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WELLTOWER INC. - Quarter Report: 2013 September (Form 10-Q)

 

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

 

 

 

þ

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

or

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                      

Commission File number 1-8923

HEALTH CARE REIT, INC.

 

(Exact name of registrant as specified in its charter

 

 

 

Delaware

 

34-1096634

 

 

 

(State or other jurisdiction of

 incorporation or organization)

 

(I.R.S. Employer

 Identification No.)

 

 

 

4500 Dorr Street, Toledo, Ohio

 

43615

 

 

 

(Address of principal executive office)

 

(Zip Code)

(419) 247-2800

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes  þ  No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

Large accelerated filer þ  

 

Accelerated filer o  

 

Non-accelerated filer   o

 (Do not check if a smaller reporting company)

 

Smaller reporting company o  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No  þ

As of October 31, 2013, the registrant had 288,670,688 shares of common stock outstanding.

 

 

 


 

TABLE OF CONTENTS

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements (Unaudited)

 

 

 

Consolidated Balance Sheets — September 30, 2013 and December 31, 2012

3

 

 

Consolidated Statements of Comprehensive Income — Three and nine months ended September 30, 2013 and 2012

4

 

 

Consolidated Statements of Equity — Nine months ended September 30, 2013 and 2012

6

 

 

Consolidated Statements of Cash Flows — Nine months ended September 30, 2013 and 2012

7

 

 

Notes to Unaudited Consolidated Financial Statements

8

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

28

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

59

 

 

Item 4. Controls and Procedures

60

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

 

Item 1A. Risk Factors

60

 

60

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

60

 

 

Item 5. Other Information

60

 

 

Item 6. Exhibits

61

 

 

Signatures

62

 

 

 


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

CONSOLIDATED BALANCE SHEETS

HEALTH CARE REIT, INC. AND SUBSIDIARIES

(In thousands)

 

 

 

 

 

 

 

September 30, 2013

 

December 31, 2012

 

 

 

 

  

(Unaudited)

 

(Note)

Assets:  

 

 

 

 

 

Real estate investments:  

 

 

 

 

 

 

Real property owned:  

 

 

 

 

 

 

 

Land and land improvements  

$

 1,869,234 

 

$

 1,365,391 

 

 

Buildings and improvements  

 

 20,387,577 

 

 

 15,635,127 

 

 

Acquired lease intangibles  

 

 1,050,542 

 

 

 673,684 

 

 

Real property held for sale, net of accumulated depreciation  

 

 2,141 

 

 

 245,213 

 

 

Construction in progress  

 

 158,006 

 

 

 162,984 

 

 

 

Gross real property owned  

 

 23,467,500 

 

 

 18,082,399 

 

 

Less accumulated depreciation and amortization  

 

 (2,168,334) 

 

 

 (1,555,055) 

 

 

 

Net real property owned  

 

 21,299,166 

 

 

 16,527,344 

 

Real estate loans receivable  

 

 307,377 

 

 

 895,665 

 

Net real estate investments  

 

 21,606,543 

 

 

 17,423,009 

Other assets:  

 

 

 

 

 

 

 

Equity investments  

 

 475,574 

 

 

 438,936 

 

 

Goodwill  

 

 68,321 

 

 

 68,321 

 

 

Deferred loan expenses  

 

 68,569 

 

 

 66,327 

 

 

Cash and cash equivalents  

 

 164,838 

 

 

 1,033,764 

 

 

Restricted cash  

 

 80,890 

 

 

 107,657 

 

 

Receivables and other assets  

 

 585,070 

 

 

 411,095 

 

 

 

Total other assets  

 

 1,443,262 

 

 

 2,126,100 

Total assets  

$

 23,049,805 

 

$

 19,549,109 

 

 

 

 

  

 

 

 

 

 

Liabilities and equity  

 

 

 

 

 

Liabilities:  

 

 

 

 

 

 

 

Borrowings under unsecured line of credit arrangement  

$

 847,670 

 

$

 0 

 

 

Senior unsecured notes  

 

 6,395,638 

 

 

 6,114,151 

 

 

Secured debt  

 

 3,115,862 

 

 

 2,336,196 

 

 

Capital lease obligations  

 

 84,069 

 

 

 81,552 

 

 

Accrued expenses and other liabilities  

 

 660,441 

 

 

 462,099 

Total liabilities  

 

 11,103,680 

 

 

 8,993,998 

Redeemable noncontrolling interests  

 

 31,706 

  

  

 34,592 

Equity:  

 

 

 

 

 

 

 

Preferred stock  

 

 1,022,917 

 

 

 1,022,917 

 

 

Common stock  

 

 288,249 

 

 

 260,396 

 

 

Capital in excess of par value  

 

 12,349,678 

 

 

 10,543,690 

 

 

Treasury stock  

 

 (21,263) 

 

 

 (17,875) 

 

 

Cumulative net income  

 

 2,301,869 

 

 

 2,184,819 

 

 

Cumulative dividends  

 

 (4,363,376) 

 

 

 (3,694,579) 

 

 

Accumulated other comprehensive income (loss)  

 

 (23,475) 

 

 

 (11,028) 

 

 

Other equity  

 

 5,864 

 

 

 6,461 

 

 

 

Total Health Care REIT, Inc. stockholders’ equity  

 

 11,560,463 

 

 

 10,294,801 

 

 

Noncontrolling interests  

 

 353,956 

 

 

 225,718 

Total equity  

 

 11,914,419 

 

 

 10,520,519 

Total liabilities and equity  

$

 23,049,805 

 

$

 19,549,109 

 

NOTE: The consolidated balance sheet at December 31, 2012 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

 

See notes to unaudited consolidated financial statements

 

3


 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

HEALTH CARE REIT, INC. AND SUBSIDIARIES

(In thousands, except per share data)

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2013

 

2012

 

2013

 

2012

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Rental income  

$

 311,731 

 

$

 277,919 

 

$

 909,659 

 

$

 789,748 

 

Resident fees and services

 

 466,127 

 

 

 174,464 

 

 

 1,164,446 

 

 

 498,295 

 

Interest income

 

 7,629 

 

 

 8,111 

 

 

 24,325 

 

 

 24,131 

 

Other income

 

 1,443 

 

 

 1,339 

 

 

 3,168 

 

 

 4,505 

 

 

Total revenues

 

 786,930 

 

 

 461,833 

 

 

 2,101,598 

 

 

 1,316,679 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 116,530 

 

 

 91,915 

 

 

 336,585 

 

 

 271,223 

 

Property operating expenses

 

 342,730 

 

 

 144,417 

 

 

 874,960 

 

 

 409,236 

 

Depreciation and amortization

 

 242,668 

 

 

 127,844 

 

 

 628,700 

 

 

 373,344 

 

General and administrative

 

 28,718 

 

 

 23,679 

 

 

 79,799 

 

 

 77,302 

 

Transaction costs

 

 23,591 

 

 

 8,264 

 

 

 117,707 

 

 

 42,535 

 

Loss (gain) on derivatives, net

 

 4,872 

 

 

 409 

 

 

 4,465 

 

 

 (1,712) 

 

Loss (gain) on extinguishment of debt, net

 

 (4,068) 

 

 

 215 

 

 

 (4,376) 

 

 

 791 

 

Provision for loan losses

 

 0 

 

 

 27,008 

 

 

 0 

 

 

 27,008 

 

 

Total expenses

 

 755,041 

 

 

 423,751 

 

 

 2,037,840 

 

 

 1,199,727 

Income (loss) from continuing operations before income taxes

 

 

 

 

 

 

 

 

 

 

 

 

and income from unconsolidated entities

 

 31,889 

 

 

 38,082 

 

 

 63,758 

 

 

 116,952 

Income tax (expense) benefit

 

 (3,077) 

 

 

 (836) 

 

 

 (7,055) 

 

 

 (3,754) 

Income (loss) from unconsolidated entities

 

 (331) 

 

 

 (739) 

 

 

 (3,529) 

 

 

 2,250 

Income (loss) from continuing operations

 

 28,481 

 

 

 36,507 

 

 

 53,174 

 

 

 115,448 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) on sales of properties, net

 

 4,707 

 

 

 12,827 

 

 

 57,202 

 

 

 46,046 

 

Impairment of assets

 

 0 

 

 

 (6,952) 

 

 

 0 

 

 

 (6,952) 

 

Income (loss) from discontinued operations, net

 

 417 

 

 

 11,124 

 

 

 2,212 

 

 

 33,294 

 

 

Discontinued operations, net

 

 5,124 

 

 

 16,999 

 

 

 59,414 

 

 

 72,388 

Net income

 

 33,605 

 

 

 53,506 

 

 

 112,588 

 

 

 187,836 

Less:

Preferred stock dividends

 

 16,602 

 

 

 16,602 

 

 

 49,805 

 

 

 52,527 

Less:

Preferred stock redemption charge

 

 0 

 

 

 0 

 

 

 0 

 

 

 6,242 

Less:

Net income (loss) attributable to noncontrolling interests(1)

 

 (3,688) 

 

 

 (365) 

 

 

 (4,462) 

 

 

 (2,241) 

Net income (loss) attributable to common stockholders

$

 20,691 

 

$

 37,269 

 

$

 67,245 

 

$

 131,308 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 286,020 

 

 

 224,391 

 

 

 273,148 

 

 

 212,592 

 

Diluted

 

 288,029 

 

 

 226,258 

 

 

 275,247 

 

 

 214,075 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

 

attributable to common stockholders

$

 0.05 

 

$

 0.09 

 

$

 0.03 

 

$

 0.28 

 

Discontinued operations, net

 

 0.02 

 

 

 0.08 

 

 

 0.22 

 

 

 0.34 

 

Net income (loss) attributable to common stockholders*

$

 0.07 

 

$

 0.17 

 

$

 0.25 

 

$

 0.62 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

 

attributable to common stockholders

$

 0.05 

 

$

 0.09 

 

$

 0.03 

 

$

 0.28 

 

Discontinued operations, net

 

 0.02 

 

 

 0.08 

 

 

 0.22 

 

 

 0.34 

 

Net income (loss) attributable to common stockholders*

$

 0.07 

 

$

 0.16 

 

$

 0.24 

 

$

 0.61 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared and paid per common share

$

 0.765 

 

$

 0.74 

 

$

 2.295 

 

$

 2.22 

* Amounts may not sum due to rounding

(1) Includes amounts attributable to redeemable noncontrolling interests.

