Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2018
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number 001-08895
 
HCP, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
Maryland
 
33-0091377
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
1920 Main Street, Suite 1200
Irvine, CA 92614
(Address of principal executive offices)
(949) 407-0700
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files).  YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☒
 
Accelerated Filer ☐
Non-accelerated Filer ☐
 
Smaller Reporting Company ☐
 
 
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  YES ☐ NO ☒
At October 29, 2018, there were 469,918,837 shares of the registrant’s $1.00 par value common stock outstanding.
 

Table of Contents

HCP, INC.
INDEX
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2
Table of Contents

HCP, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
 
September 30,
2018
 
December 31,
2017
ASSETS
 

 
 

Real estate:
 

 
 

Buildings and improvements
$
10,956,474

 
$
11,239,732

Development costs and construction in progress
442,007

 
447,976

Land
1,663,069

 
1,785,865

Accumulated depreciation and amortization
(2,825,850
)
 
(2,741,695
)
Net real estate
10,235,700

 
10,731,878

Net investment in direct financing leases
714,709

 
714,352

Loans receivable, net
41,302

 
313,326

Investments in and advances to unconsolidated joint ventures
623,255

 
800,840

Accounts receivable, net of allowance of $4,552 and $4,425, respectively
48,701

 
40,733

Cash and cash equivalents
78,864

 
55,306

Restricted cash
29,877

 
26,897

Intangible assets, net
305,805

 
410,082

Assets held for sale, net
423,063

 
417,014

Other assets, net
582,682

 
578,033

Total assets
$
13,083,958

 
$
14,088,461

LIABILITIES AND EQUITY
 

 
 

Bank line of credit
$
636,709

 
$
1,017,076

Term loan
223,468

 
228,288

Senior unsecured notes
5,706,181

 
6,396,451

Mortgage debt
139,401

 
144,486

Other debt
92,494

 
94,165

Intangible liabilities, net
56,871

 
52,579

Liabilities of assets held for sale, net
3,146

 
14,031

Accounts payable and accrued liabilities
410,804

 
401,738

Deferred revenue
174,509

 
144,709

Total liabilities
7,443,583

 
8,493,523

Commitments and contingencies


 


Common stock, $1.00 par value: 750,000,000 shares authorized; 469,916,246 and 469,435,678 shares issued and outstanding, respectively
469,916

 
469,436

Additional paid-in capital
8,189,946

 
8,226,113

Cumulative dividends in excess of earnings
(3,584,397
)
 
(3,370,520
)
Accumulated other comprehensive income (loss)
(4,297
)
 
(24,024
)
Total stockholders' equity
5,071,168

 
5,301,005

Joint venture partners
392,319

 
117,045

Non-managing member unitholders
176,888

 
176,888

Total noncontrolling interests
569,207

 
293,933

Total equity
5,640,375

 
5,594,938

Total liabilities and equity
$
13,083,958

 
$
14,088,461


See accompanying Notes to the Unaudited Consolidated Financial Statements.


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Table of Contents

HCP, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 

 
 

 
 
 
 
Rental and related revenues
$
262,828

 
$
266,109

 
$
821,462

 
$
816,147

Tenant recoveries
41,026

 
36,860

 
116,984

 
105,794

Resident fees and services
137,359

 
126,040

 
416,947

 
391,688

Income from direct financing leases
13,573

 
13,240

 
40,329

 
40,516

Interest income
1,236

 
11,774

 
9,048

 
50,974

Total revenues
456,022

 
454,023

 
1,404,770

 
1,405,119

Costs and expenses:
 

 
 

 
 
 
 
Interest expense
63,486

 
71,328

 
211,626

 
235,834

Depreciation and amortization
132,198

 
130,588

 
418,740

 
397,893

Operating
181,207

 
155,338

 
527,625

 
467,582

General and administrative
23,503

 
23,523

 
75,192

 
67,287

Transaction costs
4,489

 
580

 
9,088

 
2,504

Impairments (recoveries), net
5,268

 
25,328

 
19,180

 
82,010

Total costs and expenses
410,151

 
406,685

 
1,261,451

 
1,253,110

Other income (expense):
 

 
 

 
 
 
 
Gain (loss) on sales of real estate, net
95,332

 
5,182

 
162,211

 
322,852

Loss on debt extinguishments
(43,899
)
 
(54,227
)
 
(43,899
)
 
(54,227
)
Other income (expense), net
1,604

 
(10,556
)
 
(37,017
)
 
40,723

Total other income (expense), net
53,037

 
(59,601
)
 
81,295

 
309,348

Income (loss) before income taxes and equity income (loss) from unconsolidated joint ventures
98,908

 
(12,263
)
 
224,614

 
461,357

Income tax benefit (expense)
4,929

 
5,481

 
14,919

 
14,630

Equity income (loss) from unconsolidated joint ventures
(911
)
 
1,062

 
(442
)
 
4,571

Net income (loss)
102,926

 
(5,720
)
 
239,091

 
480,558

Noncontrolling interests' share in earnings
(3,555
)
 
(1,937
)
 
(9,546
)
 
(7,687
)
Net income (loss) attributable to HCP, Inc.
99,371

 
(7,657
)
 
229,545

 
472,871

Participating securities' share in earnings
(425
)
 
(131
)
 
(1,278
)
 
(560
)
Net income (loss) applicable to common shares
$
98,946

 
$
(7,788
)
 
$
228,267

 
$
472,311

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.21

 
$
(0.02
)
 
$
0.49

 
$
1.01

Diluted
$
0.21

 
$
(0.02
)
 
$
0.49

 
$
1.01

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
469,867

 
468,975

 
469,732

 
468,642

Diluted
470,118

 
468,975

 
469,876

 
468,828

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.37

 
$
0.37

 
$
1.11

 
$
1.11

See accompanying Notes to the Unaudited Consolidated Financial Statements.


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Table of Contents

HCP, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
102,926

 
$
(5,720
)
 
$
239,091

 
$
480,558

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Net unrealized gains (losses) on derivatives
342

 
(3,672
)
 
5,971

 
(10,105
)
Change in Supplemental Executive Retirement Plan obligation and other
82

 
66

 
264

 
220

Foreign currency translation adjustment
(921
)
 
5,750

 
(4,596
)
 
14,362

Reclassification adjustment realized in net income (loss)
280

 
654

 
18,088

 
674

Total other comprehensive income (loss)
(217
)
 
2,798

 
19,727

 
5,151

Total comprehensive income (loss)
102,709

 
(2,922
)
 
258,818

 
485,709

Total comprehensive income (loss) attributable to noncontrolling interests
(3,555
)
 
(1,937
)
 
(9,546
)
 
(7,687
)
Total comprehensive income (loss) attributable to HCP, Inc.
$
99,154

 
$
(4,859
)
 
$
249,272

 
$
478,022

See accompanying Notes to the Unaudited Consolidated Financial Statements.


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Table of Contents

HCP, Inc.
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except per share data)
(Unaudited)
 
Common Stock
 
Additional Paid-In Capital
 
Cumulative Dividends In Excess Of Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders’ Equity
 
Total Noncontrolling Interests
 
Total
Equity
 
Shares
 
Amount
 
 
 
 
 
 
December 31, 2017
469,436

 
$
469,436

 
$
8,226,113

 
$
(3,370,520
)
 
$
(24,024
)
 
$
5,301,005

 
$
293,933

 
$
5,594,938

Impact of adoption of ASU No. 2017-05(1)
—

 
—

 
—

 
79,144

 
—

 
79,144

 
—

 
79,144

January 1, 2018
469,436

 
$
469,436

 
$
8,226,113

 
$
(3,291,376
)
 
$
(24,024
)
 
$
5,380,149

 
$
293,933

 
$
5,674,082

Net income (loss)
—

 
—

 
—

 
229,545

 
—

 
229,545

 
9,546

 
239,091

Other comprehensive income (loss)
—

 
—

 
—

 
—

 
19,727

 
19,727

 
—

 
19,727

Issuance of common stock, net
601

 
601

 
3,709

 
—

 
—

 
4,310

 
—

 
4,310

Repurchase of common stock
(138
)
 
(138
)
 
(3,204
)
 
—

 
—

 
(3,342
)
 
—

 
(3,342
)
Exercise of stock options
17

 
17

 
359

 
—

 
—

 
376

 
—

 
376

Amortization of deferred compensation
—

 
—

 
13,098

 
—

 
—

 
13,098

 
—

 
13,098

Common dividends ($1.11 per share)
—

 
—

 
—

 
(522,566
)
 
—

 
(522,566
)
 
—

 
(522,566
)
Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
(13,924
)
 
(13,924
)
Issuances of noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
298,929

 
298,929

Purchase of noncontrolling interests
—

 
—

 
(50,129
)
 
—

 
—

 
(50,129
)
 
(19,277
)
 
(69,406
)
September 30, 2018
469,916

 
$
469,916

 
$
8,189,946

 
$
(3,584,397
)
 
$
(4,297
)
 
$
5,071,168

 
$
569,207

 
$
5,640,375

 
Common Stock
 
Additional Paid-In Capital
 
Cumulative Dividends In Excess Of Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders’ Equity
 
Total Noncontrolling Interests
 
Total
Equity
 
Shares
 
Amount
 
 
 
 
 
 
January 1, 2017
468,081

 
$
468,081

 
$
8,198,890

 
$
(3,089,734
)
 
$
(29,642
)
 
$
5,547,595

 
$
393,713

 
$
5,941,308

Net income (loss)
—

 
—

 
—

 
472,871

 
—

 
472,871

 
7,687

 
480,558

Other comprehensive income (loss)
—

 
—

 
—

 
—

 
5,151

 
5,151

 
—

 
5,151

Issuance of common stock, net
998

 
998

 
16,352

 
—

 
—

 
17,350

 
—

 
17,350

Conversion of DownREIT units to common stock
68

 
68

 
2,003

 
—

 
—

 
2,071

 
(2,071
)
 
—

Repurchase of common stock
(144
)
 
(144
)
 
(4,315
)
 
—

 
—

 
(4,459
)
 
—

 
(4,459
)
Exercise of stock options
32

 
32

 
736

 
—

 
—

 
768

 
—

 
768

Amortization of deferred compensation
—

 
—

 
10,865

 
—

 
—

 
10,865

 
—

 
10,865

Common dividends ($1.11 per share)
—

 
—

 
—

 
(520,779
)
 
—

 
(520,779
)
 
—

 
(520,779
)
Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
(19,520
)
 
(19,520
)
Issuances of noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
1,050

 
1,050

Deconsolidation of noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
(58,061
)
 
(58,061
)
September 30, 2017
469,035

 
$
469,035

 
$
8,224,531

 
$
(3,137,642
)
 
$
(24,491
)
 
$
5,531,433

 
$
322,798

 
$
5,854,231

_______________________________________
(1)
On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (“ASU 2017-05”), and recognized the cumulative-effect of adoption to beginning retained earnings. Refer to Note 2 for a detailed impact of adoption.

See accompanying Notes to the Unaudited Consolidated Financial Statements.


6
Table of Contents

HCP, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended
September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income (loss)
$
239,091

 
$
480,558

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization of real estate, in-place lease and other intangibles
418,740

 
397,893

Amortization of deferred compensation
13,098

 
10,865

Amortization of deferred financing costs
9,760

 
11,141

Straight-line rents
(20,888
)
 
(12,236
)
Equity loss (income) from unconsolidated joint ventures
442

 
(4,571
)
Distributions of earnings from unconsolidated joint ventures
17,519

 
27,692

Deferred income tax expense (benefit)
(12,831
)
 
(17,786
)
Impairments (recoveries), net
19,180

 
82,010

Loss on extinguishment of debt
43,899

 
54,227

Loss (gain) on sales of real estate, net
(162,211
)
 
(322,852
)
Loss (gain) on consolidation, net
41,017

 
—

Casualty-related loss (recoveries), net
—

 
9,912

Loss (gain) on sale of marketable securities
—

 
(50,895
)
Other non-cash items
(1,033
)
 
(1,529
)
Decrease (increase) in accounts receivable and other assets, net
(4,665
)
 
(2,221
)
Increase (decrease) in accounts payable and accrued liabilities
31,800

 
(24,312
)
Net cash provided by (used in) operating activities
632,918

 
637,896

Cash flows from investing activities:
 
 
 
Acquisitions of other real estate
(315,392
)
 
(135,816
)
Development and redevelopment of real estate
(341,906
)
 
(261,510
)
Leasing costs, tenant improvements, and recurring capital expenditures
(70,237
)
 
(75,211
)
Proceeds from sales of real estate, net
686,222

 
1,249,993

Contributions to unconsolidated joint ventures
(10,815
)
 
(25,776
)
Distributions in excess of earnings from unconsolidated joint ventures
19,631

 
4,845

Proceeds from the RIDEA II transaction, net
335,709

 
462,242

Proceeds from the U.K. JV transaction, net
393,997

 
—

Proceeds from sales/principal repayments on debt investments and direct financing leases
147,435

 
550,270

Investments in loans receivable, direct financing leases and other
(27,110
)
 
(28,339
)
Net cash provided by (used in) investing activities
817,534

 
1,740,698

Cash flows from financing activities:
 
 
 
Borrowings under bank line of credit, net
1,203,000

 
23,419

Repayments under bank line of credit
(1,580,668
)
 
(339,826
)
Issuance and borrowings of debt, excluding bank line of credit
223,587

 
5,395

Repayments and repurchase of debt, excluding bank line of credit
(927,869
)
 
(1,466,946
)
Payments for debt extinguishment and deferred financing costs
(41,552
)
 
(51,415
)
Issuance of common stock and exercise of options
4,686

 
18,118

Repurchase of common stock
(3,342
)
 
(4,459
)
Dividends paid on common stock
(522,566
)
 
(520,779
)
Issuance of noncontrolling interests
298,929

 
1,050

Distributions to and purchase of noncontrolling interests
(78,364
)
 
(19,520
)
Net cash provided by (used in) financing activities
(1,424,159
)
 
(2,354,963
)
Effect of foreign exchange on cash, cash equivalents and restricted cash
245

 
401

Net increase (decrease) in cash, cash equivalents and restricted cash
26,538

 
24,032

Cash, cash equivalents and restricted cash, beginning of period
82,203

 
136,990

Cash, cash equivalents and restricted cash, end of period
$
108,741

 
$
161,022

See accompanying Notes to the Unaudited Consolidated Financial Statements.

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Table of Contents

HCP, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) 
NOTE 1.  Business
Overview
HCP, Inc., a Standard & Poor’s (“S&P”) 500 company, is a Maryland corporation that is organized to qualify as a real estate investment trust (“REIT”) which, together with its consolidated entities (collectively, “HCP” or the “Company”), invests primarily in real estate serving the healthcare industry in the United States (“U.S.”). The Company acquires, develops, leases, manages and disposes of healthcare real estate and provides financing to healthcare providers. The Company’s 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.
NOTE 2.  Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Management is required to make estimates and assumptions in the preparation of financial statements in conformity with GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from management’s estimates.
The consolidated financial statements include the accounts of HCP, Inc., its wholly-owned subsidiaries, joint ventures (“JVs”) and variable interest entities (“VIEs”) that it controls through voting rights or other means. Intercompany transactions and balances have been eliminated upon consolidation. All adjustments (consisting of normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows have been included. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. The accompanying unaudited interim financial information should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”).
Recent Accounting Pronouncements
Revenue Recognition. Between May 2014 and February 2017, the Financial Accounting Standards Board (“FASB”) issued four Accounting Standards Updates (“ASUs”) changing the requirements for recognizing and reporting revenue (together, herein referred to as the “Revenue ASUs”): (i) ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), (ii) ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”), (iii) ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”), and (iv) ASU No. 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (“ASU 2017-05”). ASU 2014-09 provides guidance for revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2016-08 is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. ASU 2016-12 provides practical expedients and improvements on the previously narrow scope of ASU 2014-09. ASU 2017-05 clarifies the scope of the FASB’s guidance on nonfinancial asset derecognition and aligns the accounting for partial sales of nonfinancial assets and in-substance nonfinancial assets with the guidance in ASU 2014-09. The Company adopted the Revenue ASUs effective January 1, 2018 and utilized a modified retrospective adoption approach, resulting in a cumulative-effect adjustment to equity of $79 million as of January 1, 2018. Under the Revenue ASUs, the Company also elected to utilize a practical expedient which allows the Company to only reassess contracts that were not completed as of the adoption date, rather than all historical contracts.

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As the primary source of revenue for the Company is generated through leasing arrangements, for which timing and recognition of revenue will be the same whether accounted for under the Revenue ASUs or lease accounting guidance (see discussion below), the impact of the Revenue ASUs, upon and subsequent to adoption, is generally limited to the following:
•
The Company, along with its JV partners and independent SHOP operators, provide certain ancillary services to SHOP residents that are not contemplated in the lease with each resident (i.e., guest meals, concierge services, pharmacy services, etc.). These services are provided and paid for in addition to the standard services included in each resident lease (i.e., room and board, standard meals, etc.). The Company bills residents for ancillary services one month in arrears and recognizes revenue as the services are provided, as the Company has no continuing performance obligation related to those services. Included within resident fees and services for the three months ended September 30, 2018 and 2017 is $10 million and $9 million, respectively, of ancillary service revenue. Included within resident fees and services for the nine months ended September 30, 2018 and 2017 is $30 million and $28 million, respectively, of ancillary service revenue.
•
Prior to the adoption of the Revenue ASUs, the Company recognized a gain on sale of real estate using the full accrual method when collectibility of the sales price was reasonably assured, the Company was not obligated to perform additional activities that may be considered significant, the initial investment from the buyer was sufficient and other profit recognition criteria had been satisfied. The Company deferred all or a portion of a gain on sale of real estate if the requirements for gain recognition were not met at the time of sale. Subsequent to adopting the Revenue ASUs on January 1, 2018, the Company began recognizing a gain on sale of real estate upon transferring control of the asset to the purchaser, which is generally satisfied at the time of sale. In conjunction with its adoption of the Revenue ASUs, the Company reassessed its historical partial sale of real estate transactions to determine which transactions, if any, were not completed contracts (i.e., the transaction did not qualify for sale treatment under previous guidance). The Company concluded that it had one such material transaction, its partial sale of RIDEA II in the first quarter of 2017 (which was not a completed sale under historical guidance as of the Company's adoption date due to a minor obligation related to the interest sold). In accordance with the Revenue ASUs, the Company recorded its retained 40% equity investment at fair value as of the sale date. As a result, the Company recorded an adjustment to equity as of January 1, 2018 (under the modified retrospective transition approach) representing a step-up in the fair value of its equity investment in RIDEA II of $107 million (to a carrying value of $121 million as of January 1, 2018) and a $30 million impairment charge to decrease the carrying value to the sales price of the investment (see Note 4). The Company completed the sale of its equity investment in June 2018 and no longer holds an economic interest in RIDEA II.
•
The Company generally expects that the new guidance will result in certain transactions qualifying as sales of real estate at an earlier date than under historical accounting guidance.
Additionally, effective January 1, 2018, the Company adopted the following ASUs, each of which did not have a material impact to its consolidated financial position, results of operations, cash flows or disclosures upon adoption:
•
ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”) and ASU No. 2018-03, Technical Corrections and Improvements to Financial Instruments - Overall (“ASU 2018-03”). The core principle of the amendments in ASU 2016-01 and ASU 2018-03 involves the measurement of equity investments (except those accounted for under the equity method of accounting or those that result in consolidation) at fair value and the recognition of changes in fair value of those investments during each reporting period in net income (loss). As a result, ASU 2016-01 and ASU 2018-03 eliminate the cost method of accounting for equity securities that do not have readily determinable fair values. Pursuant to the new guidance, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
•
ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”). The amendments in ASU 2016-16 require an entity to recognize the income tax consequences of intra-entity transfers of assets other than inventory at the time that the transfer occurs. Historical guidance does not require recognition of tax consequences until the asset is eventually sold to a third party.
During the fourth quarter of 2017, the Company adopted ASU No. 2016-18, Restricted Cash (“ASU 2016-18”) and ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”) (collectively, the “Cash Flow ASUs”). ASU 2016-18 requires an entity to reconcile and explain the period-over-period change in total cash, cash equivalents and restricted cash within its statements of cash flows and ASU 2016-15 provides guidance clarifying how certain cash receipts and cash payments should be classified. The full retrospective adoption approach is required for the Cash Flow ASUs and, accordingly, certain line items in the Company’s consolidated statements of cash flows have been reclassified to conform to the current period presentation.

