % change | | | 6.4% | | | | | Property count(1) | 69 | 69 | | 130 | 130 | | | Average capacity (units)(2) | 9,944 | 9,962 | | 16,028 | 12,704 | | | Average annual rent per unit | $44,209 | $42,081 | | $42,851 | $41,435 | | (1) From our 2015 presentation of SPP, we removed two SHOP properties that were sold and a SHOP property that was classified as held for sale. Our 2016 and 2015 Total Portfolio property count has been adjusted to include a property classified as held for sale as of December 31, 2016 and 2015. (2) 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 increased primarily as a result of increased occupancy and rates for resident fees and services. Total Portfolio NOI and adjusted NOI increased primarily as a result of the aforementioned increases to SPP along with 2015 acquisitions, primarily our RIDEA III acquisition. The increase in Total Portfolio NOI was partially offset by a termination fee related to our RIDEA III acquisition, which was not repeated in 2016. ### Life Science #### 2017 and 2016 The following table summarizes results at and for the years ended December 31, 2017 and 2016 (dollars and sq. ft. in thousands, except per sq. ft. data): | | SPP 2017 | 2016 | Change | Total Portfolio 2017 | 2016 | Change | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Rental revenues(1) | $304,858 | $292,147 | $12,711 | $358,816 | $358,537 | $279 | | Operating expenses | (63,612) | (58,363) | (5,249) | (78,001) | (72,478) | (5,523) | | NOI | 241,246 | 233,784 | 7,462 | 280,815 | 286,059 | (5,244) | | Adjustments to NOI | 2,427 | 339 | 2,088 | (4,517) | (2,954) | (1,563) | | Adjusted NOI | $243,673 | $234,123 | $9,550 | 276,298 | 283,105 | (6,807) | | Non-SPP adjusted NOI | | | | (32,625) | (48,982) | 16,357 | | SPP adjusted NOI | | | | $243,673 | $234,123 | $9,550 | | SPP Adjusted NOI % change | | | 4.1% | | | | | Property count(2) | 108 | 108 | | 131 | 128 | | | Average occupancy | 96.3% | 97.7% | | 96.2% | 97.5% | | | Average occupied square feet | 6,105 | 6,193 | | 6,841 | 7,332 | | | Average annual total revenues per occupied square foot | $50 | $47 | | $52 | $48 | | | Average annual base rent per occupied square foot | $41 | $39 | | $42 | $40 | | (1) Represents rental and related revenues and tenant recoveries. (2) From our 2016 presentation of SPP, we removed one life science facility that was sold and four life science facilities that were classified as held for sale. Our 2016 Total Portfolio property count has been adjusted to include eight properties in development and four properties classified as held for sale as of December 31, 2016. 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 developments 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. #### 2016 and 2015 The following table summarizes results at and for the years ended December 31, 2016 and 2015 (dollars and sq. ft. in thousands, except per sq. ft. data): | | SPP 2016 | 2015 | Change | Total Portfolio 2016 | 2015 | Change | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Rental revenues(1) | $306,317 | $295,515 | $10,802 | $358,537 | $342,984 | $15,553 | | Operating expenses | (58,812) | (58,779) | (33) | (72,478) | (70,217) | (2,261) | | NOI | 247,505 | 236,736 | 10,769 | 286,059 | 272,767 | 13,292 | | Adjustments to NOI | 554 | (6,366) | 6,920 | (2,954) | (10,128) | 7,174 | | Adjusted NOI | $248,059 | $230,370 | $17,689 | 283,105 | 262,639 | 20,466 | | Non-SPP adjusted NOI | | | | (35,046) | (32,269) | (2,777) | | SPP adjusted NOI | | | | $248,059 | $230,370 | $17,689 | | SPP Adjusted NOI % change | | | 7.7% | | | | | Property count(2) | 107 | 107 | | 128 | 120 | | | Average occupancy | 97.8% | 96.8% | | 97.5% | 97.1% | | | Average occupied square feet | 6,378 | 6,314 | | 7,332 | 7,179 | | | Average annual total revenues per occupied square foot | $48 | $46 | | $48 | $46 | | | Average annual base rent per occupied square foot | $40 | $37 | | $40 | $38 | | (1) Represents rental and related revenues and tenant recoveries. (2) From our 2015 presentation of SPP, we removed four life science facilities that were sold and four life science facilities that were classified as held for sale. Our 2016 Total Portfolio property count has been adjusted to include eight properties in development and four properties classified as held for sale as of December 31, 2016. Our 2015 Total Portfolio property count has been adjusted to include two properties in development as of December 31, 2015. SPP NOI and Adjusted NOI increased primarily as a result of the following: - mark-to-market lease renewals; - new leasing activity; and - increased occupancy. Additionally, SPP adjusted NOI increased as a result of annual rent escalations and a decline in rent abatements. Total Portfolio NOI and adjusted NOI increased primarily as a result of the aforementioned increases to SPP and the following impacts to Non-SPP: - life science acquisitions in 2015 and 2016; and - increased occupancy in a development placed in operation in 2016; partially offset by - five life science facilities sold in 2016. ### Medical Office #### 2017 and 2016 The following table summarizes results at and for the years ended December 31, 2017 and 2016 (dollars and sq. ft. in thousands, except per sq. ft. data): | | SPP 2017 | 2016 | Change | Total Portfolio 2017 | 2016 | Change | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Rental revenues(1) | $400,747 | $392,166 | $8,581 | $477,459 | $446,280 | $31,179 | | Operating expenses | (150,329) | (146,300) | (4,029) | (183,197) | (173,687) | (9,510) | | NOI | 250,418 | 245,866 | 4,552 | 294,262 | 272,593 | 21,669 | | Adjustments to NOI | 2,183 | (523) | 2,706 | (2,952) | (3,536) | 584 | | Adjusted NOI | $252,601 | $245,343 | $7,258 | 291,310 | 269,057 | 22,253 | | Non-SPP adjusted NOI | | | | (38,709) | (23,714) | (14,995) | | SPP adjusted NOI | | | | $252,601 | $245,343 | $7,258 | | SPP Adjusted NOI % change | | | 3.0% | | | | | Property count(2) | 212 | 212 | | 254 | 242 | | | Average occupancy | 91.9% | 92.2% | | 91.8% | 91.5% | | | Average occupied square feet | 14,224 | 14,303 | | 16,674 | 15,697 | | | 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 2016 presentation of SPP, we removed four MOBs that were sold and two MOBs that were placed into redevelopment. Our 2016 Total Portfolio property count has been adjusted to include four properties in development as of December 31, 2016. 