Bt Investments Blog

Here's a good summary from the Washington Post. (Link via Brad DeLong's blog.)

You can skip this beginning part if you know what a CDO is or know a mezzanine tranche from junk:

By now, almost everyone knows that most mortgages are no longer held by banks until they are paid off: They are packaged with other mortgages and sold to investors much like a bond. In the simple version, each investor owned a small percentage of the entire package and got the same yield as all the other investors. Then someone figured out that you could do a bigger business by selling them off in tranches corresponding to different levels of credit risk. Under this arrangement, if any of the mortgages in the pool defaulted, the riskiest tranche would absorb all the losses until its entire investment was wiped out, followed by the next riskiest and the next. With these tranches, mortgage debt could be divided among classes of investors. The riskiest tranches -- those with the lowest credit ratings -- were sold to hedge funds and junk bond funds whose investors wanted the higher yields that went with the higher risk. The safest ones, offering lower yields and Treasury-like AAA ratings, were snapped up by risk-averse pension funds and money market funds. The least sought-after tranches were those in the middle, the "mezzanine" tranches, which offered middling yields for supposedly moderate risks.

Stick with me now, because this is where it gets interesting. For it is at this point that the banks got the bright idea of buying up a bunch of mezzanine tranches from various pools. Then, using fancy computer models, they convinced themselves and the rating agencies that by repeating the same "tranching" process, they could use these mezzanine-rated assets to create a new set of securities -- some of them junk, some mezzanine, but the bulk of them with the AAA ratings more investors desired. It was a marvelous piece of financial alchemy, one that made Wall Street banks and the ratings agencies billions of dollars in fees. And because so much borrowed money was used -- in buying the original mortgages, buying the tranches for the CDOs and then in buying the tranches of the CDOs -- the whole thing was so highly leveraged that the returns, at least on paper, were very attractive. No wonder they were snatched up by British hedge funds, German savings banks, oil-rich Norwegian villages and Florida pension funds.

Here is the money paragraph:

What we know now, of course, is that the investment banks and ratings agencies underestimated the risk that mortgage defaults would rise so dramatically that even AAA investments could lose their value. One analysis, by Eidesis Capital, a fund specializing in CDOs, estimates that, of the CDOs issued during the peak years of 2006 and 2007, investors in all but the AAA tranches will lose all their money, and even those will suffer losses of 6 to 31 percent. And looking across the sector, J.P. Morgan's CDO analysts estimate that there will be at least $300 billion in eventual credit losses, the bulk of which is still hidden from public view. That includes at least $30 billion in additional write-downs at major banks and investment houses, and much more at hedge funds that, for the most part, remain in a state of denial.

...and the rest: it's bad, going to get worse.

As part of the unwinding process, the rating agencies are in the midst of a massive and embarrassing downgrading process that will force many banks, pension funds and money market funds to sell their CDO holdings into a market so bereft of buyers that, in one recent transaction, a desperate E-Trade was able to get only 27 cents on the dollar for its highly rated portfolio. Meanwhile, banks that are forced to hold on to their CDO assets will be required to set aside much more of their own capital as a financial cushion. That will sharply reduce the money they have available for making new loans. And it doesn't stop there. CDO losses now threaten the AAA ratings of a number of insurance companies that bought CDO paper or insured against CDO losses. And because some of those insurers also have provided insurance to investors in tax-exempt bonds, states and municipalities have decided to pull back on new bond offerings because investors have become skittish.

If all this sounds like a financial house of cards, that's because it is. And it is about to come crashing down, with serious consequences not only for banks and investors but for the economy as a whole. That's not just my opinion. It's why banks are husbanding their cash and why the outstanding stock of bank loans and commercial paper is shrinking dramatically. It is why Treasury officials are working overtime on schemes to stem the tide of mortgage foreclosures and provide a new vehicle to buy up CDO assets. It's why state and federal budget officials are anticipating sharp decreases in tax revenue next year. And it is why the Federal Reserve is now willing to toss aside concerns about inflation, the dollar and bailing out Wall Street, and move aggressively to cut interest rates and pump additional funds directly into the banking system.

This may not be 1929. But it's a good bet that it's way more serious than the junk bond crisis of 1987, the S&L crisis of 1990 or the bursting of the tech bubble in 2001.