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The following table illustrates changes in the Company’s cash flows as reported and as previously reported prior to the adoption of the Cash Flow ASUs during the fourth quarter of 2017 (in thousands):
 
 
Nine Months Ended September 30, 2017
 
 
As Reported
 
As Previously Reported
Net cash provided by (used in) investing activities
    
$
1,740,698

 
$
1,755,823

Net increase (decrease) in balance(1)
 
24,032

 
39,157

Balance - beginning of period(1)
 
136,990

 
94,730

Balance - end of period(1)
 
161,022

 
133,887

_______________________________________
(1)
Amounts in the As Reported column include cash and cash equivalents and restricted cash as required upon the adoption of the Cash Flow ASUs. Amounts in the As Previously Reported column reflect only cash and cash equivalents.
In addition to the changes in the consolidated statements of cash flows as a result of the adoption of the Cash Flow ASUs, certain amounts within the consolidated statements of cash flows have been reclassified for prior periods to conform to the current period presentation. Such reclassifications primarily combined line items of similar classes of transactions and had no impact on cash flows from operating, investing and financing activities.
Leases. In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 amends the current accounting for leases to: (i) require lessees to put most leases on their balance sheets, but continue recognizing expenses on their income statements in a manner similar to requirements under current accounting guidance, (ii) eliminate current real estate specific lease provisions, and (iii) modify the classification criteria and accounting for sales-type leases for lessors. ASU 2016-02 is effective for fiscal years, and interim periods within, beginning after December 15, 2018. Early adoption is permitted. The transition method required by ASU 2016-02 varies based on the specific amendment being adopted. As a result of adopting ASU 2016-02, the Company: (i) will recognize all of its significant operating leases for which it is the lessee, including corporate office leases, equipment leases, and ground leases, on its consolidated balance sheets through a right-of-use asset and corresponding lease liability, (ii) will capitalize fewer costs related to the drafting and execution of its lease agreements, and (iii) may be required to increase its revenue and expense for lessor costs paid directly by lessees under triple-net leases, if the amount paid is readily determinable (i.e., real estate taxes).
ASU 2016-02 provides a practical expedient, which the Company plans to elect, that allows an entity to not reassess the following upon adoption (must be elected as a group): (i) whether an expired or existing contract contains a lease arrangement, (ii) lease classification related to expired or existing lease arrangements, or (iii) whether costs incurred on expired or existing leases qualify as initial direct costs.
Additionally, in July 2018, the FASB issued ASU No. 2018-11, Leases - Targeted Improvements (“ASU 2018-11”), which provides lessors with the option to elect a practical expedient allowing them to not separate lease and nonlease components in a contract for the purpose of revenue recognition and disclosure. This practical expedient is limited to circumstances in which: (i) the timing and pattern of transfer are the same for the nonlease component and the related lease component and (ii) the lease component, if accounted for separately, would be classified as an operating lease. This practical expedient causes an entity to assess whether a contract is predominantly lease or service based and recognize the entire contract under the relevant accounting guidance (i.e., predominantly lease-based would be accounted for under ASU 2016-02 and predominantly service-based would be accounted for under the Revenue ASUs). The Company plans to elect this practical expedient as well. The Company completed a preliminary assessment of predominance for its senior housing triple-net, medical office, and life science segments and, effective upon the adoption of ASU 2016-02 (codified under Accounting Standards Codification (“ASC”) 842), the Company expects to recognize revenue from these segments under ASC 842. The Company is still in the process of completing its preliminary assessment related to SHOP. The Company plans to finalize its assessment for all segments during the fourth quarter of 2018.
The Company is still evaluating the complete impact of the adoption of ASU 2016-02 and ASU 2018-11 on January 1, 2019 to its consolidated financial position, results of operations and disclosures.
Credit Losses. In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 is intended to improve financial reporting by requiring timelier recognition of credit losses on loans and other financial instruments held by financial institutions and other organizations. The amendments in ASU 2016-13 eliminate the “probable” initial threshold for recognition of credit losses in current accounting guidance and, instead, reflect an entity’s current estimate of all expected credit losses over the life of the financial instrument. Previously, when credit losses were measured under current accounting guidance, an entity generally only considered past events and current conditions in measuring the incurred loss. The amendments in ASU 2016-13 broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss. ASU 2016-13 is effective for fiscal years, and interim periods within, beginning

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after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within, beginning after December 15, 2018. A reporting entity is required to apply the amendments in ASU 2016-13 using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. Upon adoption of ASU 2016-13, the Company is required to reassess its financing receivables, including direct financing leases (“DFLs”) and loans receivable, and expects that application of ASU 2016-13 may result in the Company recognizing credit losses at an earlier date than would otherwise be recognized under current accounting guidance. The Company is evaluating the impact of the adoption of ASU 2016-13 on January 1, 2020 to its consolidated financial position and results of operations.
The following ASU has been issued, but not adopted, and the Company does not expect a material impact to its consolidated financial position, results of operations, cash flows, or disclosures upon adoption:
•
ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). ASU 2017-12 is effective for fiscal years, including interim periods within, beginning after December 15, 2018 and early adoption is permitted. The amendments in ASU 2017-12 expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. For cash flow and net investment hedges existing at the date of adoption, a reporting entity must apply the amendments in ASU 2017-12 using the modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. The presentation and disclosure amendments in ASU 2017-12 must be applied using a prospective approach.
NOTE 3.  Master Transactions and Cooperation Agreement with Brookdale
Master Transactions and Cooperation Agreement with Brookdale
On November 1, 2017, the Company and Brookdale Senior Living Inc. (“Brookdale”) entered into a Master Transactions and Cooperation Agreement (the “MTCA”) to provide the Company with the ability to significantly reduce its concentration of assets leased to and/or managed by Brookdale (the “Brookdale Transactions”). Through a series of dispositions and transitions of assets currently leased to and/or managed by Brookdale, as contemplated by the MTCA and further described below, the Company’s exposure to Brookdale is expected to be significantly reduced.
In connection with the overall transaction pursuant to the MTCA, the Company (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, which accounted for primarily all of the assets subject to triple-net leases between the Company and the Lessee (before giving effect to the contemplated sale or transition of 34 assets discussed below). Under the Amended Master Lease, the Company has 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 including:
•
A security deposit (which increases if specified leverage thresholds are exceeded);
•
A termination right if certain financial covenants and a net worth test are not satisfied;
•
Enhanced reporting requirements and related remedies; and
•
The right to market for sale the CCRC Portfolio (as defined below).
Future changes in control of Brookdale are permitted pursuant to the Amended Master Lease, subject to certain conditions, including the purchaser either meeting experience requirements or retaining a majority of Brookdale’s principal officers.
The Amended Master Lease preserves the renewal terms and, with certain exceptions, the rents under the previously existing triple-net leases. In addition, the Company and Brookdale agreed to the following:
•
The Company received the right to sell, or transition to other operators, 32 triple-net assets. If such sale or transition does not occur within one year of executing the MTCA, the triple-net lease with respect to such assets will convert to a cash flow lease (under which the Company will bear the risks and rewards of operating the assets) with a term of two years, provided that the Company has the right to terminate the cash flow lease at any time during the term without penalty;
•
The Company provided an aggregate $5 million annual reduction in rent on three assets, effective January 1, 2018; and
•
The Company would sell two triple-net assets to Brookdale or its affiliates for $35 million, both of which were sold in April 2018.

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Also pursuant to the MTCA, the Company and Brookdale agreed to the following:
•
The Company, which owned 90% of the interests in its RIDEA I and RIDEA III JVs with Brookdale at the time the MTCA was executed, agreed to purchase Brookdale’s 10% noncontrolling interest in each JV for an aggregate purchase price of $95 million. At the time the MTCA was executed, these JVs collectively owned and operated 58 independent living, assisted living, memory care and/or skilled nursing facilities (the “RIDEA Facilities”). The Company completed its acquisitions of the RIDEA III noncontrolling interest for $32 million in December 2017 and the RIDEA I noncontrolling interest for $63 million in March 2018;
•
The Company received 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 of executing the MTCA, 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;
•
The Company would sell four of the RIDEA Facilities to Brookdale or its affiliates for $240 million, one of which was sold in January 2018 for $32 million and the remaining three of which were sold in April 2018 for $208 million;
•
A Brookdale affiliate continues to manage the remaining 18 RIDEA Facilities pursuant to amended 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
•
The Company received the right to sell, to certain permitted transferees, its 49% ownership interest in JVs that own and operate a portfolio of continuing care retirement communities (the “CCRC Portfolio”) 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, the Company 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.
In June 2018, the Company entered into definitive agreements with a third-party buyer to sell 11 senior housing triple-net assets (of the 32 noted above) and 11 RIDEA Facilities (of the 36 noted above) previously leased to Brookdale for total gross proceeds of $428 million. As part of this transaction, the buyer funded a $13 million nonrefundable deposit. During the quarter ended September 30, 2018, three RIDEA Facilities were removed from the transaction, resulting in 19 assets to be sold for approximately $377 million. Those 19 assets were classified as held for sale at September 30, 2018. On October 1, 2018, the Company sold the first 17 assets for approximately $263 million and anticipates the sale of the final two assets will close during the fourth quarter of 2018.
During the nine months ended September 30, 2018, the Company terminated the previous management agreements or leases with Brookdale on 33 assets and completed the transition of 17 SHOP assets and 16 senior housing triple-net assets to other managers. Additionally, subsequent to September 30, 2018, the Company completed the transition of one senior housing triple-net asset to another manager.
NOTE 4.  Real Estate Transactions
Dispositions of Real Estate
Held for Sale
At September 30, 2018, 14 SHOP facilities, 11 senior housing triple-net facilities and one undeveloped life science land parcel were classified as held for sale, with an aggregate carrying value of $423 million, primarily comprised of real estate assets of $407 million, net of accumulated depreciation of $109 million. At December 31, 2017, two senior housing triple-net facilities, four life science facilities and six SHOP facilities were classified as held for sale, with an aggregate carrying value of $417 million, primarily comprised of real estate assets of $393 million, net of accumulated depreciation of $93 million. Liabilities of assets held for sale is primarily comprised of intangible and other liabilities at both September 30, 2018 and December 31, 2017.
RIDEA II Sale Transaction
In January 2017, the Company completed the contribution of its ownership interest in RIDEA II to an unconsolidated JV owned by HCP and an investor group led by Columbia Pacific Advisors, LLC (“CPA”) (the “HCP/CPA JV”). Also in January 2017, 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, the Company received combined proceeds of $480 million from the

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HCP/CPA JV and $242 million in loans receivable and retained an approximately 40% ownership interest in RIDEA II. This transaction resulted in the Company deconsolidating the net assets of RIDEA II and recognizing a net gain on sale of $99 million. Refer to Note 2 for the impact of adopting the Revenue ASUs on January 1, 2018 to the Company’s partial sale of RIDEA II in the first quarter of 2017.
On November 1, 2017, the Company entered into a definitive agreement with an investor group led by CPA to sell its remaining 40% ownership interest in RIDEA II for $90 million and cause CPA to refinance the Company’s $242 million of loans receivable from RIDEA II. The Company completed the transaction in June 2018, resulting in proceeds of $332 million. The Company no longer holds an economic interest in RIDEA II.
U.K. Portfolio
In June 2018, the Company entered into a joint venture with an institutional investor (the “U.K. JV”) through which the Company sold a 51% interest in substantially all United Kingdom (“U.K.”) assets previously owned by the Company (the “U.K. Portfolio”) based on a total value of £382 million ($507 million). The Company retained a 49% noncontrolling interest in the joint venture and received gross proceeds of $402 million, including proceeds from the refinancing of the Company’s previously held intercompany loans. Upon closing the U.K. JV, the Company deconsolidated the U.K. Portfolio, recognized its retained noncontrolling interest investment at fair value ($105 million) and recognized a gain on sale of $11 million, net of $17 million of cumulative foreign currency translation reclassified from other comprehensive income (see Note 18 for the reclassification impact of the Company’s hedge of its net investment in the U.K.). The U.K. JV provides numerous mechanisms by which the joint venture partner can acquire the Company’s remaining interest in the U.K. JV. The fair value of the Company’s retained noncontrolling interest investment is based on Level 2 measurements within the fair value hierarchy.
Additionally, in August 2018, the Company sold its remaining £11 million U.K. development loan at par.
2018 Dispositions 
During the quarter ended March 31, 2018, the Company sold two SHOP assets for $35 million, resulting in total gain on sales of $21 million (includes asset sales to Brookdale as discussed in Note 3 above).
During the quarter ended June 30, 2018, the Company sold eight SHOP assets for $268 million and two senior housing triple-net assets for $35 million, resulting in total gain on sales of $25 million (includes asset sales to Brookdale as discussed in Note 3 above).
During the quarter ended September 30, 2018, the Company sold four life science assets for $269 million, 11 SHOP assets for $76 million and two medical office buildings (“MOBs”) for $21 million, resulting in total gain on sales of $95 million.
In October 2018, the Company entered into a definitive agreement to sell its Shoreline Technology Center life science campus located in Mountain View, California for $1.0 billion. Under the agreement, the buyer funded a $65 million nonrefundable deposit. The sale is expected to generate a gain on sale of approximately $700 million upon its anticipated closing in the fourth quarter 2018.
2017 Dispositions
In March 2017, the Company sold 64 senior housing triple-net assets, previously under triple-net leases with Brookdale, for $1.125 billion to affiliates of Blackstone Real Estate Partners VIII, L.P., resulting in a gain on sale of $170 million.
Additionally, during the quarter ended March 31, 2017, the Company sold four life science facilities for $76 million and a SHOP asset for $3 million, resulting in total gain on sales of $45 million.
During the quarter ended June 30, 2017, the Company sold a land parcel for $27 million and one life science facility for $5 million, resulting in total gain on sales of $1 million.
During the quarter ended September 31, 2017, the Company sold two senior housing triple-net assets for $15 million, resulting in a gain on sale of $5 million.
During the quarter ended December 31, 2017, the Company sold four SHOP assets for $41 million, three MOBs for $14 million and two senior housing triple-net assets for $12 million, resulting in total gain on sales of $34 million.

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Investments in Real Estate
MSREI MOB JV
In August 2018, the Company and Morgan Stanley Real Estate Investment (“MSREI”) formed a joint venture (the “MSREI JV”) to own a portfolio of MOBs, which the Company owns 51% of and consolidates. To form the joint venture, MSREI contributed cash of $298 million and HCP contributed nine wholly-owned MOBs (the “Contributed Assets”). The Contributed Assets are primarily located in Texas and Florida and were valued at approximately $320 million at the time of contribution. The MSREI JV used substantially all of the cash contributed by MSREI to acquire an additional portfolio of 16 MOBs in Greenville, South Carolina (the “Greenville Portfolio”) for $285 million. Concurrent with acquiring the additional MOBs, the MSREI JV entered into 10-year leases with an anchor tenant on each MOB in the Greenville Portfolio, which accounts for approximately 93% of the total leasable space in the portfolio.
The Contributed Assets are accounted for at historical depreciated cost by the Company, as the assets continue to be consolidated. The Greenville Portfolio is accounted for as an asset acquisition, which requires the Company to record the individual components of the acquisition at each component’s relative fair value. As a result, the Company recorded net real estate of $273 million and net intangible assets of $20 million during the three months ended September 30, 2018 related to the Greenville Portfolio. Additionally, the Company recognized a noncontrolling interest of $298 million related to the interest owned by MSREI. Refer to Note 15 for a discussion of the Company’s consolidation of the MSREI JV.
Other Real Estate Investments
During the nine months ended September 30, 2018, the Company acquired development rights on a land parcel in the Boston suburb of Lexington, Massachusetts for $21 million. The Company commenced a life science development on the land in 2018.
During the year ended December 31, 2017, the Company acquired 20 properties, the impact of which is summarized in the following table (dollars in thousands):
 
 
Consideration
 
Assets Acquired
Segment
 
Cash Paid
 
Liabilities Assumed
 
Real Estate
 
Net Intangibles
SHOP
 
$
44,258

 
$
797

 
$
37,940

 
$
7,115

Life science
 
315,255

 
3,524

 
305,760

 
13,019

Medical office
 
201,240

 
1,104

 
184,115

 
18,229

 
 
$
560,753

 
$
5,425

 
$
527,815

 
$
38,363

Impairments of Real Estate
2018
During the second quarter 2018, in conjunction with classifying two underperforming SHOP portfolios (13 assets total) and an undeveloped life science land parcel as held for sale, the Company concluded that the assets were impaired and wrote-down the carrying value of the assets to their fair value less estimated costs to sell. Accordingly, the Company recognized a $14 million impairment charge during the second quarter of 2018. The fair value of the assets was based on contracted sales prices, which are considered to be Level 2 measurements within the fair value hierarchy.
During the third quarter 2018, in conjunction with classifying three underperforming SHOP assets as held for sale, the Company concluded that the assets were impaired and wrote-down the carrying value of the assets to their fair value less estimated costs to sell. Accordingly, the Company recognized a $5 million impairment charge during the third quarter of 2018. The fair value of the assets was based on contracted sales prices which are considered to be Level 2 measurements within the fair value hierarchy.
2017
During the third quarter 2017, the Company determined that 11 underperforming senior housing triple-net assets that are candidates for potential future sale were impaired. Accordingly, the Company wrote-down the carrying amount of these 11 assets to their fair value, which resulted in an aggregate impairment charge of $23 million. The fair value of the assets was based on forecasted sales prices which are considered to be Level 2 measurements within the fair value hierarchy.
Casualty-Related Losses
As a result of Hurricane Harvey and Hurricane Irma, the Company recorded an estimated $11 million of casualty-related losses, net of a small insurance recovery, during the third quarter of 2017. The losses are comprised of $6 million of property damage and $5 million of other associated costs, including storm preparation, clean up, relocation and other costs. Of the total $11 million casualty losses incurred, $10 million was recorded in other income (expense), net, and $1 million was recorded in equity income

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(loss) from unconsolidated joint ventures as it relates to casualty losses for properties owned by certain of our unconsolidated joint ventures. In addition, the Company recorded a $2 million deferred tax benefit associated with the casualty-related losses.
NOTE 5.  Net Investment in Direct Financing Leases
Net investment in DFLs consists of the following (dollars in thousands):
 
September 30,
2018
 
December 31,
2017
Minimum lease payments receivable
$
1,028,487

 
$
1,062,452

Estimated residual value
507,484

 
504,457

Less unearned income
(821,262
)
 
(852,557
)
Net investment in direct financing leases
$
714,709

 
$
714,352

Properties subject to direct financing leases
29

 
29

In February 2017, the Company sold a hospital within a DFL in Palm Beach Gardens, Florida for $43 million to the current tenant and recognized a gain on sale of $4 million.
Direct Financing Lease Internal Ratings
The following table summarizes the Company’s internal ratings for DFLs at September 30, 2018 (dollars in thousands):
 
 
Carrying
Amount
 
Percentage of
DFL Portfolio
 
Internal Ratings
Segment
 
 
 
Performing DFLs
 
Watch List DFLs
 
Workout DFLs
Senior housing triple-net
 
$
630,105

 
88
 
$
278,085

 
$
352,020

 
$
—

Other non-reportable segments
 
84,604

 
12
 
84,604

 
—

 
—

 
 
$
714,709

 
100
 
$
362,689

 
$
352,020

 
$
—

Beginning September 30, 2013, the Company placed a 14-property senior housing triple-net DFL (the “DFL Watchlist Portfolio”) on nonaccrual status and “Watch List” status. The Company determined that the collection of all rental payments was and continues to be no longer reasonably assured; therefore, rental revenue for the DFL Watchlist Portfolio is being recognized on a cash basis. During both the three months ended September 30, 2018 and 2017, the Company recognized income from DFLs of $4 million and received cash payments of $5 million from the DFL Watchlist Portfolio. During the nine months ended September 30, 2018 and 2017, the Company recognized income from DFLs of $11 million and $10 million, respectively, and received cash payments of $14 million during each period from the DFL Watchlist Portfolio. The carrying value of the DFL Watchlist Portfolio was $352 million and $356 million at September 30, 2018 and December 31, 2017, respectively.
NOTE 6.  Loans Receivable
The following table summarizes the Company’s loans receivable (in thousands):
 
September 30, 2018
 
December 31, 2017
 
Real Estate
Secured
 
Other
Secured
 
Total
 
Real Estate
Secured
 
Other
Secured
 
Total
Mezzanine
$
—

 
$
21,572

 
$
21,572

 
$
—

 
$
269,299

 
$
269,299

Other(1)
19,792

 
—

 
19,792

 
188,418

 
—

 
188,418

Unamortized discounts, fees and costs
—

 
(62
)
 
(62
)
 
—

 
(596
)
 
(596
)
Allowance for loan losses(2)
—

 
—

 
—

 
—

 
(143,795
)
 
(143,795
)
 
$
19,792

 
$
21,510

 
$
41,302

 
$
188,418

 
$
124,908

 
$
313,326

_______________________________________
(1)
At September 30, 2018, the Company had $95 million remaining of commitments to fund a $115 million senior living development project. At December 31, 2017, includes the U.K. Bridge Loan discussed below.
(2)
Related to the Company’s mezzanine loan facility to Tandem Health Care discussed below.