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 our 2016 and 2017 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 seven MOBs during 2016 and 2017 and the placement of a MOB into redevelopment. #### 2016 and 2015 The following table summarizes results at and for the years ended December 31, 2016 and 2015 (dollars and sq. ft. in thousands, except per sq. ft. data): | | SPP 2016 | 2015 | Change | Total Portfolio 2016 | 2015 | Change | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Rental revenues(1) | $376,346 | $367,804 | $8,542 | $446,280 | $415,351 | $30,929 | | Operating expenses | (141,897) | (138,130) | (3,767) | (173,687) | (162,054) | (11,633) | | NOI | 234,449 | 229,674 | 4,775 | 272,593 | 253,297 | 19,296 | | Adjustments to NOI | (443) | (2,379) | 1,936 | (3,536) | (4,933) | 1,397 | | Adjusted NOI | $234,006 | $227,295 | $6,711 | 269,057 | 248,364 | 20,693 | | Non-SPP adjusted NOI | | | | (35,051) | (21,069) | (13,982) | | SPP adjusted NOI | | | | $234,006 | $227,295 | $6,711 | | SPP Adjusted NOI % change | | | 3.0% | | | | | Property count(2) | 202 | 202 | | 242 | 231 | | | Average occupancy | 91.8% | 91.5% | | 91.5% | 90.7% | | | Average occupied square feet | 12,976 | 12,905 | | 15,697 | 14,677 | | | Average annual total revenues per occupied square foot | $29 | $28 | | $28 | $28 | | | Average annual base rent per occupied square foot | $24 | $24 | | $24 | $23 | | (1) Represents rental and related revenues and tenant recoveries. (2) From our 2015 presentation of SPP, we removed three MOBs that were sold and six MOBs that were placed into redevelopment. Our 2016 Total Portfolio property count has been adjusted to include four and five properties in development as of December 31, 2016 and December 31, 2015, respectively. SPP NOI and adjusted NOI increased primarily as a result of increased occupancy. 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 occupancy in former redevelopment and development properties that have been placed into operations; - additional NOI from our MOB acquisitions in 2015 and 2016; partially offset by - the sale of three MOBs. ### Other Income and Expense Items The following table summarizes results for the years ended December 31, 2017, 2016 and 2015 (in thousands): | | Year Ended December 31, 2017 | 2016 | 2015 | 2017 vs. 2016 | 2016 vs. 2015 | | --- | ---: | ---: | ---: | ---: | ---: | | Interest income | $56,237 | $88,808 | $112,184 | $(32,571) | $(23,376) | | Interest expense | 307,716 | 464,403 | 479,596 | (156,687) | (15,193) | | Depreciation and amortization | 534,726 | 568,108 | 504,905 | (33,382) | 63,203 | | General and administrative | 88,772 | 103,611 | 95,965 | (14,839) | 7,646 | | Transaction costs | 7,963 | 9,821 | 27,309 | (1,858) | (17,488) | | Impairments (recoveries), net | 166,384 | — | 108,349 | 166,384 | (108,349) | | Gain (loss) on sales of real estate, net | 356,641 | 164,698 | 6,377 | 191,943 | 158,321 | | Loss on debt extinguishments | (54,227) | (46,020) | — | (8,207) | (46,020) | | Other income (expense), net | 31,420 | 3,654 | 16,208 | 27,766 | (12,554) | | Income tax benefit (expense) | 1,333 | (4,473) | 9,807 | 5,806 | (14,280) | | Equity income (loss) from unconsolidated joint ventures | 10,901 | 11,360 | 6,590 | (459) | 4,770 | | Total discontinued operations | — | 265,755 | (699,086) | (265,755) | 964,841 | | Noncontrolling interests’ share in earnings | (8,465) | (12,179) | (12,817) | 3,714 | 638 | *Interest income.* The decrease in interest income for the year ended December 31, 2017 was primarily the result of: (i) the payoff of our HC-One Facility in June 2017, (ii) incremental interest income received during the second quarter of 2016 due to the payoff of three participating development loans, and (iii) decreased interest received from our Tandem Mezzanine Loan during the fourth quarter of 2017, partially offset by additional interest income in 2017 from our $131 million loan to Maria Mallaband in November 2016. The decrease in interest income for the year ended December 31, 2016 was primarily the result of: (i) placing our Four Seasons Notes on cost recovery status in the third quarter of 2015 and (ii) paydowns in our loan portfolio. The decrease in interest income was partially offset by additional interest income from: (i) the Four Seasons senior secured term loan purchased in the fourth quarter of 2015 and (ii) additional fundings in our loan portfolio, including our £105 million ($131 million) loan to Maria Mallaband in November 2016. *Interest expense.* The decrease in interest expense for the year ended December 31, 2017 was primarily the result of senior unsecured notes and mortgage debt repayments, which occurred primarily in the second half of 2016 and throughout 2017. The decrease in interest expense for the year ended December 31, 2016 was primarily the result of: (i) mortgage debt repayments during 2015 and 2016, primarily from mortgage debt secured by properties in our senior housing triple-net, life science and medical office segments, (ii) senior unsecured notes payoffs during 2015 and 2016 and higher capitalized interest. The decrease in interest expense was partially offset by: (i) senior unsecured notes issued during 2015 and (ii) increased borrowings under our Facility. Approximately 84%, 83% and 96% of our total debt, inclusive of $44 million, $46 million and $71 million of variable rate debt swapped to fixed through interest rate swaps, was fixed rate debt as of December 31, 2017, 2016 and 2015, respectively. At December 31, 2017, our fixed rate debt and variable rate debt had weighted average interest rates of 4.19% and 2.56%, respectively. At December 31, 2016, our fixed rate debt and variable rate debt had weighted average interest rates of 4.26% and 2.23%, respectively. At December 31, 2015, our fixed rate debt and variable rate debt had weighted average interest rates of 4.68% and 1.72%, 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.* The decrease in depreciation and amortization expense for the year ended December 31, 2017 was 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 and placed in service during 2016 and 2017. The increase in depreciation and amortization expense for the year ended December 31, 2016 was primarily the result of the impact of acquisitions primarily in our SHOP and medical office segments. *General and administrative expenses.* The decrease in general and administrative expenses for the year ended December 31, 2017 was primarily as a result of severance and related charges primarily resulting from the departure of our former President and CEO in the third quarter of 2016 which exceeded severance and related charges primarily related to the departure of our former CAO in the third quarter of 2017. The increase in general and administrative expenses for the year ended December 31, 2016 was primarily the result of: (i) higher severance-related charges primarily resulting from the departure of our former President and CEO in the third quarter of 2016 and (ii) higher professional fees in 2016, partially offset by lower compensation related expenses. We expect to record severance and related charges of approximately $9 million in the first quarter of 2018 related to the previously announced departure of our Executive Chairman, effective March 1, 2018. *Transaction costs.* The decrease in transaction costs for the year ended December 31, 2016 was primarily a result of lower levels of transactional activity in 2016 compared to the same period in 2015. *Impairments (recoveries), net.* During the year ended December 31, 2017, we recognized (i) $144 million of impairments on our Tandem Mezzanine Loan due to a variety of factors including recent operating results of the underlying collateral and events of default under the loan agreement (see Note 7 to the Consolidated Financial Statements for further information) and (ii) $23 million of impairments on 11 underperforming senior housing triple-net facilities. For the year ended December 31, 2016, there were no impairments recognized. During the year ended December 31, 2015, we recognized the following impairment charges: (i) $112 million related to our investment in Four Seasons Notes and (ii) $3 million related to a MOB. The impairment charges were partially offset by a $6 million impairment recovery related to the repayment of a loan. *Gain (loss) on sales of real estate, net.