I told you so: here is a post of mine from 2005 predicting that things would end in tears in credit derivative markets.

Repeat five times: it's not a black swan event, it was predictable; it's not that statistical modeling and correlations are useless, but rather how they are used; don't blame the quants; the incentive structures were all wrong; traders selling naked puts; blah blah blah.

LONG BEACH, Calif., Feb 12, 2010 (BUSINESS WIRE) —-Diluted FFO per share was $0.55, before giving effect to impairments of $0.19 per diluted share; diluted FFO per share was $0.36; and diluted earnings per share was $0.09

–Year-over-year quarterly adjusted NOI same property performance increased by 2.3%

–FULL YEAR HIGHLIGHTS

–Diluted FFO per share was $2.14, before giving effect to impairments and a litigation provision of $0.64 per diluted share; diluted FFO per share was $1.50; and diluted earnings per share was $0.40

–Year-over-year twelve month adjusted NOI same property performance increased by 3.2%

–Strengthened balance sheet and liquidity Reduced financial leverage from 48% to 43%

–Raised $881 million of equity capital through the issuance of common stock

–Ended the year with $1.4 billion available on our line of credit and $289 million of unrestricted cash and marketable securities

–Purchased a $720 million participation in HCR ManorCare’s first mortgage debt

–Sold HCA bonds for $157 million and recognized gains of $9 million

–Sold real estate assets for $72 million and recognized gain on sales of real estate of $37 million

–Terminated and transitioned 15 Sunrise-managed communities to new operators

HCP (the “Company” or “we”) /quotes/comstock/13*!hcp/quotes/nls/hcp (HCP 27.39, -0.65, -2.32%) announced results for the fourth quarter and year ended December 31, 2009 as follows (in thousands, except per share amounts):

Three Months ended Three Months ended December 31, 2009 December 31, 2008 amount Per Share amount Per ShareFunds from operations (“FFO”) $ 106,040 $ 0.36 $ 121,029 $ 0.48Impairments (1) 54,485 0.19 14,426 0.06Merger-related charges — – 724 –FFO before giving effect to impairments and merger-related charges $ 160,525 $ 0.55 $ 136,179 $ 0.54Net income applicable to common shares $ 26,397 $ 0.09 $ 34,650 $ 0.14 (1) For further information regarding the quarter ended December 31, 2009 impairment charges see “Other Events” section herein.

In addition to impairment charges and litigation provision, FFO applicable to common shares for the quarter ended December 31, 2009 included the positive impact of $0.02 per diluted share of the following: i) termination fees of $0.01 per share and ii) income of $0.01 per share related to sales of marketable debt securities. In addition to impairment and merger-related charges, FFO applicable to common shares for the quarter ended December 31, 2008 included the negative impact of $0.01 per diluted share of the following: i) recognized losses on marketable securities and charges related to hedge ineffectiveness of $0.02 per share; and ii) a gain of $0.01 per share related to the early repayment of $120 million of mortgage debt at a discount.

Full Year Comparison

Year ended Year ended December 31, 2009 December 31, 2008 amount Per Share amount Per ShareFFO $ 412,464 $ 1.50 $ 535,789 $ 2.24Impairments 75,514 0.27 27,851 0.11Ventas litigation provision 101,973 0.37 — –Merger-related charges — – 3,897 0.02FFO before giving effect to impairments, a litigation provision $ 589,951 $ 2.14 $ 567,537 $ 2.37and merger-related chargesNet income applicable to common shares $ 109,069 $ 0.40 $ 425,368 $ 1.79

FFO is a supplemental non-GAAP financial measure that the Company believes is helpful in evaluating the operating performance of real estate investment trusts.

During the quarter ended December 31, 2009, we funded $33 million for construction and other capital projects, primarily in our life science segment. during the quarter ended December 31, 2009, we sold marketable debt securities for $38 million, recognizing aggregate gains of $2.5 million, and three senior housing facilities for $14 million, recognizing gain on sales of real estate of $3 million.