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Loans Receivable Internal Ratings
The following table summarizes the Company’s internal ratings for loans receivable at September 30, 2018 (dollars in thousands):
 
 
Carrying
Amount
 
Percentage of
Loan Portfolio
 
Internal Ratings
Investment Type
 
 
 
Performing Loans
 
Watch List Loans
 
Workout Loans
Real estate secured
 
$
19,792

 
48
 
$
19,792

 
$
—

 
$
—

Other secured
 
21,510

 
52
 
21,510

 
—

 
—


 
$
41,302

 
100
 
$
41,302

 
$
—

 
$
—

Four Seasons Health Care
In March 2017, the Company sold its investment in Four Seasons Health Care’s (“Four Seasons”) senior secured term loan at par plus accrued interest for £29 million ($35 million).
Additionally, in March 2017, pursuant to a shift in the Company’s investment strategy, the Company sold its £138.5 million par value Four Seasons senior notes (the “Four Seasons Notes”) for £83 million ($101 million). The disposition of the Four Seasons Notes generated a £42 million ($51 million) gain on sale, recognized in other income (expense), net, as the sales price was above the previously-impaired carrying value of £41 million ($50 million).
HC-One Facility
On June 30, 2017, the Company received £283 million ($367 million) from the repayment of its HC-One mezzanine loan.
Tandem Health Care Loan
From July 2012 through May 2015, the Company funded, in aggregate, $257 million under a collateralized mezzanine loan facility (the “Mezzanine Loan”) to certain affiliates of Tandem Health Care (together with its affiliates, “Tandem”). During 2017, the Company recorded impairment charges totaling $144 million on the Mezzanine Loan. The decline in fair value driving each impairment charge was based primarily on declining operating results of the collateral underlying the Mezzanine Loan, as well as market and industry data, which reflected a declining trend in admissions and a continuing shift away from higher-rate Medicare plans in the post-acute/skilled nursing sector. The resulting carrying value of the Mezzanine Loan as of December 31, 2017 was $105 million. In conjunction with the declining operating results and industry trends, beginning in the first quarter of 2017, the Company elected to recognize interest income on a cash basis. During the three and nine months ended September 30, 2017, the Company recognized interest income and received cash payments of $8 million and $23 million, respectively, from Tandem. During the nine months ended September 30, 2018, the Company did not recognize interest income nor receive cash payments from Tandem.
In March 2018, the Company sold the Mezzanine Loan to a third party for approximately $112 million, resulting in an impairment recovery, net of transaction costs and fees, of $3 million included in other income (expense), net. The Company holds no further economic interest in the operations of Tandem.
U.K. Bridge Loan
In 2016, the Company provided a £105 million ($131 million at closing) bridge loan to MMCG (the “U.K. Bridge Loan”) to fund the acquisition of a portfolio of seven care homes in the U.K. Under the U.K. Bridge Loan, the Company retained a three-year call option to acquire those seven care homes at a future date for £105 million, subject to certain conditions precedent being met. In March 2018, upon resolution of all conditions precedent, the Company began the process of exercising its call option to acquire the seven care homes and concluded that it should consolidate the real estate. As a result, the Company derecognized the outstanding loan receivable of £105 million and recognized a £29 million ($41 million) loss on consolidation. Refer to Note 15 for the complete impact of consolidating the seven care homes during the first quarter of 2018.
In June 2018, the Company completed the process of exercising the above-mentioned call option. The seven care homes acquired through the call option were included in the U.K. JV transaction (see Note 4).

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NOTE 7.  Investments in and Advances to Unconsolidated Joint Ventures
The Company owns interests in the following entities that are accounted for under the equity method (dollars in thousands): 
 
 
 
 
 
 
Carrying Amount
 
 
 
 
 
 
 
 
September 30,
 
December 31,
Entity(1)
 

 
Ownership%
 
2018
 
2017
CCRC JV
 

 
 
49
 
 
$
374,988

 
$
400,241

RIDEA II(2)
 

 
 
40
 
 
—

 
259,651

U.K. JV(3)
 
 
 
 
49
 
 
105,200

 
—

Life Science JVs(4)
 

 

50 - 63

 
67,328

 
65,581

MBK JV
 

 
 
50
 
 
35,934

 
38,005

Development JVs(5)
 

 
 
50 - 90
 
 
26,100

 
23,365

Medical Office JVs(6)
 

 
 
20 - 67
 
 
12,313

 
12,488

K&Y JVs(7)
 

 
 
80
 
 
1,380

 
1,283

Advances to unconsolidated joint ventures, net
 
 
 
 
 
 
 
12

 
226

 
 
 
 
 
 
 
 
$
623,255

 
$
800,840

_______________________________________
(1)
These entities are not consolidated because the Company does not control, through voting rights or other means, the joint ventures.
(2)
In June 2018, the Company sold its equity method investment in RIDEA II (see Note 4).
(3)
See Note 4 for discussion of the formation of the U.K. JV and the Company’s equity method investment.
(4)
Includes the following unconsolidated partnerships (and the Company’s ownership percentage): (i) Torrey Pines Science Center, LP (50%); (ii) Britannia Biotech Gateway, LP (55%); and (iii) LASDK, LP (63%).
(5)
Includes four unconsolidated SHOP development joint ventures (and the Company’s ownership percentage): (i) Vintage Park Development JV (85%); (ii) Waldwick JV (85%); (iii) Otay Ranch JV (90%); and (iv) MBK Development JV (50%).
(6)
Includes three unconsolidated medical office joint ventures (and the Company’s ownership percentage): HCP Ventures IV, LLC (20%); HCP Ventures III, LLC (30%); and Suburban Properties, LLC (67%).
(7)
Includes three unconsolidated joint ventures.
NOTE 8.  Intangibles
Intangible assets primarily consist of lease-up intangibles, above market tenant lease intangibles and below market ground lease intangibles. Intangible liabilities primarily consist of below market lease intangibles and above market ground lease intangibles. The following tables summarize the Company’s intangible lease assets and liabilities (in thousands):
Intangible lease assets
 
September 30,
2018
 
December 31,
2017
Gross intangible lease assets
 
$
600,671

 
$
795,305

Accumulated depreciation and amortization
 
(294,866
)
 
(385,223
)
Intangible assets, net
 
$
305,805

 
$
410,082

Intangible lease liabilities
 
September 30,
2018
 
December 31,
2017
Gross intangible lease liabilities
 
$
107,687

 
$
126,212

Accumulated depreciation and amortization
 
(50,816
)
 
(73,633
)
Intangible liabilities, net
 
$
56,871

 
$
52,579


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NOTE 9.  Debt
Bank Line of Credit and Term Loan
The Company’s $2.0 billion unsecured revolving line of credit facility (the “Facility”) matures on October 19, 2021 and contains two, six-month extension options. Borrowings under the Facility accrue interest at LIBOR plus a margin that depends on the Company’s credit ratings. The Company pays a facility fee on the entire revolving commitment that depends on its credit ratings. Based on the Company’s credit ratings at September 30, 2018, the margin on the Facility was 1.00% and the facility fee was 0.20%. The Facility also includes a feature that allows the Company to increase the borrowing capacity by an aggregate amount of up to $750 million, subject to securing additional commitments. At September 30, 2018, the Company had $637 million, including £55 million ($72 million), outstanding under the Facility, with a weighted average effective interest rate of 3.33%.
At September 30, 2018, the Company had $224 million outstanding on its term loan, which accrues interest at a rate of LIBOR plus 1.15%, subject to adjustments based on the Company’s credit ratings. On July 3, 2018, the Company exercised its one-time right to repay the outstanding British pound sterling (“GBP”) balance and re-borrow in U.S. Dollars (“USD”) with all other key terms unchanged, which resulted in repayment of the £169 million balance and re-borrowing of $224 million. The term loan continues to mature in January 2019 and contains a one-year committed extension option.
The Facility and term loan contain certain financial restrictions and other customary requirements, including cross-default provisions to other indebtedness. Among other things, these covenants, using terms defined in the agreements: (i) limit the ratio of Consolidated Total Indebtedness to Consolidated Total Asset Value to 60%; (ii) limit the ratio of Secured Debt to Consolidated Total Asset Value to 30%; (iii) limit the ratio of Unsecured Debt to Consolidated Unencumbered Asset Value to 60%; (iv) require a minimum Fixed Charge Coverage ratio of 1.5 times; and (v) require a Minimum Consolidated Tangible Net Worth of $6.5 billion. At September 30, 2018, the Company was in compliance with each of these restrictions and requirements of the Facility and term loan.
Senior Unsecured Notes
At September 30, 2018, the Company had senior unsecured notes outstanding with an aggregate principal balance of $5.8 billion. The senior unsecured notes contain certain covenants including limitations on debt, maintenance of unencumbered assets, cross-acceleration provisions and other customary terms. The Company believes it was in compliance with these covenants at September 30, 2018.
The following table summarizes the Company’s senior unsecured notes payoffs for the periods presented (dollars in thousands):
Period
 
Amount
 
Coupon Rate
2018
 
 
 
 
July 16, 2018(1)
    
$
700,000

 
5.375
%
2017
 
 
 
 
May 1, 2017
 
$
250,000

 
5.625
%
July 27, 2017(2)
 
$
500,000

 
5.375
%
_______________________________________
(1)
The Company recorded a $44 million loss on debt extinguishment related to the repurchase of senior notes.
(2)
The Company recorded a $54 million loss on debt extinguishment related to the repurchase of senior notes.
On October 9, 2018, the Company provided a redemption notice to holders of its $450 million 3.75% senior unsecured notes due in 2019, which will be redeemed in November 2018. There will be no loss on debt extinguishment associated with this redemption.
There were no senior unsecured notes issuances during the nine months ended September 30, 2018 or year ended December 31, 2017.
Mortgage Debt
At September 30, 2018, the Company had $134 million in aggregate principal of mortgage debt outstanding, which is secured by 15 healthcare facilities with a carrying value of $280 million. In March 2017, the Company paid off $472 million of mortgage debt.
Mortgage debt generally requires monthly principal and interest payments, is collateralized by real estate assets and is generally non-recourse. Mortgage debt typically restricts transfer of the encumbered assets, prohibits additional liens, restricts prepayment, requires payment of real estate taxes, requires maintenance of the assets in good condition, requires insurance on the assets and includes conditions to obtain lender consent to enter into or terminate material leases. Some of the mortgage debt may require tenants or operators to maintain compliance with the applicable leases or operating agreements of such real estate assets.

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Table of Contents

Debt Maturities
The following table summarizes the Company’s stated debt maturities and scheduled principal repayments at September 30, 2018 (in thousands):
Year
 
Bank Line of
Credit(1)
 
Term Loan
 
Senior
Unsecured
Notes(2)
 
Mortgage
Debt(3)
 
Total(4)
2018 (three months)
 
$
—

 
$
—

 
$
—

 
$
860

 
$
860

2019
 
—

 
223,587

 
450,000

 
3,561

 
677,148

2020
 
—

 
—

 
800,000

 
3,609

 
803,609

2021
 
636,709

 
—

 
—

 
10,957

 
647,666

2022
 
—

 
—

 
900,000

 
2,691

 
902,691

Thereafter
 
—

 
—

 
3,600,000

 
112,516

 
3,712,516

 
 
636,709

 
223,587

 
5,750,000

 
134,194

 
6,744,490

(Discounts), premium and debt costs, net
 
—

 
(119
)
 
(43,819
)
 
5,207

 
(38,731
)
 
 
$
636,709

 
$
223,468

 
$
5,706,181

 
$
139,401

 
$
6,705,759

_______________________________________
(1)
Includes £55 million translated into USD.
(2)
Effective interest rates on the notes ranged from 2.79% to 6.88% with a weighted average effective interest rate of 4.03% and a weighted average maturity of five years. On October 9, 2018, the Company provided a redemption notice to holders of its $450 million senior unsecured notes due in 2019, which will be redeemed in November 2018 (see discussion above).
(3)
Effective interest rates on the mortgage debt ranged from 2.65% to 5.91% with a weighted average effective interest rate of 4.19% and a weighted average maturity of 19 years.
(4)
Excludes $92 million of other debt that have no scheduled maturities.
NOTE 10.  Commitments and Contingencies
Legal Proceedings
From time to time, the Company is a party to, or has a significant relationship to, legal proceedings, lawsuits and other claims. Except as described below, the Company is not aware of any legal proceedings or claims that it believes may have, individually or taken together, a material adverse effect on the Company’s financial condition, results of operations or cash flows. The Company’s policy is to expense legal costs as they are incurred.
Class Action. On May 9, 2016, a purported stockholder of the Company filed a putative class action complaint, Boynton Beach Firefighters’ Pension Fund v. HCP, Inc., et al., Case No. 3:16-cv-01106-JJH, in the U.S. District Court for the Northern District of Ohio against the Company, certain of its officers, HCR ManorCare, Inc. (“HCRMC”), and certain of its officers, asserting violations of the federal securities laws. The suit asserts claims under sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and alleges that the Company made certain false or misleading statements relating to the value of and risks concerning its investment in HCRMC by allegedly failing to disclose that HCRMC had engaged in billing fraud, as alleged by the U.S. Department of Justice (“DoJ”) in a suit against HCRMC arising from the False Claims Act that the DoJ voluntarily dismissed with prejudice. The plaintiff in the class action suit demands compensatory damages (in an unspecified amount), costs and expenses (including attorneys’ fees and expert fees), and equitable, injunctive, or other relief as the Court deems just and proper. On November 28, 2017, the Court appointed Societe Generale Securities GmbH (SGSS Germany) and the City of Birmingham Retirement and Relief Systems (Birmingham) as Co-Lead Plaintiffs in the class action. The motion to dismiss was fully briefed on May 21, 2018 and oral arguments were held on October 23, 2018. The Company believes the suit to be without merit and intends to vigorously defend against it.
Derivative Actions. On June 16, 2016 and July 5, 2016, purported stockholders of the Company filed two derivative actions, respectively Subodh v. HCR ManorCare Inc., et al., Case No. 30-2016-00858497-CU-PT-CXC and Stearns v. HCR ManorCare, Inc., et al., Case No. 30-2016-00861646-CU-MC-CJC, in the Superior Court of California, County of Orange, against certain of the Company’s current and former directors and officers and HCRMC. The Company is named as a nominal defendant. As both derivative actions contained substantially the same allegations, they have been consolidated into a single action (the “California derivative action”). The consolidated action alleges that the defendants engaged in various acts of wrongdoing, including, among other things, breaching fiduciary duties by publicly making false or misleading statements of fact regarding HCRMC’s finances and prospects, and failing to maintain adequate internal controls. On April 18, 2017, the Court approved the parties’ stipulation to stay the case pending disposition of the motion to dismiss the class action litigation.

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On April 10, 2017, a purported stockholder of the Company filed a derivative action, Weldon v. Martin et al., Case No. 3:17-cv-755, in federal court in the Northern District of Ohio, Western Division, against certain of the Company’s current and former directors and officers and HCRMC. The Company is named as a nominal defendant. The Weldon complaint asserts similar claims to those asserted in the California derivative action. In addition, the complaint asserts a claim under Section 14(a) of the Exchange Act, alleging that the Company made false statements in its 2016 proxy statement by not disclosing that the Company’s performance issues in 2015 were the direct result of alleged billing fraud at HCRMC. On April 18, 2017, the Court re-assigned and transferred this action to the judge presiding over the related federal securities class action. On July 11, 2017, the Court approved a stipulation by the parties to stay the case pending disposition of the motion to dismiss the class action.
On July 21, 2017, a purported stockholder of the Company filed another derivative action, Kelley v. HCR ManorCare, Inc., et al., Case No. 8:17-cv-01259, in federal court in the Central District of California, against certain of the Company’s current and former directors and officers and HCRMC. The Company is named as a nominal defendant. The Kelley complaint asserts similar claims to those asserted in Weldon and in the California derivative action. Like Weldon, the Kelley complaint also additionally alleges that the Company made false statements in its 2016 proxy statement, and asserts a claim for a violation of Section 14(a) of the Exchange Act. On November 28, 2017, the federal court in the Central District of California granted Defendants’ motion to transfer the action to the Northern District of Ohio (i.e., the court where the class action and other federal derivative action are pending). The Court in the Northern District of Ohio is currently considering whether to consolidate the Weldon and Kelley actions, appointment of lead plaintiffs and counsel, and whether the stay in Weldon should continue as to either or both actions.
The Company’s Board of Directors received letters dated August 17, 2016, April 19, 2017, and April 20, 2017 from private law firms acting on behalf of clients who are purported stockholders of the Company, each asserting allegations similar to those made in the California derivative action matters discussed above. Each letter demands that the Board of Directors take action to assert the Company’s rights. The Board of Directors completed its evaluation and rejected the demand letters in December of 2017.
The Company believes that the plaintiffs lack standing or the lawsuits and demands are without merit, but cannot predict the outcome of these proceedings or reasonably estimate any potential loss at this time. Accordingly, no loss contingency has been recorded for these matters as of September 30, 2018, as the likelihood of loss is not considered probable or estimable.
Commitments
The Company’s commitments related to development and redevelopment projects increased by $160 million, to $293 million at September 30, 2018 when compared to December 31, 2017. The Company’s ground and other operating lease obligations increased by $105 million (when compared to December 31, 2017), to $501 million at September 30, 2018, primarily as a result of the acquisition of the Greenville Portfolio by the MSREI JV (see Note 4). There have been no other material changes, outside of the ordinary course of business, to the Company’s commitments during the nine months ended September 30, 2018.

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NOTE 11.  Equity
Accumulated Other Comprehensive Income (Loss)
The following table summarizes the Company’s accumulated other comprehensive income (loss) (in thousands):
 
September 30,
2018
 
December 31,
2017
Cumulative foreign currency translation adjustment(1)
$
(921
)
 
$
(6,955
)
Unrealized gains (losses) on derivatives, net
(521
)
 
(13,950
)
Supplemental Executive Retirement plan minimum liability and other
(2,855
)
 
(3,119
)
Total other comprehensive income (loss)
$
(4,297
)
 
$
(24,024
)
_______________________________________
(1)
See Note 4 for a discussion of the U.K. JV transaction.
NOTE 12.  Segment Disclosures
The Company evaluates its business and allocates resources based on its reportable business segments: (i) senior housing triple-net, (ii) SHOP, (iii) life science and (iv) medical office. The Company has non-reportable segments that are comprised primarily of the Company’s debt investments, hospital properties, unconsolidated JVs (see below) and U.K. investments. The accounting policies of the segments are the same as those in Note 2 to the Consolidated Financial Statements in the Company’s 2017 Annual Report on Form 10-K filed with the SEC, as updated by Note 2 herein.
During the three and nine months ended September 30, 2018, six and 16 senior housing triple-net facilities, respectively, were transferred to the Company’s SHOP segment. During the three and nine months ended September 30, 2017, three and four senior housing triple-net facilities, respectively, were transferred to the Company’s SHOP segment. When an asset is transferred from one segment to another, the results associated with that asset are included in the original segment until the date of transfer. Results generated after the transfer date are included in the new segment.
The Company evaluates performance based upon: (i) property NOI and (ii) Adjusted NOI. NOI is defined as rental and related revenues, including tenant recoveries, resident fees and services, and income from DFLs, less property level operating expenses (which exclude transition costs); NOI excludes all other financial statement amounts included in net income (loss). 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.
During the fourth quarter of 2017, as a result of a change in how operating results are reported to the chief operating decision makers for the purpose of evaluating performance and allocating resources, the Company began excluding unconsolidated JVs from its evaluation of its segments' operating results. Unconsolidated JVs are now reflected in other non-reportable segments.
The adjustments to NOI and resulting Adjusted NOI for SHOP have been recast for prior periods to conform to the current period presentation which excludes: (i) the impact of deferred community fee income and expense, resulting in recognition as cash is received and expenses are paid and (ii) adjustments related to unconsolidated JVs (see above).
Non-segment assets consist of assets in the Company's other non-reportable segments and corporate non-segment assets. Corporate non-segment assets consist primarily of corporate assets, including cash and cash equivalents, restricted cash, accounts receivable, net, marketable equity securities and, if any, real estate assets and liabilities held for sale. See Note 16 for other information regarding concentrations of credit risk.

