0001104659-07-070869.txt : 20070924 0001104659-07-070869.hdr.sgml : 20070924 20070924163040 ACCESSION NUMBER: 0001104659-07-070869 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20070806 ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20070924 DATE AS OF CHANGE: 20070924 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HCP, INC. CENTRAL INDEX KEY: 0000765880 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 330091377 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-08895 FILM NUMBER: 071131783 BUSINESS ADDRESS: STREET 1: 3760 KILROY AIRPORT WAY STREET 2: SUITE 300 CITY: LONG BEACH STATE: CA ZIP: 90806 BUSINESS PHONE: 562-733-5100 MAIL ADDRESS: STREET 1: 3760 KILROY AIRPORT WAY STREET 2: SUITE 300 CITY: LONG BEACH STATE: CA ZIP: 90806 FORMER COMPANY: FORMER CONFORMED NAME: HEALTH CARE PROPERTY INVESTORS INC DATE OF NAME CHANGE: 19920703 8-K/A 1 a07-24026_28ka.htm 8-K/A

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 8-K/A

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): August 6, 2007

HCP, INC.
(Exact Name of Registrant as Specified in its Charter)

Maryland	001-08895	33-0091377
(State or Other Jurisdiction of	(Commission File Number)	(I.R.S. Employer Identification No.)
Incorporation or Organization)

3760 Kilroy Airport Way, Suite 300 Long Beach, California		90806
(Address of Principal Executive Offices)		(Zip Code)

(562) 733-5100

(Registrant’s Telephone Number, Including Area Code)

Not applicable
(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 240.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Explanatory Note

This Current Report on Form 8-K/A (this “Amendment”) is being filed to include disclosures that supplement those disclosures made by HCP, Inc., a Maryland corporation (formerly known as Health Care Property Investors, Inc. until a name change that took effect on September 7, 2007) (“HCP” or the “Company”), in its Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on August 6, 2007 (the “Form 8-K”), as set forth below.

The financial statements and pro forma financial information described in Item 9.01 below should be read in conjunction with the Form 8-K and this Amendment.

Item 9.01 Financial Statements and Exhibits.

As previously announced, on August 1, 2007, HCP completed the acquisition of Slough Estates USA Inc. (“SEUSA”), pursuant to that certain Share Purchase Agreement, dated as of June 3, 2007, by and between HCP and SEGRO plc (the “Share Purchase Agreement”). Specifically, this Amendment provides: (1) SEUSA’s Unaudited Consolidated Financial Statements as of June 30, 2007, and for the six months ended June 30, 2007 and 2006 (Exhibit 99.1); (2) SEUSA’s Consolidated Financial Statements as of December 31, 2006, and for the year ended December 31, 2006 (Exhibit 99.2); and (3) HCP’s Unaudited Pro Forma Condensed Consolidated Financial Statements as of June 30, 2007, and for the year ended December 31, 2006 and the six months ended June 30, 2007 (Exhibit 99.3). The information in Exhibits 99.1 and 99.2 were provided by SEUSA. The information in Exhibits 99.1, 99.2 and 99.3 is incorporated herein by reference.

(a) Financial Statements of Businesses Acquired.

The following financial statements (including any accompanying notes) are attached hereto and incorporated herein by this reference:

SEUSA’s Unaudited Consolidated Financial Statements as of June 30, 2007, and for the six months ended June 30, 2007 and 2006 (Exhibit 99.1)

SEUSA’s Consolidated Financial Statements as of December 31, 2006, and for the year ended December 31, 2006 (Exhibit 99.2)

(b) Pro Forma Financial Information. The following pro forma financial statements (including any accompanying notes) are attached hereto and incorporated herein by this reference:

HCP’s Unaudited Pro Forma Condensed Consolidated Financial Statements as of June 30, 2007, and for the year ended December 31, 2006 and the six months ended June 30, 2007 (attached hereto as Exhibit 99.3)

(d) Exhibits. The following exhibits are being incorporated by reference herein or filed herewith:

23.1 Consent of SEUSA’s Independent Accountants — PricewaterhouseCoopers LLP

99.1 SEUSA’s Unaudited Consolidated Financial Statements as of June 30, 2007, and for the six months ended June 30, 2007 and 2006

99.2 SEUSA’s Consolidated Financial Statements as of December 31, 2006, and for the year ended December 31, 2006

99.3 HCP’s Unaudited Pro Forma Condensed Consolidated Financial Statements as of June 30, 2007, and for the year ended December 31, 2006 and the six months ended June 30, 2007

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

			HCP, INC.
			(Registrant)


		By:	/s/ Edward J. Henning
Date:	September 24, 2007		Edward J. Henning
			Executive Vice President, General Counsel and Corporate Secretary

EXHIBIT INDEX

Attached as exhibits to this form are the documents listed below:

	23.1		Consent of SEUSA’s Independent Accountants — PricewaterhouseCoopers LLP

	99.1		SEUSA’s Unaudited Consolidated Financial Statements as of June 30, 2007, and for the six months ended June 30, 2007 and 2006

	99.2		SEUSA’s Consolidated Financial Statements as of December 31, 2006, and for the year ended December 31, 2006

	99.3		HCP’s Unaudited Pro Forma Condensed Consolidated Financial Statements as of June 30, 2007, and for the year ended December 31, 2006 and the six months ended June 30, 2007

EX-23.1 2 a07-24026_2ex23d1.htm EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-28483, Form S-8 No. 333-90353, Form S-8 No. 333-54786, Form S-8 No. 333-54784, Form S-8 No. 333-108838, Form S-8 No. 135679, Form S-3 No. 333-99067, Form S-3 No. 333-99063, Form S-3 No. 333-95487, Form S-3 No. 333-111174, Form S-3 No. 333-110939, Form S-3 No. 333-86654, Form S-3 No. 333-122456, Form S-3 No. 333-119469, Form S-3 No. 333-124922, Form S-3 No. 333-136344, Form S-3 No. 333-137225, and Form S-4 No. 333-135569) of HCP, Inc. and in the related Prospectus and Prospectus Supplements of our report dated April 27, 2007 relating to the financial statements of Slough Estates USA Inc., which appears in the Current Report on Form 8-K/A of HCP, Inc. dated September 24, 2007.

/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
September 24, 2007

EX-99.1 3 a07-24026_2ex99d1.htm EX-99.1

Exhibit 99.1

Slough Estates USA Inc. and Subsidiaries

Consolidated Financial Statements (Unaudited)

June 30, 2007 and 2006

Slough Estates USA Inc. and Subsidiaries

Index

		Page(s)

Consolidated Financial Statements (Unaudited)

Consolidated Balance Sheets at June 30, 2007 and December 31, 2006		1

Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2007 and 2006		2

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006		3

Notes to Consolidated Financial Statements		4-17

Slough Estates USA Inc. and Subsidiaries

Consolidated Balance Sheets

June 30, 2007 and December 31, 2006

	June 30,			December 31,
(in thousands of dollars)	2007			2006
	(Unaudited)
Assets
Investments in real estate
Rental property - land	$	424,447		$	379,881
Rental property - buildings and improvements net of accumulated depreciation of $182,694 and $157,567 at June 30, 2007 and December 31, 2006, respectively	754,738			681,593
Construction in progress - rental property	213,493			184,600

Net investment in real estate	1,392,678			1,246,074

Investment in and advances to real estate projects (Note 4)	22,309			9,792
Other investments (Note 5)	33,824			34,191
Intangible assets, net of accumulated amortization of $15,338 and $12,788 at June 30, 2007 and December 31, 2006, respectively	20,117			22,861
Deferred costs, net of accumulated amortization of $5,518 and $4,397 at June 30, 2007 and December 31, 2006, respectively	23,864			20,225

Total investments	1,492,792			1,333,143

Other assets
Cash and cash equivalents	16,577			10,272
Restricted cash	705			696
Investment in equity securities (Note 7)	1,994			2,089
Derivative instruments (Note 8)	9,031			7,136
Rents receivable, net of allowance for doubtful accounts of $1,116 and $755 at June 30, 2007 and December 31, 2006, respectively	1,035			2,177
Deferred rents receivable	61,814			56,941
Income tax receivable	10,992			6,805
Other accounts receivable	1,628			3,636
Other assets	3,489			10,347

Total other assets	107,265			100,099

Total assets	$	1,600,057		$	1,433,242

Liabilities and Stockholder’s Equity
Loans payable, notes payable and accrued interest
Due to SEGRO (Note 9)	$	210,000		$	30,000
Lines of credit (Note 9)	550,000			556,000
Notes payable (Note 9)	383,608			401,826
Mortgage notes payable (Note 9)	52,291			54,910
Other long-term liabilities (Note 9)	850			938
Accrued interest payable	38,499			3,890

Total loans payable, notes payable and accrued interest	1,235,248			1,047,564

Other liabilities
Net deferred tax liability	46,527			59,889
Accrued real estate taxes	996			—
Deferred revenue	15,741			9,031
Intangible liabilities, net of accumulated amortization of $7,204 and $5,468 at June 30, 2007 and December 31, 2006, respectively	6,713			8,450
Accounts payable and other accrued liabilities	40,515			35,621

Total other liabilities	110,492			112,991

Total liabilities	1,345,740			1,160,555

Minority interest	—			(178		)

Stockholder’s equity
Preferred stock (Note 12)	185,000			185,000
Common stock (Note 12)	1			1
Contributed capital	33,413			32,953
Retained earnings	37,485			56,446
Accumulated other comprehensive loss	(1,582		)	(1,535		)

Total stockholder’s equity	254,317			272,865

Total liabilities and stockholder’s equity	$	1,600,057		$	1,433,242

See notes to the interim consolidated financial statements.

Slough Estates USA Inc. and Subsidiaries

Consolidated Statements of Operations and Comprehensive Income (Loss)

Six Months Ended June 30, 2007 and 2006 (Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands of dollars)	2007			2006			2007			2006

Revenues
Rental
Minimum rents	$	31,684		$	25,620		$	62,407		$	49,616
Deferred rents	(237		)	495			(2,254		)	2,044
Tenant recoveries	7,887			4,560			16,128			8,772
Interest income	172			179			334			257
Other income	134			99			542			137
Total revenues	39,640			30,953			77,157			60,826

Expenses
Interest	44,865			7,108			58,335			12,702
Real estate taxes	3,941			2,095			7,367			5,051
Property operations	5,513			3,206			10,748			5,758
General and administrative	6,864			3,175			8,968			5,313
Depreciation	13,088			9,705			25,152			19,294
Amortization	1,850			1,512			3,865			3,030
Net realized gain on derivatives (Notes 7 and 8)	(1,992		)	(1,032		)	(1,846		)	(930		)
Foreign currency exchange loss	1,919			908			2,094			879
Total expenses	76,048			26,677			114,683			51,097
Income (loss) before equity in net income of real estate and other investments, income taxes, minority interest and discontinued operations	(36,408		)	4,276			(37,526		)	9,729
Equity in net income of real estate and other investments (Note 6)	704			6,271			4,668			6,520
Income (loss) before income taxes, minority interest and discontinued operations	(35,704		)	10,547			(32,858		)	16,249
Income tax (benefit) expense - continuing operations	(13,918		)	3,015			(12,997		)	4,583
Income (loss) before minority interest and discontinued operations	(21,786		)	7,532			(19,861		)	11,666
Minority interest participation in income (loss)	—			(443		)	(338		)	(889		)
Income (loss) from continuing operations	(21,786		)	7,089			(20,199		)	10,777
Discontinued operations (Note 3)
Income from operations	—			3,477			—			4,386
Income tax expense	—			1,376			—			1,735
Net income from discontinued operations	—			2,101			—			2,651
Net income (loss)	(21,786		)	9,190			(20,199		)	13,428
Other comprehensive income (loss)
Unrealized holding gains (losses) on equity securities	18			(302		)	(47		)	89
Comprehensive income (loss)	$	(21,768	)	$	8,888		$	(20,246	)	$	13,517

See notes to the interim consolidated financial statements.