During the year ended December 31, 2009, we made aggregate investments of $724 million as follows: i) purchased a $720 million participation in the first mortgage debt of HCR ManorCare at a discount of $130 million, which resulted in an acquisition cost of $590 million; ii) purchased the remaining interests in three senior housing joint ventures with an aggregate unencumbered value of $15 million; and iii) funded $119 million for construction and other capital projects, primarily in our life science segment. during the year ended December 31, 2009, we sold investments for $229 million from the following segments: i) $203 million of hospital ($157 million of HCA bonds and $46 million in real estate assets); ii) $15 million of senior housing; and iii) $11 million of medical office.

During the quarter ended December 31, 2009, we recognized aggregate impairments of $54 million, which primarily included the following: i) $48 million of impairment charges related to three direct financing leases and a $10 million participation in a senior construction loan associated with properties operated by Erickson Retirement Communities; and ii) a $4 million impairment charge related to a senior secured term loan to an affiliate of the Cirrus Group, LLC.

On February 1, 2010, we announced that our Board of Directors declared an increase to our quarterly cash dividend from $0.46 to $0.465 per common share, which represents an annual increase of $0.02 per share. The dividend will be paid on February 23, 2010 to stockholders of record as of the close of business on February 11, 2010.

For the full year 2010, we expect FFO applicable to common shares to range between $2.11 and $2.17 per diluted share and net income applicable to common shares to range between $0.98 and $1.04 per diluted share.

COMPANY INFORMATION

HCP has scheduled a conference call and webcast for Friday, February 12, 2010 at 9:00 a.m. Pacific Time (12:00 p.m. Eastern Time) in order to present the Company’s performance and operating results for the quarter ended December 31, 2009. The conference call is accessible by dialing (800) 299-7635 (U.S.) or (617) 786-2901 (International). The participant passcode is 40355843. The webcast is accessible via the Company’s website at hcpi.com. this link can be found on the “Event Calendar” page, which is under the “Investor Relations” tab. a webcast replay of the conference call will be available after 12:00 p.m. Pacific Time (3:00 p.m. Eastern Time) on February 12, 2010 through February 26, 2010 on the Company’s website and a telephonic replay can be accessed by calling (888) 286-8010 (U.S.) or (617) 801-6888 (International) and entering passcode 35515186. The Company’s supplemental information package for the current period will also be available on the Company’s website in the “Presentations” section of the “Investor Relations” tab.

HCP, inc., an S&P 500 company, is a real estate investment trust (REIT) that, together with its consolidated subsidiaries, invests primarily in real estate serving the healthcare industry in the United States. as of December 31, 2009 the Company’s portfolio of investments, including properties owned by our Investment Management Platform, consisted of interests in 675 facilities among the following segments: 256 senior housing, 98 life science, 251 medical office, 22 hospital and 48 skilled nursing, and $1.8 billion of mezzanine and other secured loan investments. For more information, visit the Company’s website at hcpi.com.

FORWARD-LOOKING STATEMENTS

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995: The statements contained in this release which are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include among other things, net income applicable to common shares on a diluted basis, FFO applicable to common shares on a diluted basis, and gain on sales of real estate, real estate depreciation and amortization, and joint venture adjustments for the full year of 2010. These statements are made as of the date hereof and are subject to known and unknown risks, uncertainties, assumptions and other factors–many of which are out of the Company’s control and difficult to forecast–that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. These risks and uncertainties include but are not limited to: national and local economic conditions, including the possibility of a prolonged recession; continued volatility in the capital markets, including changes in interest rates and the availability and cost of capital, which changes and volatility affect opportunities for profitable investment; the Company’s ability to access external sources of capital when desired and on reasonable terms; the Company’s ability to manage its indebtedness levels; changes in the terms of the Company’s indebtedness; the Company’s ability to maintain its credit ratings; the potential impact of existing and future litigation matters, including the possibility of larger than expected litigation costs and related developments; the Company’s ability to sell its investments when desired and on profitable terms; competition for lessees and mortgagors (including new leases and mortgages and the renewal or rollover of existing leases); the Company’s ability to reposition its properties on the same or better terms if existing leases are not renewed or the Company exercises its right to replace an existing operator or tenant upon default; the Company’s ability to pursue legal remedies in the Erickson matter as well as any further restructuring of the loan with Cirrus; continuing reimbursement uncertainty in the skilled nursing segment; competition in the senior housing segment specifically and in the healthcare industry in general; the ability of the Company’s operators and tenants to maintain or increase occupancy levels at, and rental income from, the senior housing segment; the Company’s ability to realize the benefits of its mezzanine and other loan investments; the ability of the Company’s lessees and mortgagors to maintain the financial strength and liquidity necessary to satisfy their respective obligations to the Company and other third parties; the bankruptcy, insolvency or financial deterioration of the Company’s operators, lessees, borrowers or other obligors; changes in healthcare laws and regulations, including the impact of future or pending healthcare reform, and other changes in the healthcare industry which affect the operations of the Company’s lessees or obligors; the Company’s ability to recruit and retain key management personnel; costs of compliance with regulations and environmental laws affecting the Company’s properties; changes in tax laws and regulations; the Company’s ability and willingness to maintain its qualification as a REIT; changes in rules governing financial reporting, including new accounting pronouncements; and other risks described from time to time in the Company’s Securities and Exchange Commission filings. The Company assumes no, and hereby disclaims any, obligation to update any of the foregoing or any other forward-looking statements as a result of new information or new or future developments, except as otherwise required by law.