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Table of Contents

The following tables summarize information for the reportable segments (in thousands):
For the three months ended September 30, 2018:
 
 
Senior Housing Triple-Net
 
SHOP
 
Life Science
 
Medical Office
 
Other Non-reportable
 
Corporate Non-segment
 
Total
Rental revenues(1)
 
$
67,487

 
$
137,044

 
$
98,040

 
$
129,618

 
$
22,597

 
$
—

 
$
454,786

Operating expenses
 
(840
)
 
(106,182
)
 
(23,668
)
 
(49,150
)
 
(1,367
)
 
—

 
(181,207
)
NOI
 
66,647

 
30,862

 
74,372

 
80,468

 
21,230

 
—

 
273,579

Adjustments to NOI(2)
 
534

 
1,378

 
(1,439
)
 
(319
)
 
(857
)
 
—

 
(703
)
Adjusted NOI
 
67,181

 
32,240

 
72,933

 
80,149

 
20,373

 
—

 
272,876

Addback adjustments
 
(534
)
 
(1,378
)
 
1,439

 
319

 
857

 
—

 
703

Interest income
 
—

 
—

 
—

 
—

 
1,236

 
—

 
1,236

Interest expense
 
(599
)
 
(688
)
 
(78
)
 
(117
)
 
—

 
(62,004
)
 
(63,486
)
Depreciation and amortization
 
(18,884
)
 
(25,166
)
 
(34,432
)
 
(50,294
)
 
(3,422
)
 
—

 
(132,198
)
General and administrative
 
—

 
—

 
—

 
—

 
—

 
(23,503
)
 
(23,503
)
Transaction costs
 
—

 
—

 
—

 
—

 
—

 
(4,489
)
 
(4,489
)
Recoveries (impairments), net
 
—

 
(5,268
)
 
—

 
—

 
—

 
—

 
(5,268
)
Gain (loss) on sales of real estate, net
 
463

 
10,163

 
80,580

 
3,903

 
223

 
—

 
95,332

Loss on debt extinguishments
 
—

 
—

 
—

 
—

 
—

 
(43,899
)
 
(43,899
)
Other income (expense), net
 
—

 
—

 
—

 
—

 
—

 
1,604

 
1,604

Income tax benefit (expense)
 
—

 
—

 
—

 
—

 
—

 
4,929

 
4,929

Equity income (loss) from unconsolidated JVs
 
—

 
—

 
—

 
—

 
(911
)
 
—

 
(911
)
Net income (loss)
 
$
47,627

 
$
9,903

 
$
120,442

 
$
33,960

 
$
18,356

 
$
(127,362
)
 
$
102,926

_______________________________________
(1)
Represents rental and related revenues, tenant recoveries, resident fees and services, and income from DFLs.
(2)
Represents straight-line rents, DFL non-cash interest, amortization of market lease intangibles, net, deferral of community fees, net and termination fees.

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Table of Contents

For the three months ended September 30, 2017:
 
 
Senior Housing Triple-Net
 
SHOP
 
Life Science
 
Medical Office
 
Other Non-reportable
 
Corporate Non-segment
 
Total
Rental revenues(1)
 
$
77,220

 
$
126,040

 
$
90,174

 
$
119,847

 
$
28,968

 
$
—

 
$
442,249

Operating expenses
 
(934
)
 
(86,821
)
 
(19,960
)
 
(46,486
)
 
(1,137
)
 
—

 
(155,338
)
NOI
 
76,286

 
39,219

 
70,214

 
73,361

 
27,831

 
—

 
286,911

Adjustments to NOI(2)
 
(600
)
 
(35
)
 
(785
)
 
(578
)
 
(1,283
)
 
—

 
(3,281
)
Adjusted NOI
 
75,686

 
39,184

 
69,429

 
72,783

 
26,548

 
—

 
283,630

Addback adjustments
 
600

 
35

 
785

 
578

 
1,283

 
—

 
3,281

Interest income
 
—

 
—

 
—

 
—

 
11,774

 
—

 
11,774

Interest expense
 
(640
)
 
(933
)
 
(87
)
 
(126
)
 
(618
)
 
(68,924
)
 
(71,328
)
Depreciation and amortization
 
(25,547
)
 
(24,884
)
 
(30,851
)
 
(42,047
)
 
(7,259
)
 
—

 
(130,588
)
General and administrative
 
—

 
—

 
—

 
—

 
—

 
(23,523
)
 
(23,523
)
Transaction costs
 
—

 
—

 
—

 
—

 
—

 
(580
)
 
(580
)
Recoveries (impairments), net
 
—

 
—

 
—

 
—

 
(25,328
)
 
—

 
(25,328
)
Gain (loss) on sales of real estate, net
 
5,176

 
(2
)
 
8

 
—

 
—

 
—

 
5,182

Loss on debt extinguishments
 
—

 
—

 
—

 
—

 
—

 
(54,227
)
 
(54,227
)
Other income (expense), net
 
—

 
—

 
—

 
—

 
—

 
(10,556
)
 
(10,556
)
Income tax benefit (expense)
 
—

 
—

 
—

 
—

 
—

 
5,481

 
5,481

Equity income (loss) from unconsolidated JVs
 
—

 
—

 
—

 
—

 
1,062

 
—

 
1,062

Net income (loss)
 
$
55,275

 
$
13,400

 
$
39,284

 
$
31,188

 
$
7,462

 
$
(152,329
)
 
$
(5,720
)
_______________________________________
(1)
Represents rental and related revenues, tenant recoveries, resident fees and services, and income from DFLs.
(2)
Represents straight-line rents, DFL non-cash interest, amortization of market lease intangibles, net, deferral of community fees, net and termination fees.

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Table of Contents

For the nine months ended September 30, 2018:
 
 
Senior Housing Triple-Net
 
SHOP
 
Life Science
 
Medical Office
 
Other Non-reportable
 
Corporate Non-segment
 
Total
Rental revenues(1)
 
$
212,489

 
$
420,067

 
$
298,692

 
$
378,798

 
$
85,676

 
$
—

 
$
1,395,722

Operating expenses
 
(2,677
)
 
(309,694
)
 
(68,208
)
 
(143,114
)
 
(3,932
)
 
—

 
(527,625
)
NOI
 
209,812

 
110,373

 
230,484

 
235,684

 
81,744

 
—

 
868,097

Adjustments to NOI(2)
 
(323
)
 
(356
)
 
(7,423
)
 
(2,383
)
 
(3,566
)
 
—

 
(14,051
)
Adjusted NOI
 
209,489

 
110,017

 
223,061

 
233,301

 
78,178

 
—

 
854,046

Addback adjustments
 
323

 
356

 
7,423

 
2,383

 
3,566

 
—

 
14,051

Interest income
 
—

 
—

 
—

 
—

 
9,048

 
—

 
9,048

Interest expense
 
(1,806
)
 
(2,067
)
 
(240
)
 
(356
)
 
(1,469
)
 
(205,688
)
 
(211,626
)
Depreciation and amortization
 
(62,041
)
 
(80,797
)
 
(105,782
)
 
(142,229
)
 
(27,891
)
 
—

 
(418,740
)
General and administrative
 
—

 
—

 
—

 
—

 
—

 
(75,192
)
 
(75,192
)
Transaction costs
 
—

 
—

 
—

 
—

 
—

 
(9,088
)
 
(9,088
)
Recoveries (impairments), net
 
(6,273
)
 
(5,268
)
 
(7,639
)
 
—

 
—

 
—

 
(19,180
)
Gain (loss) on sales of real estate, net
 
(22,687
)
 
79,340

 
80,581

 
3,903

 
21,074

 
—

 
162,211

Loss on debt extinguishments
 
—

 
—

 
—

 
—

 
—

 
(43,899
)
 
(43,899
)
Other income (expense), net
 
—

 
—

 
—

 
—

 
(40,567
)
 
3,550

 
(37,017
)
Income tax benefit (expense)
 
—

 
—

 
—

 
—

 
—

 
14,919

 
14,919

Equity income (loss) from unconsolidated JVs
 
—

 
—

 
—

 
—

 
(442
)
 
—

 
(442
)
Net income (loss)
 
$
117,005

 
$
101,581

 
$
197,404

 
$
97,002

 
$
41,497

 
$
(315,398
)
 
$
239,091

_______________________________________
(1)
Represents rental and related revenues, tenant recoveries, resident fees and services, and income from DFLs.
(2)
Represents straight-line rents, DFL non-cash interest, amortization of market lease intangibles, net, deferral of community fees, net and termination fees.

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For the nine months ended September 30, 2017:
 
 
Senior Housing Triple-Net
 
SHOP
 
Life Science
 
Medical Office
 
Other Non-reportable
 
Corporate Non-segment
 
Total
Rental revenues(1)
 
$
255,332

 
$
391,684

 
$
262,224

 
$
357,381

 
$
87,524

 
$
—

 
$
1,354,145

Operating expenses
 
(2,927
)
 
(267,226
)
 
(56,024
)
 
(137,930
)
 
(3,475
)
 
—

 
(467,582
)
NOI
 
252,405

 
124,458

 
206,200

 
219,451

 
84,049

 
—

 
886,563

Adjustments to NOI(2)
 
(2,844
)
 
(334
)
 
(1,211
)
 
(2,304
)
 
(3,162
)
 
—

 
(9,855
)
Adjusted NOI
 
249,561

 
124,124

 
204,989

 
217,147

 
80,887

 
—

 
876,708

Addback adjustments
 
2,844

 
334

 
1,211

 
2,304

 
3,162

 
—

 
9,855

Interest income
 
—

 
—

 
—

 
—

 
50,974

 
—

 
50,974

Interest expense
 
(1,898
)
 
(6,950
)
 
(288
)
 
(382
)
 
(3,541
)
 
(222,775
)
 
(235,834
)
Depreciation and amortization
 
(77,478
)
 
(75,657
)
 
(95,648
)
 
(127,261
)
 
(21,849
)
 
—

 
(397,893
)
General and administrative
 
—

 
—

 
—

 
—

 
—

 
(67,287
)
 
(67,287
)
Transaction costs
 
—

 
—

 
—

 
—

 
—

 
(2,504
)
 
(2,504
)
Recoveries (impairments), net
 
—

 
—

 
—

 
—

 
(82,010
)
 
—

 
(82,010
)
Gain (loss) on sales of real estate, net
 
273,409

 
131

 
45,922

 
(406
)
 
3,796

 
—

 
322,852

Loss on debt extinguishments
 
—

 
—

 
—

 
—

 
—

 
(54,227
)
 
(54,227
)
Other income (expense), net
 
—

 
—

 
—

 
—

 
50,895

 
(10,172
)
 
40,723

Income tax benefit (expense)
 
—

 
—

 
—

 
—

 
—

 
14,630

 
14,630

Equity income (loss) from unconsolidated JVs
 
—

 
—

 
—

 
—

 
4,571

 
—

 
4,571

Net income (loss)
 
$
446,438

 
$
41,982

 
$
156,186

 
$
91,402

 
$
86,885

 
$
(342,335
)
 
$
480,558

_______________________________________
(1)
Represents rental and related revenues, tenant recoveries, resident fees and services, and income from DFLs.
(2)
Represents straight-line rents, DFL non-cash interest, amortization of market lease intangibles, net, deferral of community fees, net and termination fees.
The following table summarizes the Company’s revenues by segment (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Segment
 
2018
 
2017
 
2018
 
2017
Senior housing triple-net
 
$
67,487

 
$
77,220

 
$
212,489

 
$
255,332

SHOP
 
137,044

 
126,040

 
420,067

 
391,684

Life science
 
98,040

 
90,174

 
298,692

 
262,224

Medical office
 
129,618

 
119,847

 
378,798

 
357,381

Other non-reportable segments
 
23,833

 
40,742

 
94,724

 
138,498

Total revenues
 
$
456,022

 
$
454,023

 
$
1,404,770

 
$
1,405,119

See Notes 3, 4 and 6 for significant transactions impacting the Company’s segment assets during the periods presented.

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NOTE 13.  Earnings Per Common Share
Basic income (loss) per common share is computed based upon the weighted average number of common shares outstanding. Diluted income (loss) per common share is computed based upon the weighted average number of common shares outstanding plus the common shares issuable from the assumed conversion of DownREIT units, stock options, certain performance restricted stock units and unvested restricted stock units. Only those instruments having a dilutive impact on our basic income (loss) per share are included in diluted income (loss) per share during the periods presented.
Restricted stock and certain performance restricted stock units are considered participating securities, because dividend payments are not forfeited even if the underlying award does not vest, and require use of the two-class method when computing basic and diluted earnings per share.
The following table illustrates the computation of basic and diluted earnings per share (in thousands, except per share amounts):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Numerator
 
 
 
 
 
 
 
Net income (loss)
$
102,926

 
$
(5,720
)
 
$
239,091

 
$
480,558

Noncontrolling interests' share in earnings
(3,555
)
 
(1,937
)
 
(9,546
)
 
(7,687
)
Net income (loss) attributable to HCP, Inc.
99,371

 
(7,657
)
 
229,545

 
472,871

Less: Participating securities' share in earnings
(425
)
 
(131
)
 
(1,278
)
 
(560
)
Net income (loss) applicable to common shares
$
98,946

 
$
(7,788
)
 
$
228,267

 
$
472,311

Denominator
 

 
 

 
 
 
 
Basic weighted average shares outstanding
469,867

 
468,975

 
469,732

 
468,642

Dilutive potential common shares - equity awards
251

 
—

 
144

 
186

Diluted weighted average common shares
470,118

 
468,975

 
469,876

 
468,828

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.21

 
$
(0.02
)
 
$
0.49

 
$
1.01

Diluted
$
0.21

 
$
(0.02
)
 
$
0.49

 
$
1.01


For all periods presented in the above table, 7 million shares issuable upon conversion of DownREIT units and approximately 1 million equity awards (restricted stock units and stock options) were not included because they are anti-dilutive. For the three months ended September 30, 2017, diluted loss per share from continuing operations is calculated using the weighted-average common shares outstanding during the period.

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NOTE 14.  Supplemental Cash Flow Information
The following table provides supplemental cash flow information (in thousands):
 
Nine Months Ended September 30,
 
2018
 
2017
Supplemental cash flow information:
 

 
 

Interest paid, net of capitalized interest
$
226,907

 
$
261,799

Income taxes paid
2,040

 
9,897

Capitalized interest
13,769

 
12,607

Supplemental schedule of non-cash investing and financing activities:
 
 
 
Accrued construction costs
78,557

 
63,515

Retained equity method investment from U.K. JV transaction
104,922

 
—

Derecognition of U.K. Bridge Loan receivable
147,474

 
—

Consolidation of net assets related to U.K. Bridge Loan
106,457

 
—

Deconsolidation of noncontrolling interest in connection with RIDEA II transaction
—

 
58,061

Vesting of restricted stock units and conversion of non-managing member units into common stock
389

 
2,464

Other liabilities assumed with real estate acquisitions
2,093

 
3,678

See discussions related to the RIDEA II transaction, U.K. JV transaction, and MSREI JV in Note 4 and the U.K. Bridge Loan in Notes 6 and 15.
The following table summarizes cash, cash equivalents and restricted cash (in thousands):
 
 
September 30,
 
 
2018
 
2017
Cash and cash equivalents
    
$
78,864

    
$
133,887

Restricted cash
 
29,877

    
27,135

Cash, cash equivalents and restricted cash
 
$
108,741

 
$
161,022

NOTE 15.  Variable Interest Entities
Unconsolidated Variable Interest Entities
At September 30, 2018, the Company had investments in: (i) 48 properties leased to VIE tenants, (ii) four unconsolidated VIE JVs, (iii) marketable debt securities of one VIE and (iv) one loan to a VIE borrower. The Company has determined that it is not the primary beneficiary of and therefore does not consolidate these VIEs because it does not have the ability to control the activities that most significantly impact their economic performance. Except for the Company’s equity interest in the unconsolidated JVs (CCRC OpCo, Vintage Park Development JV, Waldwick JV and the LLC investment discussed below), it has no formal involvement in these VIEs beyond its investments.
The Company leases 48 properties to a total of seven tenants that have also been identified as VIEs (“VIE tenants”). These VIE tenants are “thinly capitalized” entities that rely on the operating cash flows generated from the senior housing facilities to pay operating expenses, including the rent obligations under their leases.
The Company holds a 49% ownership interest in CCRC OpCo, a JV entity formed in August 2014 that operates senior housing properties in a RIDEA structure and has been identified as a VIE. The equity members of CCRC OpCo “lack power” because they share certain operating rights with Brookdale, as manager of the CCRCs. The assets of CCRC OpCo primarily consist of the CCRCs that it owns and leases, resident fees receivable, notes receivable, and cash and cash equivalents; its obligations primarily consist of operating lease obligations to CCRC PropCo, debt service payments and capital expenditures for the properties, and accounts payable and expense accruals associated with the cost of its CCRCs’ operations. Assets generated by the CCRC operations (primarily rents from CCRC residents) of CCRC OpCo may only be used to settle its contractual obligations (primarily from debt service payments, capital expenditures, and rental costs and operating expenses incurred to manage such facilities).

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The Company holds an 85% ownership interest in a JV (Vintage Park Development JV), which has been identified as a VIE as power is shared with a member that does not have a substantive equity investment at risk. The assets of the JV primarily consist of a leased property (net real estate), rents receivable, and cash and cash equivalents; its obligations primarily consist of debt-service payments. Any assets generated by the JV may only be used to settle its respective contractual obligations (primarily debt service payments).
The Company holds an 85% ownership interest in a development JV (Waldwick JV), which has been identified as a VIE as power is shared with a member that does not have a substantive equity investment at risk. The assets of the JV primarily consist of an in-progress senior housing facility development project that it owns and cash and cash equivalents; its obligations primarily consist of accounts payable and expense accruals associated with the cost of its development obligations. Any assets generated by the JV may only be used to settle its respective contractual obligations (primarily development expenses and debt service payments).
The Company holds a limited partner ownership interest in an unconsolidated LLC that has been identified as a VIE. The Company’s involvement in the entity is limited to its equity investment as a limited partner, and it does not have any substantive participating rights or kick-out rights over the general partner. The assets and liabilities of the entity primarily consist of those associated with its senior housing real estate and development activities. Any assets generated by the entity may only be used to settle its contractual obligations (primarily development expenses and debt service payments).
The Company holds commercial mortgage-backed securities (“CMBS”) issued by Federal Home Loan Mortgage Corporation (commonly referred to as Freddie MAC) through a special purpose entity that has been identified as a VIE because it is “thinly capitalized.” The CMBS issued by the VIE are backed by mortgage debt obligations on real estate assets.
The Company provided seller financing of $10 million related to its sale of seven senior housing triple-net facilities. The financing was provided in the form of a secured five-year mezzanine loan to a “thinly capitalized” borrower created to acquire the facilities.
The classification of the related assets and liabilities and the maximum loss exposure as a result of the Company’s involvement with these VIEs at September 30, 2018 was as follows (in thousands):
VIE Type
 
Asset/Liability Type
 
Maximum Loss
Exposure
and Carrying
Amount(1)
VIE tenants - DFLs(2)
 
Net investment in DFLs
 
$
601,137

VIE tenants - operating leases(2)
 
Lease intangibles, net and straight-line rent receivables
 
6,643

CCRC OpCo
 
Investments in unconsolidated joint ventures
 
180,174

Unconsolidated Development JVs
 
Investments in unconsolidated joint ventures
 
15,222

Loan - Seller Financing
 
Loans receivable, net
 
10,000

CMBS and LLC investment
 
Marketable debt and LLC investment
 
34,133

_______________________________________
(1)
The Company’s maximum loss exposure represents the aggregate carrying amount of such investments (including accrued interest).
(2)
The Company’s maximum loss exposure may be mitigated by re-leasing the underlying properties to new tenants upon an event of default.
At September 30, 2018, the Company had not provided, and is not required to provide, financial support through a liquidity arrangement or otherwise, to its unconsolidated VIEs, including circumstances in which it could be exposed to further losses (e.g., cash shortfalls).
See Notes 5, 6 and 7 for additional descriptions of the nature, purpose and operating activities of the Company’s unconsolidated VIEs and interests therein.