* During the year ended December 31, 2017, we sold 68 senior housing triple-net assets for $1.152 billion, five life science facilities for $81 million, five SHOP facilities for $43 million, four MOBs for $15 million and a 40% interest in RIDEA II and recognized total net gain on sales of real estate of $357 million. During the year ended December 31, 2016, we sold a portfolio of five facilities in one of our non-reportable segments and two senior housing triple-net facilities for $130 million, five life science facilities for $386 million, seven senior housing triple-net facilities for $88 million, three MOBs for $20 million and three SHOP facilities for $41 million, recognizing total gain on sales of $165 million. During the year ended December 31, 2015, we sold the following assets: (i) nine senior housing triple-net facilities for $60 million, resulting from Brookdale’s exercise of its purchase option, and (ii) a MOB for $0.4 million, recognizing total gain on sales of $6 million. *Loss on debt extinguishments.* During the year ended December 31, 2017, we repurchased $500 million of our 5.375% senior notes due 2021 and recognized a $54 million loss on debt extinguishment, primarily related to a premium for early payment. During the fourth quarter of 2016, using proceeds from the Spin-Off, we repaid $1.1 billion of senior unsecured notes that were due to mature in January 2017 and January 2018 and repaid $108 million of mortgage debt, incurring aggregate loss on debt extinguishments of $46 million, primarily related to prepayment penalties. *Other income (expense), net.* The increase in other income, net for the year ended December 31, 2017 was primarily as a result of the £42 million ($51 million) gain on sale of our Four Seasons Notes, partially offset by $12 million of casualty-related charges due to hurricanes in the third quarter of 2017 and $13 million of increased litigation-related expenses, including costs from securities class action litigation, and a legal settlement in 2017. The decrease in other income, net for the year ended December 31, 2016 was primarily the result of a reduction of foreign currency remeasurement gains from remeasuring assets and liabilities denominated in GBP to U.S. dollars (“USD”) as a result of effective hedges designated in September 2015. *Income tax benefit (expense).* The increase in income tax benefit for the year ended December 31, 2017 was primarily the result of: (i) a $6 million income tax benefit from the partial sale of RIDEA II in 2017, (ii) a $5 million income tax benefit related to our share of operating losses from our RIDEA joint ventures, (iii) a $1 million deferred tax benefit from casualty-related charges recognized in the second half of 2017 and (iv) a $11 million income tax expense recognized in 2016 associated with federal income tax and state built-in gain tax for the disposition of certain real estate assets. The total tax benefit was partially offset by a $17 million income tax expense related to the impact of tax rate legislation during the fourth quarter of 2017. The increase in income tax expense for the year ended December 31, 2016 was primarily the result of recognizing tax liabilities representing state built-in gain tax for the disposition of certain real estate assets. *Equity income (loss) from unconsolidated joint ventures.* The decrease in equity income from unconsolidated joint ventures for the year ended December 31, 2017 was primarily the result of income from our share of gains on sales of real estate in 2016, partially offset by income from our investment in RIDEA II, which was deconsolidated in the first quarter of 2017. The increase in equity income from unconsolidated joint ventures for the year ended December 31, 2016 was primarily the result of increased income from our share of gains on sales of real estate. *Total discontinued operations.* Discontinued operations for the years ended December 31, 2016 and 2015 resulted in income of $266 million and loss of $699 million, respectively. Income and loss from discontinued operations primarily relates to the operations of QCP. Income from discontinued operations increased during the year ended December 31, 2016 as a result of impairment charges during 2015 not repeated in 2016. The increase in discontinued operations was partially offset by the following: (i) a reduction in income from our HCRMC investments as a result of the HCRMC lease amendment effective April 1, 2015, the sale of non-strategic assets during the second half of 2015 and the first half of 2016, and a change in income recognition to a cash basis method beginning in January 2016, (ii) transaction costs of $87 million related to the Spin-Off and (iii) increased income tax expense related to our estimated exposure to state built-in gain tax. During the year ended December 31, 2015, we recognized impairments of $1.3 billion related to our HCRMC portfolio. There were no discontinued operations for the year ended December 31, 2017. ### 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 liquidity 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, 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. As of January 31, 2018, 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 During the fourth quarter of 2017, we adopted Accounting Standards Update ("ASU") No. 2016-18, *Restricted Cash* and ASU No. 2016-15, *Classification of Certain Cash Receipts and Cash Payments* using the full retrospective approach. See Note 2 to the Consolidated Financial Statements for additional information. 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, cash equivalents and restricted cash were $82 million, $137 million and $407 million at December 31, 2017, 2016 and 2015, respectively. The following table sets forth changes in cash flows (in thousands): | | Year Ended December 31, 2017 | 2016 | 2015 | | --- | ---: | ---: | ---: | | Net cash provided by (used in) operating activities | $847,041 | $1,214,131 | $1,222,145 | | Net cash provided by (used in) investing activities | 1,246,257 | (428,973) | (1,660,365) | | Net cash provided by (used in) financing activities | (2,148,461) | (1,054,265) | 614,087 | Operating cash flow decreased $367 million between the years ended December 31, 2017 and 2016 primarily as the result of: (i) decreased Adjusted NOI related to the QCP Spin-Off and dispositions in 2016 and 2017 and (ii) decreased interest received as a result of loan repayments during 2016 and 2017; partially offset by (i) 2016 and 2017 acquisitions, (ii) annual rent increases, (iii) and decreased interest paid as a result of lower balances on our senior unsecured notes and term loans. 