HCP, inc.Consolidated Balance SheetsIn thousands, except share and per share data December 31, 2009 2008AssetsReal estate:Buildings and improvements $ 7,826,388 $ 7,738,817Development costs and construction in progress 272,542 224,336Land 1,547,518 1,546,889Accumulated depreciation and amortization (1,061,103 ) (818,672 )Net real estate 8,585,345 8,691,370Net investment in direct financing leases 600,077 648,234Loans receivable, net 1,672,938 1,068,454Investments in and advances to unconsolidated joint ventures 267,978 272,929Accounts receivable, net of allowance of $10,772 and $18,413, 43,726 33,834respectivelyCash and cash equivalents 112,259 57,562Restricted cash 33,000 35,078Intangible assets, net 389,698 505,507Real estate held for sale, net — 35,737Other assets, net 504,714 501,121Total assets $ 12,209,735 $ 11,849,826Liabilities and equityBank line of credit $ — $ 150,000Term loan 200,000 200,000Bridge loan — 320,000Senior unsecured notes 3,521,325 3,523,513Mortgage and other secured debt 1,834,935 1,641,734Other debt 99,883 102,209Intangible liabilities, net 200,260 232,630Accounts payable and accrued liabilities 309,596 211,715Deferred revenue 85,127 60,185Total liabilities 6,251,126 6,441,986Commitments and contingenciesPreferred stock, $1.00 par value: 50,000,000 shares authorized; 285,173 285,17311,820,000 shares issued and outstanding, liquidation preference of$25.00 per shareCommon stock, $1.00 par value: 750,000,000 shares authorized 293,548 253,601293,548,162 and 253,601,454 shares issued and outstanding,respectivelyAdditional paid-in capital 5,719,400 4,873,727Cumulative dividends in excess of earnings (515,450 ) (130,068 )Accumulated other comprehensive loss (2,134 ) (81,162 )Total stockholders’ equity 5,780,537 5,201,271Joint venture partners 7,529 12,912Non-managing member unitholders 170,543 193,657Total noncontrolling interests 178,072 206,569Total equity 5,958,609 5,407,840Total liabilities and equity $ 12,209,735 $ 11,849,826 HCP, inc.Consolidated Statements of OperationsIn thousands, except per share data Three Months ended Year ended December 31, 2009 December 31, 2009 2008 2009 2008Revenues:Rental and related revenues $ 224,240 $ 225,461 $ 886,495 $ 875,436Tenant recoveries 22,458 20,992 89,582 82,811Income from direct financing leases 12,193 14,503 51,495 58,149Interest income 36,354 32,515 124,146 130,869Investment management fee income 1,179 1,475 5,312 5,923Total revenues 296,424 294,946 1,157,030 1,153,188Costs and expenses:Depreciation and amortization 77,472 81,037 319,583 313,404Operating 46,087 49,271 185,898 193,121General and administrative 16,853 17,835 78,476 73,698Litigation provision — – 101,973 –Impairments 54,485 12,993 75,389 18,276Total costs and expenses 194,897 161,136 761,319 598,499Other income (expense):other income, net 2,704 (4,142 ) 7,940 25,846Interest expense (72,845 ) (83,903 ) (298,897 ) (348,390 )Total other income (expense) (70,141 ) (88,045 ) (290,957 ) (322,544 )Income before income tax (expense) benefit and equity income from 31,386 45,765 104,754 232,145unconsolidated joint venturesIncome tax (expense) benefit (518 ) 521 (1,924 ) (4,248 )Equity income (loss) from unconsolidated joint ventures 1,518 (410 ) 3,511 3,326Income from continuing operations 32,386 45,876 106,341 231,223Discontinued operations:Income (loss) before gain on sales of real estate, net of income 134 (418 ) 2,614 19,746taxesImpairments — (1,033 ) (125 ) (9,175 )Gain on sales of real estate, net of income taxes 2,964 794 37,321 229,189Total discontinued operations 3,098 (657 ) 39,810 239,760Net income 35,484 45,219 146,151 470,983Noncontrolling interests’ and participating securities’ share in (3,805 ) (5,287 ) (15,952 ) (24,485 )earningsPreferred stock dividends (5,282 ) (5,282 ) (21,130 ) (21,130 )Net income applicable to common shares $ 26,397 $ 34,650 $ 109,069 $ 425,368Basic earnings per common share:Continuing operations $ 0.08 $ 0.14 $ 0.25 $ 0.78Discontinued operations 0.01 — 0.15 1.01Net income applicable to common shares $ 0.09 $ 0.14 $ 0.40 $ 1.79Diluted earnings per common share:Continuing operations $ 0.08 $ 0.14 $ 