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Table of Contents

Consolidated Variable Interest Entities
HCP, Inc.’s consolidated total assets and total liabilities at September 30, 2018 and December 31, 2017 include certain assets of VIEs that can only be used to settle the liabilities of the related VIE. The VIE creditors do not have recourse to HCP, Inc. Total assets and total liabilities include VIE assets and liabilities as follows (in thousands):
 
September 30, 2018
 
December 31, 2017
Assets
 
 
 
Buildings and improvements
$
2,029,066

 
$
2,436,414

Development costs and construction in progress
37,581

 
32,285

Land
155,807

 
227,162

Accumulated depreciation and amortization
(352,879
)
 
(542,091
)
Net real estate
1,869,575

 
2,153,770

Investments in and advances to unconsolidated joint ventures
1,641

 
2,231

Accounts receivable, net
5,761

 
10,242

Cash and cash equivalents
20,028

 
15,861

Restricted cash
3,362

 
2,619

Intangible assets, net
146,701

 
125,475

Other assets, net
34,884

 
33,749

Total assets
$
2,081,952

 
$
2,343,947

Liabilities
 
 
 
Mortgage debt
44,694

 
45,016

Intangible liabilities, net
32,058

 
10,672

Accounts payable and accrued liabilities
71,580

 
269,280

Deferred revenue
17,969

 
14,432

Total liabilities
$
166,301

 
$
339,400

HCP Ventures V, LLC.  The Company holds a 51% ownership interest in and is the managing member of a JV entity formed in October 2015 that owns and leases MOBs (“HCP Ventures V”). Upon adoption of ASU No. 2015-02, Amendments to the Consolidation Analysis (“ASU 2015-02”), the Company classified HCP Ventures V as a VIE due to the non-managing member lacking substantive participation rights in the management of HCP Ventures V or kick-out rights over the managing member. The Company consolidates HCP Ventures V as the primary beneficiary because it has the ability to control the activities that most significantly impact the VIE’s economic performance. The assets of HCP Ventures V primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; its obligations primarily consist of capital expenditures for the properties. Assets generated by HCP Ventures V may only be used to settle its contractual obligations (primarily from capital expenditures).
Vintage Park JV.  The Company holds a 90% ownership interest in a JV entity formed in January 2015 (“Vintage Park JV”) that owns an 85% interest in an unconsolidated development VIE. Upon adoption of ASU 2015-02, the Company classified Vintage Park JV as a VIE due to the non-managing member lacking substantive participation rights in the management of the Vintage Park JV or kick-out rights over the managing member. The Company consolidates Vintage Park JV as the primary beneficiary because it has the ability to control the activities that most significantly impact the VIE’s economic performance. The assets of Vintage Park JV primarily consist of an investment in the Vintage Park Development JV and cash and cash equivalents; its obligations primarily consist of funding the ongoing development of the Vintage Park Development JV. Assets generated by the Vintage Park JV may only be used to settle its contractual obligations (primarily from the funding of the Vintage Park Development JV).
Watertown JV.  The Company holds a 95% ownership interest in JV entities formed in November 2017 that own and operate a senior housing property in a RIDEA structure (“Watertown JV”). Watertown PropCo is a VIE as the Company and the non-managing member share in control of the entity, but substantially all of the entity's activities are performed on behalf of the Company. Watertown OpCo is a VIE as the non-managing member, through its equity interest, lacks substantive participation rights in the management of Watertown OpCo or kick-out rights over the managing member. The Company consolidates Watertown PropCo and Watertown OpCo as the primary beneficiary because it has the ability to control the activities that most significantly impact these VIEs’ economic performance. The assets of Watertown PropCo primarily consist of a leased property (net real estate), rents receivable, and cash and cash equivalents; its obligations primarily consist of notes payable to a non-VIE consolidated subsidiary of the Company. The assets of Watertown OpCo primarily consist of leasehold interests in a senior housing facility

29
Table of Contents

(operating lease), resident fees receivable, and cash and cash equivalents; its obligations primarily consist of lease payments to Watertown PropCo and operating expenses of its senior housing facilities (accounts payable and accrued expenses). Assets generated by the senior housing operations (primarily from senior housing resident rents) of the Watertown structure may only be used to settle its contractual obligations (primarily from the rental costs, operating expenses incurred to manage such facilities and debt costs).
Hayden JV.  The Company holds a 99% ownership interest in a JV entity formed in December 2017 that owns and leases a life science complex (“Hayden JV”). The Hayden JV is a VIE as the members share in control of the entity, but substantially all of the entity's activities are performed on behalf of the Company. The Company consolidates the Hayden JV as the primary beneficiary because it has the ability to control the activities that most significantly impact these VIEs’ economic performance. The assets of the Hayden JV primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; its obligations primarily consist of debt service payments and capital expenditures for the properties. Assets generated by Hayden JV may only be used to settle its contractual obligations (primarily from capital expenditures).
MSREI MOB JV. The Company holds a 51% ownership interest in, and is the managing member of, a JV entity formed in August 2018 that owns and leases MOBs (the “MSREI JV” - see Note 4). The MSREI JV is a VIE due to the non-managing member lacking substantive participation rights in the management of the joint venture or kick-out rights over the managing member. The Company consolidates the MSREI JV as the primary beneficiary because it has the ability to control the activities that most significantly impact the VIE’s economic performance. The assets of the MSREI JV primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; its obligations primarily consist of capital expenditures for the properties. Assets generated by the MSREI JV may only be used to settle its contractual obligations (primarily from capital expenditures).
Consolidated Lessees. The Company leases seven senior housing properties to lessee entities under cash flow leases through which the Company receives monthly rent equal to the residual cash flows of the properties. The lessee entities are classified as VIEs as they are "thinly capitalized" entities. The Company consolidates the lessee entities as it has the ability to control the activities that most significantly impact the economic performance of the lessee entities. The lessee entities' assets primarily consist of leasehold interests in senior housing facilities (operating leases), resident fees receivable, and cash and cash equivalents; its obligations primarily consist of lease payments to the Company and operating expenses of the senior housing facilities (accounts payable and accrued expenses). Assets generated by the senior housing operations (primarily from senior housing resident rents) may only be used to settle its contractual obligations (primarily from the rental costs, operating expenses incurred to manage such facilities and debt costs).
DownREITs.  The Company holds a controlling ownership interest in and is the managing member of five limited liability companies (“DownREITs”). The Company classifies the DownREITs as VIEs due to the non-managing members lacking substantive participation rights in the management of the DownREITs or kick-out rights over the managing member. The Company consolidates the DownREITs as the primary beneficiary because it has the ability to control the activities that most significantly impact these VIEs’ economic performance. The assets of the DownREITs primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; their obligations primarily consist of debt service payments and capital expenditures for the properties. Assets generated by the DownREITs (primarily from resident rents) may only be used to settle their contractual obligations (primarily from debt service and capital expenditures).
Other Consolidated Real Estate Partnerships.  The Company holds a controlling ownership interest in and is the general partner (or managing member) of multiple partnerships that own and lease real estate assets (the “Partnerships”). The Company classifies the Partnerships as VIEs due to the limited partners (non-managing members) lacking substantive participation rights in the management of the Partnerships or kick-out rights over the general partner (managing member). The Company consolidates the Partnerships as the primary beneficiary because it has the ability to control the activities that most significantly impact these VIEs’ economic performance. The assets of the Partnerships primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; their obligations primarily consist of debt service payments and capital expenditures for the properties. Assets generated by the Partnerships (primarily from resident rents) may only be used to settle their contractual obligations (primarily from debt service and capital expenditures).
Other consolidated VIEs.  The Company made a loan to an entity that entered into a tax credit structure (“Tax Credit Subsidiary”) and a loan to an entity that made an investment in a development JV (“Development JV”) both of which are considered VIEs. The Company consolidates the Tax Credit Subsidiary and Development JV as the primary beneficiary because it has the ability to control the activities that most significantly impact the VIEs’ economic performance. The assets and liabilities of the Tax Credit Subsidiary and Development JV substantially consist of a development in progress, notes receivable, prepaid expenses, notes payable, and accounts payable and accrued liabilities generated from their operating activities. Any assets generated by the operating activities of the Tax Credit Subsidiary and Development JV may only be used to settle their contractual obligations.
U.K. Bridge Loan. In 2016, the Company provided a £105 million ($131 million at closing) bridge loan to MMCG to fund the acquisition of a portfolio of seven care homes in the U.K. MMCG created a special purpose entity to acquire the portfolio and funded it entirely using the Company’s bridge loan. As such, the special purpose entity had historically been identified as a VIE

30
Table of Contents

because it was “thinly capitalized.” The Company retained a three-year call option to acquire all the shares of the special purpose entity, which it could only exercise upon the occurrence of certain events. During the quarter ended March 31, 2018, the Company concluded that the conditions required to exercise the call option had been met and initiated the call option process to acquire the special purpose entity. In conjunction with initiating the process to legally exercise its call option and the satisfaction of required contingencies, the Company concluded that it was the primary beneficiary of the special purpose entity and therefore, should consolidate the entity. As such, during the quarter ended March 31, 2018, the Company derecognized the previously outstanding loan receivable, recognized the special purpose entity’s assets and liabilities at their respective fair values, and recognized a £29 million ($41 million) loss on consolidation (within other income (expense), net and income tax benefit (expense)), net of a tax benefit of £2 million ($3 million), to account for the difference between the carrying value of the loan receivable and the fair value of net assets and liabilities assumed. The fair value of net assets and liabilities consolidated during the first quarter of 2018 consisted of £81 million ($114 million) of net real estate, £4 million ($5 million) of intangible assets, and £9 million ($13 million) of net deferred tax liabilities.
In June 2018, the Company completed the exercise of the above-mentioned call option and formally acquired full ownership of the special purpose entity. As such, the Company reconsidered whether the special purpose entity was a VIE and concluded that it was no longer “thinly capitalized” as the previously outstanding bridge loan converted to equity at risk and, therefore, was no longer a VIE. The real estate assets held by the special purpose entity were contributed to the U.K. JV formed by the Company in June 2018 (see Note 4).
NOTE 16.  Concentration of Credit Risk
Concentrations of credit risk arise when one or more tenants, operators or obligors related to the Company’s investments are engaged in similar business activities or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to the Company, to be similarly affected by changes in economic conditions. The Company regularly monitors various segments of its portfolio to assess potential concentrations of credit risks.
The following tables provide information regarding the Company’s concentrations of credit risk with respect to certain tenants:
 
 
Percentage of Total Assets
 
 
Total Company
 
Senior Housing Triple-Net
 
 
September 30,
 
December 31,
 
September 30,
 
December 31,
Tenant
 
2018
 
2017
 
2018
 
2017
Brookdale
 
8
 
10
 
34
 
39
 
 
Percentage of Revenues
 
 
Total Company
 
Senior Housing Triple-Net
 
 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
Tenant
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Brookdale(1)
 
5
 
8
 
6
 
10
 
37
 
48
 
40
 
53
_______________________________________
(1)
The Company's concentration with respect to Brookdale as a tenant is expected to decrease with the completion of the Brookdale Transactions (see Note 3). Nine months ended September 30, 2017 includes revenues from 64 senior housing triple-net facilities that were sold in March 2017. 
At September 30, 2018 and December 31, 2017, Brookdale managed or operated, in the Company’s SHOP segment, approximately 7% and 13%, respectively, of the Company’s real estate investments (based on total assets). Because an operator manages the Company’s facilities in exchange for the receipt of a management fee, the Company is not directly exposed to the credit risk of its operators in the same manner or to the same extent as its triple-net tenants. At September 30, 2018, Brookdale provided comprehensive facility management and accounting services with respect to 43 of the Company’s consolidated SHOP facilities and 16 SHOP facilities owned by its unconsolidated JVs, for which the Company or JV pay annual management fees pursuant to long-term management agreements. The Company's concentration with respect to Brookdale as an operator in its SHOP segment is expected to decrease with the completion of the Brookdale Transactions (see Note 3). Most of the management agreements have terms ranging from 10 to 15 years, with three to four 5-year renewal periods. The base management fees are 4.5% to 5.0% of gross revenues (as defined) generated by the RIDEA properties. In addition, there are incentive management fees payable to Brookdale if operating results of the RIDEA properties exceed pre-established EBITDAR (as defined) thresholds.
To mitigate the credit risk of leasing properties to certain senior housing and post-acute/skilled nursing operators, leases with operators are often combined into portfolios that contain cross-default terms, so that if a tenant of any of the properties in a portfolio

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defaults on its obligations under its lease, the Company may pursue its remedies under the lease with respect to any of the properties in the portfolio. Certain portfolios also contain terms whereby the net operating profits of the properties are combined for the purpose of securing the funding of rental payments due under each lease.
NOTE 17.  Fair Value Measurements
Financial assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheets are immaterial at September 30, 2018.
The table below summarizes the carrying amounts and fair values of the Company’s financial instruments (in thousands):
 
September 30, 2018(3)
 
December 31, 2017(3)
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
Loans receivable, net(2)  
$
41,302

 
$
39,558

 
$
313,326

 
$
313,242

Marketable debt securities(2)  
19,070

 
19,070

 
18,690

 
18,690

Bank line of credit(2)  
636,709

 
636,709

 
1,017,076

 
1,017,076

Term loan(2)  
223,468

 
223,468

 
228,288

 
228,288

Senior unsecured notes(1)  
5,706,181

 
5,746,710

 
6,396,451

 
6,737,825

Mortgage debt(2)  
139,401

 
134,194

 
144,486

 
125,984

Other debt(2)  
92,494

 
92,494

 
94,165

 
94,165

Interest-rate swap liabilities(2)  
1,364

 
1,364

 
2,483

 
2,483

Cross currency swap liability(2)  
—

 
—

 
10,968

 
10,968

_______________________________________
(1)
Level 1: Fair value calculated based on quoted prices in active markets.
(2)
Level 2: Fair value based on (i) for marketable debt securities, quoted prices for similar or identical instruments in active or inactive markets, respectively, or (ii) for loans receivable, net, mortgage debt and swaps, calculated utilizing standardized pricing models in which significant inputs or value drivers are observable in active markets. For bank line of credit, term loan and other debt, the carrying values are a reasonable estimate of fair value because the borrowings are primarily based on market interest rates and the Company’s credit rating.
(3)
During the nine months ended September 30, 2018 and year ended December 31, 2017, there were no material transfers of financial assets or liabilities within the fair value hierarchy.
NOTE 18.  Derivative Financial Instruments
The following table summarizes the Company’s outstanding swap contracts at September 30, 2018 (dollars in thousands):
Date Entered
 
Maturity Date
 
Hedge Designation
 
Notional
 
Pay Rate
 
Receive Rate
 
Fair Value(1)
Interest rate:
 
 
 
 
 
 

 
 
 
 
 
 

July 2005(2)
 
July 2020
 
Cash Flow
 
$
43,000

 
3.82%
 
BMA Swap Index
 
$
(1,364
)
______________________________________
(1)
Derivative liabilities are recorded in accounts payable and accrued liabilities on the consolidated balance sheets.
(2)
Represents three interest-rate swap contracts, which hedge fluctuations in interest payments on variable-rate secured debt due to overall changes in hedged cash flows.
The Company uses derivative instruments to mitigate the effects of interest rate fluctuations on specific forecasted transactions as well as recognized financial obligations or assets. Utilizing derivative instruments allows the Company to manage the risk of fluctuations in interest rates related to the potential impact these changes could have on future earnings and forecasted cash flows. The Company does not use derivative instruments for speculative or trading purposes. Assuming a one percentage point shift in the underlying interest rate curve, the estimated change in fair value of each of the underlying derivative instruments would not exceed $1 million.
On June 29, 2018, concurrent with closing the U.K. JV transaction, the Company terminated a cross currency swap contract, which was designated as a hedge of the Company’s net investment in the U.K. As such, upon deconsolidation of the U.K. Portfolio, the Company reclassified the $6 million loss in other comprehensive income related to the cross currency swap through gain (loss) on sales of real estate, net.

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At September 30, 2018, £55 million of the Company’s GBP-denominated borrowings under the Facility are designated as a hedge of a portion of the Company’s net investments in GBP-functional currency unconsolidated subsidiaries to mitigate its exposure to fluctuations in the GBP to USD exchange rate. For instruments that are designated and qualify as net investment hedges, the variability in the foreign currency to USD exchange rate of the instrument is recorded as part of the cumulative translation adjustment component of accumulated other comprehensive income (loss). Accordingly, the remeasurement value of the designated £55 million GBP-denominated borrowings due primarily to fluctuations in the GBP to USD exchange rate are reported in accumulated other comprehensive income (loss) as the hedging relationship is considered to be effective. The balance in accumulated other comprehensive income (loss) will be reclassified to earnings when the Company sells its remaining investment in the U.K.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
All references in this report to “HCP,” “we,” “us” or “our” mean HCP, Inc., together with its consolidated subsidiaries. Unless the context suggests otherwise, references to “HCP, Inc.” mean the parent company without its subsidiaries.
Cautionary Language Regarding Forward-Looking Statements
Statements in this Quarterly Report on Form 10-Q that are not historical factual statements are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include, among other things, statements regarding our and our officers’ intent, belief or expectation as identified by the use of words such as “may,” “will,” “project,” “expect,” “believe,” “intend,” “anticipate,” “seek,” “forecast,” “plan,” “potential,” “estimate,” “could,” “would,” “should” and other comparable and derivative terms or the negatives thereof. Forward-looking statements reflect our current expectations and views about future events and are subject to risks and uncertainties that could significantly affect our future financial condition and results of operations. While forward-looking statements reflect our good faith belief and assumptions we believe to be reasonable based upon current information, we can give no assurance that our expectations or forecasts will be attained. As more fully set forth under Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, risks and uncertainties that may cause our actual results to differ materially from the expectations contained in the forward-looking statements include, among other things:
•
our reliance on a concentration of a small number of tenants and operators for a significant percentage of our revenues;
•
the financial condition of our existing and future tenants, operators and borrowers, including potential bankruptcies and downturns in their businesses, and their legal and regulatory proceedings, which results in uncertainties regarding our ability to continue to realize the full benefit of such tenants’ and operators’ leases and borrowers’ loans;
•
the ability of our existing and future tenants, operators and borrowers to conduct their respective businesses in a manner sufficient to maintain or increase their revenues and to generate sufficient income to make rent and loan payments to us and our ability to recover investments made, if applicable, in their operations;
•
competition for the acquisition and financing of suitable healthcare properties as well as competition for tenants and operators, including with respect to new leases and mortgages and the renewal or rollover of existing leases;
•
our concentration in the healthcare property sector, particularly in senior housing, life sciences and medical office buildings, which makes our profitability more vulnerable to a downturn in a specific sector than if we were investing in multiple industries;
•
our ability to identify replacement tenants and operators and the potential renovation costs and regulatory approvals associated therewith;
•
the risks associated with property development and redevelopment, including costs above original estimates, project delays and lower occupancy rates and rents than expected;
•
the risks associated with our investments in joint ventures and unconsolidated entities, including our lack of sole decision making authority and our reliance on our partners’ financial condition and continued cooperation;
•
our ability to achieve the benefits of acquisitions or other investments within expected time frames or at all, or within expected cost projections;
•
the potential impact on us and our tenants, operators and borrowers from current and future litigation matters, including the possibility of larger than expected litigation costs, adverse results and related developments;
•
operational risks associated with third party management contracts, including the additional regulation and liabilities of our RIDEA lease structures;
•
the effect on us and our tenants and operators of legislation, executive orders and other legal requirements, including compliance with the Americans with Disabilities Act, fire, safety and health regulations, environmental laws, the Affordable Care Act, licensure, certification and inspection requirements, and laws addressing entitlement programs and related services, including Medicare and Medicaid, which may result in future reductions in reimbursements or fines for noncompliance;
•
changes in federal, state or local laws and regulations, including those affecting the healthcare industry that affect our costs of compliance or increase the costs, or otherwise affect the operations, of our tenants and operators;
•
our ability to foreclose on collateral securing our real estate-related loans;

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•
volatility or uncertainty in the capital markets, the availability and cost of capital as impacted by interest rates, changes in our credit ratings, and the value of our common stock, and other conditions that may adversely impact our ability to fund our obligations or consummate transactions, or reduce the earnings from potential transactions;
•
changes in global, national and local economic and other conditions, including currency exchange rates;
•
our ability to manage our indebtedness level and changes in the terms of such indebtedness;
•
competition for skilled management and other key personnel;
•
the potential impact of uninsured or underinsured losses;
•
our reliance on information technology systems and the potential impact of system failures, disruptions or breaches; and
•
our ability to maintain our qualification as a real estate investment trust (“REIT”).
Except as required by law, we do not undertake, and hereby disclaim, any obligation to update any forward-looking statements, which speak only as of the date on which they are made.
The information set forth in this Item 2 is intended to provide readers with an understanding of our financial condition, changes in financial condition and results of operations. We will discuss and provide our analysis in the following order:
•
Executive Summary
•
2018 Transaction Overview
•
Dividends
•
Results of Operations
•
Liquidity and Capital Resources
•
Contractual Obligations and Off-Balance Sheet Arrangements
•
Non-GAAP Financial Measures Reconciliations
•
Critical Accounting Policies
•
Recent Accounting Pronouncements
Executive Summary
HCP, Inc., a Standard & Poor’s (“S&P”) 500 company, invests primarily in real estate serving the healthcare industry in the United States. We are a Maryland corporation organized in 1985 and qualify as a self-administered REIT. We acquire, develop, lease, manage and dispose of healthcare real estate. At September 30, 2018, our portfolio of investments, including properties in our unconsolidated joint ventures (“JVs”), consisted of interests in 775 properties.  
We invest and manage our real estate portfolio for the long-term to maximize the benefit to our stockholders and support the growth of our dividends. The core elements of our strategy are: (i) to acquire, develop, lease, own and manage a diversified portfolio of quality healthcare properties across multiple geographic locations and business segments including senior housing, medical office, and life science, among others; (ii) to align ourselves with leading healthcare companies, operators and service providers which, over the long-term, should result in higher relative rental rates, net operating cash flows and appreciation of property values; 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.
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.
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

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be consistent with our investment strategies. We may co-invest alongside institutional or development investors through partnerships or limited liability companies.
We monitor, but do not limit, our investments based on the percentage of our total assets that may be invested in any one property type, investment vehicle or geographic location, the number of properties that may be leased to a single tenant or operator, or loans that may be made to a single borrower. In allocating capital, we target opportunities with the most attractive risk/reward profile for our portfolio as a whole. We may take additional measures to mitigate risk, including diversifying our investments (by sector, geography, tenant or operator), structuring transactions as master leases, requiring tenant or operator insurance and indemnifications, and obtaining credit enhancements in the form of guarantees, letters of credit or security deposits.
Our REIT qualification requires us to distribute at least 90% of our REIT taxable income (excluding net capital gains); therefore, we 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 maintain a disciplined balance sheet by actively managing our debt to equity levels and maintaining multiple sources of liquidity. Our debt obligations are primarily long-term fixed rate with staggered maturities.
We finance our investments based on our evaluation of available sources of funding. For short-term purposes, we may utilize our revolving line of credit facility or arrange for other short-term borrowings from banks or other sources. We arrange for longer-term financing by offering debt and equity securities, placing mortgage debt and obtaining capital from institutional lenders and JV partners.
2018 Transaction Overview
Brookdale Transactions Update
•
In January 2018, we sold the first of six agreed upon facilities to Brookdale Senior Living, Inc. (“Brookdale”) for $32 million. In April 2018, we sold the remaining five facilities to Brookdale for $243 million.
•
In March 2018, we completed the acquisition of Brookdale’s noncontrolling interest in RIDEA I for $63 million.
•
In June 2018, we entered into definitive agreements with a third-party buyer to sell certain triple-net and senior housing operating portfolio (“SHOP”) facilities previously leased to Brookdale. We sold the first 17 assets in October 2018 and anticipate the sale of the remaining two assets will close later in the fourth quarter of 2018, for total proceeds of approximately $377 million.
•
As of September 30, 2018, we had completed the transition of 34 assets previously operated by Brookdale to other operators. An additional asset previously operated by Brookdale was transitioned to another operator subsequent to September 30, 2018.
See Note 3 to the Consolidated Financial Statements for additional information.
Mountain View Campus Sale
•
Subsequent to September 30, 2018, we entered into a definitive agreement to sell our Shoreline Technology Center life science campus located in Mountain View, California for $1.0 billion. Under the agreement, the buyer funded a $65 million nonrefundable deposit. The sale is expected to generate a gain on sale of approximately $700 million upon its anticipated closing in the fourth quarter 2018.
U.K. Investment Update
•
In June 2018, we entered into a joint venture with an institutional investor (the “U.K. JV”) through which we sold a 51% interest in United Kingdom (“U.K.”) assets previously owned by us (“the U.K. Portfolio”) based on a total value of £382 million ($507 million). We retained a 49% noncontrolling interest in the joint venture and received gross proceeds of $402 million, including proceeds from the refinancing of our previously held intercompany loans. Upon closing the U.K. JV, we deconsolidated the U.K. Portfolio, recognized its retained noncontrolling interest investment at fair value ($105 million) and recognized a gain on sale of $11 million.
Additionally, in August 2018, we sold our remaining £11 million U.K. development loan at par.