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. Operating cash flow decreased $8 million between the years ended December 31, 2016 and 2015 primarily as the result of: (i) decreased Adjusted NOI related to the QCP Spin-Off and dispositions in 2015 and 2016 and (ii) decreased interest received as a result of loan repayments during 2016; partially offset by (i) 2015 and 2016 acquisitions, (ii) annual rent increases, (iii) and decreased interest paid as a result of lower balances on our senior unsecured notes and term loans. The following are significant investing and financing activities for the year ended December 31, 2017: - received net proceeds of $1.8 billion from the sale of real estate, including the sale and recapitalization of RIDEA II; - received net proceeds of $559 million primarily from the sale of our Four Seasons investments, the repayment of our HC-One Facility, and a DFL repayment; - made investments of $1.1 billion primarily for the acquisition and development of real estate; - repaid $1.4 billion of debt under our 2012 Term Loan, 2015 Term Loan, senior unsecured notes and mortgage debt, partially offset by net borrowings under our bank line of credit; and - paid cash dividends on common stock of $695 million. The following are significant investing and financing activities for the year ended December 31, 2016: - made investments of $1.3 billion (development, leasing and acquisition of real estate, investments in unconsolidated joint ventures and loans, and purchases of securities) and received proceeds of $908 million primarily from real estate and DFL sales; - paid cash dividends on common stock of $980 million, which were generally funded by cash provided by our operating activities and cash on hand; and - received net proceeds of $1.7 billion from the Spin-Off of QCP, raised proceeds of $1.1 billion primarily from our net borrowings under our bank line of credit, and repaid $2.9 billion under our bank line of credit, senior unsecured notes and mortgage debt. The following are significant investing and financing activities for the year ended December 31, 2015: - made investments of $2.4 billion (development, leasing and acquisition of real estate, and investments in unconsolidated joint ventures and loans); - paid dividends on common stock of $1 billion, which were generally funded by cash provided by our operating activities and cash on hand; and - raised proceeds of $2.7 billion primarily from issuing senior unsecured notes, the term loan originated in January 2015, net borrowings under our bank line of credit, issuances of common stock and noncontrolling interest, and an additional $684 million from sales of real estate, and loan and DFL repayments; and repaid $969 million of senior unsecured notes, bank line of credit and mortgage debt. ### 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 during the year ended December 31, 2017. ### Equity At December 31, 2017, we had 469 million shares of common stock outstanding, equity totaled $5.6 billion, and our equity securities had a market value of $12.4 billion. At December 31, 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-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 year ended December 31, 2017 and, as of December 31, 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. Our current shelf registration statement expires in June 2018. We expect to file a new shelf registration statement on or before such time. 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. ### Contractual Obligations The following table summarizes our material contractual payment obligations and commitments at December 31, 2017 (in thousands): | | Total(1) | 2018 | 2019-2020 | 2021-2022 | More than Five Years | | --- | ---: | ---: | ---: | ---: | ---: | | Bank line of credit(2) | $1,017,076 | $— | $— | $1,017,076 | $— | | Term loan(3) | 228,674 | — | 228,674 | — | — | | Senior unsecured notes | 6,450,000 | — | 1,250,000 | 1,600,000 | 3,600,000 | | Mortgage debt | 138,567 | 3,512 | 7,458 | 13,978 | 113,619 | | U.K. loan commitments(4) | 3,236 | 3,236 | — | — | — | | Construction loan commitments(5) | 114,691 | 45,863 | 68,828 | — | — | | Development commitments(6) | 133,371 | 128,101 | 2,228 | 3,042 | — | | Ground and other operating leases | 395,796 | 6,619 | 13,434 | 13,524 | 362,219 | | Interest(7) | 1,938,466 | 297,694 | 551,684 | 419,699 | 669,389 | | Total | $10,419,877 | $485,025 | $2,122,306 | $3,067,319 | $4,745,227 | (1) Excludes $94 million of other debt that represents life care bonds and demand notes that have no scheduled maturities. (2) Includes £105 million ($142 million) translated into USD. (3) Represents £169 million translated into USD. (4) Represents £2 million translated into USD for commitments to fund our U.K. loan facilities. (5) Represents commitments to finance development projects. (6) Represents construction and other commitments for developments in progress. (7) Interest on variable-rate debt is calculated using rates in effect at December 31, 2017. ### Off-Balance Sheet Arrangements We own interests in certain unconsolidated joint ventures as described in Note 8 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, as described under Note 11 to the Consolidated Financial Statements. Our risk of loss for these certain properties is limited to the outstanding debt balance plus penalties, if any. We have no other material off-balance sheet arrangements that we expect would materially affect our liquidity and capital resources except those described above under “Contractual Obligations”. ### Inflation Our leases often provide for either fixed increases in base rents or indexed escalators, based on the Consumer Price Index or other measures, and/or additional rent based on increases in the tenants’ operating revenues. Most of our MOB leases require the tenant to pay a share of property operating costs such as real estate taxes, insurance and utilities. Substantially all of our senior housing, life science, and remaining other leases require the tenant or operator to pay all of the property operating costs or reimburse us for all such costs. We believe that inflationary increases in expenses will be offset, in part, by the tenant or operator expense reimbursements and contractual rent increases described above. ### Non-GAAP Financial Measure Reconciliations ### Funds From Operations and Funds Available for Distribution The following is a reconciliation from net income (loss) 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): | | Year Ended December 31, 2017 | 2016 | 2015 | 2014 | 2013 | | --- | ---: | ---: | ---: | ---: | ---: | | Net income (loss) applicable to common shares | $413,013 | $626,549 | $(560,552) | $919,796 | $969,103 | | Real estate related depreciation and amortization | 534,726 | 572,998 | 510,785 | 459,995 | 429,174 | | Real estate related depreciation and amortization on unconsolidated joint ventures | 60,058 | 49,043 | 48,188 | 21,303 | 9,891 | | Real estate related depreciation and amortization on noncontrolling interests and other | (15,069) | (21,001) | (14,506) | (8,027) | (6,217) | | Other depreciation and amortization | 9,364 | 11,919 | 22,223 | 18,864 | 14,326 | | Loss (gain) on sales of real estate, net | (356,641) | (164,698) | (6,377) | (31,298) | (69,866) | | Loss (gain) on sales of real estate, net on unconsolidated joint ventures | (1,430) | (16,332) | (15,003) | — | — | | Loss (gain) on sales of real estate, net on noncontrolling interests | — | 224 | 1,453 | 1,001 | 1,481 | | Taxes