0.25 $ 0.78Discontinued operations 0.01 — 0.15 1.01Net income applicable to common shares $ 0.09 $ 0.14 $ 0.40 $ 1.79Weighted average shares used to calculate earnings per commonshare:Basic 292,748 252,497 274,216 237,301Diluted 293,763 252,673 274,631 237,972 HCP, inc.Consolidated Statements of Cash FlowsIn thousands Year ended December 31, 2009 2008Cash flows from operating activities:Net income $ 146,151 $ 470,983Adjustments to reconcile net income to net cash provided byoperating activities:Depreciation and amortization of real estate, in-place lease andother intangibles:Continuing operations 319,583 313,404Discontinued operations 542 7,832Amortization of above and below market lease intangibles, net (14,780 ) (8,440 )Stock-based compensation 14,388 13,765Amortization of debt premiums, discounts and issuance costs, net 8,328 9,869Straight-line rents (46,688 ) (39,463 )Interest accretion (39,172 ) (27,019 )Deferred rental revenue 12,804 13,931Equity income from unconsolidated joint ventures (3,511 ) (3,326 )Distributions of earnings from unconsolidated joint ventures 7,273 6,745Gain on sales of real estate (37,321 ) (229,189 )Gain on early repayment of debt — (2,396 )Marketable securities (gains) losses, net (8,876 ) 7,230Derivative losses, net 69 4,577Impairments 75,514 27,451Impairments of unconsolidated joint venture investments — 400Changes in:Accounts receivable 4,408 10,681Other assets (6,881 ) (1,315 )Accrued liability for litigation provision 101,973 –Accounts payable and other accrued liabilities (18,170 ) (7,023 )Net cash provided by operating activities 515,634 568,697Cash flows from investing activities:Cashed used in other acquisitions and development of real estate (96,528 ) (155,531 )Lease commissions and tenant and capital improvements (40,702 ) (59,991 )Proceeds from sales of real estate, net 72,272 639,585Contributions to unconsolidated joint ventures (7,975 ) (3,579 )Distributions in excess of earnings from unconsolidated joint 6,869 8,400venturesPurchase of marketable securities — (30,089 )Proceeds from the sale of marketable securities 157,122 10,700Proceeds from the sales of interests in unconsolidated joint ventures — 2,855Principal repayments on loans receivable and direct financing leases 10,952 16,790Investments in loans receivable and direct financing leases, net (165,494 ) (3,162 )Decrease in restricted cash 2,078 1,349Net cash provided by (used in) investing activities (61,406 ) 427,327Cash flows from financing activities:Net repayments under bank line of credit (150,000 ) (801,700 )Repayments of term and bridge loans (320,000 ) (1,030,000 )Borrowings under term loan — 200,000Repayments and repurchases of mortgage debt (234,080 ) (225,316 )Issuance of mortgage debt 1,942 579,557Repayments of senior unsecured notes (7,735 ) (300,000 )Settlement of cash flow hedges, net — (9,658 )Debt issuance costs (860 ) (12,657 )Net proceeds from the issuance of common stock and exercise of 852,912 1,060,538optionsDividends paid on common and preferred stock (517,072 ) (457,643 )Purchase of noncontrolling interests (9,097 ) –Distributions to noncontrolling interests (15,541 ) (37,852 )Net cash used in financing activities (399,531 ) (1,034,731 )Net increase (decrease) in cash and cash equivalents 54,697 (38,707 )Cash and cash equivalents, beginning of year 57,562 96,269Cash and cash equivalents, end of year $ 112,259 $ 57,562 HCP, inc.Funds from Operations InformationIn thousands, except per share data(Unaudited) Three Months ended Year ended December 31, December 31, 2009 2008 (1) 2009 2008 (1)Net income applicable to common shares $ 26,397 $ 34,650 $ 109,069 $ 425,368Depreciation and amortization of real estate, in-place lease andother intangibles:Continuing operations 77,472 81,037 319,583 313,404Discontinued operations 69 447 542 7,832Gain on sales of real estate (2,964 ) (794 ) (37,321 ) (229,189 )Equity (income) loss from unconsolidated joint ventures (1,518 ) 410 (3,511 ) (3,326 )FFO from unconsolidated joint ventures 7,019 5,909 26,023 24,125Noncontrolling interests’ and participating securities’ share in 3,805 5,287 15,952 24,485earningsNoncontrolling