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MSREI MOB JV
•
In August 2018, HCP and Morgan Stanley Real Estate Investment (“MSREI”) formed a joint venture (the “MSREI JV”) to own a portfolio of medical office buildings (“MOBs”), which HCP owns 51% of and consolidates. To form the joint venture, MSREI contributed cash of $298 million and HCP contributed nine wholly-owned MOBs (the “Contributed Assets”). The Contributed Assets are primarily located in Texas and Florida and were valued at approximately $320 million at the time of contribution. The MSREI JV used substantially all of the cash contributed by MSREI to acquire an additional portfolio of 16 MOBs in Greenville, South Carolina (the “Greenville Portfolio”) for $285 million. Concurrent with acquiring the additional MOBs, the MSREI JV entered into 10-year leases with an anchor tenant on each MOB in the Greenville Portfolio, which accounts for approximately 93% of the total leasable space in the portfolio.
Other Real Estate Disposition and Loan Transactions
In addition to the transactions discussed above, we completed the following real estate disposition and loan transactions:
•
In June 2018, we completed our previously announced deal to sell our remaining 40% ownership interest in RIDEA II for $90 million and cause Columbia Pacific Advisors, LLC to refinance our $242 million of loans receivable from RIDEA II, which resulted in total proceeds of $332 million.
•
In 2016, we provided a £105 million ($131 million at closing) bridge loan to MMCG (the “U.K. Bridge Loan”) to fund the acquisition of a portfolio of seven care homes in the U.K. Under the bridge loan, we retained a call option to acquire those seven care homes at a future date for £105 million, subject to certain conditions being met. In March 2018, in conjunction with MMCG and HCP satisfying the conditions necessary to exercise our call option to acquire the seven care homes, we began consolidating the real estate. As a result, we derecognized the outstanding loan receivable and recognized a £29 million ($41 million) loss on consolidation for the difference between the carrying value of the loan receivable and the fair value of net assets and liabilities assumed, primarily real estate.
In June 2018, we completed the process of exercising the above-mentioned call option. The seven care homes acquired through the call option were included in the U.K. JV transaction (see U.K. Investment Update above). See Notes 4, 6 and 15 to the Consolidated Financial Statements for additional information.
•
In March 2018, we sold our Tandem Health Care mezzanine loan (“Tandem Mezzanine Loan”) to a third party for approximately $112 million, resulting in an impairment recovery, net of transaction costs and fees, of $3 million.
•
During the quarter ended June 30, 2018, we sold five SHOP assets for $61 million.
•
During the quarter ended September 30, 2018, we sold four life science assets for $269 million, 11 SHOP assets for $76 million and two MOBs for $21 million.
Financing Activities
•
On July 3, 2018, we exercised our right to repay the outstanding £169 million balance under our term loan and re-borrow $224 million with all other key terms unchanged.
•
On July 16, 2018, we repaid $700 million of our 5.375% senior notes due 2021, primarily using proceeds from the U.K. JV transaction and other asset sales (see discussions above), and recorded a loss on debt extinguishment of approximately $44 million.
•
On October 9, 2018, we provided a redemption notice to holders of our $450 million 3.75% senior unsecured notes due in 2019, which will be redeemed in November 2018. There will be no loss on debt extinguishment associated with this redemption.
Development Activities
•
In March 2018, we acquired the rights to develop a new 214,000 square foot life science facility on our existing Hayden Research Campus in Lexington, Massachusetts for $21 million. The planned development, 75 Hayden, will be a four-story, purpose-built Class A life science facility and parking garage.
•
In September and October 2018, we signed two leases totaling 222,000 square feet at The Shore at Sierra Point, bringing the $224 million first phase of the development to 100% pre-leased. The Shore at Sierra Point is a 23-acre waterfront life science development offering state-of-the-art laboratory and office space along with premier amenities.

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Dividends
The following table summarizes our common stock cash dividends declared in 2018:
Declaration Date
 
Record Date
 
Amount
Per Share
 
Dividend
Payment Date
February 1
 
February 15
 
$
0.37

 
March 2
April 26
 
May 7
 
0.37

 
May 22
July 26
 
August 6
 
0.37

 
August 21
October 25
 
November 5
 
0.37

 
November 20
Results of Operations
We evaluate our business and allocate resources among our reportable business segments: (i) senior housing triple-net, (ii) SHOP, (iii) life science and (iv) medical office. Under the life science and medical office segments, we invest through the acquisition and development of life science facilities and medical office buildings, 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 debt investments, hospital properties, unconsolidated JVs and U.K. investments. 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 in Note 2 of our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the United States (“U.S.”) Securities and Exchange Commission (“SEC”), as updated by Note 2 herein.
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 (which exclude transition costs); NOI excludes all other financial statement amounts included in net income (loss) as presented in Note 12 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. 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 12 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 (Cash) 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.
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

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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 (“FFO”)
We believe FFO applicable to common shares, diluted FFO applicable to common shares, and diluted FFO per common share are important supplemental non-GAAP measures of operating performance for a REIT. Because the historical cost accounting convention used for real estate assets utilizes straight-line depreciation (except on land), such accounting presentation implies that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen and fallen with market conditions, presentations of operating results for a REIT that use historical cost accounting for depreciation could be less informative. The term FFO was designed by the REIT industry to address this issue.
FFO, as defined by the National Association of Real Estate Investment Trusts (“NAREIT”), is net income (loss) applicable to common shares (computed in accordance with GAAP), excluding gains or losses from sales of depreciable property, including any current and deferred taxes directly associated with sales of depreciable property, impairments of, or related to, depreciable real estate, plus real estate and other depreciation and amortization, and adjustments to compute our share of FFO and FFO as adjusted (see below) from joint ventures. Adjustments for joint ventures are calculated to reflect our pro-rata share of both our consolidated and unconsolidated joint ventures. We reflect our share of FFO for unconsolidated joint ventures by applying our actual ownership percentage for the period to the applicable reconciling items on an entity by entity basis. 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 on an adjusted basis 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 (recoveries), 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

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investment will impact our future results. Other REITs or real estate companies may use different methodologies for calculating an adjusted FFO measure, and accordingly, our FFO as adjusted may not be comparable to those reported by other REITs. For a reconciliation of net income (loss) to FFO and FFO as adjusted and other relevant disclosure, refer to “Non-GAAP Financial Measures Reconciliations” below.
Funds Available for Distribution (“FAD”)
FAD is defined as FFO as adjusted after excluding the impact of the following: (i) amortization of 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 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 second generation 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, recurring capital expenditures, including second generation leasing costs and second generation tenant and capital improvements ("FAD capital expenditures") excludes our share from unconsolidated joint ventures (currently reported in “other FAD adjustments”). Adjustments for joint ventures are calculated to reflect our pro-rata share of both our consolidated and unconsolidated joint ventures. We reflect our share of FAD for unconsolidated joint ventures by applying our actual ownership percentage for the period to the applicable reconciling items on an entity by entity basis. We reflect our share for consolidated joint ventures in which we do not own 100% of the equity by adjusting our FAD to remove the third party ownership share of the applicable reconciling items based on actual ownership percentage for the applicable periods (see FFO above for further disclosure regarding our use of pro-rata share information and its limitations). Other REITs or real estate companies may use different methodologies for calculating FAD, and accordingly, our FAD may not be comparable to those reported by other REITs. Although our FAD computation may not be comparable to that of other REITs, management believes FAD provides a meaningful supplemental measure of our performance and is frequently used by analysts, investors, and other interested parties in the evaluation of our performance as a REIT. We believe FAD is an alternative run-rate earnings measure that improves the understanding of our operating results among investors and makes comparisons with: (i) expected results, (ii) results of previous periods and (iii) results among REITs more meaningful. FAD does not represent cash generated from operating activities determined in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs as it excludes the following items which generally flow through our cash flows from operating activities: (i) adjustments for changes in working capital or the actual timing of the payment of income or expense items that are accrued in the period, (ii) transaction-related costs, (iii) litigation settlement expenses, (iv) severance-related expenses and (v) actual cash receipts from interest income recognized on loans receivable (in contrast to our FAD adjustment to exclude non-cash interest and depreciation related to our investments in direct financing leases). Furthermore, FAD is adjusted for recurring capital expenditures, which are generally not considered when determining cash flows from operations or liquidity. FAD is a non-GAAP supplemental financial measure and should not be considered as an alternative to net income (loss) determined in accordance with GAAP. For a reconciliation of net income (loss) to FAD and other relevant disclosure, refer to “Non-GAAP Financial Measures Reconciliations” below.
Comparison of the Three and Nine Months Ended September 30, 2018 to the Three and Nine Months Ended September 30, 2017
Overview
Three Months Ended September 30, 2018 and 2017
The following table summarizes results for the three months ended September 30, 2018 and 2017 (dollars in thousands):
 
Three Months Ended September 30,
 
 
 
2018
 
2017
 
Change
Net income (loss) applicable to common shares
$
98,946

 
$
(7,788
)
 
$
106,734

FFO
155,632

 
155,248

 
384

FFO as adjusted
208,196

 
227,769

 
(19,573
)
FAD
186,545

 
202,407

 
(15,862
)
Net income applicable to common shares (“EPS”) increased primarily as a result of the following:
•
an increase in net gain on sales of real estate during the third quarter of 2018 compared to the third quarter of 2017, primarily from the sale of life science assets;

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•
increased NOI from: (i) annual rent escalations, (ii) 2017 and 2018 acquisitions, and (iii) development and redevelopment projects placed in service during 2017 and 2018;
•
a reduction in interest expense as a result of debt repayments primarily in the second and third quarters of 2017 and third quarter of 2018, partially offset by an increased average balance under our revolving credit facility during 2018;
•
decreased impairment charges related to senior housing facilities during the third quarter of 2018;
•
a reduction in loss on debt extinguishment related to the repurchases of our senior notes in July 2018 compared to July 2017; and
•
casualty-related charges incurred due to hurricanes in the third quarter of 2017.
The increase in EPS was partially offset by:
•
a reduction in NOI in our senior housing triple-net segment, primarily as a result of the transition of senior housing triple-net assets to SHOP during 2017 and 2018;
•
a reduction in NOI in our SHOP segment, primarily as a result of occupancy declines and higher labor costs;
•
a reduction in income as a result of: (i) asset sales during 2017 and 2018 and (ii) selling joint venture interests in the U.K. JV and MSREI JV (see Note 4 to the Consolidated Financial Statements);
•
a reduction in interest income primarily as a result of the sale of our Tandem Mezzanine Loan; and
•
increased depreciation and amortization expense as a result of: (i) assets acquired during 2017 and (ii) development and redevelopment projects placed into operations during 2017 and 2018.
FFO increased primarily as a result of the aforementioned events impacting EPS, except for the following, which are excluded from FFO:
•
depreciation and amortization expense;
•
impairments of senior housing facilities; and
•
gain on sales of real estate.
FFO as adjusted decreased primarily as a result of the aforementioned events impacting FFO, except for the following, which are excluded from FFO as adjusted:
•
loss on debt extinguishments from the repurchases of our senior notes in July 2017 and July 2018;
•
casualty-related charges due to hurricanes in the third quarter of 2017; and
•
the impairment of our Tandem Mezzanine Loan in the third quarter of 2017.
FAD decreased primarily as a result of the aforementioned events impacting FFO as adjusted, except for the impact of straight-line rents, which is excluded from FAD. The decrease in FAD was partially offset by increased non-refundable entrance fees from our CCRC JV and lower FAD capital expenditures during the third quarter of 2018.
Nine Months Ended September 30, 2018 and 2017
The following table summarizes results for the nine months ended September 30, 2018 and 2017 (dollars in thousands):
 
 
Nine Months Ended September 30,
 
 
 
2018
 
2017
 
Change
Net income (loss) applicable to common shares
 
$
228,267

 
$
472,311

 
$
(244,044
)
FFO
 
585,001

 
608,162

 
(23,161
)
FFO as adjusted
 
655,099

 
692,726

 
(37,627
)
FAD
 
578,377

 
621,109

 
(42,732
)
EPS decreased primarily as a result of the following:
•
a loss on consolidation of seven care homes in the U.K. during the first quarter of 2018;
•
a gain on sale of our Four Seasons senior notes (“Four Seasons Notes”) during the first quarter of 2017, which was not replicated in 2018;

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•
a reduction in NOI in our senior housing triple-net segment, primarily as a result of the sale of 64 senior housing triple-net assets during the first quarter of 2017 and the transition of senior housing triple-net assets to SHOP during 2017 and 2018;
•
a reduction in NOI in our SHOP segment, primarily as a result of occupancy declines and higher labor costs;
•
a reduction in income as a result of: (i) asset sales during 2017 and 2018 and (ii) selling joint venture interests in the U.K. JV and MSREI JV (see Note 4 to the Consolidated Financial Statements);
•
a reduction in interest income due to the: (i) payoff of our HC-One Facility in June 2017 and (ii) sale of our Tandem Mezzanine Loan in March 2018;
•
increased depreciation and amortization expense as a result of: (i) assets acquired during 2017 and (ii) development and redevelopment projects placed into operations during 2017 and 2018, primarily in our life science and medical office segments;
•
an increase in severance and related charges during 2018 primarily related to the departure of our former Executive Chairman; and
•
a decrease in gain on sales of real estate during the first three quarters of 2017 compared to the first three quarters of 2018.
The decrease in EPS was partially offset by:
•
increased NOI from: (i) annual rent escalations, (ii) 2017 and 2018 acquisitions, and (iii) development and redevelopment projects placed in service during 2017 and 2018;
•
impairments of our Tandem Mezzanine Loan in the second and third quarters of 2017;
•
impairments related to 11 underperforming senior housing triple-net facilities in the third quarter of 2017, partially offset by impairment charges on 16 SHOP assets and an undeveloped life science land parcel classified as held for sale during 2018;
•
a reduction in interest expense as a result of debt repayments primarily in the second and third quarters of 2017 and third quarter of 2018, partially offset by an increased average balance under our revolving credit facility during 2018;
•
a reduction in loss on debt extinguishment related to the repurchases of our senior notes in July 2018 compared to July 2017; and
•
casualty-related charges incurred due to hurricanes in the third quarter of 2017.
FFO decreased primarily as a result of the aforementioned events impacting EPS, except for the following, which are excluded from FFO:
•
depreciation and amortization expense;
•
impairments of facilities within our senior housing triple-net and SHOP segments;
•
loss on consolidation; and
•
gain on sales of real estate.
FFO as adjusted decreased primarily as a result of the aforementioned events impacting FFO, except for the following, which are excluded from FFO as adjusted:
•
severance and related charges;
•
losses on debt extinguishments;
•
casualty-related charges;
•
a gain on sale of our Four Seasons Notes during the first quarter of 2017; and
•
the impairments of our Tandem Mezzanine Loan in the second and third quarters of 2017 and an undeveloped life science land parcel in the second quarter of 2018.
FAD decreased primarily as a result of the aforementioned events impacting FFO as adjusted, except for the impact of straight-line rents, which is excluded from FAD. Additionally, FAD decreased as a result of declines in non-refundable entrance fees from our CCRC JV during 2018, partially offset by lower FAD capital expenditures.

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Segment Analysis 
The tables below provide selected operating information for our SPP and total property portfolio for each of our business segments. Our SPP for the three months ended September 30, 2018 consists of 547 properties representing properties acquired or placed in service and stabilized on or prior to July 1, 2017 and that remained in operation under a consistent reporting structure through September 30, 2018. Our SPP for the nine months ended September 30, 2018 consists of 545 properties representing properties acquired or placed in service and stabilized on or prior to January 1, 2017 and that remained in operation under a consistent reporting structure through September 30, 2018. Our total property portfolio consists of 672 and 737 properties at September 30, 2018 and 2017, respectively.
Senior Housing Triple-Net
The following table summarizes results at and for the three months ended September 30, 2018 and 2017 (dollars in thousands, except per unit data):
 
SPP
 
Total Portfolio
 
Three Months Ended September 30,
 
Three Months Ended September 30,
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Rental revenues(1)
$
63,652

 
$
61,475

 
$
2,177

 
$
67,487

 
$
77,220

 
$
(9,733
)
Operating expenses
(84
)
 
(98
)
 
14

 
(840
)
 
(934
)
 
94

NOI
63,568

 
61,377

 
2,191

 
66,647

 
76,286

 
(9,639
)
Adjustments to NOI
583

 
1,759

 
(1,176
)
 
534

 
(600
)
 
1,134

Adjusted NOI
$
64,151

 
$
63,136

 
$
1,015

 
67,181

 
75,686

 
(8,505
)
Non-SPP adjusted NOI
 

 
 

 
 

 
(3,030
)
 
(12,550
)
 
9,520

SPP adjusted NOI
 

 
 

 
 

 
$
64,151

 
$
63,136

 
$
1,015

Adjusted NOI % change
 

 
 

 
1.6
%
 
 

 
 

 
 

Property count(2)
152

 
152

 
 

 
163

 
204

 
 

Average capacity (units)(3)
15,626

 
15,623

 
 

 
16,635

 
20,311

 
 

Average annual rent per unit
$
16,443

 
$
16,190

 
 

 
$
16,356

 
$
15,089

 
 

_______________________________________
(1)
Represents rental and related revenues and income from direct financing leases (“DFLs”).
(2)
From our 2017 presentation of SPP, we removed two senior housing triple-net properties that were sold, 11 senior housing triple-net properties that were classified as held for sale and 36 senior housing triple-net properties that were transitioned to SHOP.
(3)
Represents average capacity as reported by the respective tenants or operators for the 12-month period and a quarter in arrears from the periods presented.
SPP NOI and Adjusted NOI increased primarily as a result of annual rent escalations. The increase in SPP Adjusted NOI was partially offset by rent reductions under the Brookdale Transactions.
Total Portfolio NOI and Adjusted NOI decreased primarily as a result of the following Non-SPP impacts:
•
the transfer of 21 and 16 senior housing triple-net facilities to our SHOP segment during 2017 and 2018, respectively; and
•
senior housing triple-net facilities sold during 2017 and 2018.
The decrease in Total Portfolio NOI and Adjusted NOI is partially offset by the aforementioned increases to SPP.