associated with real estate dispositions(1) | (5,498) | 60,451 | — | — | — | | Impairments (recoveries) of real estate, net | 22,590 | — | 2,948 | — | 1,372 | | FFO applicable to common shares | 661,113 | 1,119,153 | (10,841) | 1,381,634 | 1,349,264 | | Distributions on dilutive convertible units | — | 8,732 | — | 13,799 | 13,276 | | Diluted FFO applicable to common shares | $661,113 | $1,127,885 | $(10,841) | $1,395,433 | $1,362,540 | | Weighted average shares used to calculate diluted FFO per common share | 468,935 | 471,566 | 462,795 | 464,845 | 461,710 | | Impact of adjustments to FFO: | | | | | | | Transaction-related items(2) | $62,576 | $96,586 | $32,932 | $(18,856) | $6,191 | | Other impairments (recoveries), net(3) | 92,900 | — | 1,446,800 | 35,913 | — | | Severance and related charges(4) | 5,000 | 16,965 | 6,713 | — | 27,244 | | Loss on debt extinguishments(5) | 54,227 | 46,020 | — | — | — | | Litigation costs(6) | 15,637 | 3,081 | — | — | — | | Casualty-related charges (recoveries), net | 10,964 | — | — | — | — | | Foreign currency remeasurement losses (gains) | (1,043) | 585 | (5,437) | — | — | | Tax rate legislation impact(7) | 17,028 | — | — | — | — | | | $257,289 | $163,237 | $1,481,008 | $17,057 | $33,435 | | FFO as adjusted applicable to common shares | $918,402 | $1,282,390 | $1,470,167 | $1,398,691 | $1,382,699 | | Distributions on dilutive convertible units and other | 6,657 | 12,849 | 13,597 | 13,766 | 13,220 | | Diluted FFO as adjusted applicable to common shares | $925,059 | $1,295,239 | $1,483,764 | $1,412,457 | $1,395,919 | | Weighted average shares used to calculate diluted FFO as adjusted per common share | 473,620 | 473,340 | 469,064 | 464,845 | 461,710 | | FFO as adjusted applicable to common shares | $918,402 | $1,282,390 | $1,470,167 | $1,398,691 | $1,382,699 | | Amortization of deferred compensation(8) | 13,510 | 15,581 | 23,233 | 21,885 | 23,327 | | Amortization of deferred financing costs | 14,569 | 20,014 | 20,222 | 19,260 | 18,541 | | Straight-line rents | (23,933) | (27,560) | (38,415) | (43,857) | (39,587) | | FAD capital expenditures(9) | (124,176) | (93,407) | (91,320) | (85,183) | (75,163) | | Lease restructure payments | 1,470 | 16,604 | 22,657 | 9,425 | — | | CCRC entrance fees(10) | 21,385 | 21,287 | 27,895 | 11,121 | — | | Deferred income taxes(11) | (15,490) | (13,692) | (15,281) | (4,580) | 3,500 | | Other FAD adjustments(12) | (2,017) | (5,521) | (157,309) | (147,940) | (155,235) | | FAD applicable to common shares | 803,720 | 1,215,696 | 1,261,849 | 1,178,822 | 1,158,082 | | Distributions on dilutive convertible units | — | 13,088 | 14,230 | 13,799 | 13,276 | | Diluted FAD applicable to common shares | $803,720 | $1,228,784 | $1,276,079 | $1,192,621 | $1,171,358 | 59 | | Year Ended December 31, 2017 | 2016 | 2015 | 2014 | 2013 | | --- | ---: | ---: | ---: | ---: | ---: | | Diluted earnings per common share | $0.88 | $1.34 | $(1.21) | $2.00 | $2.13 | | Depreciation and amortization | 1.25 | 1.30 | 1.22 | 1.07 | 0.97 | | Loss (gain) on sales of real estate, net | (0.76) | (0.38) | (0.04) | (0.07) | (0.15) | | Taxes associated with real estate dispositions | (0.01) | 0.13 | — | — | — | | Impairments (recoveries) of real estate, net | 0.05 | — | 0.01 | — | — | | Diluted FFO per common shares | $1.41 | $2.39 | $(0.02) | $3.00 | $2.95 | | Transaction-related items(2) | 0.13 | 0.20 | 0.07 | (0.04) | 0.01 | | Other impairments (recoveries), net(3) | 0.20 | — | 3.11 | 0.08 | — | | Severance and related charges(4) | 0.01 | 0.04 | 0.01 | — | 0.06 | | Loss on debt extinguishments(5) | 0.11 | 0.10 | — | — | — | | Litigation costs(6) | 0.03 | 0.01 | — | — | — | | Casualty-related charges (recoveries), net | 0.02 | — | — | — | — | | Foreign currency remeasurement losses (gains) | — | — | (0.01) | — | — | | Tax rate legislation impact(7) | 0.04 | — | — | — | — | | Diluted FFO as adjusted per common shares | $1.95 | $2.74 | $3.16 | $3.04 | $3.02 | (1) For the year ended December 31, 2017, represents income tax benefit associated with the disposition of real estate assets in our RIDEA II transaction. For the year ended December 31, 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 HCRMC real estate portfolio. (2) For the year ended December 31, 2017, includes $55 million of net non-cash charges related to the right to terminate certain triple-net leases and management agreements in conjunction with the November 2017 Brookdale transaction. For the year ended December 31, 2016, primarily relates to the Spin-Off. For the year ended December 31, 2015, primarily related to acquisition and pursuit costs. For the year ended December 31, 2014, includes a net benefit from the 2014 Brookdale transaction, partially offset by acquisition and pursuit costs. For the year ended December 31, 2013, primarily relates to acquisition and pursuit costs. (3) For the year ended December 31, 2017, relates to $144 million of impairments on our Tandem Mezzanine Loan throughout 2017, net of a $51 million impairment recovery upon the sale of our Four Seasons Notes in the first quarter of 2017. For the year ended December 31, 2015, include impairment charges of: (i) $1.3 billion related to our HCRMC DFL investments, (ii) $112 million related to our Four Seasons Notes and (iii) $46 million related to our equity investment in HCRMC, partially offset by an impairment recovery of $6 million related to a loan payoff. For the year ended December 31, 2014, relates to our equity investment in HCRMC. (4) For the year ended December 31, 2017, primarily relates to the departure of our former Executive Vice President and Chief Accounting Officer. For the year ended December 31, 2016, primarily relates to the departure of our former President and Chief Executive Officer. For the year ended December 31, 2015, relates to the departure of our former Executive Vice President and Chief Investment Officer. For the year ended December 31, 2013, relates to the departure of our former Chairman, CEO and President. (5) For the year ended December 31, 2017, represents the premium associated with the prepayment of $500 million of senior unsecured notes. For the year ended December 31, 2016, represents penalties of $46 million from the prepayment of $1.1 billion of senior unsecured notes and $108 million of mortgage debt using proceeds from the Spin-Off. (6) For the year ended December 31, 2017, relates to costs from securities class action litigation and a legal settlement. For the year ended December 31, 2016, primarily relates to costs from securities class action litigation. See Note 3 in the Consolidated Financial Statements for additional information. (7) Represents the remeasurement of deferred tax assets and liabilities as a result of the Tax Cuts and Jobs Act that was signed into legislation on December 22, 2017. (8) Excludes $0.7 million related to the acceleration of deferred compensation for restricted stock units that vested upon the departure of our former Executive Vice President and Chief Accounting Officer, which is included in the severance and related charges for the year ended December 31, 2017. Excludes $7 million related to the acceleration of deferred compensation for restricted stock units that vested upon the departure of our former