Slough Estates USA Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Six Months Ended June 30, 2007 and 2006 (Unaudited)

(in thousands of dollars)	2007			2006

Cash flows from operating activities
Net income (loss)	$	(20,199	)	$	13,428
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation and amortization expense	29,017			22,324
Amortization of above/below market rents	(1,584		)	(1,619		)
Amortization of discount on notes receivable*	—			(1,568		)
Share awards granted to SEUSA executives	460			265
Net realized gain on derivatives	(1,846		)	(930		)
Foreign currency exchange loss	2,094			879
Amortization of fair value of warrants and stocks received	(418		)	—
Amortization of loan premium	(312		)	(263		)
Distribution from investment in and advance to real estate projects	723			1,114
Equity in net income of real estate and other investments	(4,668		)	(5,880		)
Loss (gain) on sale of equity securities, real estate and other investments*	—			(3,025		)
Minority interest participation in income*	338			889
Deferred rents*	2,254			(2,044		)
Changes in operating assets and liabilities:
Change in restricted cash	(9		)	—
Rents receivable	1,142			508
Other accounts receivable*	2,008			1,422
Current and deferred income tax liability	(16,311		)	793
Other assets*	6,828			864
Accounts payable and other accrued liabilities*	11,814			(4,786		)
Accrued real estate taxes*	996			—
Accrued interest payable	34,609			(235		)
Net cash flows provided by operating activities	46,936			22,136

Cash flows from investing activities
Payments for rental properties and construction in progress*	(145,470		)	(89,132		)
Deposits for rental properties	—			300
Proceeds from sale of real estate, equity securities and other investments*	5,208			11,830
Buyout of minority interest in unconsolidated real estate investments	(33,500		)	—
Contributions to investment in and advances to real estate projects	(12,648		)	—
Contributions to other investments	(765		)	(4,231		)
Payment of leasing commissions	(4,000		)	(3,692		)
Repayments on note receivable*	—			35,341
Net cash flows used in investing activities	(191,175		)	(49,584		)

Cash flows from financing activities
Principal repayments of notes payable	(20,000		)	—
Principal repayments of mortgage notes payable	(2,619		)	(2,446		)
Principal payments of other long-term liabilities*	(88		)	(83		)
Proceeds of loans from SEGRO	680,000			540,000
Repayment of loans from SEGRO	(500,000		)	(510,000		)
Proceeds from lines of credit	791,324			108,783
Repayment of lines of credit	(797,324		)	(108,783		)
Distributions to minority interest	(749		)	(881		)
Net cash flows provided by financing activities	150,544			26,590

Net (decrease) increase in cash and cash equivalents	6,305			(858		)

Cash and cash equivalents
Beginning of period	10,272			6,149
End of period	$	16,577		$	5,291

* includes discontinued operations

Non-cash investing activities
Change in accounts payable on construction in progress	$	(6,920	)	$	(1,752	)
Write-off of customer relationship value	104			—

See notes to the interim consolidated financial statements.

Slough Estates USA Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

(in thousands of dollars)

1. Summary of Operations and Significant Accounting Policies

Consolidation

The unaudited interim consolidated financial statements include the accounts of Slough Estates USA Inc. and its majority owned subsidiaries (“SEUSA” or the “Company”) for the three and six month periods ended June 30, 2007 and 2006.

SEUSA is an indirect wholly-owned subsidiary of SEGRO, formerly called Slough Estates plc, through its direct parent company, Slough Trading Estates Limited (“STEL”). SEUSA was organized for the purpose of developing, owning, and renting commercial, industrial, office and residential real estate. SEUSA also has equity interests in partnerships that own and operate real estate projects and invest in equity securities of various affiliated and non-affiliated entities.

Minority interest represents participation of unrelated third party interests held in subsidiaries included in the SEUSA consolidated financial statements.

All significant intercompany transactions and balances have been eliminated upon consolidation.

These unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America applicable to interim financial statements and reflect all adjustments (consisting of normal recurring items) that management believes are necessary for a fair presentation of the results of the interim operations. These unaudited interim consolidated financial statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Company’s audited financial statements for the year ended December 31, 2006. Results of operations for the interim periods are not necessarily indicative of annual results of operations. The consolidated balance sheet at December 31, 2006 was derived from the Company’s audited annual consolidated financial statements and does not include all the disclosures required by accounting principles generally accepted in the United States of America.

Certain reclassifications have been made for comparative financial statement presentation.

Accounting Policies

New Accounting Pronouncements

In June 2005, the Financial Accounting Standards Board (“FASB”) ratified the consensus reached by the Emerging Issues Task Force (“EITF”) regarding EITF 04-5, “Investor’s Accounting for an Investment in a Limited Partnership When the Investor is the Sole General Partner and the Limited Partners Have Certain Rights.” The conclusion provides a framework for addressing the question of when a sole general partner, as defined in EITF 04-5, should consolidate a limited partnership. The EITF has concluded that the general partner of a limited partnership should consolidate a limited partnership unless (1) the limited partners possess substantive kick-out rights as defined in paragraph B20 of FIN 46R, or (2) the limited partners possess substantive participating rights similar to the rights described in EITF 96-16, “Investor’s Accounting for an Investee When the Investor has a Majority of the Voting Interest by the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights.” In addition, the EITF concluded that the guidance should be expanded to include all limited partnerships, including those with multiple general partners. The provisions of EITF 04-5 are effective after June 29, 2005 for general partners of all new limited partnerships formed. For existing limited partnerships for which the partnership agreements are modified and for general partners in all other limited partnerships, the provisions of EITF 04-5 are

effective for fiscal years beginning after December 15, 2005. The adoption of this interpretation did not have an impact on the Company’s consolidated financial statements.

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on description, classification, interest and penalties, accounting in interim periods, discourse and transition. FIN 48 became effective on January 1, 2007. See Note 15 for a description of the impact of adoption.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB 123 (revised), “Accounting for Stock-Based Compensation,” using the modified prospective application method for stock compensation awards. The Company has previously accounted for its stock based employee compensation plans under the recognition and measurement principles of the Accounting Practices Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. See Note 13 for a description of the impact of adoption.

In June 2007, the FASB cleared for issuance the Statement of Position 07-1, “Clarification of the Scope of the Audit and Accounting Guide, Investment Companies, and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies” (“SOP 07-1”). SOP 07-1 addresses whether the accounting principles of the Audit and Accounting Guide, Investment Companies, may be applied to an entity by clarifying the definition of an investment company and whether those accounting principles may be retained by a parent company in consolidation or by an investor in the application of the equity method of accounting. SOP 07-1 applies to periods beginning on or after December 15, 2007. The Company is currently evaluating the impact that SOP 07-1 will have on its financial statements.

Estimates and Assumptions

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates used in the preparation of the consolidated financial statements.

Investments in Real Estate

The Company accounts for all property acquisitions in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations.” The Company allocates the purchase price of an acquired property based on the estimated fair value of the assets acquired, which may include land, land improvements, building, tenant improvements and certain intangible assets. The Company allocates the purchase price to the fair value of the tangible assets of an acquired property determined by estimating the value of the property as if it were vacant. As these allocations are based upon management estimates, the actual impact of depreciation and amortization expense over future periods may differ from these estimates.

the associated lease. The value of leasing costs for the in-place leases and the tenant relationship intangibles are amortized to expense over the anticipated term of the lease and tenant relationship, respectively. If a tenant terminates its lease early, the unamortized portion of the tenant improvements, above and below market leases, leasing costs and the tenant relationship values are charged to expense.

The Company assesses its properties for possible impairment whenever indications of impairment exist in accordance with the requirements of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets.” In the event that an impairment in value is indicated and the carrying amount of the real estate asset will not be recovered from future cash flows, a provision is recorded to reduce the carrying basis of the property to its estimated fair value. The estimated fair value of the Company’s property is determined by using independent real estate appraiser reports. These reports use industry standard methods that include discounted cash flow and/or direct capitalization analysis.

Completed buildings are depreciated over their useful lives (ranging from 30 to 40 years), using the straight-line method. Building improvements and land improvements are depreciated over their useful lives of 15 years, using the straight-line method. The cost of property and equipment retired or sold and the related accumulated depreciation or amortization is removed from the accounts and any related gain or loss is recognized. Tenant improvements are amortized over the lives of the related leases.

Interest, real estate taxes, and other expenses incurred during the construction periods are capitalized as part of the depreciable cost of each project. Real estate taxes and other expenses applicable to land and improvements held for future development are capitalized as a cost of the property once development commences.

Repairs and maintenance are expensed as incurred.

Revenue Recognition

Rental revenue is recognized on a straight-line basis over the terms of the related leases. Differences between rental income earned and amounts due according to the respective lease agreements are credited or charged, as applicable, to deferred rents receivable. Additional rents from expense reimbursements for common area maintenance, real estate taxes, and certain other expenses are recognized in the period in which the related expenses are incurred.

Amounts received currently, but recognized as income in future periods, are included in deferred revenue in the consolidated balance sheets. Recognition of rental income commences at the date the property is ready for its intended use and the tenant takes possession of or controls the physical use of the property.

Deferred Costs

Leasing commissions are capitalized and amortized on a straight-line basis over the initial terms of the respective leases. Generally, upon the occurrence of a lease amendment or early renewal, the remaining book balance of leasing commissions attributed to the previous lease are amortized over the remaining term of the amended or renewed lease to the extent that the tenant still occupies the space to which the leasing commission relates.

Costs incurred in connection with the execution of mortgages and other notes payable are amortized over the terms of the related notes.

Income Taxes

Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial statement balance amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable earnings. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense includes taxes payable for the period and the change during the period in deferred tax assets and liabilities.

Investment in and Advances to Real Estate Projects and Other Investments

The Company accounts for its investments in unconsolidated real estate joint ventures, which it does not control, using the equity and cost method of accounting as appropriate. Under the equity method of accounting, the Company records its initial interest at cost and adjusts its investment accounts for additional capital contributions, distributions and its share of income or loss. Under the cost method of accounting, the Company records its initial interest at cost and adjusts its investment accounts for additional capital contributions and distributions. All dividend income is reflected in the consolidated statement of operations in the period it is received.

Any amounts paid to acquire investments in real estate projects and other investments, which are accounted for under the equity method of accounting, which are in excess of SEUSA’s share of the net assets of that entity, are accounted for in accordance with the provisions of SFAS 141.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less, when purchased, to be cash equivalents. The carrying amount approximates fair value due to the short maturity of these investments.

Restricted Cash

Restricted cash balances relate to tenant deposits and other cash balances where access to the funds is legally restricted.

Derivative Instruments and Hedging Activities

SEUSA applies the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 137 and SFAS No. 138 (collectively, “SFAS No. 133”) to all derivatives. Derivatives are recognized and measured at fair value. If the derivative does not qualify as a hedge or is not designated as a hedge, the gain or loss on the derivative is recognized currently in earnings.

The Company’s derivatives include investments in warrants to purchase shares of common stock in various public companies. Based on the terms of the warrant agreements, the warrants meet the definition of a derivative and accordingly must be marked to fair value with the impact reflected in the consolidated statement of operations.

The Company’s derivatives also include a cross currency swap agreement (the “swap agreement”). The swap agreement is intended to limit the Company’s exposure to currency fluctuations related to interest payments payable in Canadian dollars due on an outstanding note payable. Under the swap agreement, payments and receipts are recognized as adjustments to interest expense. The swap agreement is recognized at fair value on the consolidated balance sheet, with changes in fair value being reported through the statement of operations.

Discontinued Operations

SFAS No. 144 addresses financial accounting and reporting for the disposal of long lived assets. SFAS No. 144 requires that the results of operations and gains or losses of a component of an entity that either has been disposed or is classified as held for sale shall be presented in discontinued operations if both of the following criteria are met: (a) the operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of the Company as a result of the disposal transactions and (b) the Company will not have any significant involvement in the operations of the component after the disposal transactions. SFAS No. 144 also requires prior period results of operations for these components to be restated and presented in discontinued operations.

Investments in Marketable Securities

At June 30, 2007 and December 31, 2006, the Company owned stock of certain publicly traded companies. The Company accounts for these shares in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” These securities are carried at fair value with the changes in fair value recorded as unrealized gains and losses on marketable equity securities in accumulated other comprehensive income. On sale of the stock, the unrealized gains or losses related to the shares included in accumulated other comprehensive income, are recognized currently in the consolidated statement of operations and comprehensive income (loss).

Foreign Currency

The Company has an outstanding note payable denominated in Canadian dollars. In accordance with SFAS No. 52, “Foreign Currency Translation,” the gain or loss associated with remeasuring the foreign currency transaction into the US dollar is recognized currently in earnings.

Significant Customers

SEUSA leases a significant portion of its properties to biotech companies in California.

At June 30, 2007, approximately 79.8% (2006: 79.0%) of SEUSA’s real estate portfolio is concentrated in the San Francisco market and approximately 20.2% (2006: 21.0%) is concentrated in the San Diego market.

Stock Based Compensation

Certain officers of SEUSA are awarded stock and stock options in SEGRO under various stock compensation plans. The stock issued to the officers of SEUSA is accounted for within the Company’s consolidated financial statements based on the fair value of the stock, with compensation expense being recognized in the consolidated statements of operations over the performance period.

2. Acquisitions of Investments in Real Estate

On January 10, 2007, SEUSA purchased a land parcel with an existing building for $1.0 million and on January 31, 2007, a vacant land parcel for $36.8 million.

On February 15, 2007, SEUSA purchased the remaining 10% minority interest in Britannia Pointe Grand LP and Britannia Gateway II, LP for $28.5 million and $5.0 million, respectively.

3. Discontinued Operations

On April 27, 2005, the Company sold its Quail West Ltd. operations located in Naples, Florida for $63.5 million. The sale resulted in a loss of $3.7 million. In connection with the sale, the buyer issued a note receivable to SEUSA in the amount of $41.5 million. The note is non-interest bearing, matures on April 27, 2009 and is subject to annual principal repayments. Under the terms of the agreement, the buyer must accelerate these repayments to the extent that they sell land lots at the development, at $225 per lot sold. The note is collateralized against certain lots at the developments. The effective interest rate on the note is 12%. Amortization of the discount through June 30, 2006 was $1,568. On June 9, 2006, the buyer prepaid the balance of the note.