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The following table summarizes results at and for the nine months ended September 30, 2018 and 2017 (dollars in thousands, except per unit data):
 
SPP
 
Total Portfolio
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Rental revenues(1)
$
190,080

 
$
183,785

 
$
6,295

 
$
212,489

 
$
255,332

 
$
(42,843
)
Operating expenses
(259
)
 
(278
)
 
19

 
(2,677
)
 
(2,927
)
 
250

NOI
189,821

 
183,507

 
6,314

 
209,812

 
252,405

 
(42,593
)
Adjustments to NOI
(386
)
 
4,576

 
(4,962
)
 
(323
)
 
(2,844
)
 
2,521

Adjusted NOI
$
189,435

 
$
188,083

 
$
1,352

 
209,489

 
249,561

 
(40,072
)
Non-SPP adjusted NOI
 

 
 

 
 

 
(20,054
)
 
(61,478
)
 
41,424

SPP adjusted NOI
 

 
 

 
 

 
$
189,435

 
$
188,083

 
$
1,352

Adjusted NOI % change
 

 
 

 
0.7
%
 
 

 
 

 
 

Property count(2)
152

 
152

 
 

 
163

 
204

 
 

Average capacity (units)(3)
15,621

 
15,623

 
 

 
17,494

 
22,409

 
 

Average annual rent per unit
$
16,191

 
$
16,076

 
 

 
$
16,171

 
$
15,023

 
 

_______________________________________
(1)
Represents rental and related revenues and income from DFLs.
(2)
From our 2017 presentation of SPP, we removed two senior housing triple-net properties that were sold, 11 senior housing triple-net properties that were classified as held for sale and 36 senior housing triple-net properties that were transitioned to SHOP.
(3)
Represents average capacity as reported by the respective tenants or operators for the 12-month period and a quarter in arrears from the periods presented.
SPP NOI and Adjusted NOI increased primarily as a result of annual rent escalations. The increase in Adjusted NOI was partially offset by rent reductions under the Brookdale Transactions.
Total Portfolio NOI and Adjusted NOI decreased primarily as a result of the following Non-SPP impacts:
•
senior housing triple-net facilities sold during 2017 and 2018; and
•
the transfer of 24 and 16 senior housing triple-net facilities to our SHOP segment during 2017 and 2018, respectively.
The decrease in Total Portfolio NOI and Adjusted NOI is partially offset by the aforementioned increases to SPP.

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Senior Housing Operating Portfolio
The following table summarizes results at and for the three months ended September 30, 2018 and 2017 (dollars in thousands, except per unit data):
 
SPP
 
Total Portfolio
 
Three Months Ended September 30,
 
Three Months Ended September 30,
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Rental revenues(1)
$
71,454

 
$
70,170

 
$
1,284

 
$
137,044

 
$
126,040

 
$
11,004

Operating expenses
(50,014
)
 
(46,874
)
 
(3,140
)
 
(106,182
)
 
(86,821
)
 
(19,361
)
NOI
21,440

 
23,296

 
(1,856
)
 
30,862

 
39,219

 
(8,357
)
Adjustments to NOI
372

 
(14
)
 
386

 
1,378

 
(35
)
 
1,413

Adjusted NOI
$
21,812

 
$
23,282

 
$
(1,470
)
 
32,240

 
39,184

 
(6,944
)
Non-SPP adjusted NOI
 

 
 

 
 

 
(10,428
)
 
(15,902
)
 
5,474

SPP adjusted NOI
 

 
 

 
 

 
$
21,812

 
$
23,282

 
$
(1,470
)
Adjusted NOI % change
 

 
 

 
(6.3
)%
 
 

 
 

 
 

Property count(2)
50

 
50

 
 

 
97

 
84

 
 

Average capacity (units)(3)
6,646

 
6,638

 
 

 
13,365

 
12,248

 
 

Average annual rent per unit
$
50,152

 
$
61,159

 
 

 
$
49,992

 
$
47,742

 
 

_______________________________________
(1)
Represents resident fees and services.
(2)
From our 2017 presentation of SPP, we removed six SHOP properties that were sold, 11 SHOP properties that were classified as held for sale and six SHOP properties that were placed in redevelopment.
(3)
Represents average capacity as reported by the respective tenants or operators for the 12-month period and a quarter in arrears from the periods presented.
SPP NOI and Adjusted NOI decreased primarily as a result of the following:
•
occupancy declines and higher labor costs; partially offset by
•
increased rates for resident fees.
Total Portfolio NOI and Adjusted NOI decreased primarily as a result of the aforementioned impacts to SPP and the following Non-SPP impacts:
•
decreased NOI from assets sold in 2017 and 2018; partially offset by
•
increased NOI from the transfer of 21 and 16 senior housing triple-net assets to our SHOP segment during 2017 and 2018, respectively.

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The following table summarizes results at and for the nine months ended September 30, 2018 and 2017 (dollars in thousands, except per unit data):
 
SPP
 
Total Portfolio
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Rental revenues(1)
$
214,447

 
$
209,700

 
$
4,747

 
$
420,067

 
$
391,684

 
$
28,383

Operating expenses
(146,711
)
 
(137,904
)
 
(8,807
)
 
(309,694
)
 
(267,226
)
 
(42,468
)
NOI
67,736

 
71,796

 
(4,060
)
 
110,373

 
124,458

 
(14,085
)
Adjustments to NOI
1,484

 
(221
)
 
1,705

 
(356
)
 
(334
)
 
(22
)
Adjusted NOI
$
69,220

 
$
71,575

 
$
(2,355
)
 
110,017

 
124,124

 
(14,107
)
Non-SPP adjusted NOI
 

 
 

 
 

 
(40,797
)
 
(52,549
)
 
11,752

SPP adjusted NOI
 

 
 

 
 

 
$
69,220

 
$
71,575

 
$
(2,355
)
Adjusted NOI % change
 

 
 

 
(3.3
)%
 
 

 
 

 
 

Property count(2)
49

 
49

 
 

 
97

 
84

 
 

Average capacity (units)(3)
6,646

 
6,628

 
 

 
12,688

 
12,585

 
 

Average annual rent per unit
$
49,899

 
$
47,771

 
 

 
$
52,921

 
$
48,102

 
 

_______________________________________
(1)
Represents resident fees and services.
(2)
From our 2017 presentation of SPP, we removed six SHOP properties that were sold, 11 SHOP properties that were classified as held for sale and six SHOP properties that were placed in redevelopment.
(3)
Represents average capacity as reported by the respective tenants or operators for the 12-month period and a quarter in arrears from the periods presented.
SPP NOI and Adjusted NOI decreased primarily as a result of the following:
•
occupancy declines and higher labor costs; partially offset by
•
increased rates for resident fees.
Total Portfolio NOI and Adjusted NOI decreased primarily as a result of the aforementioned impacts to SPP and the following Non-SPP impacts:
•
decreased NOI from our partial sale of RIDEA II in the first quarter of 2017; and
•
decreased NOI from assets sold in 2017 and 2018; partially offset by
•
increased NOI from the transfer of 24 and 16 senior housing triple-net assets to our SHOP segment during 2017 and 2018, respectively.

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Life Science
The following table summarizes results at and for the three months ended September 30, 2018 and 2017 (dollars and square feet in thousands, except per square foot data):
 
SPP
 
Total Portfolio
 
Three Months Ended September 30,
 
Three Months Ended September 30,
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Rental revenues(1)
$
78,338

 
$
75,779

 
$
2,559

 
$
98,040

 
$
90,174

 
$
7,866

Operating expenses
(17,152
)
 
(16,512
)
 
(640
)
 
(23,668
)
 
(19,960
)
 
(3,708
)
NOI
61,186

 
59,267

 
1,919

 
74,372

 
70,214

 
4,158

Adjustments to NOI
483

 
812

 
(329
)
 
(1,439
)
 
(785
)
 
(654
)
Adjusted NOI
$
61,669

 
$
60,079

 
$
1,590

 
72,933

 
69,429

 
3,504

Non-SPP adjusted NOI
 

 
 

 
 

 
(11,264
)
 
(9,350
)
 
(1,914
)
SPP adjusted NOI
 

 
 

 
 

 
$
61,669

 
$
60,079

 
$
1,590

Adjusted NOI % change
 

 
 

 
2.6
%
 
 

 
 

 
 

Property count(2)
107

 
107

 
 

 
129

 
127

 
 

Average occupancy
96.3
%
 
96.5
%
 
 

 
95.9
%
 
96.8
%
 
 

Average occupied square feet
6,081

 
6,094

 
 

 
7,065

 
6,912

 
 

Average annual total revenues per occupied square foot
$
52

 
$
50

 
 

 
$
55

 
$
52

 
 

Average annual base rent per occupied square foot(3)
$
42

 
$
40

 
 

 
$
44

 
$
42

 
 

_______________________________________
(1)
Represents rental and related revenues and tenant recoveries.
(2)
From our 2017 presentation of SPP, we removed three life science facilities that were placed in redevelopment.
(3)
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).
SPP NOI and Adjusted NOI increased primarily as a result of the following:
•
new leasing activity; and
•
specific to adjusted NOI, annual rent escalations; partially offset by
•
a mark-to-market rent decrease on a 147,000 square foot lease in South San Francisco.
Total Portfolio NOI and Adjusted NOI increased primarily as a result of the aforementioned increases to SPP and the following Non-SPP impacts:
•
increased NOI from: (i) increased occupancy in portions of a development placed into operations in 2017 and 2018 and (ii) acquisitions in 2017; partially offset by
•
decreased NOI from: (i) the sale of life science facilities in 2017 and 2018 and (ii) the placement of life science facilities into redevelopment in 2017 and 2018.

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The following table summarizes results at and for the nine months ended September 30, 2018 and 2017 (dollars and square feet in thousands, except per square foot data):
 
SPP
 
Total Portfolio
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Rental revenues(1)
$
227,042

 
$
222,017

 
$
5,025

 
$
298,692

 
$
262,224

 
$
36,468

Operating expenses
(48,134
)
 
(46,286
)
 
(1,848
)
 
(68,208
)
 
(56,024
)
 
(12,184
)
NOI
178,908

 
175,731

 
3,177

 
230,484

 
206,200

 
24,284

Adjustments to NOI
1,274

 
2,340

 
(1,066
)
 
(7,423
)
 
(1,211
)
 
(6,212
)
Adjusted NOI
$
180,182

 
$
178,071

 
$
2,111

 
223,061

 
204,989

 
18,072

Non-SPP adjusted NOI
 

 
 

 
 

 
(42,879
)
 
(26,918
)
 
(15,961
)
SPP adjusted NOI
 

 
 

 
 

 
$
180,182

 
$
178,071

 
$
2,111

Adjusted NOI % change
 

 
 

 
1.2
%
 
 

 
 

 
 

Property count(2)
106

 
106

 
 

 
129

 
127

 
 

Average occupancy
95.2
%
 
96.1
%
 
 

 
94.6
%
 
96.5
%
 
 

Average occupied square feet
5,941

 
5,993

 
 

 
7,229

 
6,750

 
 

Average annual total revenues per occupied square foot
$
51

 
$
50

 
 

 
$
54

 
$
52

 
 

Average annual base rent per occupied square foot(3)
$
41

 
$
41

 
 

 
$
44

 
$
42

 
 

_______________________________________
(1)
Represents rental and related revenues and tenant recoveries.
(2)
From our 2017 presentation of SPP, we removed three life science facilities that were placed in redevelopment.
(3)
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).
SPP NOI and Adjusted NOI increased primarily as a result of the following:
•
new leasing activity; and
•
specific to adjusted NOI, annual rent escalations; partially offset by
•
a mark-to-market rent decrease on a 147,000 square foot lease in South San Francisco.
Total Portfolio NOI and Adjusted NOI increased primarily as a result of the aforementioned increases to SPP and the following Non-SPP impacts:
•
increased NOI from: (i) increased occupancy in portions of a development placed into operations in 2017 and 2018 and (ii) acquisitions in 2017; partially offset by
•
decreased NOI from: (i) the sale of life science facilities in 2017 and 2018 and (ii) the placement of life science facilities into redevelopment in 2017 and 2018.


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Medical Office
The following table summarizes results at and for the three months ended September 30, 2018 and 2017 (dollars and square feet in thousands, except per square foot data):
 
SPP
 
Total Portfolio
 
Three Months Ended September 30,
 
Three Months Ended September 30,
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Rental revenues(1)
$
107,133

 
$
104,775

 
$
2,358

 
$
129,618

 
$
119,847

 
$
9,771

Operating expenses
(39,863
)
 
(38,707
)
 
(1,156
)
 
(49,150
)
 
(46,486
)
 
(2,664
)
NOI
67,270

 
66,068

 
1,202

 
80,468

 
73,361

 
7,107

Adjustments to NOI
197

 
(115
)
 
312

 
(319
)
 
(578
)
 
259

Adjusted NOI
$
67,467

 
$
65,953

 
$
1,514

 
80,149

 
72,783

 
7,366

Non-SPP adjusted NOI
 

 
 

 
 

 
(12,682
)
 
(6,830
)
 
(5,852
)
SPP adjusted NOI
 

 
 

 
 

 
$
67,467

 
$
65,953

 
$
1,514

Adjusted NOI % change
 

 
 

 
2.3
%
 
 

 
 

 
 

Property count(2)
223

 
223

 
 

 
268

 
244

 
 

Average occupancy
92.2
%
 
92.4
%
 
 

 
92.0
%
 
91.7
%
 
 

Average occupied square feet
14,901

 
14,955

 
 

 
17,455

 
16,604

 
 

Average annual total revenues per occupied square foot
$
29

 
$
28

 
 

 
$
29

 
$
29

 
 

Average annual base rent per occupied square foot(3)
$
24

 
$
23

 
 

 
$
25

 
$
24

 
 

_______________________________________
(1)
Represents rental and related revenues and tenant recoveries.
(2)
From our 2017 presentation of SPP, we removed five MOBs that were sold and three MOBs that were placed into redevelopment.
(3)
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).
SPP NOI and Adjusted NOI increased primarily as a result of mark-to-market lease renewals. 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 Non-SPP impacts:
•
increased NOI from our 2017 and 2018 acquisitions; and
•
increased occupancy in redevelopment and development properties that have been placed into operations in 2017 and 2018; partially offset by
•
decreased NOI from the sale of five MOBs during 2017 and 2018.

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The following table summarizes results at and for the nine months ended September 30, 2018 and 2017 (dollars and square feet in thousands, except per square foot data):
 
SPP
 
Total Portfolio
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Rental revenues(1)
$
317,076

 
$
311,770

 
$
5,306

 
$
378,798

 
$
357,381

 
$
21,417

Operating expenses
(115,710
)
 
(113,976
)
 
(1,734
)
 
(143,114
)
 
(137,930
)
 
(5,184
)
NOI
201,366

 
197,794

 
3,572

 
235,684

 
219,451

 
16,233

Adjustments to NOI
(510
)
 
(1,108
)
 
598

 
(2,383
)
 
(2,304
)
 
(79
)
Adjusted NOI
$
200,856

 
$
196,686

 
$
4,170

 
233,301

 
217,147

 
16,154

Non-SPP adjusted NOI
 

 
 

 
 

 
(32,445
)
 
(20,461
)
 
(11,984
)
SPP adjusted NOI
 

 
 

 
 

 
$
200,856

 
$
196,686

 
$
4,170

Adjusted NOI % change
 

 
 

 
2.1
%
 
 

 
 

 
 

Property count(2)
223

 
223

 
 

 
268

 
244

 
 

Average occupancy
92.2
%
 
92.6
%
 
 

 
91.9
%
 
91.9
%
 
 

Average occupied square feet
14,921

 
15,035

 
 

 
17,128

 
16,664

 
 

Average annual total revenues per occupied square foot
$
28

 
$
28

 
 

 
$
29

 
$
28

 
 

Average annual base rent per occupied square foot(3)
$
24

 
$
23

 
 

 
$
25

 
$
24

 
 

_______________________________________
(1)
Represents rental and related revenues and tenant recoveries.
(2)
From our 2017 presentation of SPP, we removed five MOBs that were sold and three MOBs that were placed into redevelopment.
(3)
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).
SPP NOI and Adjusted NOI increased primarily as a result of mark-to-market lease renewals. 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 Non-SPP impacts:
•
increased NOI from our 2017 and 2018 acquisitions; and
•
increased occupancy in redevelopment and development properties that have been placed into operations in 2017 and 2018; partially offset by
•
decreased NOI from the sale of six MOBs during 2017 and 2018 and the placement of a MOB into redevelopment.


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Other Income and Expense Items
The following table summarizes the results of our other income and expense items for the three and nine months ended September 30, 2018 and 2017 (in thousands):
 
Three Months Ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Interest income
$
1,236

 
$
11,774

 
$
(10,538
)
 
$
9,048

 
$
50,974

 
$
(41,926
)
Interest expense
63,486

 
71,328

 
(7,842
)
 
211,626

 
235,834

 
(24,208
)
Depreciation and amortization
132,198

 
130,588

 
1,610

 
418,740

 
397,893

 
20,847

General and administrative
23,503

 
23,523

 
(20
)
 
75,192

 
67,287

 
7,905

Transaction costs
4,489

 
580

 
3,909

 
9,088

 
2,504

 
6,584

Impairments (recoveries), net
5,268

 
25,328

 
(20,060
)
 
19,180

 
82,010

 
(62,830
)
Gain (loss) on sales of real estate, net
95,332

 
5,182

 
90,150

 
162,211

 
322,852

 
(160,641
)
Loss on debt extinguishments
(43,899
)
 
(54,227
)
 
10,328

 
(43,899
)
 
(54,227
)
 
10,328

Other income (expense), net
1,604

 
(10,556
)
 
12,160

 
(37,017
)
 
40,723

 
(77,740
)
Income tax benefit (expense)
4,929

 
5,481

 
(552
)
 
14,919

 
14,630

 
289

Equity income (loss) from unconsolidated joint ventures
(911
)
 
1,062

 
(1,973
)
 
(442
)
 
4,571

 
(5,013
)
Noncontrolling interests’ share in earnings
(3,555
)
 
(1,937
)
 
(1,618
)
 
(9,546
)
 
(7,687
)
 
(1,859
)
Interest income
Interest income decreased for the three and nine months ended September 30, 2018 primarily as a result of: (i) the sale of our Tandem Mezzanine Loan during the first quarter of 2018 and (ii) the conversion of the U.K. Bridge Loan into real estate during the first quarter of 2018. Additionally, the nine months ended September 30, 2018 decreased as a result of the payoff of our HC-One Facility in June 2017.
Interest expense
Interest expense decreased for the three and nine months ended September 30, 2018 as a result of senior unsecured notes, term loan, and mortgage debt repayments, which occurred primarily in the second and third quarters of 2017 and third quarter of 2018, partially offset by an increased average balance under our revolving credit facility during 2018.
Approximately 87% and 89% of our consolidated debt, inclusive of $43 million and $44 million of variable rate debt swapped to fixed through interest rate swaps, was fixed rate debt as of September 30, 2018 and 2017, respectively. At September 30, 2018, our fixed rate debt and variable rate debt had weighted average interest rates of 4.03% and 3.35%, respectively. At September 30, 2017, our fixed rate debt and variable rate debt had weighted average interest rates of 4.19% and 2.17%, respectively. For a more detailed discussion of our interest rate risk, see “Quantitative and Qualitative Disclosures About Market Risk” in Item 3 below.
Depreciation and amortization expense
Depreciation and amortization expense increased for the three and nine months ended September 30, 2018 primarily as a result of: (i) assets acquired during 2017 and 2018 (primarily in our life science and medical office segments) and (ii) development and redevelopment projects placed into operations during 2017 and 2018 (primarily in our life science and medical office segments), partially offset by: (i) dispositions of real estate throughout 2017 and 2018 (primarily in our senior housing triple-net and SHOP segments), (ii) classifying assets as held for sale during 2018 (primarily in our senior housing triple-net, SHOP and life science segments) and (iii) sale of a joint venture interest in the U.K. JV.
General and administrative expenses
General and administrative expenses increased for the nine months ended September 30, 2018 primarily as a result of increased compensation costs during 2018 and severance and related charges primarily resulting from the departure of our former Executive Chairman in March 2018.
Transaction costs
Transaction costs increased for the three and nine months ended September 30, 2018 primarily as a result of costs associated with transitioning assets previously operated by Brookdale to new operators, partially offset by costs incurred for transactions during the three and nine months ended September 30, 2017.