President and Chief Executive Officer, which is included in severance and related charges for the year ended December 31, 2016. Excludes $3 million related to the acceleration of deferred compensation for restricted stock units and stock options that vested upon the departure of our former Executive Vice President and Chief Investment Officer, which is included in the severance-related charge for year ended December 31, 2015. Excludes $17 million related to the acceleration of deferred compensation for restricted stock units and options that vested upon the departure of our former CEO, which is included in severance-related charges for the year ended December 31, 2013. (9) Includes our share of recurring capital expenditures, leasing costs, and tenant and capital improvements from unconsolidated joint ventures. (10) 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. (11) Excludes $17 million of deferred tax expenses, which is included in tax rate legislation impact for the year ended December 31, 2017. Additionally, the year ended December 31, 2017, excludes $1 million of deferred tax benefit from the casualty-related charges, which is included in casualty-related charges (recoveries), net. (12) Our equity investment in HCRMC was accounted for using the equity method, which required an elimination of DFL income that is proportional to our ownership in HCRMC. Further, our share of earnings from HCRMC (equity income) increased for the corresponding elimination of related lease expense recognized at the HCRMC entity level, which we presented as a non-cash joint venture FAD adjustment. Beginning in January 2016, as a result of placing our equity investment in HCRMC on a cash basis method of accounting, we no longer eliminated our proportional ownership share of income from DFLs to equity income (loss) from unconsolidated joint ventures. See Note 5 to the Consolidated Financial Statements for additional discussion. ### 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. For a more detailed discussion of our significant accounting policies, see Note 2 to the Consolidated Financial Statements. Below is a discussion of accounting policies that we consider critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain. ### Principles of Consolidation The consolidated financial statements include the accounts of HCP, Inc., our wholly-owned subsidiaries and joint ventures that we control, through voting rights or other means. We consolidate investments in variable interest entities (“VIEs”) when we are the primary beneficiary of the VIE. A variable interest holder is considered to be the primary beneficiary of a VIE if it has the power to direct the activities that most significantly impact the entity’s economic performance and has the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. We make judgments about which entities are VIEs based on an assessment of whether: (i) the equity investors as a group, do not have a controlling financial interest, (ii) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support, or (iii) substantially all of the entity’s activities involve or are performed on behalf of an equity investor that holds disproportionately few voting rights. We make judgments with respect to our level of influence or control over an entity and whether we are (or are not) the primary beneficiary of a VIE. Consideration of various factors includes, but is not limited to, our ability to direct the activities that most significantly impact the entity’s economic performance, our form of ownership interest, our representation on the entity’s governing body, the size and seniority of our investment, and our ability and the rights of other investors to participate in policy making decisions, replace the manager and/or liquidate the entity, if applicable. Our ability to correctly assess our influence or control over an entity when determining the primary beneficiary of a VIE affects the presentation of these entities in our consolidated financial statements. When we perform a re-analysis of the primary beneficiary at a date other than at inception of the VIE, our assumptions may be different and may result in the identification of a different primary beneficiary. If we determine that we are the primary beneficiary of a VIE, our consolidated financial statements include the operating results of the VIE rather than the results of our variable interest in the VIE. We require VIEs to provide us timely financial information and review the internal controls of VIEs to determine if we can rely on the financial information it provides. If a VIE has deficiencies in its internal controls over financial reporting, or does not provide us with timely financial information, it may adversely impact the quality and/or timing of our financial reporting and our internal controls over financial reporting. ### Revenue Recognition At the inception of a new lease arrangement, including new leases that arise from amendments, we assess the terms and conditions to determine the proper lease classification. A lease arrangement is classified as an operating lease if none of the following criteria are met: (i) transfer of ownership to the lessee prior to or shortly after the end of the lease term, (ii) the lessee has a bargain purchase option during or at the end of the lease term, (iii) the lease term is equal to 75% or more of the underlying property’s economic life, or (iv) the present value of future minimum lease payments (excluding executory costs) is equal to 90% or more of the estimated fair value of the leased asset. If one of the four criteria is met and the minimum lease payments are determined to be reasonably predictable and collectible, the lease arrangement is generally accounted for as a DFL. If the assumptions utilized in the above classifications assessments were different, our lease classification for accounting purposes may have been different; thus the timing and amount of our revenue recognized would have been impacted, which may be material to our consolidated financial statements. We recognize rental revenue for operating leases on a straight-line basis over the lease term when collectibility of all minimum lease payments is reasonably assured and the tenant has taken possession or controls the physical use of a leased asset. If the lease provides for tenant improvements, we determine whether the tenant improvements are owned by the tenant or us. When we are the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the leased asset until the tenant improvements are substantially complete. When the tenant is the owner of the tenant improvements, any tenant improvement allowance funded is treated as a lease incentive and amortized as a reduction of revenue over the lease term. The determination of ownership of a tenant improvement is subject to significant judgment. If our assessment of the owner of the tenant improvements was different, the timing and amount of our revenue recognized would be impacted. Certain leases provide for additional rents that are contingent upon a percentage of the facility’s revenue in excess of specified base amounts or other thresholds. Such revenue is recognized when actual results reported by the tenant, or estimates