See notes to unaudited consolidated financial statements

 

4


 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (CONTINUED)

HEALTH CARE REIT, INC. AND SUBSIDIARIES

(In thousands)

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

Net income

$

 33,605 

 

$

 53,506 

 

$

 112,588 

 

$

 187,836 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Unrecognized gain (loss) on equity investments

 

 (260) 

 

 

 230 

 

 

 (346) 

 

 

 192 

 

Change in net unrealized gains (losses) on cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss)

 

 473 

 

 

 414 

 

 

 1,416 

 

 

 1,138 

 

Foreign currency translation gain (loss)

 

 25,693 

 

 

 2,514 

 

 

 (18,164) 

 

 

 166 

Total other comprehensive income (loss)

 

 25,906 

 

 

 3,158 

 

 

 (17,094) 

 

 

 1,496 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

 59,511 

 

 

 56,664 

 

 

 95,494 

 

 

 189,332 

Less: Total comprehensive income (loss) attributable to noncontrolling interests(1)

 

 (3,881) 

 

 

 (365) 

 

 

 (9,109) 

 

 

 (2,241) 

Total comprehensive income (loss) attributable to common stockholders

$

 63,392 

 

$

 57,029 

 

$

 104,603 

 

$

 191,573 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Includes amounts attributable to redeemable noncontrolling interests.

 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements

 

5


 

CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

HEALTH CARE REIT, INC. AND SUBSIDIARIES

(In thousands)

 

 

 

Nine Months Ended September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Preferred

Common

Excess of

Treasury

Cumulative

Cumulative

Comprehensive

Other

Noncontrolling

 

 

 

 

 

Stock

Stock

Par Value

Stock

Net Income

Dividends

Income (Loss)

Equity

Interests

Total

Balances at beginning of period

$

 1,022,917 

$

 260,396 

$

 10,543,690 

$

 (17,875) 

$

 2,184,819 

$

 (3,694,579) 

$

 (11,028) 

$

 6,461 

$

 225,718 

$

 10,520,519 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 117,050 

 

 

 

 

 

 

 

 (2,345) 

 

 114,705 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 (12,447) 

 

 

 

 (4,647) 

 

 (17,094) 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 97,611 

Net change in noncontrolling interests

 

 

 

 1,109 

 

 23,410 

 

 

 

 

 

 

 

 

 

 

 

 135,230 

 

 159,749 

Amounts related to issuance of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

from dividend reinvestment and stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

incentive plans, net of forfeitures

 

 

 

 2,756 

 

 176,840 

 

 (3,388) 

 

 

 

 

 

 

 

 (1,448) 

 

 

 

 174,760 

Proceeds from issuance of common stock

 

 

 

 23,000 

 

 1,607,281 

 

 

 

 

 

 

 

 

 

 

 

 

 

 1,630,281 

Equity component of convertible debt

 

 

 

 988 

 

 (1,543) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 (555) 

Option compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 851 

 

 

 

 851 

Cash dividends paid:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock cash dividends

 

 

 

 

 

 

 

 

 

 

 

 (618,992) 

 

 

 

 

 

 

 

 (618,992) 

 

Preferred stock cash dividends

 

 

 

 

 

 

 

 

 

 

 

 (49,805) 

 

 

 

 

 

 

 

 (49,805) 

Balances at end of period

$

 1,022,917 

$

 288,249 

$

 12,349,678 

$

 (21,263) 

$

 2,301,869 

$

 (4,363,376) 

$

 (23,475) 

$

 5,864 

$

 353,956 

$

 11,914,419 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Preferred

Common

Excess of

Treasury

Cumulative

Cumulative

Comprehensive

Other

Noncontrolling

 

 

 

 

 

Stock

Stock

Par Value

Stock

Net Income

Dividends

Income (Loss)

Equity

Interests

Total

Balances at beginning of period

$

 1,010,417 

$

 192,299 

$

 7,019,714 

$

 (13,535) 

$

 1,893,806 

$

 (2,972,129) 

$

 (11,928) 

$

 6,120 

$

 153,883 

$

 7,278,647 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 190,077 

 

 

 

 

 

 

 

 (1,272) 

 

 188,805 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 1,496 

 

 

 

 

 

 1,496 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 190,301 

Net change in noncontrolling interests

 

 

 

 

 

 (1,529) 

 

 

 

 

 

 

 

 

 

 

 

 13,767 

 

 12,238 

Amounts related to issuance of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

from dividend reinvestment and stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

incentive plans, net of forfeitures

 

 

 

 1,784 

 

 102,238 

 

 (3,996) 

 

 

 

 

 

 

 

 (1,046) 

 

 

 

 98,980 

Proceeds from issuance of common stock

 

 

 

 64,400 

 

 3,383,008 

 

 

 

 

 

 

 

 

 

 

 

 

 

 3,447,408 

Proceeds from issuance of preferred stock

 

 287,500 

 

 

 

 (9,813) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 277,687 

Redemption of preferred stock

 

 (275,000) 

 

 

 

 6,202 

 

 

 

 (6,242) 

 

 

 

 

 

 

 

 

 

 (275,040) 

Equity component of convertible debt

 

 

 

 1,039 

 

 2,237 

 

 

 

 

 

 

 

 

 

 

 

 

 

 3,276 

Option compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 2,371 

 

 

 

 2,371 

Cash dividends paid:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock cash dividends

 

 

 

 

 

 

 

 

 

 

 

 (460,936) 

 

 

 

 

 

 

 

 (460,936) 

 

Preferred stock cash dividends

 

 

 

 

 

 

 

 

 

 

 

 (52,527) 

 

 

 

 

 

 

 

 (52,527) 

Balances at end of period

$

 1,022,917 

$

 259,522 

$

 10,502,057 

$

 (17,531) 

$

 2,077,641 

$

 (3,485,592) 

$

 (10,432) 

$

 7,445 

$

 166,378 

$

 10,522,405 

 

See notes to unaudited consolidated financial statements

 

6


 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

HEALTH CARE REIT, INC. AND SUBSIDIARIES

(In thousands)

 

 

 

 

 

 

Nine Months Ended

 

 

 

  

September 30,

 

 

 

  

2013

 

2012

Operating activities:  

 

 

 

 

 

Net income  

$

 112,588 

 

$

 187,836 

Adjustments to reconcile net income to  

 

 

 

 

 

 

net cash provided from (used in) operating activities:  

 

 

 

 

 

 

 

Depreciation and amortization  

 

 630,579 

 

 

 393,243 

 

 

Other amortization expenses  

 

 6,662 

 

 

 11,702 

 

 

Provision for loan losses  

 

 0 

 

 

 27,008 

 

 

Impairment of assets  

 

 0 

 

 

 6,952 

 

 

Stock-based compensation expense  

 

 16,650 

 

 

 16,229 

 

 

Loss (gain) on derivatives, net  

 

 4,465 

 

 

 (1,712) 

 

 

Loss (gain) on extinguishment of debt, net  

 

 (4,376) 

 

 

 791 

 

 

Loss (income) from unconsolidated entities

 

 3,529 

 

 

 (2,250) 

 

 

Rental income in excess of cash received  

 

 (31,226) 

 

 

 (32,069) 

 

 

Amortization related to above (below) market leases, net  

 

 313 

 

 

 767 

 

 

Loss (gain) on sales of properties, net  

 

 (57,202) 

 

 

 (46,046) 

 

 

Distributions by unconsolidated entities

 

 0 

 

 

 3,920 

 

 

Increase (decrease) in accrued expenses and other liabilities  

 

 9,646 

 

 

 16,417 

 

 

Decrease (increase) in receivables and other assets  

 

 (65,721) 

 

 

 (19,318) 

Net cash provided from (used in) operating activities  

 

 625,907 

 

 

 563,470 

 

 

 

  

 

 

 

 

 

Investing activities:  

 

 

 

 

 

 

Investment in real property, net of cash acquired  

 

 (3,354,716) 

 

 

 (2,119,796) 

 

Capitalized interest  

 

 (4,698) 

 

 

 (7,113) 

 

Investment in real estate loans receivable  

 

 (77,336) 

 

 

 (35,894) 

 

Other investments, net of payments  

 

 (16,589) 

 

 

 26,752 

 

Principal collected on real estate loans receivable  

 

 85,555 

 

 

 16,577 

 

Contributions to unconsolidated entities  

 

 (381,667) 

 

 

 (227,735) 

 

Distributions by unconsolidated entities  

 

 31,699 

 

 

 12,592 

 

Proceeds from (payments on) derivatives  

 

 60,909 

 

 

 4,435 

 

Decrease (increase) in restricted cash  

 

 68,796 

 

 

 (69,809) 

 

Proceeds from sales of real property  

 

 385,493 

 

 

 302,377 

Net cash provided from (used in) investing activities  

 

 (3,202,554) 

 

 

 (2,097,614) 

 

 

 

  

 

 

 

 

 

Financing activities:  

 

 

 

 

 

 

Net increase (decrease) under unsecured lines of credit arrangements  

 

 834,050 

 

 

 (610,000) 

 

Proceeds from issuance of senior unsecured notes  

 

 497,862 

 

 

 842,323 

 

Payments to extinguish senior unsecured notes  

 

 (217,615) 

 

 

 (370,524) 

 

Net proceeds from the issuance of secured debt  

 

 85,140 

 

 

 145,713 

 

Payments on secured debt  

 

 (575,373) 

 

 

 (272,399) 

 

Net proceeds from the issuance of common stock  

 

 1,792,552 

 

 

 3,536,232 

 

Net proceeds from the issuance of preferred stock  

 

 0 

 

 

 277,687 

 

Redemption of preferred stock  

 

 0 

 

 

 (275,000) 

 

Decrease (increase) in deferred loan expenses  

 

 (12,398) 

 

 

 (5,119) 

 

Contributions by noncontrolling interests(1)

 

 5,350 

 

 

 12,106 

 

Distributions to noncontrolling interests(1)

 

 (22,502) 

 

 

 (15,283) 

 

Acquisitions of noncontrolling interests

 

 (23,247) 

 

 

 0 

 

Cash distributions to stockholders  

 

 (668,797) 

 

 

 (513,463) 

 

Other financing activities

 

 (1,710) 

 

 

 641 

Net cash provided from (used in) financing activities  

 

 1,693,312 

 

 

 2,752,914 

Effect of foreign currency translation on cash and cash equivalents

 

 14,409 

 

 

 0 

Increase (decrease) in cash and cash equivalents  

 

 (868,926) 

 

 

 1,218,770 

Cash and cash equivalents at beginning of period  

 

 1,033,764 

 

 

 163,482 

Cash and cash equivalents at end of period  

$

 164,838 

 

$

 1,382,252 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

Interest paid

$

 342,739 

 

$

 275,246 

 

Income taxes paid

 

 5,146 

 

 

 3,012 

 

 

 

 

 

 

 

 

 

(1) Includes amounts attributable to redeemable noncontrolling interests.

See notes to unaudited consolidated financial statements

 

7


 

HEALTH CARE REIT, INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

1. Business

 

     Health Care REIT, Inc., an S&P 500 company with headquarters in Toledo, Ohio, is an equity real estate investment trust (“REIT”) that invests in seniors housing and health care real estate. Our full service platform offers property management and development services to our customers. As of September 30, 2013, our diversified portfolio consisted of 1,197 properties in 46 states, the United Kingdom, and Canada.  Founded in 1970, we were the first real estate investment trust to invest exclusively in health care facilities.