interests’ and participating securities’ share in FFO (4,240 ) (5,917 ) (17,873 ) (26,910 )Funds from operations applicable to common shares (2) $ 106,040 $ 121,029 $ 412,464 $ 535,789Distributions on convertible units $ — $ 1,819 $ — $ 12,974Diluted funds from operations applicable to common shares $ 106,040 $ 122,848 $ 412,464 $ 548,763Basic funds from operations per common share (2) $ 0.36 $ 0.48 $ 1.50 $ 2.26Diluted funds from operations per common share (2) $ 0.36 $ 0.48 $ 1.50 $ 2.24Weighted average shares used to calculate diluted funds from 293,763 256,616 274,631 244,650operations per common shareImpact of impairments, litigation provision and merger-relatedcharges:Impairments (3) $ 54,485 $ 14,426 $ 75,514 $ 27,851Litigation provision — – 101,973 –Merger-related charges (4) — 724 — 3,897 $ 54,485 $ 15,150 $ 177,487 $ 31,748Per common share impact of impairments, litigation provision and $ 0.19 $ 0.06 $ 0.64 $ 0.13merger-related charges on diluted funds from operationsDiluted FFO per common share, before giving effect to $ 0.55 $ 0.54 $ 2.14 $ 2.37impairments, litigation provision and merger-related charges (1) Presentation and certain computational changes have been made for the adoption of Accounting Standard Codification 260-10, Earnings Per Share – Overall (formerly FSP EITF 03-6-1, Determining whether Instruments Granted in Share Based Payment Transactions Are Participating Securities), to compute earnings per share and funds from operations per share under the two-class method.(2) The Company believes funds from operations applicable to common shares, diluted funds from operations applicable to common shares and basic and diluted funds from operations per common share are important supplemental measures of operating performance for a real estate investment trust. because the historical cost accounting convention used for real estate assets requires 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 real estate investment trust that uses historical cost accounting for depreciation could be less informative. The term funds from operations (“FFO”) was designed by the real estate investment trust industry to address this issue. FFO is defined as net income applicable to common shares (computed in accordance with U.S. generally accepted accounting principles), excluding gains or losses from real estate dispositions, plus real estate depreciation and amortization, with adjustments for joint ventures. Adjustments for joint ventures are calculated to reflect FFO on the same basis. FFO does not represent cash generated from operating activities in accordance with U.S. generally accepted accounting principles, is not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to net income. The Company’s computation of FFO may not be comparable to FFO reported by other real estate investment trusts that do not define the term in accordance with the current National Association of Real Estate Investment Trusts’ (“NAREIT”) definition or that have a different interpretation of the current NAREIT definition from the Company.(3) In the three months and year ended December 31, 2008, included in other income, net, were impairments of $0.4 million related to two of the Company’s investments in unconsolidated joint ventures.(4) Merger-related charges in the periods ended December 31, 2008 included the amortization of fees associated with our acquisition financing for Slough Estates USA inc. (“SEUSA”), as well as other SEUSA integration costs. HCP, inc.Net Operating Income and same Property Performance Information (1)(2)Dollars In thousands(Unaudited) Three Months ended Year ended December 31, December 31, 2009 2008 2009 2008Net income $ 35,484 $ 45,219 $ 146,151 $ 470,983Interest income (36,354 ) (32,515 ) (124,146 ) (130,869 )Investment management fee income (1,179 ) (1,475 ) (5,312 ) (5,923 )Depreciation and amortization 77,472 81,037 319,583 313,404General and administrative 16,853 17,835 78,476 73,698Litigation provision — – 101,973 –Impairments 54,485 12,993 75,389 18,276Other income, net (2,704 ) 4,142 (7,940 ) (25,846 )Interest expense 72,845 83,903 