of tenant results, exceed the base amount or other thresholds. The recognition of additional rents requires us to make estimates of amounts owed and, to a certain extent, is dependent on the accuracy of the facility results reported to us. Our estimates may differ from actual results, which could be material to our consolidated financial statements. We maintain an allowance for doubtful accounts, including an allowance for operating lease straight-line rent receivables, for estimated losses resulting from tenant defaults or the inability of tenants to make contractual rent and tenant recovery payments. We monitor the liquidity and creditworthiness of our tenants and operators on a continuous basis. This evaluation considers industry and economic conditions, property performance, credit enhancements and other factors. For straight-line rent receivable amounts, our assessment is based on income recoverable over the term of the lease. We exercise judgment in establishing allowances and consider payment history and current credit status in developing these estimates. These estimates may differ from actual results, which could be material to our consolidated financial statements. We use the direct finance method of accounting to record income from DFLs. For leases accounted for as DFLs, the net investment in the DFL represents receivables for the sum of future minimum lease payments receivable and the estimated residual values of the leased properties, less the unamortized unearned income. Unearned income is deferred and amortized to income over the lease terms to provide a constant yield when collectibility of the lease payments is reasonably assured. The determination of estimated useful lives and residual values are subject to significant judgment. If these assessments were to change, the timing and amount of our revenue recognized would be impacted. Loans receivable are classified as held-for-investment based on management’s intent and ability to hold the loans for the foreseeable future or to maturity. We recognize interest income on loans, including the amortization of discounts and premiums, using the interest method applied on a loan-by-loan basis when collectibility of the future payments is reasonably assured. Premiums, discounts and related costs are recognized as yield adjustments over the term of the related loans. If management determined that certain loans should no longer be classified as held-for-investment, the timing and amount of our interest income recognized would be impacted. Loans receivable and DFLs (collectively, “Finance Receivables”), are reviewed and assigned an internal rating of Performing, Watch List or Workout. Finance Receivables that are deemed Performing meet all present contractual obligations, and collection and timing, of all amounts owed is reasonably assured. Watch List Finance Receivables are defined as Finance Receivables that do not meet the definition of Performing or Workout. Workout Finance Receivables are defined as Finance Receivables in which we have determined, based on current information and events, that: (i) it is probable we will be unable to collect all amounts due according to the contractual terms of the agreement, (ii) the tenant, operator, or borrower is delinquent on making payments under the contractual terms of the agreement and (iii) we have commenced action or anticipate pursuing action in the near term to seek recovery of our investment. Finance Receivables are placed on nonaccrual status when management determines that the collectibility of contractual amounts is not reasonably assured (the asset will have an internal rating of either Watch List or Workout). Further, we perform a credit analysis to support the tenant’s, operator’s, borrower’s and/or guarantor’s repayment capacity and the underlying collateral values. We use the cash basis method of accounting for Finance Receivables placed on nonaccrual status unless one of the following conditions exist whereby we utilize the cost recovery method of accounting: (i) if we determine that it is probable that we will only recover the recorded investment in the Finance Receivable, net of associated allowances or charge-offs (if any), or (ii) we cannot reasonably estimate the amount of an impaired Finance Receivable. For cash basis method of accounting we apply payments received, excluding principal paydowns, to interest income so long as that amount does not exceed the amount that would have been earned under the original contractual terms. For cost recovery method of accounting any payment received is applied to reduce the recorded investment. Generally, we return a Finance Receivable to accrual status when all delinquent payments become current under the terms of the loan or lease agreements and collectibility of the remaining contractual loan or lease payments is reasonably assured. Allowances are established for Finance Receivables on an individual basis utilizing an estimate of probable losses, if they are determined to be impaired. Finance Receivables are impaired when it is deemed probable that we will be unable to collect all amounts due in accordance with the contractual terms of the loan or lease. An allowance is based upon our assessment of the lessee’s or borrower’s overall financial condition, economic resources, payment record, the prospects for support from any financially responsible guarantors and, if appropriate, the net realizable value of any collateral. These estimates consider all available evidence, including the expected future cash flows discounted at the Finance Receivable’s effective interest rate, fair value of collateral, general economic conditions and trends, historical and industry loss experience, and other relevant factors, as appropriate. Should a Finance Receivable be deemed partially or wholly uncollectible, the uncollectible balance is charged off against the allowance in the period in which the uncollectible determination has been made. ### Real Estate We make estimates as part of our process for allocating a purchase price to the various identifiable assets of an acquisition based upon the relative fair value of each asset. The most significant components of our allocations are typically buildings as-if-vacant, land and in-place leases. In the case of allocating fair value to buildings and intangibles, our fair value estimates will affect the amount of depreciation and amortization we record over the estimated useful life of each asset acquired. In the case of allocating fair value to in-place leases, we make our best estimates based on our evaluation of the specific characteristics of each tenant’s lease. Factors considered include estimates of carrying costs during hypothetical expected lease-up periods, market conditions and costs to execute similar leases. Our assumptions affect the amount of future revenue and/or depreciation and amortization expense that we will recognize over the remaining lease term for the acquired in-place leases. A variety of costs are incurred in the development and leasing of properties. After determination is made to capitalize a cost, it is allocated to the specific component of a project that is benefited. Determination of when a development project is