 

2. Accounting Policies and Related Matters

     Basis of Presentation

     The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2013 are not necessarily an indication of the results that may be expected for the year ending December 31, 2013. For further information, refer to the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012, as updated by our Current Report on Form 8-K filed on August 6, 2013.

     New Accounting Standards

     In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” which requires companies to provide information about the amounts that are reclassified out of accumulated other comprehensive income by component and by the respective line items of net income. The amendment to authoritative guidance associated with comprehensive income was effective for us on January 1, 2013. The adoption of this guidance did not have a material impact on our unaudited consolidated financial statements.

 

3. Real Property Acquisitions and Development

 

     The total purchase price for all properties acquired has been allocated to the tangible and identifiable intangible assets, liabilities and noncontrolling interests based upon their respective fair values in accordance with our accounting policies. The results of operations for these acquisitions have been included in our consolidated results of operations since the date of acquisition and are a component of the appropriate segments.  Transaction costs primarily represent costs incurred with property acquisitions, including due diligence costs, fees for legal and valuation services and termination of pre-existing relationships computed based on the fair value of the assets acquired, lease termination fees and other acquisition-related costs.

 

 

8


 

HEALTH CARE REIT, INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

     Seniors Housing Triple-net Activity

 

 

Nine Months Ended

 

(In thousands)

September 30, 2013(1)

September 30, 2012

 

Land and land improvements

 

$

 56,665 

 

$

 79,325 

 

Buildings and improvements

 

 

 211,903 

 

 

 935,036 

 

 

Total assets acquired

 

 

 268,568 

 

 

 1,014,361 

 

Secured debt

 

 

 - 

 

 

 (86,186) 

 

Accrued expenses and other liabilities  

 

 

 - 

 

 

 (3,340) 

 

 

Total liabilities assumed

 

 

 - 

 

 

 (89,526) 

 

Capital in excess of par

 

 

 - 

 

 

 1,024 

 

Noncontrolling interests

 

 

 - 

 

 

 (16,826) 

 

Non-cash acquisition related activity

 

 

 - 

 

 

 (310) 

 

 

Cash disbursed for acquisitions

 

 

 268,568 

 

 

 908,723 

 

Construction in progress additions

 

 

 103,951 

 

 

 131,579 

 

Less:

Capitalized interest

 

 

 (3,337) 

 

 

 (4,228) 

 

Cash disbursed for construction in progress

 

 

 100,614 

 

  

 127,351 

 

Capital improvements to existing properties

 

 

 27,819 

 

 

 48,450 

 

 

Total cash invested in real property, net of cash acquired

 

$

 397,001 

 

$

 1,084,524 

 

 

 

 

 

 

 

 

 

 

(1) Includes acquisitions with an aggregate purchase price of $268,568,000 for which the allocation of the purchase price consideration is preliminary and subject to change.

 

 

 

 

 

 

 

 

 

     Seniors Housing Operating Activity

     Acquisitions of seniors housing operating properties are structured under RIDEA, which is described in Note 18.  This structure results in the inclusion of all resident revenues and related property operating expenses from the operation of these qualified health care properties in our consolidated statements of comprehensive income.  Certain of our subsidiaries’ functional currencies are the local currencies of their respective countries. See Note 2 to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012, as updated by our Current Report on Form 8-K filed on August 6, 2013, for information regarding our foreign currency policies.

9


 

HEALTH CARE REIT, INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

(In thousands)

September 30, 2013(1)

September 30, 2012

 

Land and land improvements

 

$

 437,046 

 

$

 46,391 

 

Building and improvements

 

 

 4,214,254 

 

 

 450,255 

 

Acquired lease intangibles

 

 

 377,929 

 

 

 39,875 

 

Restricted cash

 

 

 41,524 

 

 

 - 

 

Receivables and other assets

 

 

 81,546 

 

 

 2,247 

 

  

Total assets acquired(2)

 

 

 5,152,299 

 

 

 538,768 

 

Secured debt

 

 

 (1,261,093) 

 

 

 (8,684) 

 

Accrued expenses and other liabilities  

 

 

 (86,412) 

 

 

 (5,480) 

 

 

Total liabilities assumed

 

 

 (1,347,505) 

 

 

 (14,164) 

 

Noncontrolling interests

 

 

 (230,441) 

 

 

 (2,054) 

 

Non-cash acquisition related activity(3)

 

 

 (856,103) 

 

 

 - 

 

 

Cash disbursed for acquisitions

 

 

 2,718,250 

 

 

 522,550 

 

Construction in progress additions

 

 

 1,521 

 

 

 - 

 

Less:

Capitalized interest

 

 

 (18) 

 

 

 - 

 

Cash disbursed for construction in progress

 

 

 1,503 

 

  

 - 

 

Capital improvements to existing properties

 

 

 36,813 

 

 

 13,325 

 

 

Total cash invested in real property, net of cash acquired

 

$

 2,756,566 

 

$

 535,875 

 

 

 

 

 

 

 

 

 

 

(1) Includes acquisitions with an aggregate purchase price of $5,152,299,000 for which the allocation of the purchase price consideration is preliminary and subject to change.

(2) Excludes $87,406,000 and $4,369,000 of cash acquired during the nine months ended September 30, 2013 and 2012, respectively.

(3) Represents Sunrise loan and noncontrolling interests acquisitions.

 

 

 

 

 

 

 

 

 

 

 

     Sunrise Merger

 

     In August 2012, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Sunrise Senior Living, Inc. (“Sunrise”), pursuant to which we agreed to acquire Sunrise in an all-cash merger (the “Merger”) in which Sunrise stockholders would receive $14.50 in cash for each share of Sunrise common stock. On January 9, 2013, we completed our acquisition of the Sunrise property portfolio.  The Sunrise Merger advances our strategic vision to own higher-end, private pay properties located in major metropolitan markets.  On July 1, 2013, we acquired the remaining interests in 49 previously unconsolidated properties.  As of September 30, 2013, 120 properties are wholly owned and 5 properties are held in unconsolidated entities (see Note 7 for additional information).  The total estimated purchase price of approximately $4,155,052,000, including approximately $2,456,011,000 of cash consideration, has been allocated on a preliminary basis to the tangible and identifiable intangible assets and liabilities in the table above based on respective fair values in accordance with our accounting policies. We funded the cash consideration and other associated costs of the acquisition from cash on-hand as well as draws on our primary unsecured line of credit and unsecured term loan (see Notes 9 and 10 for additional information).

 

     We recognized $201,941,000 and $443,221,000 of revenues and $65,942,000 and $145,264,000 of net operating income from continuing operations related to the consolidated Sunrise portfolio during the three and nine month periods ended September 30, 2013, respectively.  In addition, we incurred $72,337,000 of transaction costs, which include advisory fees, due diligence costs, severances, and fees for legal and valuation services during the nine month period ended September 30, 2013.  These amounts are included in the seniors housing operating results reflected in Note 17.

 

The following unaudited pro forma consolidated results of operation have been prepared as if the Sunrise Merger had occurred as of January 1, 2012 based on the preliminary purchase price allocations discussed above. Amounts are in thousands, except per share data:

10


 

HEALTH CARE REIT, INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2013

 

2012

Revenues

 

$

 2,268,062 

 

$

 1,828,395 

Income (loss) from continuing operations attributable to common stockholders

 

$

 (2,079) 

 

$

 (59,769) 

Income (loss) from continuing operations attributable to common stockholders per share:

 

 

 

 

 

 

 

Basic

 

$

 (0.01) 

 

$

 (0.28) 

 

Diluted

 

$

 (0.01) 

 

$

 (0.28) 

 

 

 

 

 

 

 

 

11


 

HEALTH CARE REIT, INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

     Medical Facilities Activity

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

(In thousands)

September 30, 2013(1)

 

September 30, 2012

 

Land and land improvements

 

$

 - 

 

$

 53,493 

 

Buildings and improvements

 

 

 144,708 

 

 

 487,255 

 

Acquired lease intangibles

 

 

 - 

 

 

 93,392 

 

Restricted cash

 

 

 505 

 

 

 975 

 

Receivables and other assets

 

 

 151 

 

 

 4,311 

 

  

Total assets acquired

 

 

 145,364 

 

  

 639,426 

 

Secured debt

 

 

 (26,300) 

 

 

 (238,589) 

 

Accrued expenses and other liabilities

 

 

 (479) 

 

 

 (18,075) 

 

 

Total liabilities assumed  

 

 

 (26,779)  

 

 

 (256,664) 

 

Non-cash acquisition activity

 

 

 (12,056)(2)

 

 

 (880) 

 

 

Cash disbursed for acquisitions

 

 

 106,529 

 

 

 381,882 

 

Construction in progress additions

 

 

 87,882 

 

 

 94,462 

 

Less:

Capitalized interest

 

 

 (1,343) 

 

 

 (2,885) 

 

 

Accruals(3)

 

 

 (9,806) 

 

 

 (4,567) 

 

Cash disbursed for construction in progress

 

 

 76,733 

 

  

 87,010 

 

Capital improvements to existing properties

 

 

 17,887 

 

 

 30,505 

 

 

Total cash invested in real property

 

$

 201,149 

 

$

 499,397 

 

 

 

 

 

 

 

 

 

 

(1) Includes acquisitions with an aggregate purchase price of $145,364,000 for which the allocation of purchase price consideration is preliminary and subject to change.

(2) Represents non-cash consideration exchanged in an asset swap transaction. Please see Note 5 for additional information.

(3) Represents non-cash accruals for amounts to be paid in future periods relating to properties that converted in the periods noted above.