The above operations are reported as discontinued operations in the consolidated statements of operations. The results for these operations are as follows:

	Three Months		Six Months
	Ended June 30,		Ended June 30,
	2006		2006

Amortization of discount on note receivable	$	646	$	1,568
Net income before income tax from discontinued operations	$	3,477	$	4,386
Income tax expense	1,376		1,735
Net income from discontinued operations	$	2,101	$	2,651

4. Investment in and Advances to Real Estate Projects

Investment in and advances to real estate projects represent SEUSA’s ownership interest in certain real estate joint ventures. SEUSA’s ownership interests in these real estate joint venture investments ranges from 50% to 63%. As of June 30, 2007 and December 31, 2006, investments in and advances to real estate projects are mainly comprised of cash invested less distributions received and equity in accumulated earnings as follows:

	June 30,			December 31,
	2007			2006

LASDK LP
Investment	$	9,240		$	—
Equity in accumulated income	6,133			3,064
Total LASDK LP	15,373			3,064

Britannia Biotech Gateway LP
Investment	—			—
Equity in accumulated income	5,363			5,247
Total Britannia Biotech Gateway LP	5,363			5,247

Torrey Pines Science Center LP
Investment	1,589			1,353
Equity in accumulated (loss) income	(16		)	128
Total Torrey Pines Science Center LP	1,573			1,481
Total investment in and advances to real estate projects	$	22,309		$	9,792

On February 13, 2007, SEUSA purchased an additional 25% interest in LASDK LP for $12.4 million. The purchase price exceeded the share of net assets of the partnership at the date of purchase by $10.0 million. The excess is amortized over the life of the partnership’s real estate assets to which it is allocated.

5. Other Investments

Other investments as of June 30, 2007 and December 31, 2006 are comprised of cash invested or advanced less distributions received and equity in accumulated earnings or losses, as follows:

	June 30,		December 31,
	2007		2006

Charterhouse Equity Partners II
Investment and advances	$	—	$	—
Equity in accumulated earnings	274		258
Total Charterhouse Equity Partners II	274		258

Charterhouse Equity Partners III
Investment and advances	2,811		2,811
Equity in accumulated earnings	6,911		6,887
Total Charterhouse Equity Partners III	9,722		9,698

Charterhouse Equity Partners IV
Investment and advances	21,870		26,312
Equity in accumulated earnings (loss)	1,958		(2,077		)
Total Charterhouse Equity Partners IV	23,828		24,235
Total other investments	$	33,824	$	34,191

SEUSA’s ownership interest in the other investments ranges from 3.43% to 7.83%. The Company applies the equity method of accounting to these investments as the President of the Company holds a board position at Charterhouse Group International, Inc., the advisor of the partnerships, and is able to exert significant influence over the partnerships.

6. Equity in Net Income (Loss) of Real Estate and Other Investments

Equity in net income (loss) of real estate and other investments accounted for using the equity and cost method for the three month and the six month periods ended June 30, 2007 and 2006 is as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006

Charterhouse GI	$	—		$	640		$	—		$	640
Charterhouse Equity Partners	—			10			—			9
Charterhouse Equity Partners II	7			114			14			138
Charterhouse Equity Partners III	13			4,794			24			4,588
Charterhouse Equity Partners IV	363			45			4,038			(48		)
Cherry Tree Associates	—			34			—			68
Hacienda Stoneridge II LP	—			93			—			94
LASDK LP	124			179			317			362
Torrey Pines Science Center LP	(76		)	195			(144		)	234
Britannia Biotech Gateway LP	273			250			419			512
Britannia Hacienda I LP	—			(83		)	—			(77		)
Total equity in net income of real estate and other investments	$	704		$	6,271		$	4,668		$	6,520

7. Investment in Equity Securities

At June 30, 2007 and December 31, 2006, investment in equity securities consists of both shares of stock and warrants to purchase shares of stock in various public companies. In accordance with SFAS No. 133, the warrants have been classified as derivatives and are carried at fair value, with the change in fair value reflected in the consolidated statement of operations. The realized holding loss for the six month period ended June 30, 2007 was $48 and the realized holding gain for the six month period ended June 30, 2006 was $65.

At June 30, 2007 and December 31, 2006, the Company owned shares of common stock in certain public and private companies with a fair value of $1,966 and $2,013, respectively. In accordance with SFAS No. 115, the fair value of the stocks has been recorded in investment in equity securities on the consolidated balance sheet with the unrealized loss of $47 and the unrealized gain of $89 in accumulated other comprehensive income for the six month periods ended June 30, 2007 and 2006, respectively.

8. Derivative Instruments

The Company’s derivatives include a swap agreement which matures September 1, 2010. As the swap agreement does not qualify as a hedge, the Company recognized gain of $1,895 and $865 in the consolidated statements of operations, related to the changes in fair value of the derivative instrument, for the six month periods ended June 30, 2007 and 2006, respectively.

9. Loans Payable and Notes Payable

Due to SEGRO

At June 30, 2007 and December 31, 2006, the Company had a loan payable to SEGRO of $210,000 and $30,000, respectively, under a $535,500 revolving credit facility (the “Facility”) which bears interest at SEGRO’s cost of funds plus 0.25% per annum (ranging from 5.78% to 6.09% in 2007 and 5.14% to 5.97% in 2006) and is due periodically on dates established by SEGRO. Related accrued interest of $33 and $20 for loans payable to SEGRO was included in accrued interest payable at June 30, 2007 and December 31, 2006, respectively.

Lines of Credit

At June 30, 2007 and December 31, 2006, the Company had outstanding bank loans under revolving lines of credit totaling $550,000 and $556,000, respectively, which are backed by letters of credit issued by SEGRO, and are due on demand. These loans bear interest at rates approximating the banks’ base interest rate plus .40% to .75% (ranging from 5.19% and 5.76% in 2007 and 4.68% to 7.75% in 2006). The total credit line at both June 30, 2007 and December 31, 2006 is $595,000. These lines of credit expire between December 31, 2007 and October 21, 2010.

Notes Payable

Financing was obtained in November 2001 and May 2000 when SEUSA issued $200,000 and $160,000, respectively, in Guaranteed Senior Notes. In December 2001, SEUSA assumed Guaranteed Senior Notes from Slough Canada, for an aggregate liability of $50,913. The notes are guaranteed both directly and indirectly by SEGRO. At June 30, 2007 and December 31, 2006, the remaining outstanding principal portion of these notes was $383,585 and $401,491, respectively.

In connection with the assumption of the Guaranteed Senior Notes from Slough Canada in December 2001, a premium of $4,175, representing the difference in the fixed interest rate on the notes and the market interest rate on the day the debt was assumed, was received. The premium is being amortized over the terms of the respective notes on a basis which approximates an effective base interest rate. At June 30, 2007 and December 31, 2006, the unamortized balance of the premium was $23 and $335, respectively, and is included in notes payable in the accompanying consolidated balance sheets.

Prior to the sale on July 13, 2005, the Company owned shares in Tipperary Corporation, a publicly traded company principally engaged in the exploration for the development and production of natural gas. The accounts of Tipperary included its wholly-owned subsidiaries Tipperary Oil and Gas Corporation and Burro Pipeline Corporation and its 90% owned subsidiary, Tipperary Oil and Gas (Australia) Pty Ltd. (“TOGA”).

On June 9, 2004, TOGA entered into a $150.0 million Australian Dollars (“AUD”) senior credit facility agreement with two major Australian financial institutions for the purpose of paying in full TOGA’s borrowings of $100.0 million AUD from STEL and to fund TOGA’s share of development costs of the Comet Ridge coalseam gas project in Queensland, Australia. This facility was guaranteed by SEGRO. The senior credit facility and guarantee were assumed by the purchaser of Tipperary and TOGA in conjunction with the sale. Under the Tipperary sales agreements, SEUSA is required to guarantee the payments associated with the senior credit facility during the period June 9, 2004 through July 13, 2005 (“Guarantee Period”). The guarantee expires on June 9, 2009. This agreement guarantees any payments during the Guarantee Period which may be considered preferential if TOGA were to subsequently fall into bankruptcy or liquidate. Management considers the likelihood of this triggering event to be remote and therefore, no liability associated with this guarantee has been recorded at June 30, 2007 or December 31, 2006.

Notes payable are summarized as follows:

	June 30,		December 31,
	2007		2006

Note payable, series A, interest at 7.84%, interest payments due on November 10 and May 10, principal due May 10, 2008	$	15,000	$	15,000
Note payable, series B, interest at 7.94%, interest payments due on November 10 and May 10, principal due May 10, 2010	91,500		91,500
Note payable, series C, interest at 8.00%, interest payments due on November 10 and May 10, principal due May 10, 2012	43,500		43,500
Note payable, series D, interest at 8.09%, interest payments due on November 10 and May 10, principal due May 10, 2015	10,000		10,000
Note payable, series A, interest at 6.57%, interest payments due on May 29 and November 29, principal due November 29, 2011	100,000		100,000
Note payable, series B, interest at 6.97%, interest payments due on May 29 and November 29, principal due November 29, 2016	100,000		100,000
Note payable, series B, interest at 7.58%, interest payments due on October 30 and April 30, principal due April 30, 2007	—		20,000
Note payable, series B, interest at 9.27%, interest payments due on March 1 and September 1, principal due September 1, 2010	23,585		21,491
Unamortized premium	23		335
	$	383,608	$	401,826

On April 30, 2007, the Company repaid the $20,000 note payable that matured on such date.

SEUSA redeemed the above notes payable on July 27, 2007. Due to the yield maintenance provisions of the notes issuance agreement, the Company has paid to the note-holders, concurrently with principal and interest payment, approximately $32,382 in penalties as a result of the early repayment of the notes payable. As irrevocable notices to repay those notes payable were issued in June 2007, the penalties were accrued as of June 30, 2007 and included in accounts payable and other accrued liabilities on the consolidated balance sheet and interest expense on the consolidated statements of operations.

Mortgage Notes Payable

The Company has the following mortgage notes payable to various financial institutions, which are collateralized by the related buildings and improvements, leases, future rents and contract rights. The total carrying value of the collateralized property equaled $83,894 and $86,521 at June 30, 2007 and December 31, 2006, respectively. Total outstanding mortgage notes payable are as follows:

	June 30,		December 31,
	2007		2006

Mortgage note, interest at 7.51%, monthly payments of interest and principal of $155, due August 1, 2007	$	13,137	$	13,569
Mortgage note, interest at 6.9%, monthly payments of interest and principal of $77, due August 1, 2007	6,703		6,932
Mortgage note, interest at 6.85% monthly payments of interest and principal of $428, due December 30, 2013	26,853		28,473
Mortgage note, interest at 6.9% monthly payments of interest and principal of $89, due December 30, 2013	5,598		5,936
	$	52,291	$	54,910

Mortgage notes payable with the maturity date of August 1, 2007 were paid off on July 27, 2007.

Other Long-Term Liabilities

In connection with the acquisition of Pt. Grand, the Company assumed a liability for portions of a bond issued by the local municipality. The municipality issued a bond to fund certain land improvements and passed on the bond liability to the land owners who benefited from the improvements. The municipality has provided the Company with an amortization schedule related to the paydown of their portion of the bond that includes interest and principal payments up to the date of maturity. Principal and interest are billed and paid through real estate tax bills. The bond bears interest at a fixed rate of 7.75% and matures in 2011. The outstanding balances as of June 30, 2007 and December 31, 2006 were $850 and $938, respectively.

Bank loans payable, mortgage notes payable and notes payable reflect terms and rates available to the Company through its ultimate parent, SEGRO. Such terms and rates are reflective of credit markets not directly accessible by the Company. As of June 30, 2007 and December 31, 2006, the Company believes that the fair value of its long-term debt approximates its carrying amount.

Interest Costs

The summary of incurred total interest costs and capitalized interest for the three month and the six month periods ended June 30, 2007 and 2006 is as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006

Interest cost	$	50,465	$	10,974	$	68,154	$	21,075

Capitalized interest	$	5,600	$	3,866	$	9,819	$	8,373

Interest costs for the three and six month periods ended June 30, 2007 include $32,382 in penalties from early repayment of notes payable (Note 9).

10. Related Party Transactions

Certain members of the Board of Directors of SEUSA are members of the Board of Directors of Charterhouse Group International, Inc., in which the Company has an equity investment.

Britannia Developments, Inc., (“Britannia Developments”) holds a partnership interest in two of the Company’s subsidiaries. Britannia Management Services, Inc. (“BMS”) is a wholly-owned subsidiary of Britannia Developments. Britannia Developments and BMS provided the Company, its subsidiaries and affiliates with certain management services for the six month period ended June 30, 2007 and 2006 totaling $1,282 and $979, respectively. There are no balances outstanding in respect to the above services as of June 30, 2007 and December 31, 2006.

SEUSA incurred interest expense on loans payable to SEGRO of $3,641 and $3,576 for the six month periods June 30, 2007 and 2006, respectively. SEUSA incurred commission expense of $300 for the six month periods ended June 30, 2007 and 2006 on the SEUSA debt that was guaranteed by Slough Estates.

11. Post-Retirement Benefit Obligations

In 1995, the Company implemented a defined-benefit post-retirement plan for certain of its executives. As of June 30, 2007 and December 31, 2006, the estimated present value of the benefit obligation was $1,071 assuming 7% (2006: 7%) expected long-term rate of return on plan assets, and a 7% (2006: 7%) discount rate. At June 30, 2007 and December 31, 2006, the Company had funded $644 and $608 of this obligation, respectively. The benefit obligation is included in accounts payable and other accrued liabilities.