substantially complete and capitalization must cease involves a degree of judgment. The costs of land and buildings under development include specifically identifiable costs. The capitalized costs include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes and other costs incurred during the period of development. We consider a construction project to be considered substantially complete and available for occupancy and cease capitalization of costs upon the completion of the related tenant improvements. ### Impairment of Long-Lived Assets We assess the carrying value of our real estate assets and related intangibles (“real estate assets”) when events or changes in circumstances indicate that the carrying amount of the real estate assets may not be recoverable, but at least annually. Recoverability of real estate assets is measured by comparing the carrying amount of the real estate assets to the respective estimated future undiscounted cash flows. The estimated future undiscounted cash flows are calculated utilizing the lowest level of identifiable cash flows that are largely independent of the cash flows of other assets and liabilities. In order to review our real estate assets for recoverability, we consider market conditions, as well as our intent with respect to holding or disposing of the asset. If our analysis indicates that the carrying value of the real estate assets is not recoverable on an undiscounted cash flow basis, we recognize an impairment charge for the amount by which the carrying value exceeds the fair value of the real estate asset. The determination of the fair value of real estate assets involves significant judgment. This judgment is based on our analysis and estimates of fair value of real estate assets, future operating results and resulting cash flows of each real estate asset whose carrying amount may not be recoverable. Our ability to accurately predict future operating results and resulting cash flows, and estimate and allocate fair values, impacts the timing and recognition of impairments. While we believe our assumptions are reasonable, changes in these assumptions may have a material impact on our financial results. ### Investments in Unconsolidated Joint Ventures The initial carrying value of investments in unconsolidated joint ventures is based on the amount paid to purchase the joint venture interest or the carrying value of the assets prior to the sale or contribution of the interests to the joint venture. We evaluate our equity method investments for impairment by first reviewing for indicators of impairment based upon the performance of the underlying real estate assets held by the joint venture. If an equity method investment shows indicators of impairment, we compare the fair value of the equity method investment to our carrying value. If we determine there is a decline in the fair value of our investment in an unconsolidated joint venture below its carrying value and it is other-than-temporary, an impairment is recorded. The determination of the fair value of investments in unconsolidated joint ventures and as to whether a deficiency in fair value is other-than-temporary involves significant judgment. Our estimates consider all available evidence including, as appropriate, the present value of the expected future cash flows discounted at market rates, general economic conditions and trends, severity and duration of a fair value deficiency, and other relevant factors. Capitalization rates, discount rates and credit spreads utilized in our valuation models are based upon rates that we believe to be within a reasonable range of current market rates for the respective investments. While we believe our assumptions are reasonable, changes in these assumptions may have a material impact on our financial results. ### Income Taxes As part of the process of preparing our consolidated financial statements, significant management judgment is required to evaluate our compliance with REIT requirements. Our determinations are based on interpretation of tax laws, and our conclusions may have an impact on the income tax expense recognized. Adjustments to income tax expense may be required as a result of: (i) audits conducted by federal, state and local tax authorities, (ii) our ability to qualify as a REIT, (iii) the potential for built-in gain recognition, and (iv) changes in tax laws. Adjustments required in any given period are included within the income tax provision. ### Recent Accounting Pronouncements See Note 2 to the Consolidated Financial Statements for the impact of new accounting standards. ## Market risk As filed, 4,736 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 23 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 and 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 December 31, 2017, we are exposed to market risks related to fluctuations in interest rates primarily on variable rate debt. As of December 31, 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 adversely be 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 or decrease in interest rates would change the fair value of our fixed rate debt by approximately $332 million and $358 million, respectively, and would not materially impact earnings or cash flows. A one percentage point increase or decrease in interest rates would change the fair value of our fixed rate debt investments by approximately $8 million and $9 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, 2017, our annual interest expense and interest income would change by approximately $12 million and $1 million, respectively. ### Foreign Currency Exchange Rate Risk At December 31, 2017, our exposure to foreign currencies primarily relates to U.K. investments in leased real estate 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 year ended December 31, 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 year ended December 31, 2017, 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, 2017, both the fair value and carrying value of marketable debt securities were $19 million. ## Controls and procedures As filed, 7,217 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 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, 2017. 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, 2017, at the reasonable assurance level. *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 2017 to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. *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, 2017. The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report, which is included herein. ### 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, 2017, 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, 2017, 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, 2017, of the Company and our report dated February 13, 2018, expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s adoption of Accounting Standards Update 2017-01*, Business Combinations (Topic 805): Clarifying the Definition of a Business.* ### 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 13, 2018 Filed Feb 13, 2018. Source: SEC EDGAR, the filing index for accession 0001628280-18-001552. Last ingested by Listed: Nov 14, 2026, 21:09 ET. No prices; not investment advice.