LETTER TO SHAREHOLDERS

It’s a funny thing about life.
If you refuse to accept anything
but the best, you very often get it.

SOMERSET MAUGHAN

Dear Fellow Shareholders:

2007 was the most successful year in HCP’s 23-year history:

  • reported FFO growth of 18%
  • investments of $4.7 billion
  • dispositions of $1.0 billion
  • joint venture contributions of $1.7 billion
  • capital raised of $6.3 billion
  • revenue quality mix of 94%

As importantly, 2007 brought to a close the multi-year repositioning of HCP’s investment portfolio. In February, we acquired the Medical City Dallas campus comprised of two acute care hospitals operated by HCA under long-term leases and six medical office buildings. In August, HCP acquired Slough Estates’ California portfolio, which resulted in 20% of our portfolio being invested in best-in-class life science laboratory and office facilities leased to leading pharmaceutical and biotechnology companies such as Amgen, Genentech, and Pfizer. In December, we invested in the mezzanine debt of Manor Care as part of that company’s going-private transaction with The Carlyle Group. This investment is expected to generate attractive current returns for our shareholders from the country’s premier operator of skilled nursing and sub-acute, short-term rehabilitation facilities.

These three transactions bring the highest-quality client relationships in the hospital, life science, and skilled nursing sectors into HCP’s portfolio. In this regard, these investments are identical to our MedCap and CNL acquisitions of recent years that enabled HCP to establish relationships with high-quality clients in the medical office and senior housing sectors.

Each of the three aforementioned 2007 transactions were the result of persistent discussions and negotiations that took place over the course of several years, commencing in 2002 with Manor Care, 2003 with Slough Estates, and 2004 with Medical City Dallas. Our tenacity in “courting” these sector-leading relationships has positioned HCP to create attractive risk adjusted returns for our shareholders well into the next decade.

IS “BIGGER BETTER”?
NOT NECESSARILY,
BUT “QUALITY IS BETTER.”

Often overlooked in the $10 billion volume of recent healthcare real estate acquisitions by HCP is the $2.8 billion of capital that we have recycled through dispositions and joint venture contributions in the last two years. As the “dust settles,” we can now appreciate the substantial strategic remaking of HCP’s portfolio, weighted towards relatively new properties located in high barrier-to-entry markets with minimal exposure to state-based government reimbursement risk (i.e., Medicaid). Our portfolio is diversified across five property types anchored by the highest-quality client relationships in each sector, as illustrated by the chart on the facing page.

In addition to successfully repositioning HCP’s portfolio, 2007 is also notable in that we established “critical mass” with four product initiatives that we expect will further enhance returns for HCP’s shareholders across our property segments. These are:

Investment Management. In January 2007, we contributed 25 senior housing facilities leased to Horizon Bay into a newly formed joint venture with an institutional capital partner. HCP now has in excess of $2 billion of assets under management in institutional joint ventures whereby we function as the managing partner and minority investor in real estate portfolios in the medical office and senior housing sectors. By partnering with high-quality institutional investors, our shareholders can realize fee income and promoted interests in addition to the pro rata share of cash flows from our ownership interests.

Development. As part of our Slough Estates acquisition, HCP now enjoys a meaningful development platform representing 3.3 million square feet of laboratory/office opportunities in the land-constrained San Diego and San Francisco markets. As a result, we expect to earn returns of 150–250 basis points in excess of typical stabilized returns in the life science sector.

DownREIT. Our Medical City Dallas acquisition was structured as a DownREIT, the largest DownREIT transaction ever executed by HCP. We have now closed more than $1 billion of DownREIT transactions structured to include the benefits of HCP equity as a meaningful component of the consideration to the seller.

Mezzanine Debt. HCP has a $1.2 billion mezzanine debt portfolio invested in the leading operators in the acute care hospital, specialty hospital, and skilled nursing sectors. Mezzanine debt is a natural extension of our real estate equity underwriting expertise in these sectors and generates attractive current returns, albeit for shorter time frames, than our traditional equity investment activity.

While the strategic repositioning of our portfolio has received significant attention, the menu of products we can now provide across each of our property segments has also evolved. Our critical mass by product and segment is illustrated by our “5 x 5” Business Model.

During 2007, we welcomed Christine Garvey to our Board of Directors. Christine’s board experience at Hilton Hotels, Union Bank, Catellus, and ProLogis will prove valuable in her making meaningful contributions to HCP in the period ahead. It is also with deep gratitude—and a bit of sadness—that HCP bids farewell to Mary Cirillo-Goldberg, after her four-year tenure as a Director of HCP. We wish Mary and her husband, Jay, all the best in the years to come.

Looking ahead, the current turmoil in the commercial real estate markets creates challenges as well as opportunities. At HCP, we remain focused on long-term value creation for our shareholders and are confident that our multi-property, multi-product offering is a superior business model for the ever-changing healthcare real estate environment in which we operate. We appreciate your continued interest in HCP.

James F. Flaherty III
Chairman and Chief Executive Officer
Long Beach, California
March 2008