12. Stockholder’s Equity

The Company has the authority to issue 3,000 shares of common stock with a per share par value of one dollar. At June 30, 2007 and December 31, 2006, there were 1,000 shares of voting common stock issued and outstanding.

At June 30, 2007 and December 31, 2006, the Company had 185,000 shares of Series A cumulative nonvoting preferred stock with a per share par value of one thousand dollars issued and outstanding.

13. Stock Compensation

Certain officers of SEUSA are awarded stock and stock options in Slough Estates under various stock compensation plans. The plans under which the officers are eligible to receive stock options include the Executive Share Option Plan, (the “Option Plan”), and the Long-Term Share Incentive Scheme (“LTIS”).

Under the Option Plan, eligible officers could receive an annual grant of options over shares with a value on grant of up to the equivalent of 100 percent of their annual salary. Options will normally be exercisable between 3 and 10 years of the date of grant, if certain performance conditions are met. If these performance conditions are not met by the third anniversary of the date of grant, options cannot be exercised and will lapse.

The LTIS is operated by the independent trustees of the Slough Estates plc Employees Benefit Trust (the “Trustees”). Awards under the LTIS are granted at the discretion of the Trustees. Shares under award will normally be released to participants on the third anniversary on which the awards were granted if certain performance targets are met.

Number of

Shares over

Number of

Options/

Which

Range of

Options

Market

Shares under

Shares

Options/

Range of

Market Value

Exercised/

Value on

Option/

Range of

Option/Award

Cancelled

Awards

Exercise/

at Grant Date

Shares

Date of

Unvested

Option

1/1/07

or Lapsed

Granted

Option Prices

of Awards

Vested

Exercise

3/31/07

Exercise

Executive Share Option Plan

255,032

—

$4.98 - $8.03

N/A

—

255,032

3/24/04 - 4/13/14

Long-Term Share Incentive Scheme

193,638

—

101,103

N/A

$7.52 - $14.93

—

294,741

N/A

The adoption of FASB 123 (revised) resulted in additional compensation expense of $231 and $133 for the three month periods ended June 30, 2007 and June 30, 2006, respectively, and of $461 and $265 for the six month periods ended June 30, 2007 and 2006, respectively.

14. Commitments and Contingencies

Under an agreement with Charterhouse Equity Partners IV, L.P., the Company agreed to commit $35,000 for the purchase of portfolio investments. At June 30, 2007 and December 31, 2006, the uncalled commitment was $7,735 and $8,500, respectively.

The Company is currently undergoing an Internal Revenue Service audit for the years ended December 31, 2005 and 2004. The audit is in progress and the outcome is not yet known.

15. Income Taxes

The Company adopted the provisions of FIN 48 as of January 1, 2007. The Company has recognized on implementation a net increase of $1,237 to retained earnings, with corresponding increases of $1,796 to income taxes receivable and $559 to deferred tax liabilities.

The Company recognizes interest and penalties accrued related to uncertain tax positions in income tax expense in the consolidated statements of operations, which is consistent with the recognition of these items in prior reporting periods. As of June 30, 2007, the Company has recorded a net receivable of approximately $209 for the receipt of interest and a liability of approximately $299 for the payment of penalties, which is included in income tax receivable.

The Internal Revenue Service (“IRS”) has completed examination of the 2003 tax return and no changes were proposed to the return. The Company is currently undergoing a federal audit for the 2004 tax year and expects to be audited for the 2005 tax year. A net operating loss carryforward was fully utilized on the 2004 federal tax return. The years in which these net operating losses originated are open under the statute of limitations to the extent of the amount of the loss. These years are 1995 and 1997-2003. Additionally, the Company has received notification from the Illinois Department of Revenue that they intend to audit the 2003-2005 tax years.

As of June 30, 2007, it is reasonably possible that the amounts of the uncertain tax positions may increase or decrease within the twelve months following the reporting date. It is not expected that any of the changes will be significant individually or in total to the results or financial position of the Company.

16. Subsequent Events

On July 27, 2007, the Company repaid all outstanding Notes Payable and Mortgage Notes Payable, replacing it with intercompany debt due to SEGRO. The swap agreement was terminated in conjunction with the repayment of the notes.

On July 31, 2007, the Company assigned its interest in its Other Investments to SEGRO. The assignment was treated as a distribution.

On August 1, 2007, all common and preferred shares of the Company were acquired by a subsidiary of Health Care Property Investors, Inc., a public real estate investment trust, for an aggregate consideration of $2.9 billion before post-closing adjustments.

On August 10, 2007, the Company purchased a land parcel with an existing building located in South San Francisco for $9.45 million in cash.

EX-99.2 4 a07-24026_2ex99d2.htm EX-99.2

Exhibit 99.2

Slough Estates USA Inc.

and Subsidiaries

Consolidated Financial Statements

December 31, 2006

Slough Estates USA Inc. and Subsidiaries

Index

December 31, 2006

		Page(s)

Report of Independent Auditors		1

Consolidated Financial Statements

Consolidated Balance Sheet		2

Consolidated Statement of Operations and Comprehensive Income		3

Consolidated Statement of Changes in Stockholder’s Equity		4

Consolidated Statement of Cash Flows		5

Notes to Consolidated Financial Statements		6-22

Report of Independent Auditors

To the Board of Directors and Stockholder of

Slough Estates USA Inc.

In our opinion, the accompanying consolidated balance sheet and the related consolidated statement of operations and comprehensive income, changes in stockholder’s equity and cash flows present fairly, in all material respects, the financial position of Slough Estates USA Inc. and its subsidiaries (the “Company”) at December 31, 2006, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Chicago, Illinois

April 27, 2007

Slough Estates USA Inc. and Subsidiaries

Consolidated Balance Sheet

December 31, 2006

(in thousands of dollars)
Assets
Investments in real estate
Rental property - land	$	379,881
Rental property - buildings and improvements, net of accumulated depreciation of $157,567	681,593
Construction in progress - rental property	184,600

Net investment in real estate	1,246,074

Investment in and advances to real estate projects (Note 5)	9,792
Other investments (Note 6)	34,191
Deferred costs, net of accumulated amortization of $17,185	43,086

Total investments	1,333,143

Other assets
Cash and cash equivalents	10,272
Restricted cash (Note 1)	696
Investment in equity securities (Note 8)	2,089
Derivative instruments (Note 9)	7,136
Rents receivable, net of allowance for doubtful accounts of $755	2,177
Deferred rents receivable	56,941
Income tax receivable	6,805
Other accounts receivable	3,636
Other assets	10,347

Total other assets	100,099

Total assets	$	1,433,242

Liabilities and Stockholder’s Equity
Loans payable, notes payable and accrued interest
Due to SEGRO (Note 10)	$	30,000
Lines of credit (Note 10)	556,000
Notes payable (Note 10)	401,826
Mortgage notes payable (Note 10)	54,910
Other long-term liabilities (Note 10)	938
Accrued interest payable	3,890

Total loans payable, notes payable and accrued interest	1,047,564

Other liabilities
Net deferred tax liability (Note 13)	59,889
Accounts payable and other accrued liabilities	45,224
Deferred revenue	7,878

Total other liabilities	112,991

Total liabilities	1,160,555

Minority interest	(178		)

Stockholder’s equity
Preferred stock (Note 15)	185,000
Common stock (Note 15)	1
Contributed capital	32,953
Retained earnings	56,446
Accumulated other comprehensive loss	(1,535		)

Total stockholder’s equity	272,865

Total liabilities and stockholder’s equity	$	1,433,242

The accompanying notes are an integral part of the consolidated financial statements.

Slough Estates USA Inc. and Subsidiaries

Consolidated Statement of Operations and Comprehensive Income

Year Ended December 31, 2006

(in thousands of dollars)
Revenues
Rental
Minimum rents	$	100,918
Deferred rents	(314		)
Tenant recoveries	19,752
Equity in net income of real estate and other investments (Note 7)	10,428
Interest income	538
Other income (Note 4)	488
Total revenues	131,810
Expenses
Interest	29,192
Real estate taxes	11,352
Property operations	15,932
General and administrative	11,801
Depreciation	40,928
Amortization	6,410
Net realized loss on derivatives (Notes 8 and 9)	47
Foreign currency exchange loss	50
Total expenses	115,712
Income before gain on sale of real estate and other investments, income taxes, minority interest and discontinued operations	16,098
Net loss on sale of real estate and other investments	(546		)
Income before income taxes, minority interest and discontinued operations	15,552
Income tax expense - continuing operations	4,630
Income before minority interest and discontinued operations	10,922
Minority interest participation in income	(1,652		)
Income from continuing operations	9,270
Discontinued operations (Note 3)
Income from operations (including net gain on disposal of $3,025)	4,387
Income tax expense	1,735
Net income from discontinued operations	2,652
Net income	11,922
Other comprehensive income
Unrealized holding gains on equity securities	181
Comprehensive income	$	12,103

The accompanying notes are an integral part of the consolidated financial statements.

Slough Estates USA Inc. and Subsidiaries

Consolidated Statement of Changes in Stockholder’s Equity

Year Ended December 31, 2006

										Accumulated
							Retained			Other
	Preferred		Common		Contributed		(Deficit)			Comprehensive
(in thousands of dollars)	Stock		Stock		Capital		Earnings			Income (Loss)			Total
Balance, December 31, 2005	$	185,000	$	1	$	32,424	$	330,825		$	(1,716	)	$	546,534
Net income	—		—		—		11,922			—			11,922
Share awards granted to SEUSA executives by Parent	—		—		529		—			—			529
Dividends paid	—		—		—		(285,500		)	—			(285,500		)
Distribution to Parent	—		—		—		(801		)	—			(801		)
Other comprehensive income
Unrealized holding gain on equity securities	—		—		—		—			181			181
Balance, December 31, 2006	$	185,000	$	1	$	32,953	$	56,446		$	(1,535	)	$	272,865

The accompanying notes are an integral part of the consolidated financial statements.

Slough Estates USA Inc. and Subsidiaries

Consolidated Statement of Cash Flows

Year Ended December 31, 2006

(in thousands of dollars)
Cash flows from operating activities
Net income	$	11,922
Adjustments to reconcile net income to net cash flows provided by operating activities
Depreciation and amortization expense	47,337
Amortization of above/below market rents	(3,239		)
Amortization of discount on note receivable*	(1,568		)
Share awards granted to SEUSA executives	529
Net realized loss on derivatives	47
Foreign currency exchange loss	50
Amortization of fair value of warrants and stock received	(158		)
Amortization of loan premium	(526		)
Distribution from investment in and advance to real estate projects	1,906
Equity in net income of real estate and other investments	(10,428		)
Loss on sale of equity securities, real estate and other investments	546
Gain on early payoff of note receivable*	(3,025		)
Minority interest participation in income	1,652
Deferred rents	314
Changes in assets and liabilities
Rents receivable	1,533
Other accounts receivable	1,555
Current and deferred income tax liability	(7,531		)
Other assets	(6,191		)
Accounts payable and other accrued liabilities	(17		)
Accrued interest payable	(129		)
Net cash flows provided by operating activities	34,579
Cash flows from investing activities
Payments for rental properties and construction in progress	(246,438		)
Deposits for rental properties	(1,600		)
Proceeds from sale of investment in and advances to real estate projects	450
Proceeds from sale of real estate, equity securities and other investments	17,062
Contributions to investment in and advances to real estate projects	(180		)
Contributions to other investments	(4,147		)
Payment of leasing commissions	(9,760		)
Principal payments of other long-term liabilities	(170		)
Repayments on note receivable	35,341
Net cash flows used in investing activities	(209,442		)
Cash flows from financing activities
Principal repayments of mortgage notes payable	(4,944		)
Proceeds of loans from SEGRO	1,435,096
Repayment of loans from SEGRO	(1,520,096		)
Proceeds from lines of credit	1,310,031
Repayment of lines of credit	(754,031		)
Dividends paid	(285,500		)
Change in restricted cash	(56		)
Distributions to minority interest	(1,514		)
Net cash flows provided by financing activities	178,986
Net increase in cash and cash equivalents	4,123
Cash and cash equivalents
Beginning of year	6,149
End of year	$	10,272
Supplemental information
Interest paid (net of capitalized amounts)	$	29,321
Income tax paid	13,895
Non-cash investing activities
Change in accounts payable on construction in progress	6,675
Non-cash financing activity
Warrants distributed to parent	802
Investment in equity securities received as a termination fee	511

* includes discontinued operations

The accompanying notes are an integral part of the consolidated financial statements.

Slough Estates USA Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2006

(in thousands of dollars)

1. Summary of Operations and Significant Accounting Policies

Consolidation

The consolidated financial statements include the accounts of Slough Estates USA Inc. and its majority owned subsidiaries (“SEUSA” or the “Company”) for the year ended December 31, 2006.

SEUSA is an indirect wholly-owned subsidiary of SEGRO, formerly called Slough Estates plc, through its direct parent company, Slough Trading Estate Limited (“STEL”). SEUSA was organized for the purpose of developing, owning, and renting commercial, industrial, office and residential real estate. SEUSA also has equity interests in partnerships that own and operate real estate projects and invest in equity securities of various affiliated and non-affiliated entities.