 

 

 

 

 

 

 

 

 

     Construction Activity

 

     The following is a summary of the construction projects that were placed into service and began generating revenues during the periods presented (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

September 30, 2013

 

September 30, 2012

 

Development projects:

 

 

 

 

 

 

 

 

 

 

Seniors housing triple-net

  

 

$

 105,265 

 

 

$

 84,271 

 

 

Medical facilities

 

 

 

 78,839 

 

 

 

 111,327 

 

 

Total development projects

 

 

 

 184,104 

 

 

 

 195,598 

 

Expansion projects

 

 

 

 14,229 

 

 

 

 240 

Total construction in progress conversions

  

 

$

 198,333 

 

 

$

 195,838 

 

 

 

 

 

 

 

 

 

 

 

12


 

HEALTH CARE REIT, INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

4. Real Estate Intangibles

 

     The following is a summary of our real estate intangibles, excluding those classified as held for sale, as of the dates indicated (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

December 31, 2012

Assets:

  

 

 

 

 

 

 

In place lease intangibles

  

$

 918,507 

 

$

 541,729 

 

Above market tenant leases

  

 

 54,091 

 

 

 56,086 

 

Below market ground leases

  

 

 61,461 

 

 

 61,450 

 

Lease commissions

  

 

 16,483 

 

 

 14,419 

 

Gross historical cost

  

 

 1,050,542 

 

 

 673,684 

 

Accumulated amortization

  

 

 (472,389) 

 

 

 (257,242) 

 

Net book value

  

$

 578,153 

 

$

 416,442 

 

 

  

 

 

 

 

 

 

Weighted-average amortization period in years

  

 

17.1

 

 

16.4

 

 

  

 

 

 

 

 

Liabilities:

  

 

 

 

 

 

 

Below market tenant leases

  

$

 76,239 

 

$

 77,036 

 

Above market ground leases

  

 

 9,490 

 

 

 9,490 

 

Gross historical cost

  

 

 85,729 

 

 

 86,526 

 

Accumulated amortization

  

 

 (32,894) 

 

 

 (27,753) 

 

Net book value

  

$

 52,835 

 

$

 58,773 

 

 

  

 

 

 

 

 

 

Weighted-average amortization period in years

  

 

14.3

 

 

14.3

 

 

 

 

 

 

 

 

     The following is a summary of real estate intangible amortization for the periods presented (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

  

 

2013

 

2012

 

2013

 

2012

Rental income related to above/below market tenant leases, net

 

$

 235 

 

$

 (972) 

 

$

 596 

 

$

 452 

Property operating expenses related to above/below market ground leases, net

 

 

 (303) 

 

 

 (555) 

 

 

 (909) 

 

 

 (1,219) 

Depreciation and amortization related to in place lease intangibles and lease commissions

 

 

 (78,782) 

 

 

 (22,271) 

 

 

 (168,441) 

 

 

 (78,114) 

 

 

 

 

 

 

 

 

 

 

 

 

 

     The future estimated aggregate amortization of intangible assets and liabilities is as follows for the periods presented (in thousands):

 

 

 

 

 

 

 

 

 

 

Assets

 

 

Liabilities

2013

 

$

 93,415 

 

$

 1,730 

2014

 

 

 207,606 

 

 

 6,583 

2015

 

 

 58,816 

 

 

 5,623 

2016

 

 

 25,985 

 

 

 5,185 

2017

 

 

 26,825 

 

 

 4,894 

Thereafter

 

 

 165,506 

 

 

 28,820 

Totals

 

$

 578,153 

 

$

 52,835 

 

 

 

 

 

 

 

13


 

HEALTH CARE REIT, INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

5. Dispositions, Assets Held for Sale and Discontinued Operations

The following is a summary of our real property disposition activity for the periods presented (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30, 2013

 

September 30, 2012

Real property dispositions:

 

 

 

 

 

 

 

 

Seniors housing triple-net

 

$

 138,650 

 

 

$

 149,984 

 

Medical facilities

 

 

 201,845 

 

 

 

 106,347 

 

Total dispositions

 

 

 340,495 

 

 

 

 256,331 

Gain (loss) on sales of real property, net

 

 

 57,202 

 

 

 

 46,046 

Non-cash disposition activity(1)

 

 

 (12,204) 

 

 

 

0

Proceeds from real property sales

 

$

 385,493 

 

 

$

 302,377 

 

 

 

 

 

 

 

 

 

(1) Represents non-cash consideration surrendered in an asset swap transaction.  Please see Note 3 for additional information.

 

 

 

 

 

 

 

 

 

We have reclassified the income and expenses attributable to all properties sold prior to or held for sale at September 30, 2013 to discontinued operations.  Expenses include an allocation of interest expense based on property carrying values and our weighted-average cost of debt.  The following illustrates the reclassification impact as a result of classifying properties as discontinued operations for the periods presented (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

September 30,

 

 

September 30,

 

 

 

2013

 

2012

 

2013

 

2012

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

 810 

 

$

 20,747 

 

$

 5,972 

 

$

 70,166 

Expenses:

 

  

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

  

 12 

 

 

 4,328 

 

 

 1,535 

 

 

 15,504 

 

Property operating expenses

 

  

 68 

 

 

 281 

 

 

 346 

 

 

 1,469 

 

Provision for depreciation

 

  

 313 

 

 

 5,014 

 

 

 1,879 

 

 

 19,899 

 

Total expenses

 

 

 393 

 

 

 9,623 

 

 

 3,760 

 

 

 36,872 

Income (loss) from discontinued operations, net

 

$

 417 

 

$

 11,124 

 

$

 2,212 

 

$

 33,294 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6. Real Estate Loans Receivable

     The following is a summary of our real estate loan activity for the periods presented (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 2013

 

September 30, 2012

 

 

 

Seniors

 

 

 

 

 

 

Seniors

 

 

 

 

 

 

 

 

Housing

 

Medical

 

 

 

 

Housing

 

Medical

 

 

 

 

 

 

Triple-net

 

Facilities

 

Totals

 

Triple-net

 

Facilities

 

Totals

Advances on real estate loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in new loans

 

$

 27,392 

 

$

 4,095 

 

$

 31,487 

 

$

 1,154 

 

$

 0 

 

$

 1,154 

 

Draws on existing loans

 

 

 42,772 

 

 

 3,077 

 

 

 45,849 

 

 

 33,710 

 

 

 1,030 

 

 

 34,740 

 

Net cash advances on real estate loans

 

 

 70,164 

 

 

 7,172 

 

 

 77,336 

 

 

 34,864 

 

 

 1,030 

 

 

 35,894 

Receipts on real estate loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan payoffs

 

 

 65,768 

 

 

 646 

 

 

 66,414 

 

 

 450 

 

 

 0 

 

 

 450 

 

Principal payments on loans

 

 

 16,972 

 

 

 2,169 

 

 

 19,141 

 

 

 14,204 

 

 

 1,923 

 

 

 16,127 

 

Total receipts on real estate loans

 

 

 82,740 

 

 

 2,815 

 

 

 85,555 

 

 

 14,654 

 

 

 1,923 

 

 

 16,577 

Net cash advances (receipts) on real estate loans

 

 

 (12,576) 

 

 

 4,357 

 

 

 (8,219) 

 

 

 20,210 

 

 

 (893) 

 

 

 19,317 

Change in balance due to foreign currency translation

 

 

 765 

 

 

 0 

 

 

 765 

 

 

 0 

 

 

 0 

 

 

 0 

Net change in real estate loans receivable

 

$

 (11,811) 

 

$

 4,357 

 

$

 (7,454) 

 

$

 20,210 

 

$

 (893) 

 

$

 19,317 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

We recorded no provision for loan losses during the nine months ended September 30, 2013.  At September 30, 2013, we had real estate loans with outstanding balances of $2,650,000 on non-accrual status with an allowance for loan losses of $0.

14


 

HEALTH CARE REIT, INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

7. Investments in Unconsolidated Entities

 

     During the year ended December 31, 2010, we entered into a joint venture investment with Forest City Enterprises Inc. (NYSE:FCE.A and FCE.B). We acquired a 49% interest in a seven-building life science campus located at University Park in Cambridge, Massachusetts, which is immediately adjacent to the campus of the Massachusetts Institute of Technology. This investment is recorded as an investment in unconsolidated entities on the balance sheet.

 

     On December 31, 2010, we formed a strategic partnership with a national medical office building company whereby the partnership invested in 17 medical office properties.  We own a controlling interest in 11 properties and consolidate them.  Consolidation is based on a combination of ownership interest and control of operational decision-making authority.  We do not own a controlling interest in six properties and account for them under the equity method.  Our investment in the strategic partnership provides us access to health systems and includes development and property management resources.

 

     During the three months ended June 30, 2012, we entered into a joint venture (structured under RIDEA) with Chartwell Retirement Residences (TSX:CSH.UN). The portfolio contains 42 properties in Canada, 39 of which are owned 50% by us and Chartwell, and three of which we wholly own. All properties are managed by Chartwell. Our investment in the 39 properties is recorded as an investment in unconsolidated entities on the balance sheet. The aggregate remaining unamortized basis difference of our investment in this joint venture of $9,488,000 at September 30, 2013 is primarily attributable to transaction costs that will be amortized over the weighted-average useful life of the related properties and included in the reported amount of income from unconsolidated entities.

 

     In conjunction with the Sunrise Merger, we acquired joint venture interests in 54 properties and a 20% interest in a newly formed Sunrise management company, which manages the entire property portfolio. On July 1, 2013, we acquired the remaining interests in 49 of the properties.  Our original investment of $49,759,000 relating to the five remaining unconsolidated properties and the management company is recorded as an investment in unconsolidated entities on the balance sheet. See Note 3 for additional information.

 

     The results of operations for those investments accounted for under the equity method have been included in our consolidated results of operations from the date of acquisition by the joint ventures and are reflected in our statements of comprehensive income as income or loss from unconsolidated entities. The following is a summary of our income from and investments in unconsolidated entities (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

Nine Months Ended September 30,

 

Assets as of

 

 

Percentage Ownership

 

Properties

 

2013 Income (loss)

 

2012 Income (loss)

 

September 30, 2013

 

December 31, 2012

Seniors housing triple-net(1)

 

10% to 49%

 

 - 

 

$

 3,680 

 

$

 26 

 

$

 29,107 

 

$

 34,618 

Seniors housing operating

 

33% to 50%

 

 44 

 

 

 (13,946) 

 

 

 (4,090) 

 

 

 257,232 

 

 

 217,701 

Medical facilities

 

36% to 49%

 

 13 

 

 

 6,737 

 

 

 6,314 

 

 

 189,235 

 

 

 186,617 

Total

 

 

 

 

 

$

 (3,529) 

 

$

 2,250 

 

$

 475,574 

 

$

 438,936 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Asset amounts include an available-for-sale equity investment. See Note 16 for additional information.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15


 

HEALTH CARE REIT, INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

8. Credit Concentration

     The following table summarizes certain information about our credit concentration as of September 30, 2013 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Number of

 

Total

 

Percent of

Concentration by investment:(1)

 

Properties(2)

 

Investment(2)

 

 Investment(3)

 

Sunrise Senior Living  

 

 120 

 

$

 4,060,818 

 

19%

 

Genesis HealthCare  

 

 177 

 

 

 2,662,196 

 

12%

 

Revera  

 

 47 

 

 

 1,221,148 

 

6%

 

Belmont Village  

 

 19 

 

 

 859,797 

 

4%

 

Benchmark  

 

 37 

 

 

 852,960 

 

4%

 

Remaining portfolio  

 

 740 

 

 

 11,949,624 

 

55%

 

Totals  

 

 1,140 

 

$

 21,606,543 

 

100%

 

 

 

 

 

 

 

 

 

(1)     Genesis is in our seniors housing triple-net segment.  Sunrise, Revera, and Belmont Village are in our seniors housing operating segment.  Benchmark is in both our seniors housing triple-net and seniors housing operating segments.

