HCP delivered a very strong result in 2010 with portfolio same property performance of +4.8%¹ and a total shareholder return of 28%², allowing your Company to raise its annual dividend for 2011 by 3.2% to $1.92 per share. This represents the 26th consecutive year that HCP has increased its dividend.

Of greater significance are the actions HCP took during 2010 which help set the stage for a continuation of this enviable track record beyond 2011:

The $6.1 billion acquisition of the HCR ManorCare post-acute real estate portfolio owned by the private equity firm The Carlyle Group. As part of this transaction, HCP reinvested the $1.72 billion in HCR ManorCare debt we had acquired from major commercial banks during 2007-2009, realizing a 12.5% annual return on these debt investments.
The transition of 31 Sunrise Senior Living managed properties to Emeritus under attractive, long-term triple net master leases. As part of this transaction, Sunrise and HCP agreed to terminate the litigation between the two organizations.
The successful exit from most of the debt investments we opportunistically purchased in the throes of the Great Recession. With the significant improvement in the capital markets last year, we realized substantial gains for our shareholders.
The buyout of the 65% interest owned by the institutional partner in our 25-property senior housing joint venture. HCP now owns 100% of this well-positioned independent living portfolio.
Three separate public offerings raising $2.5 billion of equity which delevered HCP’s balance sheet. In recognition of these efforts, two of the rating agencies — Moody’s and Fitch — raised their credit profile of your Company.

So far, so good, right? It gets better: traditional investment theory holds that higher returning investments involve higher levels of risk. The inverse of this philosophy is also accepted investment theory, i.e., with lower risk, investors should be prepared to accept lower returns. Now, consider the following:

None of the $7.2 billion in assets acquired or placed under contract by HCP during 2010 involved competitive, “auction” processes. Each of our transactions was a negotiated, “off market” deal.
The “left hand side” of our balance sheet is now predominantly comprised of properties owned under long-term, triple net obligations — with minimal near-term expirations — leased to such healthcare leaders as Amgen, Genentech/Roche, Takeda Pharmaceuticals, HCA, HCR ManorCare, Brookdale and Emeritus. You will find NO concentrations of operating businesses and development portfolios in HCP’s portfolio.
The “right hand side” of our balance sheet is conservatively levered at 40% debt, 60% equity with only a small amount of secured debt encumbering our real estate, and enjoys the highest credit rating of any healthcare REIT.

Returning to “conventional investment wisdom,” you would expect that an S&P 500, $22 billion total market capitalization³ enterprise possessing not only the most conservative “left hand side” of the balance sheet but the most conservative “right hand side” of the balance sheet would realize a lower return for its lower risk, right? HCP’s sector-leading results for 2010 debunk this traditional investment perspective (see “2010 HCP Total Shareholder Return” below).

An important result of the accretive, well-capitalized investments made during 2010 is the reduction in HCP’s dividend payout ratio. This important metric, in combination with HCP’s conservative balance sheet, and the continued strong demand for healthcare real estate driven by the aging U.S. baby boomer, should position your Company for continued dividend increases in the future.

I want to acknowledge two outstanding contributions to HCP. First, after more than 25 years as a Director of HCP — in fact, one of the Company’s original Board members a quarter century ago — Max Messmer has announced his decision not to stand for reelection to the Board. Max’s counsel and insight have been invaluable and will be missed. We wish Max and his family all the best in the years ahead. Finally, 2010 was an exceptionally active year for our HCP colleagues. We reviewed several transactions and I am as proud of the deals we did not do as those we did. An amazing effort was put forth by the HCP team involving tremendous personal sacrifice, and for that we are deeply grateful!

Thank you for your continued interest and support of HCP.

James F. Flaherty III
Chairman and Chief Executive Officer
Long Beach, California
March 2011

⁽¹⁾ For additional information regarding Net Operating Income (NOI) and Same Property Performance (SPP), refer to the section entitled “Reconciliation of Net Operating Income and Same Property Performance Information” included elsewhere in this report.

⁽²⁾ Assumes re-investment of dividends.

⁽³⁾ Total Market Capitalization represents Total Debt plus Consolidated Market Equity as of December 31, 2010, as adjusted for the January 2011 $2.4 billion senior unsecured note offering and the assumed $852 million of HCP’s common stock to be issued in connection with the HCR ManorCare acquisition. Total Debt represents HCP’s consolidated debt at book value plus its pro rata share of debt from the Investment Management Platform. Consolidated Market Equity represents the aggregate market value of HCP’s outstanding shares of common stock, convertible partnership units (adjusted for stock splits) and preferred stock.

⁽⁴⁾ Assets Under Management represents the historical cost of real estate owned by HCP, the carrying amount of debt investments and 100% of the cost of real estate owned by the Company’s Investment Management Platform, excluding assets under development, redevelopment and land held for future development.

⁽⁵⁾ Investment Management Platform represents the following unconsolidated joint ventures: (i) HCP Ventures II; (ii) HCP Ventures III, LLC; (iii) HCP Ventures IV, LLC; and (iv) the HCP Life Science ventures.

⁽⁶⁾ For additional information regarding FFO, refer to the section entitled “Reconciliation of Net Income to Funds from Operations (FFO)” included elsewhere in this report.

⁽⁷⁾ As of March 2, 2004, each stockholder received one additional share of common stock for each share they owned, resulting from a 2-for-1 stock split announced by HCP on January 2, 2004. The stock split has been reflected in all periods presented. In addition, figures for 2003 include the impact of preferred redemption charges of $0.15 per diluted share of common stock.

⁽⁸⁾ Prior to impairments, recoveries, merger-related items and litigation provision (FFO as adjusted). For additional information regarding FFO as adjusted, refer to the section entitled “Reconciliation of Net Income to Funds from Operations (FFO)” included elsewhere in this report.

⁽⁹⁾ FFO Payout Ratio represents dividends paid per common share divided by diluted FFO as adjusted per common share for a given period. HCP believes that the FFO Payout Ratio provides investors relevant and useful information because it measures the portion of FFO being declared as dividends to common stockholders. Refer to the section entitled “Reconciliation of Net Income to Funds from Operations (FFO)” included elsewhere in this report.