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Impairments (recoveries), net
We recognized impairments on three SHOP assets classified as held for sale during the three months ended September 30, 2018. Further, during the nine months ended September 30, 2018, we recognized additional impairments on two SHOP portfolios (13 assets) and an undeveloped life science land parcel classified as held for sale.
We recognized impairments on 11 underperforming senior housing triple-net facilities and our Tandem Mezzanine Loan for the three months ended September 30, 2017. We recognized an additional impairment on our Tandem Mezzanine Loan during the nine months ended September 30, 2017.
Gain (loss) on sales of real estate, net
During the three months ended September 30, 2018, we sold: (i) 11 SHOP facilities, (ii) four life science assets and (iii) two MOBs and recognized total net gain on sales of $95 million. During the nine months ended September 30, 2018 we sold: (i) our remaining interest in RIDEA II, (ii) a 51% interest in our U.K. Portfolio, (iii) 21 SHOP facilities, (iv) four life science assets, (v) two MOBs and (vi) two senior housing triple-net facilities and recognized total net gain on sales of $162 million.
During the three months ended September 30, 2017, we sold two senior housing triple-net facilities, resulting in gain on sales of $5 million. During the nine months ended September 30, 2017 (primarily in the first quarter of 2017), we primarily sold 66 senior housing triple-net assets, five life science facilities, a SHOP facility, a MOB and a 40% interest in RIDEA II and recognized total net gain on sales of $323 million.
Loss on debt extinguishments
During the three and nine months ended September 30, 2018, we repurchased $700 million of our 5.375% senior notes due 2021 and recognized a $44 million loss on debt extinguishment, primarily related to a premium for early payment.
During the three and nine months ended September 30, 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.
Other income (expense), net
Other income (expense), net, increased for the three months ended September 30, 2018 primarily as a result of casualty-related charges incurred in the third quarter of 2017 and higher litigation costs incurred in 2017.
Other income (expense), net, decreased for the nine months ended September 30, 2018 primarily as a result of: (i) a loss on consolidation of seven U.K. care homes in March 2018 (see Note 15 to the Consolidated Financial Statements for additional information) and (ii) a gain on sale of our Four Seasons Notes in March 2017. The decrease in other income (expense), net was partially offset by: (i) the aforementioned casualty-related charges incurred in the third quarter of 2017 and (ii) decreased litigation costs in 2018.
Income tax benefit (expense)
Income taxes for the three and nine months ended September 30, 2018 were primarily the result of income tax benefits from losses generated by certain of our taxable REIT subsidiaries, partially offset by income tax expense from the sale of our 40% investment in RIDEA II in June 2018 (see Note 4).
Income taxes for the three months ended September 30, 2017 were primarily the result of income tax benefits from losses generated by certain of our taxable REIT subsidiaries and deferred tax benefit from the casualty-related charges recognized in the third quarter of 2017. Income taxes for the nine months ended September 30, 2017 were primarily the result of the aforementioned impact during the three months ended September 30, 2017 and a tax benefit from the initial sale of a 40% interest in RIDEA II in January 2017.
Equity income (loss) from unconsolidated joint ventures
The decrease in equity income from unconsolidated joint ventures for the three and nine months ended September 30, 2018 was primarily the result of: (i) the sale of our equity method investment in RIDEA II in June 2018, and (ii) lease expirations on an unconsolidated life science property during the first half of 2018. The decrease was partially offset by additional equity income from our investment in the U.K. JV.

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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 our planned redemption of our $450 million 3.75% senior unsecured notes in November 2018; and (iii) satisfying our distributions to our stockholders and non-controlling interest members.  
Our principal investing needs for the next 12 months are to:
•
fund capital expenditures, including tenant improvements and leasing costs; and
•
fund future acquisition, transactional and development activities.
We anticipate satisfying these future investing needs using one or more of the following:
•
sale or exchange of ownership interests in properties;
•
draws on our credit facilities;
•
issuance of additional debt, including unsecured notes and mortgage debt; and/or
•
issuance of common or preferred stock.
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. At October 29, 2018, we had senior unsecured credit ratings of BBB from Fitch, Baa2 from Moody’s and BBB from S&P Global.
Cash Flow Summary
The following summary discussion of our cash flows is based on the consolidated statements of cash flows and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below.
The following table sets forth changes in cash flows (in thousands):
 
Nine Months Ended September 30,
 
2018
 
2017
 
Change
Net cash provided by (used in) operating activities
$
632,918

 
$
637,896

 
$
(4,978
)
Net cash provided by (used in) investing activities
817,534

 
1,740,698

 
(923,164
)
Net cash provided by (used in) financing activities
(1,424,159
)
 
(2,354,963
)
 
930,804

Operating Cash Flows
The decrease in operating cash flow is primarily the result of a reduction in income related to: (i) dispositions during 2017 and 2018, (ii) the partial sale and deconsolidation of RIDEA II during the first quarter of 2017, (iii) occupancy declines and higher labor costs within our SHOP segment, and (iv) decreased distributions of earnings from our unconsolidated joint ventures. The decrease in operating cash flow is partially offset by: (i) 2017 and 2018 acquisitions, (ii) annual rent increases, (iii) developments and redevelopments placed in service during 2017 and the first three quarters of 2018, and (iv) decreased interest paid as a result of debt repayments during 2017 and 2018. 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.
Investing Cash Flows
The following are significant investing activities for the nine months ended September 30, 2018:
•
received net proceeds of $1.6 billion primarily from sales of: (i) RIDEA II, (ii) other real estate assets, and (iii) the Tandem Mezzanine Loan, and the U.K. JV transaction; and
•
made investments of $765 million primarily related to the acquisition, development, and redevelopment of real estate.

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The following are significant investing activities for the nine months ended September 30, 2017:
•
received net proceeds of $1.7 billion from sales of real estate, including the partial sale and recapitalization of RIDEA II;
•
received net proceeds of $555 million primarily from the sale of our Four Seasons investments, the repayment of our HC-One Facility, and a DFL repayment; and
•
made investments of $527 million primarily related to the development of real estate.
Financing Cash Flows
The following are significant financing activities for the nine months ended September 30, 2018:
•
made net repayments of $1.1 billion under our bank line of credit, term loan, senior unsecured notes (including debt extinguishment costs) and mortgage debt;
•
paid cash dividends on common stock of $523 million;
•
paid $78 million for distributions to and purchases of noncontrolling interests (primarily related to our acquisition of Brookdale’s noncontrolling interest in RIDEA I); and
•
received proceeds of $299 million for issuances of noncontrolling interests (primarily related to the MSREI MOB JV).
The following are significant financing activities for the nine months ended September 30, 2017:
•
made net repayments of $1.8 billion under our bank line of credit, term loans, senior unsecured notes (including debt extinguishment costs) and mortgage debt; and
•
paid dividends on common stock of $521 million.
Debt
See Note 9 in the Consolidated Financial Statements for additional information about our outstanding debt.
See “2018 Transaction Overview” for further information regarding our significant financing activities through October 31, 2018.
Equity
At September 30, 2018, we had 470 million shares of common stock outstanding, equity totaled $5.6 billion, and our equity securities had a market value of $12.5 billion.
At September 30, 2018, 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 September 30, 2018, the DownREIT units were convertible into 7 million shares of our common stock.
At-The-Market Program
We renewed our at-the-market equity program in May 2018, pursuant to which we may sell shares of our common stock 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 under our at-the-market program during the nine months ended September 30, 2018 and, at September 30, 2018, $750 million of our common stock remained 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 any shares under our at-the-market 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 May 2021, at which time we expect to file a new shelf registration statement. 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.

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Contractual Obligations and Off-Balance Sheet Arrangements
Our commitments related to development and redevelopment projects increased by $160 million, to $293 million at September 30, 2018 when compared to December 31, 2017. Our ground and other operating lease obligations increased by $105 million (when compared to December 31, 2017), to $501 million at September 30, 2018, primarily as a result of the acquisition of the Greenville Portfolio by the MSREI JV (see Note 4 to the Consolidated Financial Statements). Additionally, we repaid $700 million of our senior notes due 2021 in July 2018, reducing our contractual obligation to $5.8 billion at September 30, 2018. There have been no other material changes, outside of the ordinary course of business, to these contractual obligations during the nine months ended September 30, 2017.
We own interests in certain unconsolidated JVs as described in Note 7 to the Consolidated Financial Statements. Except in limited circumstances, our risk of loss is limited to our investment in the JV and any outstanding loans receivable. In addition, we have certain properties which serve as collateral for debt that is owed by a previous owner of certain of our facilities. Our risk of loss for these certain properties is limited to the outstanding debt balance plus penalties, if any. We have no other material off-balance sheet arrangements that we expect would materially affect our liquidity and capital resources except for commitments and operating leases included in our Annual Report on Form 10-K for the year ended December 31, 2017 in “Contractual Obligations” under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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Table of Contents

Non-GAAP Financial Measures Reconciliations
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):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss) applicable to common shares
$
98,946

 
$
(7,788
)
 
$
228,267

 
$
472,311

Real estate related depreciation and amortization
132,198

 
130,588

 
418,740

 
397,893

Real estate related depreciation and amortization on unconsolidated joint ventures
15,180

 
16,358

 
48,730

 
47,711

Real estate related depreciation and amortization on noncontrolling interests and other
(2,971
)
 
(3,678
)
 
(7,136
)
 
(11,711
)
Other depreciation and amortization
2,343

 
2,360

 
4,906

 
7,718

Loss (gain) on sales of real estate, net
(95,332
)
 
(5,182
)
 
(162,211
)
 
(322,852
)
Loss (gain) upon consolidation of real estate, net(1)
—

 
—

 
41,017

 
—

Taxes associated with real estate dispositions(2)
—

 
—

 
1,147

 
(5,498
)
Impairments (recoveries) of depreciable real estate, net
5,268

 
22,590

 
11,541

 
22,590

FFO applicable to common shares
155,632

 
155,248

 
585,001

 
608,162

Distributions on dilutive convertible units
—

 
—

 
—

 
5,250

Diluted FFO applicable to common shares
$
155,632

 
$
155,248

 
$
585,001

 
$
613,412

 
 
 
 
 
 
 
 
Weighted average shares outstanding - diluted FFO
470,118

 
469,156

 
469,876

 
473,519

 
 
 
 
 
 
 
 
Impact of adjustments to FFO:
 

 
 

 
 
 
 
Transaction-related items
$
4,678

 
$
580

 
$
8,612

 
$
2,476

Other impairments (recoveries), net(3)
—

 
2,738

 
4,341

 
8,526

Severance and related charges(4)
4,573

 
3,889

 
13,311

 
3,889

Loss on debt extinguishments(5)
43,899

 
54,227

 
43,899

 
54,227

Litigation costs (recoveries)
(545
)
 
2,303

 
41

 
7,507

Casualty-related charges (recoveries), net
—

 
8,925

 
—

 
8,925

Foreign currency remeasurement losses (gains)
(41
)
 
(141
)
 
(106
)
 
(986
)
Total adjustments
$
52,564

 
$
72,521

 
$
70,098

 
$
84,564

 
 
 
 
 
 
 
 
FFO as adjusted applicable to common shares
$
208,196

 
$
227,769

 
$
655,099

 
$
692,726

Distributions on dilutive convertible units and other
(90
)
 
1,493

 
(180
)
 
5,095

Diluted FFO as adjusted applicable to common shares
$
208,106

 
$
229,262

 
$
654,919

 
$
697,821

 
 
 
 
 
 
 
 
Weighted average shares outstanding - diluted FFO as adjusted
470,118

 
473,836

 
469,876

 
473,519


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Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
FFO as adjusted applicable to common shares
$
208,196

 
$
227,769

 
$
655,099

 
$
692,726

Amortization of deferred compensation(6)
3,530

 
3,237

 
11,249

 
10,329

Amortization of deferred financing costs
3,070

 
3,439

 
9,760

 
11,141

Straight-line rents
(4,409
)
 
(5,774
)
 
(20,888
)
 
(18,052
)
FAD capital expenditures
(24,646
)
 
(26,272
)
 
(70,237
)
 
(73,825
)
Lease restructure payments
300

 
311

 
901

 
1,165

CCRC entrance fees(7)
6,524

 
6,074

 
13,203

 
14,436

Deferred income taxes(8)
(4,880
)
 
(3,807
)
 
(12,751
)
 
(10,523
)
Other FAD adjustments(9)
(1,140
)
 
(2,570
)
 
(7,959
)
 
(6,288
)
FAD applicable to common shares
186,545

 
202,407

 
578,377

 
621,109

Distributions on dilutive convertible units
—

 
1,596

 
—

 
5,250

Diluted FAD applicable to common shares
$
186,545

 
$
204,003

 
$
578,377

 
$
626,359

 
 
 
 
 
 
 
 
Weighted average shares outstanding - diluted FAD
470,118

 
473,836

 
469,876

 
473,519

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Diluted earnings per common share
$
0.21

 
$
(0.02
)
 
$
0.49

 
$
1.01

Depreciation and amortization
0.31

 
0.31

 
0.99

 
0.93

Loss (gain) on sales of real estate, net
(0.20
)
 
(0.01
)
 
(0.34
)
 
(0.68
)
Loss (gain) upon consolidation of real estate, net(1)
—

 
—

 
0.09

 
—

Taxes associated with real estate dispositions(2)
—

 
—

 
—

 
(0.01
)
Impairments (recoveries) of depreciable real estate, net
0.01

 
0.05

 
0.02

 
0.05

Diluted FFO per common share
$
0.33

 
$
0.33

 
$
1.25

 
$
1.30

Transaction-related items
0.01

 
—

 
0.01

 
—

Other impairments (recoveries), net(3)
—

 
0.01

 
0.01

 
0.02

Severance and related charges(4)
0.01

 
0.01

 
0.03

 
0.01

Loss on debt extinguishment(5)
0.09

 
0.11

 
0.09

 
0.11

Litigation costs (recoveries)
—

 
—

 
—

 
0.01

Casualty-related charges (recoveries), net
—

 
0.02

 
—

 
0.02

Diluted FFO as adjusted per common share
$
0.44

 
$
0.48

 
$
1.39

 
$
1.47

_______________________________________
(1)
For the nine months ended September 30, 2018, represents the loss on consolidation of seven U.K. care homes.
(2)
Represents the income tax impact of our RIDEA II transactions in June 2018 and January 2017.
(3)
For the nine months ended September 30, 2018, represents the impairment of an undeveloped life science land parcel classified as held for sale, partially offset by an impairment recovery upon the sale of our Tandem Mezzanine Loan in March 2018. For the nine months ended September 30, 2017, represents the impairment of our Tandem Mezzanine Loan, net of the impairment recovery upon the sale of our Four Seasons Notes in the first quarter of 2017. For the three months ended September 30, 2017, represents the impairment of our Tandem Mezzanine Loan, which was sold in the first quarter of 2018.
(4)
For the three months ended September 30, 2018, relates to corporate restructuring activities. For the nine months ended September 30, 2018, primarily relates to the departure of our former Executive Chairman, which consisted of $6 million of cash severance and $3 million of equity award vestings. For the three and nine months ended September 30, 2017, primarily relates to the departure of our former Chief Accounting Officer.
(5)
Represents the premium associated with the prepayment of senior unsecured notes.
(6)
Excludes amounts in severance and related charges related to the acceleration of deferred compensation for restricted stock units that vested upon the departure of certain former employees.
(7)
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.
(8)
For the three and nine months ended September 30, 2017, excludes $2 million of deferred tax benefit from casualty-related charges, which is included in casualty-related charges (recoveries), net.
(9)
Primarily includes our share of FAD capital expenditures from unconsolidated joint ventures, partially offset by noncontrolling interests' share of FAD capital expenditures from consolidated joint ventures.
 
For a reconciliation of NOI and Adjusted NOI to net income (loss), refer to Note 12 to the Consolidated Financial Statements. For a reconciliation of SPP NOI and Adjusted NOI to total portfolio NOI and Adjusted NOI by segment, refer to the analysis of each segment in “Results of Operations” above.

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Critical Accounting Policies and Recent Accounting Pronouncements
The preparation of financial statements in conformity with U.S. GAAP requires our management to use judgment in the application of accounting policies, including making estimates and assumptions. We base estimates on the best information available to us at the time, our experience and on various other assumptions believed to be reasonable under the circumstances. These estimates affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, it is possible that different accounting would have been applied, resulting in a different presentation of our consolidated financial statements. From time to time, we re-evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2017 in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 2 to the Consolidated Financial Statements. There have been no significant changes to our critical accounting policies during 2018 other than those resulting from new accounting standards (see Note 2 to the Consolidated Financial Statements).
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various market risks, including the potential loss arising from adverse changes in interest rates and foreign currency exchange rates, specifically the British pound sterling (“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 18 to the Consolidated Financial Statements).
To illustrate the effect of movements in the interest rate markets, we performed a market sensitivity analysis on our hedging instruments. We applied various basis point spreads to the underlying interest rate curves of the derivative portfolio in order to determine the change in fair value. Assuming a one percentage point change in the underlying interest rate curve, the estimated change in fair value of each of the underlying derivative instruments would not exceed $1 million.
Interest Rate Risk.  At September 30, 2018, our exposure to interest rate risk is primarily on our variable rate debt. At September 30, 2018, $43 million of our variable-rate debt was hedged by interest rate swap transactions. The interest rate swaps are designated as cash flow hedges, with the objective of managing the exposure to interest rate risk by converting the interest rates on our variable-rate debt to fixed interest rates.
Interest rate fluctuations will generally not affect our future earnings or cash flows on our fixed rate debt and assets until their maturity or earlier prepayment and refinancing. If interest rates have risen at the time we seek to refinance our fixed rate debt, whether at maturity or otherwise, our future earnings and cash flows could be adversely affected by additional borrowing costs. Conversely, lower interest rates at the time of refinancing may reduce our overall borrowing costs. However, interest rate changes will affect the fair value of our fixed rate instruments. A one percentage point increase or decrease in interest rates would change the fair value of our fixed rate debt by approximately $264 million and $284 million, respectively, and would not materially impact earnings or cash flows. Conversely, changes in interest rates on variable rate debt and investments would change our future earnings and cash flows, but not materially impact the fair value of those instruments. Assuming a one percentage point increase in the interest rate related to the variable-rate debt and variable-rate investments, and assuming no other changes in the outstanding balance at September 30, 2018, our annual interest expense and interest income would increase by approximately $9 million and $1 million, respectively.
Foreign Currency Risk.  At September 30, 2018, our exposure to foreign currencies primarily relates to U.K. investments in leased real estate, loans receivables and related GBP denominated cash flows. Our foreign currency exposure is partially mitigated through the use of GBP-denominated borrowings. Based solely on our operating results for the three months ended September 30, 2018, including the impact of existing hedging arrangements, if the value of the GBP relative to the U.S. dollar were to increase or decrease by 10% compared to the average exchange rate during the three months ended September 30, 2018, our cash flows would have decreased or increased, as applicable, by less than $1 million.
Market Risk.  We have investments in marketable debt securities classified as held-to-maturity because we have the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are recorded at amortized cost and adjusted for the amortization of premiums and discounts through maturity. We consider a variety of factors in evaluating an other-than-temporary decline in value, such as: the length of time and the extent to which the market value has been less than our current adjusted carrying value; the issuer’s financial condition, capital strength and near-term prospects; any recent events specific to that issuer and economic conditions of its industry; and our investment horizon in relationship to an anticipated near-term recovery in the market value, if any. At September 30, 2018, both the fair value and carrying value of marketable debt securities was $19 million.

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Item 4.  Controls and Procedures
Disclosure Controls and Procedures.  We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2018. Based upon that evaluation, our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer) concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2018.
Changes in Internal Control Over Financial Reporting.  There were no changes in our internal control over financial reporting (as such term as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See the “Legal Proceedings” section of Note 10 to the Consolidated Financial Statements for information regarding legal proceedings, which information is incorporated by reference in this Item 1.
Item 1A.  Risk Factors
There are no material changes to the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a)
None.
(b)
None.
(c)
The following table sets forth information with respect to purchases of our common stock made by us or on our behalf during the three months ended September 30, 2018.
Period Covered
 
Total Number
Of Shares
Purchased(1)
 
Average
Price
Paid Per
Share
 
Total Number Of Shares
(Or Units) Purchased As
Part Of Publicly
Announced Plans Or
Programs
 
Maximum Number (Or
Approximate Dollar Value)
Of Shares (Or Units) That
May Yet Be Purchased
Under The Plans Or
Programs
July 1-31, 2018
 
—

 
$
—

 
—

 
—

August 1-31, 2018
 
7,808

 
26.57

 
—

 
—

September 1-30, 2018
 
13,195

 
27.03

 
—

 
—

Total
 
21,003

 
26.86

 
—

 
—

_______________________________________
(1)
Represents shares of our common stock withheld under our equity incentive plans to offset tax withholding obligations that occur upon vesting of restricted shares. The value of the shares withheld is based on the closing price of our common stock on the last trading day prior to the date the relevant transaction occurs.

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Item 6. Exhibits
3.1
 
 
 
 
3.2
 
 
 
 
31.1
 
 
 
 
31.2
 
 
 
 
32.1
 
 
 
 
32.2
 
 
 
 
101.INS
 
XBRL Instance Document.*
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document.*
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.*
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.*
 
 
 
101.LAB
 
XBRL Taxonomy Extension Labels Linkbase Document.*
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.*
_______________________________________
*       Filed herewith.
**     Furnished herewith. 





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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: October 31, 2018
HCP, Inc.
 
 
 
(Registrant)
 
 
 
/s/ THOMAS M. HERZOG
 
Thomas M. Herzog
 
President and Chief Executive Officer
 
(Principal Executive Officer)
 
 
 
/s/ PETER A. SCOTT
 
Peter A. Scott
 
Executive Vice President and
 
Chief Financial Officer
 
(Principal Financial Officer)
 
 
 
/s/ SHAWN G. JOHNSTON
 
Shawn G. Johnston
 
Senior Vice President and
 
Chief Accounting Officer
 
(Principal Accounting Officer)


62