(2)     Excludes our share of investments in unconsolidated entities.  Please see Note 7 for additional information.

(3)     Investments with our top five relationships comprised 37% of total investments at December 31, 2012.

 

9. Borrowings Under Line of Credit Arrangements and Related Items

     At September 30, 2013, we had a $2,250,000,000 unsecured line of credit arrangement with a consortium of 29 banks.  We have an option to upsize the facility by up to an additional $1,000,000,000 through an accordion feature, allowing for the aggregate commitment of up to $3,250,000,000.  The arrangement also allows us to borrow up to $500,000,000 in alternate currencies.  At September 30, 2013, we had $595,000,000 outstanding at 1.36%, and the U.S. dollar equivalent of $242,670,000 outstanding in Pound Sterling at 1.67%.  The revolving credit facility is scheduled to expire March 31, 2017, but can be extended for an additional year at our option.  Borrowings under the revolver are subject to interest payable in periods no longer than three months at either the agent bank’s prime rate of interest or the applicable margin over LIBOR interest rate, at our option (1.35% at September 30, 2013). The applicable margin is based on certain of our debt ratings and was 1.175% at September 30, 2013.  In addition, we pay a facility fee annually to each bank based on the bank’s commitment amount.  The facility fee depends on certain of our debt ratings and was 0.225% at September 30, 2013.  Principal is due upon expiration of the agreement.  In addition, at September 30, 2013, we had $10,000,000 outstanding in unsecured revolving demand notes bearing interest at a blended rate of 1.11%. 

     The following information relates to aggregate borrowings under the unsecured line of credit arrangements for the periods presented (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

Balance outstanding at quarter end

 

$

 847,670 

 

$

 0 

 

$

 847,670 

 

$

 0 

Maximum amount outstanding at any month end

 

$

 1,019,050 

 

$

 145,000 

 

$

 1,019,050 

 

$

 897,000 

Average amount outstanding (total of daily

 

  

 

 

  

 

 

  

 

 

  

 

 

principal balances divided by days in period)

 

$

 562,978 

 

$

 165,000 

 

$

 527,890 

 

$

 255,639 

Weighted average interest rate (actual interest

 

  

 

 

 

 

 

 

 

 

 

 

 

expense divided by average borrowings outstanding)

 

  

1.51%

 

 

2.30%

 

 

1.43%

 

 

1.79%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10. Senior Unsecured Notes and Secured Debt

 

     We may repurchase, redeem or refinance convertible and non-convertible senior unsecured notes from time to time, taking advantage of favorable market conditions when available. We may purchase senior notes for cash through open market purchases, privately negotiated transactions, a tender offer or, in some cases, through the early redemption of such securities pursuant to their terms.   The non-convertible senior unsecured notes are redeemable at our option, at any time in whole or from time to time in part, at a redemption price equal to the sum of (1) the principal amount of the notes (or portion of such notes) being redeemed plus accrued and unpaid interest thereon up to the redemption date and (2) any “make-whole” amount due under the terms of the notes in connection with early redemptions.   Redemptions and repurchases of debt, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.   At September 30, 2013, the annual principal payments due on these debt obligations were as follows (in thousands):

16


 

HEALTH CARE REIT, INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior

 

Secured

 

 

 

 

Unsecured Notes(1,2)

 

Debt (1,3)

 

Totals

2013

$

 300,000  

 

$

 75,866 

 

$

 375,866 

2014

 

 0 

 

 

 326,307 

 

 

 326,307 

2015(4)

 

 493,072 

 

 

 403,268 

 

 

 896,340 

2016

 

 1,200,000 

 

 

 384,127 

 

 

 1,584,127 

2017

 

 450,000 

 

 

 341,845 

 

 

 791,845 

Thereafter

 

 3,975,118 

 

 

 1,534,510 

 

 

 5,509,628 

Totals

$

 6,418,190 

 

$

 3,065,923 

 

$

 9,484,113 

 

 

 

 

 

 

 

 

 

(1) Amounts represent principal amounts due and do not include unamortized premiums/discounts or other fair value adjustments as reflected on the balance sheet.

(2) Annual interest rates range from 2.25% to 6.5%, excluding the Canadian denominated unsecured term loan discussed in footnote 4 and the $500,000,000 unsecured term loan discussed below.

(3) Annual interest rates range from 1.0% to 9.1%.  Carrying value of the properties securing the debt totaled $6,336,955,000 at September 30, 2013.

(4) On July 30, 2012, we completed funding on a $250,000,000 Canadian denominated unsecured term loan (approximately $243,072,000 USD at exchange rates on September 30, 2013). The loan matures July 27, 2015 (with an option to extend for an additional year at our discretion) and bears interest at the Canadian Dealer Offered Rate plus 145 basis points (2.67% at September 30, 2013).

 

 

 

 

 

 

 

 

 

      During the nine months ended September 30, 2013, we borrowed on a $500,000,000 unsecured term loan entered into as part of our unsecured line of credit arrangement.  The loan matures on March 31, 2016, but can be extended up to two years at our option and bears interest at LIBOR plus 1.35% (1.53% at September 30, 2013).

 

     The following is a summary of our senior unsecured note activity, excluding the Canadian denominated unsecured term loan, during the periods presented (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

September 30, 2013

 

September 30, 2012

 

 

 

 

Weighted Avg.

 

 

 

 

Weighted Avg.

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

Beginning balance

 $ 

 5,894,403 

 

4.675%

 

 $ 

 4,464,927 

 

5.133%

Debt issued

 

 500,000 

 

1.552%

 

 

 600,000 

 

4.125%

Debt extinguished

  

 - 

 

0.000%

 

  

 (76,853) 

 

8.000%

Debt redeemed

 

 (219,285) 

 

3.000%

 

 

 (293,671) 

 

4.750%

Ending balance

 $ 

 6,175,118 

 

4.480%

 

 $ 

 4,694,403 

 

5.030%

 

 

 

 

 

 

 

 

 

 

         The following is a summary of our secured debt principal activity for the periods presented (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

  

Nine Months Ended

 

 

  

September 30, 2013

 

September 30, 2012

 

 

 

 

 

Weighted Avg.

 

 

 

 

Weighted Avg.

 

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

Beginning balance

 

$

 2,311,586 

 

5.14%

 

$

 2,108,373 

 

5.34%

Debt issued

 

 

 85,140 

 

5.05%

 

 

 145,713 

 

4.13%

Debt assumed

 

 

 1,241,898 

 

4.11%

 

 

 311,653 

 

5.71%

Debt extinguished

  

 

 (535,367) 

 

3.52%

 

 

 (237,259) 

 

4.29%

Principal payments

 

 

 (40,006) 

 

5.27%

 

 

 (28,247) 

 

5.35%

Foreign currency

  

 

 2,672 

 

4.04%

 

 

 288 

 

5.62%

Ending balance

 

$

 3,065,923 

 

5.08%

 

$

 2,300,521 

 

5.42%

 

 

 

 

 

 

 

 

 

 

 

     Our debt agreements contain various covenants, restrictions and events of default. Certain agreements require us to maintain certain financial ratios and minimum net worth and impose certain limits on our ability to incur indebtedness, create liens and make investments or acquisitions. As of September 30, 2013, we were in compliance with all of the covenants under our debt agreements.

 

17


 

HEALTH CARE REIT, INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

11. Derivative Instruments

      We are exposed to various market risks, including the potential loss arising from adverse changes in interest rates.  We may elect to use financial derivative instruments to hedge interest rate exposure. These decisions are principally based on our policy to manage the general trend in interest rates at the applicable dates and our perception of the future volatility of interest rates.  In addition, non-U.S. investments expose us to the potential losses associated with adverse changes in foreign currency to U.S. Dollar exchange rates.  We may elect to manage this risk through the use of forward exchange contracts and issuing debt in foreign currencies.

 

     nterest Rate Swap Contracts Designated as Cash Flow Hedges

     For instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (“OCI”), and reclassified into earnings in the same period, or periods, during which the hedged transaction affects earnings.  Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in earnings.  As of September 30, 2013, we had one interest rate swap for a total aggregate notional amount of $11,692,000.  The swap hedges interest payments associated with long-term LIBOR based borrowings and matures on December 31, 2013.  Approximately $1,910,000 of losses, which are included in accumulated other comprehensive income (“AOCI”), are expected to be reclassified into earnings in the next 12 months.

     Foreign Currency Hedges

     For instruments that are designated and qualify as net investment hedges, the variability in the foreign currency to U.S. dollar of the instrument is recorded as a cumulative translation adjustment component of OCI.  The balance of the cumulative translation adjustment will be reclassified to earnings when the hedged investment is sold or substantially liquidated.  On February 15, 2012, we entered into a forward exchange contract to purchase $250,000,000 Canadian Dollars at a fixed rate in the future.  The forward contract was used to limit exposure to fluctuations in the Canadian Dollar to U.S. Dollar exchange rate associated with our initial cash investment funded for the Chartwell transaction.  On May 3, 2012, this forward exchange contract was settled for a gain of $2,772,000, which was reflected on the consolidated statement of comprehensive income, and the proceeds were used to fund our investment.  On May 3, 2012, we also entered into a forward contract to sell $250,000,000 Canadian Dollars at a fixed rate on July 31, 2012 to hedge our net investment. We settled the forward contract on July 31, 2012 with the net loss reflected in OCI. Upon settlement of the forward contract we entered into a $250,000,000 Canadian Dollar term loan, which has been designated as a net investment hedge of our Chartwell investment, and changes in fair value are reported in OCI as no ineffectiveness is anticipated.

     On August 30, 2012, we entered into two cross currency swaps to purchase £125,000,000.  The swaps were used to limit exposure to fluctuations in the Pound Sterling to U.S. Dollar exchange rate associated with our initial cash investment funded for the Sunrise transaction. The cross currency swaps have been designated as a net investment hedge, and changes in fair value are reported in OCI as no ineffectiveness is anticipated.

     On September 17, 2012, we entered into two forward exchange contracts to purchase $14,000,000 Canadian Dollars and £23,000,000 at a fixed rate in the future.  The forward contracts were used to limit exposure to fluctuations in foreign currency associated with future international transactions.  These forward contacts were settled on March 22, 2013 for a realized loss of $2,309,000.

     On January 14, 2013 and January 15, 2013, we entered into three forward exchange contracts to sell £675,000,000 at a fixed rate in the future.  The forward exchange contracts were used to hedge a portion of our investment in the United Kingdom at a fixed Pound Sterling rate in U.S. dollars and were settled on July 12, 2013. We received proceeds of $63,514,000.  The forward exchange contracts were designated as net investment hedges and the change in fair value is reported in OCI.