Minority interest represents participation of unrelated party interests held in subsidiaries included in the SEUSA consolidated financial statements.

All significant intercompany transactions and balances have been eliminated upon consolidation.

Accounting Policies

New Accounting Pronouncements

In June 2005, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) regarding EITF 04-5, “Investor’s Accounting for an Investment in a Limited Partnership When the Investor is the Sole General Partner and the Limited Partners Have Certain Rights.” The conclusion provides a framework for addressing the question of when a sole general partner, as defined in EITF 04-5, should consolidate a limited partnership. The EITF has concluded that the general partner of a limited partnership should consolidate a limited partnership unless (1) the limited partners possess substantive kick-out rights as defined in paragraph B20 of FIN 46R, or (2) the limited partners possess substantive participating rights similar to the rights described in EITF 96-16, “Investor’s Accounting for an Investee When the Investor has a Majority of the Voting Interest by the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights.” In addition, the EITF concluded that the guidance should be expanded to include all limited partnerships, including those with multiple general partners. The provisions of EITF 04-5 are effective after June 29, 2005 for general partners of all new limited partnerships formed. For existing limited partnerships for which the partnership agreements are modified and for general partners in all other limited partnerships, the provisions of EITF 04-5 are effective for fiscal years beginning after December 15, 2005. The adoption of this interpretation did not have an impact on the Company’s consolidated financial statements.

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on description, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 becomes effective on January 1, 2007. The Company has yet to assess the impact that FIN 48 will have on the Company’s consolidated financial statements.

Estimates and Assumptions

Investments in Real Estate

The intangible assets generally include management’s estimate of the value of above and below market leases, leasing costs for the in-place leases as if they were incurred and the value of the tenant relationship. The values of the above and below market leases are amortized and recorded as either an increase or decrease to rental income, respectively, over the remaining term of the associated lease. The value of leasing costs for the in-place leases and the tenant relationship intangibles are amortized to expense over the anticipated term of the lease and tenant relationship, respectively. If a tenant terminates its lease early, the unamortized portion of the tenant improvements, above and below market leases, leasing costs and the tenant relationship values are charged to expense.

Repairs and maintenance are expensed as incurred.

Revenue Recognition

Deferred Costs

Costs incurred in connection with the execution of mortgages and other notes payable are amortized over the terms of the related notes.

Income Taxes

Investment in and Advances to Real Estate Projects and Other Investments

Cash and Cash Equivalents

Restricted Cash

Restricted cash balances relate to tenant deposits and other cash balances where access to the funds is legally restricted.

Derivative Instruments and Hedging Activities

The Company’s derivatives include investments in warrants to purchase shares of common stock in various public and private companies. Based on the terms of the warrant agreements, the warrants meet the definition of a derivative and accordingly must be marked to fair value with the impact reflected in the consolidated statement of operations.

Discontinued Operations

Investments in Marketable Securities

At December 31, 2006, the Company owned stock of certain publicly traded companies. The Company accounts for these shares as available-for-sale in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” These securities are carried at fair value with the changes in fair value recorded as unrealized gains and losses on marketable equity securities in accumulated other comprehensive income. On sale of the stock, the unrealized gains or losses related to the shares included in accumulated other comprehensive income, are recognized currently in the consolidated statement of operations and comprehensive income.

Foreign Currency

Significant Customers

SEUSA leases a significant portion of its properties to biotech companies in the United States.

At December 31, 2006, approximately 80.9% of SEUSA’s real estate portfolio is concentrated in the San Francisco market, and approximately 19.1% is concentrated in the San Diego market. Approximately 14.8% and 11.3% of rental revenues for the year ended December 31, 2006 was derived from Amgen, Inc. and Rigel, respectively. No other single tenant comprises greater than 10% of the Company’s overall rental revenues. To the extent that SEUSA has a significant concentration of rental revenue from any single tenant, the inability of that tenant to make its lease payments could have an adverse effect on the Company.

Stock Based Compensation

Certain officers of SEUSA are awarded stock and stock options in Slough Estates under various stock compensation plans (the “plans”). The stock issued to the officers of SEUSA is accounted for within the Company’s consolidated financial statements based on the fair value of the stock, with compensation expense being recognized in the Consolidated Statement of Operations over the performance period.

2. Acquisitions of Real Estate

During 2006, SEUSA acquired the following portfolios of properties:

				Net
Date			Rentable	Purchase
Purchased	Property	Location	Sq. Ft.	Price
			(Unaudited)
January 26, 2006	328 Roebling	South San Francisco, CA	18,000	$	2,815
February 1, 2006	340 Roebling	South San Francisco, CA	20,000	6,173
August 31, 2006	100-180 Kimball Way	South San Francisco, CA	80,254	19,336
November 9, 2006	10275 Science Center Drive	La Jolla, CA	82,500	38,703
December 27, 2006	Pointe Grand II	South San Francisco, CA	41,155	7,440
				$	74,467

In accordance with SFAS No. 141, the Company allocated the net purchase prices as follows:

					10275
					Science		100-180		Pointe
	328 Roebling		340 Roebling		Center Drive		Kimball Way		Grand II		Total
Land	$	2,815	$	6,173	$	7,032	$	7,223	$	3,842	$	27,085
Land improvements	—		—		3,165		1,680		1,101		5,946
Building and improvements	—		—		12,236		6,420		1,921		20,577
Tenant improvements	—		—		10,549		4,013		576		15,138
Leasing commissions	—		—		1,769		—		—		1,769
In-place lease value at market	—		—		2,874		—		—		2,874
Tenant relationship value	—		—		1,078		—		—		1,078
	$	2,815	$	6,173	$	38,703	$	19,336	$	7,440	$	74,467

The recap of intangible assets related to property acquisitions for the year ended December 31, 2006:

	Value at								Value at
	December 31,					Amount			December 31,
	2005			Acquisitions		Amortized			2006

Leasing commissions	$	3,954		$	1,769	$	(976	)	$	4,747
In place lease value at market	10,582			2,874		(3,347		)	10,109
Tenant relationship value	6,496			1,078		(1,008		)	6,566
Above market lease value	1,834			—		(371		)	1,463
Below market lease value	(12,060		)	—		3,610			(8,450		)
	$	10,806		$	5,721	$	(2,092	)	$	14,435

The values of the below market leases is included in accounts payable and other accrued liabilities. The value of the leasing commissions, leasing costs for the in-place leases, the tenant relationship intangibles, and the above market leases are included in deferred costs.

3. Discontinued Operations

On April 27, 2005, the Company sold their Quail West Ltd. operations located in Naples, Florida for $63.5 million. The sale resulted in a loss of $3.7 million. In association with the sale, the buyer issued a note receivable to SEUSA in the amount of $41.5 million. The note is non-interest bearing, matures on April 27, 2009 and is subject to annual principal repayments. Under the terms of the agreement, the buyer must accelerate these repayments to the extent that they sell land lots at the development, at $225 per lot sold. The note is collateralized against certain lots at the developments. The effective interest rate on the note is 12%. The total discount on the note is $10,404. On June 9, 2006, the buyer prepaid the balance of the note, resulting in a gain of $3,025. Amortization of the discount from January 1, 2006 though June 9, 2006 was $1,568.

The above is reported as discontinued operations in the consolidated statements of operations. The results for these operations are as follows:

Revenues	$	1,402
Operating income	$	1,362
Gain from receipt of note receivable prepayment	3,025
Net income before income tax from discontinued operations	4,387
Income tax expense	(1,735		)
Net income from discontinued operations	$	2,652

For the year ended December 31, 2006, discontinued operations revenue mostly related to the amortization of the discount on the note receivable associated with the sale of the Quail West Ltd. operations.

4. Significant Leasing Transactions

During 2004, SEUSA renegotiated an amendment to a build-to-suit development agreement with a tenant which resulted in the delay of the construction of the third and final building at Britannia Oyster Point. The renegotiated agreement requires ground lease payments during the period prior to lease commencement to compensate SEUSA for infrastructure costs and specific building costs that were expended based on the original contracted delivery date for the building. Additionally, the agreement required a cash payment of $600. The income from the ground lease is recognized in the income statement to the extent of the carrying costs incurred prior to the lease commencement date and any excess will be deferred and recognized in the income statement over the term of the building lease subsequent to completing construction and delivering the building to the user. Additionally, the cash payment of $600 will be deferred and recognized in the income statement over the term of the building lease. For the year ended December 31, 2006, $1,554 has been recognized in the income statement as reimbursement of operating costs.

During 2006, SEUSA agreed to a facility swap between a tenant at Britannia Biotech Gateway I (BBG I) and Britannia Oyster Point (BOP). A new lease with the BBG I tenant was signed for the BOP facility. The agreement involved the tenant at BOP terminating their lease, effective March 31, 2007, and subleasing the BBG I facility from the existing tenant plus signing a direct lease for an additional period to match the term of their original lease at BOP. In consideration for consent of terminating their existing lease, SEUSA received shares of the tenant’s stock from the former BOP tenant. An independent appraisal of the stock was performed, resulting in a valuation of $510 which is being recognized as termination fee income over the remainder of the lease term.

5. Investment in and Advances to Real Estate Projects

Investment in and advances to real estate projects represent SEUSA’s ownership interest in certain real estate joint ventures. SEUSA’s ownership interests in these real estate joint venture investments ranges from 37% to 55%. As of December 31, 2006, investments in and advances to real estate projects are mainly comprised of cash invested less distributions received and equity in accumulated earnings or losses as follows:

LASDK LP
Investment	$	(2,751	)
Equity in accumulated income	5,815
Total LASDK LP	3,064
Britannia Biotech Gateway LP
Investment	(1,023		)
Equity in accumulated income	6,270
Total Britannia Biotech Gateway LP	5,247
Torrey Pines Science Center LP
Investment	1,353
Equity in accumulated income	128
Total Torrey Pines Science Center LP	1,481
Total investment in and advances to real estate projects	$	9,792

On November 9, 2006, SEUSA sold their 25% interest in Cherry Tree for $450, resulting in a loss of $546, to Draper and Kramer, Incorporated (“Draper and Kramer”), a related party of the Company.

6. Other Investments

Other investments as of December 31, 2006 are comprised of cash invested or advanced less distributions received and equity in accumulated earnings or losses, as follows:

Charterhouse Equity Partners
Investment and advances	$	(27,917	)
Equity in accumulated earnings	27,917
Total Charterhouse Equity Partners	—
Charterhouse Equity Partners II
Investment and advances	(13,210		)
Equity in accumulated earnings	13,468
Total Charterhouse Equity Partners II	258
Charterhouse Equity Partners III
Investment and advances	2,811
Equity in accumulated earnings (loss)	6,887
Total Charterhouse Equity Partners III	9,698
Charterhouse Equity Partners IV
Investment and advances	26,312
Equity in accumulated loss	(2,077		)
Total Charterhouse Equity Partners IV	24,235
Total other investments	$	34,191

7. Equity in Net Income (Loss) of Real Estate and Other Investments

Equity in net income (loss) of real estate and other investments accounted for using the equity and cost method for the year ended December 31, 2006 is as follows:

Charterhouse Group International, Inc.	$	640
Charterhouse Equity Partners	9
Charterhouse Equity Partners II	109
Charterhouse Equity Partners III	8,062
Charterhouse Equity Partners IV	(298		)
Cherry Tree Associates	159
Britannia Hacienda II LP	94
LASDK LP	624
Torrey Pines Science Center LP	105
Britannia Biotech Gateway LP	1,007
Britannia Hacienda I LP	(83		)
Total equity in net income of real estate and other investments	$	10,428

8. Investment in Equity Securities

At December 31, 2006, investment in equity securities consists of both shares of stock and warrants to purchase shares of stock in various public companies. In accordance with SFAS No. 133, the warrants have been classified as derivatives and are carried at fair value, with the change in fair value reflected in the consolidated statement of operations. The realized holding gain for the year ended December 31, 2006 was $76.

At December 31, 2006, the Company owned shares of common stock in certain public companies with a fair value of $2,013. In accordance with SFAS No. 115, the fair value of the stocks has been recorded in investment in equity securities on the consolidated balance sheet with the unrealized gain of $181 in accumulated other comprehensive income for the year ended December 31, 2006.

9. Derivative Instruments

The Company’s derivatives include a swap agreement which matures September 1, 2010. As the swap agreement does not qualify as a hedge, the Company recognized a $123 loss in the consolidated statements of operations, related to the changes in fair value of the derivative instrument, for the year ending December 31, 2006.

10. Loans Payable and Notes Payable

Due to SEGRO

At December 31, 2006, the Company had a loan payable to SEGRO of $30,000 under a $535,500 revolving credit facility (the “Facility”) which bears interest at SEGRO’s cost of funds plus 0.25% per annum (ranging from 5.14% to 6.09% in 2006) and is due periodically on dates established by SEGRO. Related accrued interest of $20 for loans payable to SEGRO was included in accrued interest payable at December 31, 2006.

Lines of Credit

At December 31, 2006, the Company had outstanding bank loans under revolving lines of credit totaling $556,000, which were backed by letters of credit issued by SEGRO, and are due on demand. These loans bear interest at rates approximating the banks’ base interest rate plus .40% to .75% (ranging from 4.74% to 7.75% in 2006). The credit line at December 31, 2006 is $595,000. These lines of credit expire between 2007 and 2010.

