FELLOW SHAREHOLDERS:

In an extraordinarily challenged economic and capital market environment, HCP enjoyed extraordinary successes in 2008:

  • HCP raised a total of $2.4 billion in proceeds through:
    • $656 million of asset dispositions
    • $566 million of secured financing at an average interest rate of 6.1%
    • $200 million of unsecured financing at a rate of LIBOR + 200 bp
    • $1.0 billion of equity offerings
  • More important, the significant debt reduction resulted in HCP having its lowest leverage ratio in over three years.
  • Notwithstanding the dilutive nature of our completed asset dispositions and equity raises, HCP reported growth in FFO per share of 5.0% from 2007 to 2008.(1)

In recognition of these accomplishments, HCP was selected to become a member of the prestigious S&P 500 Index, the first healthcare REIT so honored. At year end, HCP ranked as the fifth largest REIT — as measured in equity capitalization — in the United States.

A critical component of our 2008 success was our active asset management program allowing us to make our EXISTING properties more valuable. I would like to highlight three specific examples of our success in this regard:

Sorrento Summit

This 15-acre property was acquired by HCP in 2004 for $40 million. Two existing buildings aggregating 230,000 square feet and a future development site for a third building are located on this San Diego parcel. While 100% occupied by a single tenant at the time of acquisition, the existing rents were significantly under market. By effecting an early termination of the lease to the existing tenant and relocating two new tenants into the property at market rents, we achieved aggregate market rent increases of 76%. These triple net leases are expected to produce revenue growth of 3% annually for the next decade.

Irvine Hospital Campus

As part of the successful restructuring of our Tenet hospital portfolio, we were very pleased to transition the operations of our Irvine Hospital Campus to Hoag Memorial Presbyterian, the premier non-profit hospital operator in Orange County. Located in a high barrier-to-entry location, we believe this property will enjoy a meaningful increase in cash flows as a result of a significant co-investment by Hoag and the related higher quality mix of business for the next 15 years.

Aureus Senior Housing

In December, we completed the transfer of our eleven property Aureus senior housing portfolio to our high-quality operating partner, the Emeritus Corporation. By more efficiently operating this real estate, we expect the operating margin for this portfolio to increase by at least ten percentage points, generating incremental rents to HCP worth an estimated $70 million over the life of the lease.

Each of these transactions generated substantial INCREMENTAL value from EXISTING real estate with little or no additional capital outlay. In the deal environment of 2008, where it was difficult to create shareholder value through acquisitions, HCP’s ability to execute these unique transactions allowed the Company to deleverage its balance sheet while delivering an attractive increase in earnings and nicely position HCP for opportunities in 2009 and beyond.

5x5 Business Model

As we close out the first decade of the 21st century, it is important to revisit the unique strategic position that HCP enjoys:

  • the leading real estate investment trust in the largest industry in the largest economy in the world
  • a high-quality investment portfolio diversified by both property sector and investment product — our “5 x 5” business model
  • partnerships with the premier operating and tenant participants in each of our five property sectors
  • a balance sheet with investment grade ratings of Baa3/BBB/BBB (Moody’s/S&P/Fitch), current liquidity expected to be sufficient to retire scheduled debt maturities until August 2011 and low leverage and secured debt ratios of 48% and 15%, respectively(2), (3)
  • contractual lease expirations in 2009, 2010 and 2011 of just 8.4%, 6.6% and 5.2% of existing revenues, respectively
  • an Investment Management Platform that establishes HCP as the leading manager of healthcare real estate for institutional investors with approximately $2 billion of investments in joint ventures in the senior housing, medical office and life science property sectors, producing fee income and promoted interests for our shareholders

The relative competitive position of HCP has never been stronger with a number of the parties that recently invested in the healthcare real estate space “on the sidelines” for a variety of different reasons at the present time. However, the key demographic that drives demand for our five property types — the aging United States baby boomer — remains in place. Pending — and, necessary — healthcare reform in this country will likely “rearrange the deck chairs” in the healthcare real estate market. HCP’s strong liquidity, partnerships with leading market participants, active asset management program and recent changes in tax law allowing greater flexibility to healthcare REITs position the Company in an especially attractive spot at an especially attractive time.



James F. Flaherty III
Chairman and Chief Executive Officer
Long Beach, California
March 2009



(1)Refer to the section entitled “Reconciliation of Net Income to Funds from Operations (“FFO”)” included in the 2008 Annual Report for the definition of FFO and management’s reasons for using that financial measure.

(2) Leverage Ratio represents Total Debt/Total Gross Assets. Refer to the section entitled “Reconciliation of Consolidated Financial Leverage to Leverage Ratio (“Financial Leverage”)” included in the 2008 Annual Report.

(3) Secured Debt Ratio is calculated as Total Secured Debt/Total Gross Assets. Refer to the section entitled “Reconciliation of Consolidated Secured Debt Ratio to Total Secured Debt Ratio” included in the 2008 Annual Report.