     On April 4, 2013, we entered into three forward exchange contracts to purchase $600,000,000 Canadian Dollars at a fixed rate in the future and three forward exchange contracts to sell $600,000,000 Canadian Dollars at a fixed rate in the future. The forward contracts were used to limit exposure to fluctuations in the Canadian Dollar to U.S. Dollar exchange rate associated with our initial cash investment funded for an acquisition in Canada. On May 22, 2013, the three forward exchange purchase contracts were settled for a realized loss of $10,355,000, which was reflected on the consolidated statement of comprehensive income, and the proceeds were used to fund our investment. On May 22, 2013, we designated the three forward exchange sell contracts as net investment hedges, and changes in fair value are reported in OCI as no ineffectiveness is anticipated. Prior to designating the three forward exchange sell contracts as net investments, they were marked to fair value and an unrealized gain of $13,071,000 was reflected on the consolidated statement of comprehensive income.

18


 

HEALTH CARE REIT, INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

     On July 1, 2013, we entered into two forward exchange contracts to purchase £144,411,000 at a fixed rate in the future. The forward contracts were used to limit exposure to fluctuations in the Pound Sterling to U.S. Dollar exchange rate associated with our initial cash investment for an acquisition in the United Kingdom. In July 2013, these forward contracts were settled for a realized loss of $4,872,000, which was reflected on the consolidated statement of comprehensive income, and the proceeds were used to fund our investment.

     On July 12, 2013, we entered into three forward exchange contracts to sell £675,000,000 at a fixed rate in the future.  The forward exchange contracts were used to hedge a portion of our investment in the United Kingdom at a fixed Pound Sterling rate in U.S. dollars and mature on December 31, 2013.  The forward exchange contracts are designated as net investment hedges and changes in fair value are reported in OCI as no ineffectiveness is expected.

     The following presents the impact of derivative instruments on the statement of comprehensive income and OCI for the periods presented (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

 

September 30,

 

September 30,

 

 

 

Location

 

 

2013

 

 

2012

 

 

2013

 

 

2012

Gain (loss) on interest rate swap recognized in OCI (effective portion)

 

OCI

 

$

 (4) 

 

$

 797 

 

$

 (12) 

 

$

 2,342 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) on interest rate swaps reclassified from AOCI into income (effective portion)

 

Interest expense

 

 

 (477) 

 

 

 383 

 

 

 (1,428) 

 

 

 1,204 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) on interest rate swaps recognized in income

 

Gain (loss) on derivatives, net

 

 

 0 

 

 

 0 

 

 

 0 

 

 

 (96) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) on foreign exchange contracts recognized in income

 

Gain (loss) on derivatives, net

 

 

 (4,872) 

 

 

 (409) 

 

 

 (4,465) 

 

 

 1,808 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) on foreign exchange contracts and term loans designated as net investment hedge recognized in OCI

 

OCI

 

 

 (110,404) 

 

 

 (12,663) 

 

 

 (19,867) 

 

 

 (5,747) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12. Commitments and Contingencies

     At September 30, 2013, we had six outstanding letter of credit obligations totaling $5,658,000 and expiring between 2013 and 2015.  At September 30, 2013, we had outstanding construction in process of $158,006,000 for leased properties and were committed to providing additional funds of approximately $261,625,000 to complete construction. At September 30, 2013, we had contingent purchase obligations totaling $59,561,000. These contingent purchase obligations relate to unfunded capital improvement obligations and contingent obligations on acquisitions. Rents due from the tenant are increased to reflect the additional investment in the property.

     We evaluate our leases for operating versus capital lease treatment in accordance with Accounting Standards Codification (“ASC”) Topic 840 “Leases.”  A lease is classified as a capital lease if it provides for transfer of ownership of the leased asset at the end of the lease term, contains a bargain purchase option, has a lease term greater than 75% of the economic life of the leased asset, or if the net present value of the future minimum lease payments are in excess of 90% of the fair value of the leased asset. Certain leases contain bargain purchase options and have been classified as capital leases.  At September 30, 2013, we had operating lease obligations of $882,088,000 relating to certain ground leases and company office space and capital lease obligations of $118,463,000 relating to certain investment properties. We incurred rental expense relating to company office space of $410,000 and $1,217,000 for the three months and nine months ended September 30, 2013, respectively, as compared to $330,000 and $931,000 for the same periods in 2012. Regarding ground leases, we have sublease agreements with certain of our operators that require the operators to reimburse us for our monthly operating lease obligations.  At September 30, 2013, aggregate future minimum rentals to be received under these noncancelable subleases totaled $44,987,000.

19


 

HEALTH CARE REIT, INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

13. Stockholders’ Equity

 

     The following is a summary of our stockholders’ equity capital accounts as of the dates indicated:

 

 

 

 

 

 

 

September 30, 2013

 

December 31, 2012

Preferred Stock:

 

 

 

 

   Authorized shares

 

 50,000,000 

 

 50,000,000 

   Issued shares

 

 26,224,854 

 

 26,224,854 

   Outstanding shares

 

 26,224,854 

 

 26,224,854 

 

 

 

 

 

Common Stock, $1.00 par value:

 

 

 

 

   Authorized shares

 

 400,000,000 

 

 400,000,000 

   Issued shares

 

 288,821,107 

 

 260,780,109 

   Outstanding shares

 

 288,360,031 

 

 260,373,754 

 

 

 

 

 

     Preferred Stock. The following is a summary of our preferred stock activity during the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 2013

 

September 30, 2012

 

 

 

 

 

Weighted Avg.

 

 

 

Weighted Avg.

 

 

 

Shares

 

Dividend Rate

 

Shares

 

Dividend Rate

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

 26,224,854 

 

6.493%

 

 25,724,854 

 

7.013%

 

Shares issued

 

 - 

 

0.000%

 

 11,500,000 

 

6.500%

 

Shares redeemed

 

 - 

 

0.000%

 

 (11,000,000) 

 

7.716%

 

Ending balance

 

 26,224,854 

 

6.493%

 

 26,224,854 

 

6.493%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Common Stock. The following is a summary of our common stock issuances during the nine months ended September 30, 2013 and 2012 (dollars in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Issued

 

 

Average Price

 

 

Gross Proceeds

 

 

Net Proceeds

 

 

 

 

 

 

 

 

 

 

 

 

February 2012 public issuance

 

 20,700,000 

 

$

 53.50 

 

$

 1,107,450 

 

$

 1,062,256 

August 2012 public issuance

 

 13,800,000 

 

 

 58.75 

 

 

 810,750 

 

 

 778,011 

September 2012 public issuance

 

 29,900,000 

 

 

 56.00 

 

 

 1,674,400 

 

 

 1,607,140 

2012 Dividend reinvestment plan issuances

 

 1,485,598 

 

 

 55.65 

 

 

 82,678 

 

 

 82,678 

2012 Option exercises

 

 155,195 

 

 

 39.61 

 

 

 6,147 

 

 

 6,147 

2012 Senior note conversions

 

 1,039,721 

 

 

 

 

 

 0 

 

 

 0 

2012 Totals

 

 67,080,514 

 

 

 

 

$

 3,681,425 

 

$

 3,536,232 

 

 

 

 

 

 

 

 

 

 

 

 

May 2013 public issuance

 

 23,000,000 

 

$

 73.50 

 

$

 1,690,500 

 

$

 1,630,281 

2013 Dividend reinvestment plan issuances

 

 2,379,609 

 

 

 64.62 

 

 

 153,762 

 

 

 153,762 

2013 Option exercises

 

 200,467 

 

 

 42.45 

 

 

 8,509 

 

 

 8,509 

2013 Senior note conversions

 

 987,967 

 

 

 

 

 

 0 

 

 

 0 

2013 Equity issued in acquisition of noncontrolling interest

 

 1,108,917 

 

 

 

 

 

 0 

 

 

 0 

2013 Totals

 

 27,676,960 

 

 

 

 

$

 1,852,771 

 

$

 1,792,552 

 

 

 

 

 

 

 

 

 

 

 

 

     During the three months ended September 30, 2013, we acquired the remaining 20% noncontrolling interest in an existing partnership for $91,000,000 which consisted of $23,247,000 of cash and 1,108,917 shares of common stock. In connection with the acquisition, we incurred $2,732,000 of transaction costs which we have included as a reduction to additional paid in capital.

 

 

20


 

HEALTH CARE REIT, INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

     Dividends.  The increase in dividends is primarily attributable to increases in our common shares outstanding as described above.  Please refer to Note 18 for information related to federal income tax of dividends.  The following is a summary of our dividend payments (in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30, 2013

 

September 30, 2012

  

 

Per Share

 

Amount

 

Per Share

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

$

 2.2950 

 

$

 618,992 

 

$

 2.2200 

 

$

 460,936 

Series D Preferred Stock

 

 

 - 

 

 

 0 

 

 

 0.5030 

 

 

 2,012 

Series F Preferred Stock

 

 

 - 

 

 

 0 

 

 

 0.4872 

 

 

 3,410 

Series H Preferred Stock

 

 

 2.1438 

 

 

 750 

 

 

 2.1438 

 

 

 750 

Series I Preferred Stock

 

 

 2.4375 

 

 

 35,039 

 

 

 2.4375 

 

 

 35,039 

Series J Preferred Stock

 

 

 1.2189 

 

 

 14,016 

 

 

 0.9841 

 

 

 11,316 

Totals

 

 

 

 

$

 668,797 

 

 

 

 

$

 513,463 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Accumulated Other Comprehensive IncomeThe following is a summary of accumulated other comprehensive income (loss) for the periods presented (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrecognized gains (losses) related to:

 

 

 

 

 

 

 Foreign Currency Translation

 

 

Equity Investments

 

 

Actuarial losses

 

 

Cash Flow Hedges

 

 

Total

Balance at December 31, 2012

 

$

 (881) 

 

$

 (216) 

 

$

 (2,974) 

 

$

 (6,957) 

 

$

 (11,028) 

Other comprehensive income before reclassification adjustments

 

  

 (13,517) 

 

 

 (346) 

 

 

 0 

 

 

 (12) 

 

 

 (13,875) 

Reclassification amount to net income

 

 

 0 

 

 

 0 

 

 

 0 

 

 

 1,428(1)

 

 

 1,428 

Net current-period other comprehensive income

 

  

 (13,517) 

 

 

 (346) 

 

 

 0 

 

 

 1,416 

 

 

 (12,447) 

Balance at September 30, 2013

 

$

 (14,398) 

 

$

 (562) 

 

$

 (2,974) 

 

$

 (5,541) 

 

$

 (23,475) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2011

 

$

 0 

 

$

 (619) 

 

$

 (2,748) 

 

$

 (8,561) 

 

$

 (11,928) 

Other comprehensive income before reclassification adjustments

 

  

 166 

 

  

 192 

 

  

 0 

 

  

 2,342 

 

  

 2,700 

Reclassification amount to net income

 

 

 0 

 

 

 0 

 

 

 0 

 

 

 (1,204)(1)

 

 

 (1,204) 

Net current-period other comprehensive income

 

  

 166 

 

  

 192 

 

  

 0 

 

  

 1,138 

 

  

 1,496 

Balance at September 30, 2012

 

$

 166 

 

$

 (427) 

 

$

 (2,748) 

 

$

 (7,423) 

 

$

 (10,432) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Please see Note 11 for additional information.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14. Stock Incentive Plans

     Our Amended and Restated 2005 Long-Term Incentive Plan (“2005 Plan”) authorizes up to 6,200,000 shares of common stock to be issued at the discretion of the Compensation Committee of the Board of Directors. The 2005 Plan replaced the 1995 Stock Incentive Plan (“1995 Plan”) and the Stock Plan for Non-Employee Directors. The options granted to officers and key employees under the 1995 Plan vested through 2010 and expire ten years from the date of grant. Our non-employee directors, officers and key employees are eligible to participate in the 2005 Plan. The 2005 Plan allows for the issuance of, among other things, stock options, restricted stock, deferred stock units and dividend equivalent rights. Vesting periods for options, deferred stock units and restricted shares generally range from three years for non-employee directors to five years for officers and key employees. Options expire ten years from the date of grant.  Stock-based compensation expense totaled $3,956,000 and $16,650,000 for the three and nine months ended September 30, 2013, respectively, and $2,592,000 and $16,229,000 for the same periods in 2012.