Notes Payable

Financing was obtained in November 2001 and May 2000 when SEUSA issued $200,000 and $160,000, respectively, in Guaranteed Senior Notes. In December 2001, SEUSA assumed Guaranteed Senior Notes from Slough Canada, for an aggregate liability of $50,913. The notes are guaranteed both directly and indirectly by SEGRO. At December 31, 2006, the remaining outstanding principal portion of these notes was $401,491.

In connection with the assumption of the Guaranteed Senior Notes from Slough Canada in December 2001, a premium of $4,175, representing the difference in the fixed interest rate on the notes and the market interest rate on the day the debt was assumed, was received. The premium is being amortized over the terms of the respective notes on a basis which approximates an effective base interest rate. At December 31, 2006, the unamortized balance of the premium was $335 and is included in notes payable in the accompanying consolidated balance sheets.

On June 9, 2004, TOGA entered into a $150.0 million Australian Dollars (“AUD”) senior credit facility agreement with two major Australian financial institutions for the purpose of paying in full TOGA’s borrowings of $100.0 million AUD from STEL and to fund TOGA’S share of development costs of the Comet Ridge coalseam gas project in Queensland, Australia. This facility was guaranteed by SEGRO. The senior credit facility and guarantee were assumed by the purchaser of Tipperary and TOGA in conjunction with the sale. Under the Tipperary sales agreements, SEUSA is required to guarantee the payments associated with the senior credit facility during the period June 9, 2004 through July 13, 2005 (“Guarantee Period”). The guarantee expires on June 9, 2009. This agreement guarantees any payments during the Guarantee Period which may be considered preferential if TOGA were to subsequently fall into bankruptcy or liquidate. Management considers the likelihood of this triggering event to be remote and therefore, no liability associated with this guarantee has been recorded at December 31, 2006.

Notes payable are summarized as follows:

Note payable, series A, interest at 7.84%, interest payments due on November 10 and May 10, principal due May 10, 2008	$	15,000

Note payable, series B, interest at 7.94%, interest payments due on November 10 and May 10, principal due May 10, 2010	91,500

Note payable, series C, interest at 8.00%, interest payments due on November 10 and May 10, principal due May 10, 2012	43,500

Note payable, series D, interest at 8.09%, interest payments due on November 10 and May 10, principal due May 10, 2015	10,000

Note payable, series A, interest at 6.57%, interest payments due on May 29 and November 29, principal due November 29, 2011	100,000

Note payable, series B, interest at 6.97%, interest payments due on May 29 and November 29, principal due November 29, 2016	100,000

Note payable, series B, interest at 7.58%, interest payments due on October 30 and April 30, principal due April 30, 2007	20,000

Note payable, series B, interest at 9.27%, interest payments due on March 1 and September 1, principal due September 1, 2010	21,491

Unamortized premium	335
	$	401,826

Mortgage Notes Payable

The Company has the following mortgage notes payable to various financial institutions, which are collateralized by the related buildings and improvements, leases, future rents and contract rights. The total carrying value of the collateralized property equaled $86,521 at December 31, 2006. Total outstanding mortgage notes payable are as follows:

Mortgage note, interest at 7.51%, monthly payments of interest and principal of $155, due July 31, 2007	$	13,569

Mortgage note, interest at 6.9%, monthly payments of interest and principal of $77, due August 1, 2007	6,932

Mortgage note, interest at 6.85% monthly payments of interest and principal of $428, due December 30, 2013	28,473

Mortgage note, interest at 6.9% monthly payments of interest and principal of $89, due December 30, 2013	5,936
	$	54,910

Other Long-Term Liabilities

Future Minimum Payments on Long-Term Debt

Approximate future minimum principal payments for all notes payable, mortgage notes payable and other long-term liabilities, excluding amortization of the premiums, are as follows:

2007	$	44,650
2008	19,444
2009	4,760
2010	118,088
2011	105,332
Thereafter	165,064
	$	457,338

Bank loans payable, mortgage notes payable and notes payable reflect terms and rates available to the Company through its ultimate parent, SEGRO. Such terms and rates are reflective of credit markets not directly accessible by the Company. As of December 31, 2006, the Company believes that the fair value of its long-term debt approximates its carrying amount.

Interest Costs

For the year ended December 31, 2006, the Company incurred total interest costs of $47,460, of which $18,268 was capitalized. Cash paid for interest for the year ended December 31, 2006 was $47,589.

11. Future Rentals

The Company is a lessor under noncancelable operating leases that provide for fixed minimum rental payments and reimbursement of certain lessor operating expenses. The lease agreements typically provide for contractual escalations, the recovery of operating and common area expenses, real estate taxes and insurance.

Net minimum future annual rents receivable under noncancelable operating leases and ground leases at December 31, 2006 are approximately as follows:

Year ending December 31,
2007	$	125,241
2008	146,437
2009	160,291
2010	158,664
2011	155,540
Thereafter	1,224,389
	$	1,970,562

12. Related Party Transactions

Certain members of the Board of Directors of SEUSA are members of the Board of Directors of Charterhouse Group International, Inc., in which the Company has an equity investment.

Britannia Developments, Inc., (“Britannia Developments”) holds a partnership interest in two of the Company’s subsidiaries. Britannia Management Services, Inc. (“BMS”) is a wholly-owned subsidiary of Britannia Developments. Britannia Developments and BMS provided the Company, its subsidiaries and affiliates with certain management services during 2006 totaling $1,669. There are no balances outstanding with respect to the above services as of December 31, 2006.

SEUSA incurred interest expense on loans payable to SEGRO of $7,633 for the year ended December 31, 2006. During 2006, $628 was paid to SEGRO as a commission on the SEUSA debt that was guaranteed by SEGRO.

In 2006, SEUSA paid the former CEO of Tipperary $1.5 million for services provided in conjunction with SEUSA selling its interest in Tipperary.

13. Income Taxes

Certain accounting principles applied in the preparation of the consolidated financial statements differ from accounting practices prescribed by the Internal Revenue Code of 1986, as amended, and related regulations. These circumstances caused the 2006 consolidated financial statement results to differ from the results reported for income tax purposes. For SEUSA, these differences were primarily due to accelerated methods of computing depreciation for tax purposes, timing and recognition of rental revenues for financial reporting purposes compared to tax purposes, the nondeductibility of write-downs of investments for tax purposes, certain interest paid to foreign related parties, net operating loss carryforwards, and reporting equity securities at fair value for financial reporting and at cost for tax purposes.

The net deferred tax liability on a tax effected basis, at December 31, 2006, arose as a result of the following items:

Deferred tax assets
Trade accounts receivable	$	499
Stock options	210
Investments - Quail and Hacienda	5,878
Interest expense	8
Deferred rents receivable	306
Total deferred tax asset	6,901
Deferred tax liabilities
Investments	(16,440		)
Property, plant and equipment	(49,628		)
Unrealized holding gain	(95		)
Foreign currency adjustment	(627		)
Total deferred tax liabilities	(66,790		)
Net deferred tax liability	$	(59,889	)

The components of the provision for income taxes for the year ended December 31, 2006 are as follows:

Current
Federal	$	11,246
State	3,049
Foreign	326
Current income tax provision	14,621
Deferred
Federal	(6,684		)
State	(1,795		)
Deferred income tax (benefit) provision	(8,479		)
Income tax expense	$	6,142

SEUSA paid income taxes of $13,895 (including penalties of $223) for the year ended December 31, 2006.

14. Post-Retirement Benefit Obligations

In 1995, the Company implemented a defined-benefit post-retirement plan for certain of its executives. As of December 31, 2006, the estimated present value of the benefit obligation was $1,071 assuming 7% expected long-term rate of return on plan assets, and a 7% discount rate. At December 31, 2006, the Company had funded $608 of this obligation. The benefit obligation is included in accounts payable and other accrued liabilities.

15. Stockholder’s Equity

The Company has the authority to issue 3,000 shares of common stock with a per share par value of one dollar. At December 31, 2006, there were 1,000 shares of voting common stock issued and outstanding.

At December 31, 2006, the Company had 185,000 shares of Series A cumulative nonvoting preferred stock with a per share par value of one thousand dollars issued and outstanding.

On September 29, 2006 and October 10, 2006, the Company paid preferred dividends of $250,000 and $35,500, respectively, to SEGRO, holder of the preferred stock.

On July 24, 2006, SEUSA distributed warrants for common stock in Rigel Pharmaceuticals, Inc. to Kwacker Limited, a subsidiary of SEGRO.

16. Stock Compensation

Certain officers of SEUSA are awarded stock and stock options in SEGRO under various stock compensation plans. The plans under which the officers are eligible to receive stock options include the Executive Share Option Plan, (the “Option Plan”), and the Long-Term Share Incentive Scheme (“LTIS”).

Number of

Shares over

Range of

Number of

Market

Number of

Options/

Which

Market Value

Options

Value on

Shares under

Range of

Shares under

Shares

Options/

Range of

at Grant

Exercised/

Date

Option/

Option

Option/Award

Cancelled

Awards

Exercise/

Date of

Shares

Unvested

Exercise

1/1/06

or Lapsed

Granted

Option Prices

Awards

Vested

12/31/06

Periods

Executive Share Option Plan

255,032

—

$4.98 - $8.03

N/A

—

255,032

3/24/04 - 4/13/04

Long-Term Share Incentive Scheme

110,215

19,860

116,522

N/A

7.52 - $11.24

13,239

10.30

193,638

N/A

The adoption of FASB 123 (revised) resulted in additional compensation expense of $529 for the year ended December 31, 2006.

17. Commitments and Contingencies

Under an agreement with Charterhouse Equity Partners IV, L.P., the Company agreed to commit $35,000 for the purchase of portfolio investments. At December 31, 2006, the uncalled commitment was $8,500.

The Company is currently undergoing an Internal Revenue Service audit for the years ended December 31, 2005 and 2004. The audit is in progress and the outcome is not yet known.

18. Subsequent Events

On January 10, 2007, SEUSA purchased a land parcel with an existing building for $1.0 million.

On January 31, 2007, SEUSA purchased a vacant land parcel for $36.8 million.

On February 13, 2007, SEUSA purchased an additional 25% interest in LASDK LP for $12.4 million.

On February 15, 2007, SEUSA purchased the 10% minority interest in Britannia Gateway II LP and Britannia Point Grand LP for $5.0 million and $28.5 million, respectively.

EX-99.3 5 a07-24026_2ex99d3.htm EX-99.3

Exhibit 99.3

HCP UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2007 AND FOR THE YEAR ENDED DECEMBER 31, 2006 AND THE SIX
MONTHS ENDED JUNE 30, 2007

		Page
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30, 2007		3

Unaudited Pro Forma Condensed Consolidated Statement of Operations for the six months ended June 30, 2007		4

Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 2006		5

Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements		6

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited pro forma condensed consolidated financial statements gives effect to the acquisition of Slough Estates USA, Inc. (“SEUSA”) by HCP, Inc. (“HCP”) (the “Acquisition”) and reflect the incurrence of debt by HCP in order to finance the Acquisition. The unaudited pro forma condensed consolidated financial statements presented below have been prepared based on certain pro forma adjustments to the historical consolidated financial statements of HCP and SEUSA for the year ended December 31, 2006 and for the six months ended June 30, 2007. The unaudited pro forma condensed consolidated balance sheet as of June 30, 2007 has been prepared as if the Acquisition had occurred as of that date. The unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 2006 and for the six months ended June 30, 2007 have been prepared as if the Acquisition had occurred as of January 1, 2006.

In addition, the accompanying unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2006 gives effect to HCP’s acquisition of CNL Retirements Properties, Inc. (“CRP”) and CNL Retirement Corp., the external advisor to CRP (the “Advisor”) (together the “CRP Acquisitions”), which were completed on October 5, 2006, because the CRP Acquisitions are not fully reflected in HCP’s historical statement of operations for the year ended December 31, 2006. Such statement also reflects the incurrence of debt and give effect to certain capital transactions undertaken by HCP in order to finance the CRP Acquisitions. The unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2006 has been prepared based on certain pro forma adjustments as if the CRP Acquisitions had occurred as of January 1, 2006.

The allocation of the purchase price of SEUSA reflected in these unaudited pro forma condensed consolidated financial statements has been based upon preliminary estimates of the fair value of assets acquired and liabilities assumed. In the opinion of HCP’s management, all significant adjustments necessary to reflect the effects of the Acquisition and CRP Acquisitions that can be factually supported within the SEC regulations covering the preparation of pro forma financial statements have been made.

The unaudited pro forma condensed consolidated financial statements are provided for informational purposes only. The unaudited pro forma condensed consolidated financial statements are not necessarily and should not be assumed to be an indication of the results that would have been achieved had the transactions been completed as of the dates indicated or that may be achieved in the future. The completion of the valuation and the impact of ongoing integration activities could cause material differences in the information presented. Furthermore, following consummation of the Acquisition and the CRP Acquisitions, HCP expects to apply its own methodologies and judgments in accounting for the assets and liabilities acquired in the transaction, which may differ from those reflected in SEUSA’s or CRP’s historical financial statements.