298,897 348,390Income tax expense (benefit) 518 (521 ) 1,924 4,248Equity income from unconsolidated joint ventures (1,518 ) 410 (3,511 ) (3,326 )Total discontinued operations, net of taxes (3,098 ) 657 (39,810 ) (239,760 )NOI (1) $ 212,804 $ 211,685 $ 841,674 $ 823,275Straight-line rents (7,937 ) (10,818 ) (46,688 ) (39,463 )Interest accretion – DFLs (2,074 ) (2,204 ) (8,057 ) (8,554 )Amortization of above and below market lease intangibles, net (2,123 ) (2,420 ) (14,780 ) (8,440 )Lease termination fees (3,079 ) (60 ) (4,905 ) (18,150 )NOI adjustments related to discontinued operations (7 ) (7 ) 519 322Adjusted NOI (1) $ 197,584 $ 196,176 $ 767,763 $ 748,990Non-SPP adjusted NOI (1) (2) (11,358 ) (14,133 ) (47,983 ) (51,844 )Same property portfolio NOI (1) (2) $ 186,226 $ 182,043 $ 719,780 $ 697,146Adjusted NOI % change – SPP 2.3 % 3.2 % (1) The Company believes Net Operating Income from Continuing Operations (“NOI”) provides investors relevant and useful information because it measures the operating performance of the Company’s real estate at the property level on an unleveraged basis. NOI is used to evaluate the operating performance of real estate properties and SPP. The Company uses NOI and NOI, as adjusted, to make decisions about resource allocations, to assess and compare property level performance, and evaluate SPP. The Company believes that net income is the most directly comparable U.S. generally accepted accounting principles (“GAAP”) measure to NOI. NOI should not be viewed as an alternative measure of operating performance to net income as defined by GAAP since it does not reflect the aforementioned excluded items. Further, NOI may not be comparable to that of other real estate investment trusts, as they may use different methodologies for calculating NOI. NOI is defined as rental revenues, including tenant reimbursements and income from direct financing leases, less property level operating expenses. NOI excludes investment management fee income, depreciation and amortization, general and administrative expenses, litigation provision, impairments, interest and other income, net, interest expense, income tax expense (benefit), equity income from unconsolidated joint ventures and discontinued operations. NOI, as adjusted, is calculated as NOI eliminating the effects of straight-line rents, DFL interest accretion, amortization of above and below market lease intangibles, and lease termination fees. NOI, as adjusted, is sometimes referred as “adjusted NOI” or “cash basis NOI.”(2) The Company believes same property portfolio (“SPP”) is an important component of the Company’s evaluation of the operating performance of its properties. The Company defines its same property portfolio each quarter as those properties that have been in operation throughout the current year and the prior year and that were also in operation at January 1st of the prior year. Newly acquired assets, developments and redevelopments in process and assets classified in discontinued operations are excluded from the same property portfolio. same property statistics allow management to evaluate the NOI of the Company’s real estate portfolio as a consistent population from period to period and eliminates the effects of changes in the composition of the properties on performance measures. SPP NOI excludes certain non-property specific operating expenses that are allocated to each operating segment on a consolidated basis. HCP, inc.Financial Leverage (1)In thousands(Unaudited) December 31, 2009 2008Total gross assets:Consolidated total assets $ 12,209,735 $ 11,849,826Investments in and advances to unconsolidated joint ventures (267,978 ) (272,929 )Accumulated depreciation and amortization 1,263,536 992,549Accumulated depreciation and amortization from assets held for sale — 26,134 Consolidated gross assets $ 13,205,293 $ 12,595,580HCP’s share of the Investment Management Platform (“IMP”) total 545,539 561,397assetsHCP’s share of the IMP accumulated depreciation and amortization 57,889 46,629 Total gross assets $ 13,808,721 $ 13,203,606Total debt:Bank line of credit $ — $ 150,000Bridge and