21


 

HEALTH CARE REIT, INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

15. Earnings Per Share

     The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

  

2013

 

2012

 

2013

 

2012

Numerator for basic and diluted earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

per share - net income (loss) attributable

  

 

 

 

 

 

 

 

 

 

 

 

 

to common stockholders

  

$

 20,691 

 

$

 37,269 

 

$

 67,245 

 

$

 131,308 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per

  

 

 

 

 

 

 

 

 

 

 

 

 

share - weighted average shares

  

 

 286,020 

 

 

 224,391 

 

 

 273,148 

 

 

 212,592 

Effect of dilutive securities:

  

 

 

 

 

 

 

 

 

 

 

 

 

Employee stock options

  

 

 196 

 

 

 238 

 

 

 235 

 

 

 240 

 

Non-vested restricted shares

  

 

 567 

 

 

 301 

 

 

 417 

 

 

 293 

 

Convertible senior unsecured notes

  

 

 1,246 

 

 

 1,328 

 

 

 1,447 

 

 

 950 

Dilutive potential common shares

  

 

 2,009 

 

 

 1,867 

 

 

 2,099 

 

 

 1,483 

Denominator for diluted earnings per

  

 

 

 

 

 

 

 

 

 

 

 

 

share - adjusted weighted average shares

  

 

 288,029 

 

 

 226,258 

 

 

 275,247 

 

 

 214,075 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

  

$

 0.07 

 

$

 0.17 

 

$

 0.25 

 

$

 0.62 

Diluted earnings per share

  

$

 0.07 

 

$

 0.16 

 

$

 0.24 

 

$

 0.61 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The diluted earnings per share calculations exclude the dilutive effect of 0 and 237,000 common stock equivalents for the three months ended September 30, 2013 and 2012, respectively, and 0 common stock equivalents for the nine months ended September 30, 2013 and 2012, because the exercise prices were higher than the average market price.  The Series H Cumulative Convertible and Redeemable Preferred Stock and Series I Cumulative Convertible Perpetual Preferred Stock were not included in the calculations as the effect of conversions into common stock was anti-dilutive.

 

16. Disclosure about Fair Value of Financial Instruments

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.

 

Mortgage Loans and Other Real Estate Loans Receivable — The fair value of mortgage loans and other real estate loans receivable is generally estimated by using Level 2 and Level 3 inputs such as discounting the estimated future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. 

 

Cash and Cash Equivalents — The carrying amount approximates fair value.

 

Available-for-sale Equity Investments — Available-for-sale equity investments are recorded at their fair value based on Level 1 publicly available trading prices.

 

Borrowings Under Unsecured Line of Credit Arrangements — The carrying amount of the unsecured line of credit arrangements approximates fair value because the borrowings are interest rate adjustable.

 

Senior Unsecured Notes — The fair value of the senior unsecured notes payable was estimated based on Level 1 publicly available trading prices.

 

Secured Debt — The fair value of fixed rate secured debt is estimated using Level 2 inputs by discounting the estimated future cash flows using the current rates at which similar loans would be made with similar credit ratings and for the same remaining maturities.  The carrying amount of variable rate secured debt approximates fair value because the borrowings are interest rate adjustable.

 

22


 

HEALTH CARE REIT, INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Interest Rate Swap Agreements — Interest rate swap agreements are recorded in other assets or other liabilities on the balance sheet at fair market value.  Fair market value is estimated using Level 2 inputs by utilizing pricing models that consider forward yield curves and discount rates.

 

Foreign Currency Forward Contracts — Foreign currency forward contracts are recorded in other assets or other liabilities on the balance sheet at fair market value.  Fair market value is determined using Level 2 inputs by estimating the future value of the currency pair based on existing exchange rates, comprised of current spot and traded forward points, and calculating a present value of the net amount using a discount factor based on observable traded interest rates.

 

The carrying amounts and estimated fair values of our financial instruments are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

December 31, 2012

 

 

 

Carrying Amount

 

Fair Value

 

Carrying Amount

 

Fair Value

Financial assets:

 

  

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans receivable

 

$

 131,138 

 

$

 133,554 

 

$

 87,955 

 

$

 88,975 

 

Other real estate loans receivable

 

  

 176,239 

 

 

 182,153 

 

 

 807,710 

 

 

 820,195 

 

Available-for-sale equity investments

 

  

 1,037 

 

 

 1,037 

 

 

 1,384 

 

 

 1,384 

 

Cash and cash equivalents

 

  

 164,838 

 

 

 164,838 

 

 

 1,033,764 

 

 

 1,033,764 

 

Foreign currency forward contracts

 

  

 7,669 

 

 

 7,669 

 

 

 0 

 

 

 0 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

  

 

 

 

 

 

 

 

 

 

 

 

Borrowings under unsecured line of credit arrangements

 

$

 847,670 

 

$

 847,670 

 

$

 0 

 

$

 0 

 

Senior unsecured notes

 

  

 6,395,638 

 

 

 6,806,353 

 

 

 6,114,151 

 

 

 6,793,424 

 

Secured debt

 

  

 3,115,862 

 

 

 3,262,955 

 

 

 2,336,196 

 

 

 2,515,145 

 

Interest rate swap agreements

 

 

 68 

 

 

 68 

 

 

 264 

 

 

 264 

 

Foreign currency forward contracts

 

 

 79,544 

 

 

 79,544 

 

 

 7,247 

 

 

 7,247 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. GAAP provides authoritative guidance for measuring and disclosing fair value measurements of assets and liabilities.  The guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  The guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The guidance describes three levels of inputs that may be used to measure fair value:

 

Level 1 - Quoted prices in active markets for identical assets or liabilities.

 

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Please see Note 2 to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012, as updated by our Current Report on Form 8-K filed on August 6, 2013, for additional information.

 

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

Items Measured at Fair Value on a Recurring Basis

The market approach is utilized to measure fair value for our financial assets and liabilities reported at fair value on a recurring basis.  The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The following summarizes items measured at fair value on a recurring basis (in thousands):

23


 

HEALTH CARE REIT, INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements as of September 30, 2013

 

 

Total

 

Level 1

 

Level 2

 

Level 3

Available-for-sale equity investments(1)

 

$

 1,037 

 

$

 1,037 

 

$

 0 

 

$

 0 

Interest rate swap agreements(2)

 

 

 (68) 

 

 

 0 

 

 

 (68) 

 

 

 0 

Foreign currency forward contracts(2)

 

 

 (71,875) 

 

 

 0 

 

 

 (71,875) 

 

 

 0 

 Totals 

 

$

 (70,906) 

 

$

 1,037 

 

$

 (71,943) 

 

$

 0 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Unrealized gains or losses on equity investments are recorded in accumulated other comprehensive income (loss) at each measurement date.

(2) Please see Note 11 for additional information.

 

 

 

 

 

 

 

 

 

 

 

 

 

Items Measured at Fair Value on a Nonrecurring Basis

 

In addition to items that are measured at fair value on a recurring basis, we also have assets and liabilities in our balance sheet that are measured at fair value on a nonrecurring basis.  As these assets and liabilities are not measured at fair value on a recurring basis, they are not included in the tables above. Assets, liabilities and noncontrolling interests that are measured at fair value on a nonrecurring basis include those acquired/assumed in business combinations (see Note 3) and asset impairments (if applicable, see Note 5 for impairments of real property and Note 6 for impairments of loans receivable). We have determined that the fair value measurements included in each of these assets and liabilities rely primarily on company-specific inputs and our assumptions about the use of the assets and settlement of liabilities, as observable inputs are not available. As such, we have determined that each of these fair value measurements generally reside within Level 3 of the fair value hierarchy. We estimate the fair value of real estate and related intangibles using the income approach and unobservable data such as net operating income and estimated capitalization and discount rates.  We also consider local and national industry market data including comparable sales, and commonly engage an external real estate appraiser to assist us in our estimation of fair value.  We estimate the fair value of assets held for sale based on current sales price expectations or, in the absence of such price expectations, Level 3 inputs described above.  We estimate the fair value of secured debt assumed in business combinations using current interest rates at which similar borrowings could be obtained on the transaction date.

24


 

HEALTH CARE REIT, INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

17. Segment Reporting

      We invest in seniors housing and health care real estate. We evaluate our business and make resource allocations on our five operating segments: seniors housing triple-net, seniors housing operating, medical office buildings, hospitals and life science. Our seniors housing triple-net properties include skilled nursing/post-acute facilities, assisted living facilities, independent living/continuing care retirement communities and combinations thereof. Under the seniors housing triple-net segment, we invest in seniors housing and health care real estate through acquisition and financing of primarily single tenant properties. Properties acquired are primarily leased under triple-net leases and we are not involved in the management of the property. Our seniors housing operating properties include seniors housing communities that are owned and/or operated through RIDEA structures (see Notes 3 and 18).

     Our medical facility properties include medical office buildings, hospitals and life science buildings which are aggregated into our medical facilities reportable segment. Our medical office buildings are typically leased to multiple tenants and generally require a certain level of property management. Our hospital investments are leased and we are not involved in the management of the property. Our life science investment represents an investment in an unconsolidated entity (see Note 7). 

     The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2 to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012, as updated by our Current Report on Form 8-K filed on August 6, 2013). The results of operations for all acquisitions described in Note 3 are included in our consolidated results of operations from the acquisition dates and are components of the appropriate segments.  There are no intersegment sales or transfers.