The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the respective historical financial statements and the notes thereto of HCP, SEUSA, CRP and the Advisor. The historical financial information with respect to HCP for the year ended December 31, 2006 has been a) restated to reflect the results of operations of certain properties that were initially classified as discontinued operations in the six months ended June 30, 2007, and b) includes a reclassification of equity income from unconsolidated joint ventures to conform to the presentation for the six months ended June 30, 2007. The restated historical consolidated financial statements of HCP for the year ended December 31, 2006, are contained in its Form 8-K as filed with the SEC on September 19, 2007. The historical consolidated financial statements of HCP for the six months ended June 30, 2007 are contained in HCP’s Form 10-Q as filed with the SEC on August 6, 2007. The historical consolidated financial statements of SEUSA for the six months ended June 30, 2007 and for the year ended December 31, 2006, are included as Exhibits 99.1 and 99.2 to this Current Report on Form 8-K, respectively. The historical consolidated financial statements of CRP and the Advisor for the nine months ended September 30, 2006 are contained in HCP’s Current Report on Form 8-K as filed with the SEC on January 9, 2007.

HCP, INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

June 30, 2007

(In thousands)

				SEUSA			Pro Forma			SEUSA and			Consolidated
	HCP			Historical			Adjustments			Pro Forma			Pro Forma
	Historical			(A)			(B)			Adjustments			HCP
ASSETS
Real estate:
Buildings and improvements	$	6,205,698		$	937,432		$	569,581	(C)	$	1,507,013		$	7,712,711
Developments in process	29,056			213,493			96,607		(C)	310,100			339,156
Land	770,010			424,447			486,008		(C)	910,455			1,680,465
Less: accumulated depreciation and amortization	618,321			182,694			(182,694		)(C)	—			618,321
Net real estate	6,386,443			1,392,678			1,334,890			2,727,568			9,114,011

Net investment in direct financing leases	682,176			—			—			—			682,176
Loans receivable, net	203,147			—			—			—			203,147
Investments in and advances to unconsolidated joint ventures	214,904			22,309			—			22,309			237,213
Accounts receivable, net	33,652			1,628			—			1,628			35,280
Cash and cash equivalents	351,217			16,577			(168,521		)(F)	(151,944		)	199,273
Intangible assets, net	328,753			20,117			328,489		(D)	348,606			677,359
Real estate held for sale, net	204,683			—			—			—			204,683
Other assets, net	474,351			146,748			(77,157		)(E)	69,591			543,942
Total assets	$	8,879,326		$	1,600,057		$	1,417,701		$	3,017,758		$	11,897,084

LIABILITIES AND STOCKHOLDERS’ EQUITY
Bank line of credit and term loan	$	—		$	550,000		$	2,200,000	(F)	$	2,750,000		$	2,750,000
Due to SEGRO	—			210,000			(210,000		)(F)	—			—
Senior unsecured notes	3,223,422			383,608			(383,608		)(F)	—			3,223,422
Mortgage debt	1,260,885			52,291			(19,840		)(F)	32,451			1,293,336
Other debt	108,497			—			—			—			108,497
Intangible liabilities, net	145,047			6,713			147,734		(G)	154,447			299,494
Accounts payable and accrued expenses and deferred revenues	196,286			143,128			(62,268		)(H)	80,860			277,146
Total liabilities	4,934,137			1,345,740			1,672,018			3,017,758			7,951,895
Minority interests:
Joint venture partners	34,305			—			—			—			34,305
Non-managing member unitholders	306,497			—			—			—			306,497
Total minority interests	340,802			—			—			—			340,802
Stockholders’ equity:
Preferred stock	285,173			185,000			(185,000		)(I)	—			285,173
Common stock	206,379			1			(1		)(I)	—			206,379
Additional paid-in capital	3,392,612			33,413			(33,413		)(I)	—			3,392,612
Cumulative net income	2,155,265			37,485			(37,485		)(I)	—			2,155,265
Cumulative dividends	(2,449,360		)	—			—			—			(2,449,360		)
Accumulated other comprehensive income (loss)	14,318			(1,582		)	1,582		(I)	—			14,318
Total stockholders’ equity	3,604,387			254,317			(254,317		)	—			3,604,387
Total liabilities and stockholders’ equity	$	8,879,326		$	1,600,057		$	1,417,701		$	3,017,758		$	11,897,084

The accompanying notes are an integral part of these unaudited pro forma condensed consolidated financial statements.

HCP, INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

For the six months ended June 30, 2007

(In thousands, except per share data)

										Consolidated
	HCP			SEUSA			Pro Forma			Pro Forma
	Historical			Historical (A)			Adjustments			HCP
Revenues and other income:
Rental and related revenues	$	407,946		$	76,277		$	15,605	(J)	$	499,828
Income from direct financing leases	30,205			—			—			30,205
Investment management fee income	10,459			—			—			10,459
Interest and other income	34,947			880			—			35,827
	483,557			77,157			15,605			576,319

Costs and expenses:
Interest	151,337			58,335			28,027		(K)	237,699
Depreciation and amortization	121,328			29,017			14,861		(L)	165,206
Operating	81,350			10,748			9,512		(M)	101,610
General and administrative	38,884			16,583			—			55,467
	392,899			114,683			52,400			559,982

Operating income / (loss)	90,658			(37,526		)	(36,795		)	16,337
Equity income from unconsolidated joint ventures	2,516			4,668			—			7,184
Gains on sale of real estate interests, net	10,141			—			—			10,141
Minority interests’ share of earnings	(11,974		)	(338		)	338		(N)	(11,974		)
Income / (loss) before income taxes	91,341			(33,196		)	(36,457		)	21,688

Income tax expense	—			(12,997		)	12,997		(O)	—
Income / (loss) from continuing operations	91,341			(20,199		)	(49,454		)	21,688

Less: preferred stock dividends	(10,566		)	—			—			(10,566		)
Income / (loss) from continuing operations applicable to common stocks	$	80,775		$	(20,199	)	$	(49,454	)	$	11,122

Income (loss) from continuing operations per common share – basic (P)	$	0.39								$	0.05
Income (loss) from continuing operations per common share – diluted (P)	$	0.39								$	0.05

Weighted average shares used to calculate income per common stock:
Basic (P)	204,882						1,353		(Q)	206,235
Diluted (P)	206,470						1,353		(Q)	207,823

The accompanying notes are an integral part of these unaudited pro forma condensed consolidated financial statements.

HCP, INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

For the year ended December 31, 2006

(In thousands, except per share data)

													Pro Forma
	HCP									Total HCP			CRP			Consolidated
	Historical			SEUSA			Pro Forma			Pro Forma			Acquisitions			Pro Forma
	Restated			Historical (A)			Adjustments			For SEUSA			(R)			HCP
Revenues and other income:
Rental and related revenues	$	519,337		$	120,356		$	28,284	(J)	$	667,977		$	261,396		$	929,373
Income from direct financing leases	15,008			—			—			15,008			45,522			60,530
Investment management fee income	3,895			—			—			3,895			—			3,895
Interest and other income	36,184			1,026			—			37,210			5,773			42,983
	574,424			121,382			28,284			724,090			312,691			1,036,781

Costs and expenses:
Interest	212,188			29,192			143,534		(K)	384,914			167,634			552,548
Depreciation and amortization	133,714			47,338			40,419		(L)	221,471			116,322			337,793
Operating	89,139			15,932			19,023		(M)	124,094			26,689			150,783
General and administrative	47,290			23,250			—			70,540			36,508			107,048
Impairments	3,577			—			—			3,577			—			3,577
	485,908			115,712			202,976			804,596			347,153			1,151,749

Operating income / (loss)	88,516			5,670			(174,692		)	(80,506		)	(34,462		)	(114,968		)
Equity income from unconsolidated joint ventures	8,331			10,428			—			18,759			328			19,087
Loss on sale of real estate interests and other investments, net	—			(546		)	—			(546		)	—			(546		)
Minority interests	(14,805		)	(1,652		)	1,652		(N)	(14,805		)	(414		)	(15,219		)
Income / (loss) before income taxes	82,042			13,900			(173,040		)	(77,098		)	(34,548		)	(111,646		)

Income tax expense	—			4,630			(4,630		)(O)	—			650			650
Income / (loss) from continuing operations	82,042			9,270			(168,410		)	(77,098		)	(35,198		)	(112,296		)

Less: preferred stock dividends	(21,130		)	—			—			(21,130		)	—			(21,130		)
Income / (loss) from continuing operations applicable to common stocks	$	60,912		$	9,270		$	(168,410	)	$	(98,228	)	$	(35,198	)	$	(133,426	)

Income / (loss) from continuing operations per common share – basic (P)	$	0.41								$	(0.66	)				$	(0.65	)
Income / (loss) from continuing operations per common share – diluted (P)	$	0.41								$	(0.66	)				$	(0.65	)

Weighted-average shares used to calculate income / (loss) per common stock:
Basic (P)	148,236									148,236			56,149		(Q)	204,385
Diluted (P)	149,226									148,236			56,149		(Q)	204,385

The accompanying notes are an integral part of these unaudited pro forma condensed consolidated financial statements.

HCP, INC.

NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

(A) The historical financial statements of SEUSA for the year ended December 31, 2006 and as of and for the six months ended June 30, 2007 have been presented based on the financial statement classification of HCP.

(B) On August 1, 2007 HCP, completed the acquisition of SEUSA, which was a wholly-owned subsidiary of SEGRO plc, a public limited company incorporated under the laws of England and Wales (“SEGRO”), pursuant to the Share Purchase Agreement, entered into between HCP and SEGRO, dated as of June 3, 2007 (the “Share Purchase Agreement”). The Acquisition was effected by HCP acquiring 100% of the capital stock of SEUSA, with SEUSA surviving as a wholly-owned subsidiary of HCP. Under the terms of the Share Purchase Agreement, HCP paid SEGRO cash consideration of approximately $2.9 billion, subject to certain adjustments. The calculation of the Acquisition consideration and total purchase price follow (in thousands):

Calculation of SEUSA purchase price
Payment of aggregate cash consideration	$	2,900,000
SEUSA intangible liabilities at book value	6,713
All other SEUSA liabilities at book value	143,128
Adjustment to record SEUSA intangible liabilities at fair value (Note G)	147,734
Adjustment to record SEUSA other liabilities at fair value (Note H)	(62,268		)
Estimated fees and other expenses related to the Acquisition	10,000
Total purchase price	$	3,145,307

The calculation of the estimated fees and other expenses related to the Acquisition follow (in thousands):

Advisory fees	$	2,000
Legal, accounting and other fees and costs	8,000
Total	$	10,000

(C) SEUSA’s real estate assets have been adjusted to their preliminary estimated fair values as of June 30, 2007 and SEUSA’s historical accumulated depreciation and amortization balances are eliminated when real estate assets are recorded at fair value.

(D) Adjustments to SEUSA’s historical balance of intangible assets follow (in thousands):

Recognition of assets associated with the acquired in-place leases that have favorable market rental rates	$	114,164
Recognition of other related in-place lease intangibles	234,442
Elimination of historical carrying value of in-place lease intangible assets	(20,117		)
	$	328,489

Other related in-place lease intangible assets acquired include amounts for in-place lease values that are based on HCP’s evaluation of the specific characteristics of each tenant’s lease. Factors to be considered include estimates of carrying costs during hypothetical expected lease-up periods, market conditions, and costs to execute similar leases. In estimating carrying costs, HCP includes estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, HCP considers leasing commissions, legal and other related costs.

(E) Adjustments to SEUSA’s historical balance of other assets follow (in thousands):

Deferral of issuance costs associated with debt issued in the Acquisition	$	8,521
Elimination of historical straight-line rent receivable balance	(61,814		)
Elimination of historical deferred debt issuance and leasing costs and leasing commissions	(23,864		)
	$	(77,157	)

(F) On August 1, 2007, HCP obtained a $2.75 billion bridge loan maturing on July 31, 2008 which also includes two six-month extension periods. In reflecting the funding for the Acquisition on the balance sheet as of June 30, 2007 to fund the consideration of $2.9 billion, estimated fees and costs related to the Acquisition of $10 million (Note B), and the $8.5 million bridge loan debt issuance costs (Note E), HCP was assumed to have used $169 million of cash on hand. Prior to August 1, 2007, SEUSA repaid its bank line of credit, senior unsecured notes and $20 million of mortgage debt using advances from SEGRO. The SEGRO advances were repaid in full at the date of closing of the SEUSA acquisition.

(G) Adjustments to SEUSA’s historical balance of intangible liabilities follow (in thousands):

Recognition of liabilities associated with the acquired in-place leases that have below-market rental rates	$	154,447
Elimination of liabilities associated with acquired in-place leases that have below-market rental rates	(6,713		)
	$	147,734

(H) Adjustments to SEUSA’s historical balance of other liabilities follow (in thousands):

Elimination of historical deferred tax liability	$	(46,527	)
Elimination of deferred revenue	(15,741		)
	$	(62,268	)

(I) Adjustments represent the elimination of historical SEUSA balances. Because the acquisition of SEUSA was financed with cash, no additional shares of HCP were issued in connection with the Acquisition.