term loans 200,000 520,000Senior unsecured notes 3,521,325 3,523,513Mortgage debt 1,834,935 1,641,734Other debt 99,883 102,209 Consolidated debt $ 5,656,143 $ 5,937,456HCP’s share of the IMP debt 341,389 346,470 Total debt $ 5,997,532 $ 6,283,926 Consolidated debt/Consolidated gross assets 43% 47% Financial Leverage (1) 43% 48% (1) The Company believes that its Financial Leverage is a meaningful supplemental measure of its financial position, which enables both management and investors to analyze its leverage and to compare its leverage to that of other companies. The Company believes that the ratio of consolidated debt to consolidated gross assets is the most directly comparable GAAP measure to Financial Leverage. Financial Leverage represents Total Debt divided by Total Gross Assets. The Company’s computation of its financial leverage may not be identical to the computations of financial leverage reported by other companies. The Company’s share of total debt is not intended to reflect its actual liability or ability to access assets should there be a default under any or all of such loans or a liquidation of the joint ventures. Defined Terms: Consolidated Debt. The carrying amount of bank line of credit, bridge and term loans, senior unsecured notes, mortgage debt and other debt as reported in the Company’s consolidated financial statements. Consolidated Gross Assets. The carrying amount of total assets, excluding investments in and advances to unconsolidated joint ventures, after adding back accumulated depreciation and amortization, as reported in the Company’s consolidated financial statements. Investment Management Platform (“IMP”). Represents the following unconsolidated joint ventures: (i) HCP Life Science, (ii) HCP Ventures II, (iii) HCP Ventures III, LLC and (iv) HCP Ventures IV, LLC. Total Debt. Consolidated Debt plus the Company’s pro rata share of debt from the Investment Management Platform. Total Gross Assets. The Consolidated Gross Assets plus the Company’s pro rata share of total assets from the Investment Management Platform, after adding back accumulated depreciation and amortization. HCP, inc.Projected Future Operations (1)(Unaudited) Full Year 2010 Low HighDiluted earnings per common share $ 0.98 $ 1.04Gain on sales of real estate — –Real estate depreciation and amortization 1.06 1.06Joint venture adjustments 0.07 0.07Diluted FFO per common share $ 2.11 $ 2.17 (1) except as otherwise noted above, the foregoing projections reflect management’s view of current and future market conditions, including assumptions with respect to rental rates, occupancy levels, development activities, property dispositions and the earnings impact of the events referenced in this release. except as otherwise noted, these estimates do not reflect the potential impact of future acquisitions, impairments, the future bankruptcy or insolvency of the Company’s operators, lessees, borrowers or other obligors, the effect of any future restructuring of the Company’s contractual relationships with such entities, realized gains or losses on marketable securities, ineffectiveness related to our cash flow hedges, offerings of debt or equity securities or existing and future litigation matters including the possibility of larger than expected litigation costs and related developments. By definition, FFO does not include real estate-related depreciation and amortization or gains and losses associated with real estate disposition activities, but does include impairments. there can be no assurance that the Company’s actual results will not differ materially from the estimates set forth above. The aforementioned ranges represent management’s best estimate of results based upon the underlying assumptions as of the date of this press release. except as otherwise required by law, management assumes no, and hereby disclaims any, obligation to update any of the foregoing projections as a result of new information or new or future developments. HCP Thomas M. Herzog Executive Vice President and Chief Financial Officer (562) 733-5309

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