HCP, INC. | 2013 | FY |

(8)   Investments in and Advances to Unconsolidated Joint Ventures

• HCP Ventures II

        On January 14, 2011, the Company acquired its partner's 65% interest in HCP Ventures II, a joint venture that owned 25 senior housing facilities, becoming the sole owner of the portfolio.

        The HCP Ventures II consideration was as follows (in thousands):

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(1)

At closing, the Company recognized a gain of approximately $8 million, included in other income, net, which represents the fair value of the Company's 35% interest in HCP Ventures II in excess of its carrying value as of the acquisition date.

(2)

Represents estimated fees and costs that were expensed and included in general and administrative expenses.

(3)

Represents debt assumption fees that were capitalized as deferred debt costs.

        In accordance with the accounting guidance applicable to acquisitions of the partner's ownership interests that result in consolidation of previously unconsolidated entities, the Company recorded all of the assets and liabilities of HCP Ventures II at their fair value as of the January 14, 2011 acquisition date. In estimating the fair values, relevant market data and valuation techniques were utilized and included, but were not limited to, market data comparables for capitalization and discount rates, credit spreads and property specific cash flows assumptions. The capitalization and discount rates as well as credit spread assumptions utilized in the Company's valuation model were based on information that it believes to be within a reasonable range of current market data.

        The following table summarizes the fair values of the HCP Ventures II assets acquired and liabilities assumed as of the acquisition date of January 14, 2011 (in thousands):

        The related assets, liabilities and results of operations of HCP Ventures II are included in the consolidated financial statements from the date of acquisition, January 14, 2011.

• Summary of Unconsolidated Joint Venture Information

        The Company owns interests in the following entities that are accounted for under the equity method at December 31, 2013 (dollars in thousands):

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(1)

These entities are not consolidated because the Company does not control, through voting rights or other means, the joint ventures. See Note 2 regarding the Company's accounting policies related to principles of consolidation.

(2)

Represents the carrying value of the Company's investment in the unconsolidated joint venture. See Note 2 regarding the Company's accounting policy for joint venture interests. At December 31, 2013, includes a senior housing partnership for which the Company has a 72% ownership with an investment balance of zero.

(3)

Includes three unconsolidated joint ventures between the Company and an institutional capital partner for which the Company is the managing member. HCP Life Science includes the following 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%).

        Summarized combined financial information for the Company's unconsolidated joint ventures follows (in thousands):

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(1)

The combined basis difference of the Company's investments in these joint ventures of $60 million, as of December 31, 2013, is primarily attributable to real estate, capital lease obligations, deferred tax assets, goodwill and lease-related net intangibles.

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(1)

Includes the financial information of HCP Ventures II, up to the date in which it was consolidated on January 14, 2011.

(2)

Beginning April 7, 2011, includes the financial information of HCR ManorCare, in which the Company acquired an interest for $95 million that represented a 9.9% equity interest at closing.

(3)

The combined net loss for the year ended December 31, 2011 includes impairments, net of the related tax benefit, of $865 million related to HCR ManorCare's goodwill and intangible assets. The impairments at the operating entity were the result of reduced cash flows primarily caused by the reimbursement reductions for the Medicare skilled nursing facility Prospective Payment System announced by the Centers for Medicare & Medicaid Services effective October 1, 2011. The combined net loss for the year ended December 31, 2013 includes tax expense of $400 million related to recording of a valuation allowance which was necessary to reduce the carrying value of HCR ManorCare's deferred tax assets to an amount that is more likely than not to be realized as determined by HCR ManorCare's management. HCR ManorCare's goodwill, intangible assets and deferred tax assets were not previously considered in the Company's initial investments in the operations of HCR ManorCare; therefore, the related impairments and valuation allowance against the carrying value of the deferred tax assets did not impact the Company's recorded investment. As such, HCR ManorCare's impairments during the year ended December 31, 2011 and tax expense related to the valuation allowance during the year ended December 31, 2013 did not have an impact on the Company's share of earnings from or its investment in HCR ManorCare.

(4)

The Company's joint venture interest in HCR ManorCare is accounted for using the equity method and results in an ongoing reduction of DFL income, proportional to HCP's ownership in HCR ManorCare. As required to eliminate intercompany profit, the Company recharacterized $62.1 million, $59.4 million and $42.2 million of DFL income to the Company's share of earnings from HCR ManorCare (equity income) for the years ended December 31, 2013, 2012 and 2011, respectively.