(J) Adjustments to rental income and other revenues follow (in thousands):

	Year Ended December 31, 2006			Six Months Ended June 30, 2007
Recognize the total minimum lease payments provided under the acquired leases on a straight-line basis over the remaining term from the assumed acquisition date of January 1, 2006	$	8,824		$	3,742
Recognize the amortization of above-and below-market lease intangibles	3,362			1,681
Increase in tenant expense recoveries related to increase in real estate taxes (see Note M)	19,023			9,512
Eliminate SEUSA’s historical straight-line rent and deferred revenue adjustment, net	314			2,254
Eliminate SEUSA’s historical amortization of above- and below-market lease intangibles	(3,239		)	(1,584		)
	$	28,284		$	15,605

(K) Adjustments to interest expense follow (in thousands):

	Year Ended December 31, 2006			Six Months Ended June 30, 2007
Interest expense associated with debt issued and assumed in the Acquisition	$	167,360		$	83,680
Amortization of the premium recognized on assumed debt	(315		)	(158		)
Amortization of debt issuance costs associated with new debt issued in the Acquisition	5,681			2,840
Eliminate SEUSA’s historical interest expense	(29,192		)	(58,335		)
	$	143,534		$	28,027

The pro forma increase in interest expense as a result of the issuance of new debt in the Acquisition is calculated using rates for the lines of credit and short-term borrowings issued on August 1, 2007 (the date that the Acquisition was completed). Each 1/8 of 1% increase in the annual interest assumed with respect to the debt will increase pro forma interest expense by $3.4 million for the year ended December 31, 2006 and $1.7 million for the six month period ended June 30, 2007.

(L) Adjustments to depreciation and amortization expense follow (in thousands):

	Year Ended December 31, 2006			Six Months Ended June 30, 2007
Real estate depreciation expense as a result of the recording of SEUSA’s real estate at its estimated fair value at the assumed acquisition date of January 1, 2006	$	47,599		$	23,799
Amortization expense related to lease-up related intangible assets associated with acquired leases	40,158			20,079
Eliminate SEUSA’s historical depreciation and amortization	(47,338		)	(29,017		)
	$	40,419		$	14,861

An estimated useful life of 35 years was assumed to compute real estate depreciation. For assets and liabilities associated with the value of in-place leases, a weighted-average remaining lease term of approximately 9 years was used to compute amortization expense. The Company computes depreciation and amortization using the straight-line method over the estimated useful lives of the properties or the remaining lease term of the related intangible.

(M) Net impact in real estate tax expense based on the step-up in basis of certain properties as a result of the Acquisition.

(N) Minority interests’ share of earnings of SEUSA has been eliminated because HCP acquired the interests of all minority shareholders in the Acquisition.

(O) At the closing of this Acquisition, 100% of the capital stock of SEUSA was acquired by a REIT subsidiary of HCP, which, assuming the acquisition was effective January 1, 2006, subtantially all of the amounts of the deferred tax obligations and income tax expense would then be eliminated.

(P) The calculations of basic and diluted earnings from continuing operations attributable to common stock per share follow (in thousands, except per share data):

	Year Ended December 31, 2006									Six Months Ended June 30, 2007
							Total HCP
				Total HCP			Pro Forma
	HCP			Pro Forma			for SEUSA			HCP			Pro Forma
	Historical			for SEUSA			and CRP			Historical			HCP
Income (loss) from continuing operations	$	82,042		$	(77,098	)	$	(112,296	)	$	91,341		$	21,688
Less: preferred stock dividends	(21,130		)	(21,130		)	(21,130		)	(10,566		)	(10,566		)
Earnings (loss) from continuing operations attributable to common stocks	$	60,912		$	(98,228	)	$	(133,426	)	$	80,775		$	11,122
Weighted average shares used to calculate earnings per common stock–Basic	148,236			148,236			204,385			204,882			206,235
Incremental weighted average effect of potentially dilutive instruments	990			—			—			1,588			1,588
Adjusted weighted average shares used to calculate earnings (loss) per common stock–Diluted	149,226			148,236			204,385			206,470			207,823
Earnings (loss) from continuing operations per common stock–Basic	$	0.41		$	(0.66	)	$	(0.65	)	$	0.39		$	0.05
Earnings (loss) from continuing operations per common stock–Diluted	$	0.41		$	(0.66	)	$	(0.65	)	$	0.39		$	0.05

(Q) The pro forma weighted-average shares outstanding are the historical weighted-average shares of HCP for the periods presented, adjusted for the issuance of 40.3 million shares (33.5 million shares issued in November 2006 and 6.8 million shares issued in January 2007) of HCP common stock whose proceeds were used to repay debt initially used to finance the CRP Acquisitions and the issuance of 27.2 million shares of HCP common stock issued in conjunction with the CRP Acquisitions, which were assumed to have been issued at January 1, 2006.

(R) Because the results of CRP and the Advisor are not fully reflected in the historical statement of operations of HCP for the year ended December 31, 2006, pro forma information to reflect the CRP acquisitions for the year ended December 31, 2006 is presented (collectively, “Pro Forma CRP Acquisitions”). Additionally, HCP entered into certain capital market and financing transactions subsequent to the CRP acquisitions but related to the CRP acquisitions, which are not fully reflected in the historical statement of operations of HCP for year ended December 31, 2006. These Pro Forma CRP adjustments for the year ended December 31, 2006 have been prepared as if they had occurred as of January 1, 2006 for the year ended December 31, 2006. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the respective historical financial statements and the notes thereto of CRP and the Advisor for the year ended December 31, 2005 and as of and for the nine months ended September 30, 2006.

	CRP												Advisor
	Historical												Historical
	Nine Months												Nine Months
	ended			CRP Re-						CRP			ended		Advisor			CRP/			Pro Forma
	September 30,			Classifications			CRP			Pro Forma			September 30,		Pro Forma			Advisor			CRP
	2006			(R1)			Reclassified			Adjustments			2006		Adjustments			Eliminations			Acquisitions
Revenues and other income:
Rental and other revenues	$	—		$	272,900		$	272,900		$	33,416	(R2)	$	—	$	—		$	—		$	261,396
										(2,054		)(R2)
										(32,034		)(R2)
										547		(R2)
										(11,379		)(R2)
Seniors’ housing rental income	187,078			(187,078		)	—			—			—		—			—			—
Earned income from direct financing leases	45,522			—			45,522			—			—		—			—			45,522
FF&E reserve income	6,038			(6,038		)	—			—			—		—			—			—
Contingent rent	839			(839		)	—			—			—		—			—			—
Medical facilities rental income and other revenues	78,945			(78,945		)	—			—			—		—			—			—
Equity income from unconsolidated joint ventures	328			(328		)	—			—			—		—			—			—
Acquisition fees	—			—			—			—			2,599		—			(2,599		)(R9)	—
Debt acquisition fees	—			—			—			—			4,328		—			(4,328		)(R9)	—
Management fees	—			—			—			—			15,742		—			(15,742		)(R9)	—
Interest and other income	5,773			—			5,773			—			2,278		—			(2,278		)(R9)	5,773
	324,523			(328		)	324,195			(11,504		)	24,947		—			(24,947		)	312,691

Costs and expenses:
Interest	71,164			—			71,164			104,609		(R3)	—		—			—			167,634
										(3,530		)(R3)
										(225		)(R4)
										(4,384		)(R4)
Depreciation and amortization	84,260			—			84,260			23,718		(R5)	—		4,538		(R7)	—			116,322
										6,530		(R5)
										(2,724		)(R5)
Operating	—			26,372			26,372			317		(R6)	—		—			—			26,689
Seniors’ housing property expenses	749			(749		)	—			—			—		—			—			—
Medical facilities operating expenses	25,623			(25,623		)	—			—			—		—			—			—
General and administrative	23,301			7,676			30,977			(7,193		)(R10)	15,002		—			(2,278		)(R9)	36,508
Asset management fees paid to related party	15,597			—			15,597			—			—		—			(15,597		)(R9)	—
Impairments	—			—			—			—			—		—			—			—
Provision for doubtful accounts	8,326			(8,326		)	—			—			—		—			—			—
	229,020			(650		)	228,370			117,118			15,002		4,538			(17,875		)	347,153

Income before minority interests	95,503			322			95,825			(128,622		)	9,945		(4,538		)	(7,072		)	(34,462		)
Equity income from unconsolidated joint ventures	—			328			328			—			—		—			—			328
Minority interests	(414		)	—			(414		)	—			—		—			—			(414		)
Earnings before income taxes	95,089			650			95,739			(128,622		)	9,945		(4,538		)	(7,072		)	(34,548		)
Income tax expense	—			650			650			—			3,804		(3,804		)(R8)	—			650
Income from continuing operations	$	95,089		$	—		$	95,089		$	(128,622	)	$	6,141	$	(734	)	$	(7,072	)	$	(35,198	)

Weighted-average shares used to calculate income/(loss) per common stock:
Basic (Q)										56,149											56,149
Diluted (Q)										56,149											56,149

(R1) Reclassifications to conform certain CRP amounts to HCP’s presentation are as follows:

· “Seniors’ housing rental income,” “FF&E reserve income,” “Contingent rent,” and “Medical facilities rental income and other revenues” have been reclassified to “Rental and other revenues;”

· “Seniors’ housing property expenses” and “Medical facilities operating expenses” have been reclassified to “Operating;”

· “Provision for doubtful accounts” has been reclassified to “General and administrative;”

· Income taxes have been reclassified from “General and administrative” to a separate line item; and

· Reclassification of equity income from unconsolidated joint ventures from revenues and other income to other operating income to conform to classification used in 2007.

(R2) Adjustments to CRP’s rental income and other revenues are as follows (in thousands):

Recognize the total minimum lease payments provided under the acquired leases on a straight-line basis over the remaining term from January 1, 2006	$	33,416
Recognize the amortization of above- and below-market lease intangibles	(2,054		)
Eliminate CRP’s historical straight-line rent adjustment	(32,034		)
Eliminate CRP’s historical amortization of above- and below-market lease intangibles	547
Eliminate CRP’s historical rental revenue earned from divested properties	(11,379		)
	$	(11,504	)

(R3) On October 5, 2006, in connection with the CRP Acquisitions, HCP entered into credit agreements with a syndicate of banks providing for aggregate borrowings of $3.4 billion. The credit facilities included a $700 million bridge loan, a $1.7 billion two-year term loan, and a $1.0 billion three-year revolving credit facility. $2.1 billion of the aggregate borrowings of $3.0 billion needed to acquire CRP were assumed or repaid using the proceeds from the following transactions:

a. On November 10, 2006, HCP issued 33.5 million shares of common stock and received net proceeds of approximately $960 million. (See note Q)

b. On December 4, 2006, HCP issued $400 million senior unsecured notes priced at 99.768% of the principal amount for an effective yield of 5.69%.

c.On January 19, 2007, HCP issued 6.8 million shares of common stock and received net proceeds of approximately $261 million (See note Q).

d. On January 22, 2007, HCP issued $500 million senior unsecured notes priced at 99.323% of the principal amount for an effective yield of 6.09%.

Pro Forma CRP interest expense adjustments for the above debt transactions are as follows (in thousands):

Increase in interest expense associated with senior unsecured notes, term loan and bridge loans for the CRP Acquisitions	104,609
Eliminate amortization of issuance costs of bridge and term loans repaid with subsequent financing and capital market transactions	(3,530		)
	$	101,079

The pro forma increase in interest expense as a result of the issuance of $900 million senior unsecured notes and a $870 million term loan in the CRP Acquisitions is calculated using effective rates of the senior notes and the rates for the short-term borrowings issued on October 5, 2006 (the date that the CRP Acquisitions were completed), respectively. Each 1/8 of 1% increase in the annual interest assumed with respect to the debt will increase pro forma interest expense by $2.2 million for the year ended December 31, 2006.

(R4) Amortization of the net premiums and discounts recognized at the merger date of the CRP Acquisitions for the fair value of the assumed CRP mortgage debt of $225,000, and elimination of historical interest expense of approximately $4.4 million incurred on debt repaid in conjunction with divested properties.

(R5) Adjustments to depreciation expenses are as follows (in thousands):

Represents the increase in real estate depreciation expense as a result of the recording of CRP’s real estate at its estimated fair value at the assumed CRP Acquisitions date of January 1, 2006	$	23,718
Represents the incremental amortization expense related to lease-up related intangible assets associated with acquired leases	6,530
Eliminate CRP’s historical depreciation expense incurred from divested properties	(2,724		)
	$	27,524

An estimated useful life of 35 years was assumed to compute the adjustment to real estate depreciation. For assets and liabilities associated with the value of in-place leases, a weighted-average remaining lease term of 7 years was used to compute amortization expense.

(R6) Operating expenses are adjusted to include amortization of below-market ground lease intangibles.

(R7) Depreciation and amortization is adjusted to include the amortization of non-compete contract intangibles. A 4 year period was used to compute amortization expense.

(R8) Income taxes of the Advisor have been eliminated as a result of the merger with CRP, which is assumed as of January 1, 2006. At the closing of this merger, the Advisor was merged into a Qualifying REIT Subsidiary (“QRS”) which, assuming the merger was effective as of January 1, 2006, would eliminate the Advisor’s income tax obligations.

(R9) Represents the elimination of acquisition, debt acquisition, management and other fees earned by the Advisor from CRP. Because acquisition fees and debt acquisition fees paid by CRP to the Advisor are capitalized by CRP, only management fees and other fees are eliminated within costs and expenses.

(R10) Represents the elimination of nonrecurring charges directly attributable to the CRP Acquisitions.