     We evaluate performance based upon net operating income from continuing operations (“NOI”) of each segment. We define NOI as total revenues, including tenant reimbursements, less property level operating expenses. We believe NOI provides investors relevant and useful information because it measures the operating performance of our properties at the property level on an unleveraged basis. We use NOI to make decisions about resource allocations and to assess the property level performance of our properties.    

     Non-segment revenue consists mainly of interest income on non-real estate investments and other income. Non-segment assets consist of corporate assets including cash, deferred loan expenses and corporate offices and equipment among others. Non-property specific revenues and expenses are not allocated to individual segments in determining NOI.

     Summary information for the reportable segments for the three and nine months ended September 30, 2013 and 2012 is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2013:

 

 

Seniors Housing Triple-net

 

 

Seniors Housing Operating

 

 

Medical Facilities

 

 

Non-segment / Corporate

 

 

Total

 

Rental income

 

$

 199,408 

 

$

 - 

 

$

 112,323 

 

$

 - 

 

$

 311,731 

 

Resident fees and services

 

 

 - 

 

 

 466,127 

 

 

 - 

 

 

 - 

 

 

 466,127 

 

Interest income

 

 

 5,035 

 

 

 - 

 

 

 2,594 

 

 

 - 

 

 

 7,629 

 

Other income

 

 

 778 

 

 

 167 

 

 

 466 

 

 

 32 

 

 

 1,443 

 

Total revenues

 

 

 205,221 

 

 

 466,294 

 

 

 115,383 

 

 

 32 

 

 

 786,930 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

 - 

 

 

 (311,575) 

 

 

 (31,155) 

 

 

 - 

 

 

 (342,730) 

 

Net operating income from continuing operations

 

 

 205,221 

 

 

 154,719 

 

 

 84,228 

 

 

 32 

 

 

 444,200 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciling items:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 (5,968) 

 

 

 (24,693) 

 

 

 (9,143) 

 

 

 (76,726) 

 

 

 (116,530) 

 

(Loss) gain on derivatives, net

 

 

 (4,872) 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 (4,872) 

 

Depreciation and amortization

 

 

 (58,148) 

 

 

 (144,578) 

 

 

 (39,942) 

 

 

 - 

 

 

 (242,668) 

 

General and administrative

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 (28,718) 

 

 

 (28,718) 

 

Transaction costs

 

 

 (4,026) 

 

 

 (18,882) 

 

 

 (683) 

 

 

 - 

 

 

 (23,591) 

 

(Loss) gain on extinguishment of debt, net

 

 

 - 

 

 

 5,252 

 

 

 - 

 

 

 (1,184) 

 

 

 4,068 

 

Income (loss) from continuing operations before income taxes and income from unconsolidated entities

 

$

 132,207 

 

$

 (28,182) 

 

$

 34,460 

 

$

 (106,596) 

 

$

 31,889 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

 9,222,731 

 

$

 9,031,224 

 

$

 4,645,540 

 

$

 150,310 

 

$

 23,049,805 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2012:

 

 

Seniors Housing Triple-net

 

 

Seniors Housing Operating

 

 

Medical Facilities

 

 

Non-segment / Corporate

 

 

Total

Rental income

 

$

 178,193 

 

$

 - 

 

$

 99,726 

 

$

 - 

 

$

 277,919 

Resident fees and services

 

 

 - 

 

 

 174,464 

 

 

 - 

 

 

 - 

 

 

 174,464 

Interest income

 

 

 6,116 

 

 

 - 

 

 

 1,995 

 

 

 - 

 

 

 8,111 

Other income

 

 

 662 

 

 

 - 

 

 

 400 

 

 

 277 

 

 

 1,339 

Total revenues

 

 

 184,971 

 

 

 174,464 

 

 

 102,121 

 

 

 277 

 

 

 461,833 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

 - 

 

 

 (118,369) 

 

 

 (26,048) 

 

 

 - 

 

 

 (144,417) 

Net operating income from continuing operations

 

 

 184,971 

 

 

 56,095 

 

 

 76,073 

 

 

 277 

 

 

 317,416 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciling items:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 (347) 

 

 

 (17,474) 

 

 

 (7,940) 

 

 

 (66,154) 

 

 

 (91,915) 

(Loss) gain on derivatives, net

 

 

 - 

 

 

 (409) 

 

 

 - 

 

 

 - 

 

 

 (409) 

Depreciation and amortization

 

 

 (52,294) 

 

 

 (39,591) 

 

 

 (35,959) 

 

 

 - 

 

 

 (127,844) 

General and administrative

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 (23,679) 

 

 

 (23,679) 

Transaction costs

 

 

 (5,590) 

 

 

 (1,966) 

 

 

 (708) 

 

 

 - 

 

 

 (8,264) 

(Loss) gain on extinguishment of debt, net

 

 

 (126) 

 

 

 (89) 

 

 

 - 

 

 

 - 

 

 

 (215) 

Provision for loan losses

 

 

 (27,008) 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 (27,008) 

Income (loss) from continuing operations before income taxes and income from unconsolidated entities

 

$

 99,606 

 

$

 (3,434) 

 

$

 31,466 

 

$

 (89,556) 

 

$

 38,082 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2013:

 

 

Seniors Housing Triple-net

 

 

Seniors Housing Operating

 

 

Medical Facilities

 

 

Non-segment / Corporate

 

 

Total

 

Rental income

 

$

 573,112 

 

$

 - 

 

$

 336,547 

 

$

 - 

 

$

 909,659 

 

Resident fees and services

 

 

 - 

 

 

 1,164,446 

 

 

 - 

 

 

 - 

 

 

 1,164,446 

 

Interest income

 

 

 16,311 

 

 

 757 

 

 

 7,257 

 

 

 - 

 

 

 24,325 

 

Other income

 

 

 1,183 

 

 

 169 

 

 

 1,539 

 

 

 277 

 

 

 3,168 

 

Total revenues

 

 

 590,606 

 

 

 1,165,372 

 

 

 345,343 

 

 

 277 

 

 

 2,101,598 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

 - 

 

 

 (785,050) 

 

 

 (89,910) 

 

 

 - 

 

 

 (874,960) 

 

Net operating income from continuing operations

 

 

 590,606 

 

 

 380,322 

 

 

 255,433 

 

 

 277 

 

 

 1,226,638 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciling items:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 (15,841) 

 

 

 (63,175) 

 

 

 (28,441) 

 

 

 (229,128) 

 

 

 (336,585) 

 

(Loss) gain on derivatives, net

 

 

 (4,872) 

 

 

 407 

 

 

 - 

 

 

 - 

 

 

 (4,465) 

 

Depreciation and amortization

 

 

 (169,603) 

 

 

 (338,099) 

 

 

 (120,998) 

 

 

 - 

 

 

 (628,700) 

 

General and administrative

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 (79,799) 

 

 

 (79,799) 

 

Transaction costs

 

 

 (15,730) 

 

 

 (101,006) 

 

 

 (971) 

 

 

 - 

 

 

 (117,707) 

 

(Loss) gain on extinguishment of debt, net

 

 

 - 

 

 

 5,560 

 

 

 - 

 

 

 (1,184) 

 

 

 4,376 

 

Income (loss) from continuing operations before income taxes and income from unconsolidated entities

 

$

 384,560 

 

$

 (115,991) 

 

$

 105,023 

 

$

 (309,834) 

 

$

 63,758 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2012:

 

 

Seniors Housing Triple-net

 

 

Seniors Housing Operating

 

 

Medical Facilities

 

 

Non-segment / Corporate

 

 

Total

Rental income

 

$

 508,004 

 

$

 - 

 

$

 281,744 

 

$

 - 

 

$

 789,748 

Resident fees and services

 

 

 - 

 

 

 498,295 

 

 

 - 

 

 

 - 

 

 

 498,295 

Interest income

 

 

 17,977 

 

 

 - 

 

 

 6,154 

 

 

 - 

 

 

 24,131 

Other income

 

 

 2,268 

 

 

 - 

 

 

 1,482 

 

 

 755 

 

 

 4,505 

Total revenues

 

 

 528,249 

 

 

 498,295 

 

 

 289,380 

 

 

 755 

 

 

 1,316,679 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

 - 

 

 

 (336,952) 

 

 

 (72,284) 

 

 

 - 

 

 

 (409,236) 

Net operating income from continuing operations

 

 

 528,249 

 

 

 161,343 

 

 

 217,096 

 

 

 755 

 

 

 907,443 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciling items:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 (602) 

 

 

 (49,537) 

 

 

 (22,338) 

 

 

 (198,746) 

 

 

 (271,223) 

(Loss) gain on derivatives, net

 

 

 (96) 

 

 

 1,808 

 

 

 - 

 

 

 - 

 

 

 1,712 

Depreciation and amortization

 

 

 (147,074) 

 

 

 (123,820) 

 

 

 (102,450) 

 

 

 - 

 

 

 (373,344) 

General and administrative

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 (77,302) 

 

 

 (77,302) 

Transaction costs

 

 

 (30,796) 

 

 

 (6,365) 

 

 

 (5,374) 

 

 

 - 

 

 

 (42,535) 

(Loss) gain on extinguishment of debt, net

 

 

 (2,363) 

 

 

 1,089 

 

 

 483 

 

 

 - 

 

 

 (791) 

Provision for loan losses

 

 

 (27,008) 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 (27,008) 

Income (loss) from continuing operations before income taxes and income from unconsolidated entities

 

$

 320,310 

 

$

 (15,482) 

 

$

 87,417 

 

$

 (275,293) 

 

$

 116,952 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                                                           

25


 

HEALTH CARE REIT, INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

     Our portfolio of properties and other investments are located in the United States, the United Kingdom and Canada.  Revenues and assets are attributed to the country in which the property is physically located.  The following is a summary of geographic information for our operations for the periods presented (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30, 2013

 

 

September 30, 2012

 

 

September 30, 2013

 

 

September 30, 2012

Revenues:

 

Amount

%

 

 

Amount

%

 

 

Amount

%

 

 

Amount

%

United States

$

 669,968 

85.1%

 

$

 454,742 

98.5%

 

$

 1,837,068 

87.4%

 

$

 1,307,533 

99.3%

International

 

 116,962 

14.9%

 

 

 7,091 

1.5%

 

 

 264,530 

12.6%

 

 

 9,146 

0.7%

Total

$

 786,930 

100.0%

 

$

 461,833 

100.0%

 

$

 2,101,598 

100.0%

 

$

 1,316,679 

100.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

 

December 31, 2012

 

 

 

 

 

 

 

 

Assets:

 

Amount

%

 

 

Amount

%

 

 

 

 

 

 

 

 

United States

$

 19,622,576 

85.1%

 

$

 18,692,214 

95.6%

 

 

 

 

 

 

 

 

International

 

 3,427,229 

14.9%

 

 

 856,895 

4.4%

 

 

 

 

 

 

 

 

Total

$

 23,049,805 

100.0%

 

$

 19,549,109 

100.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27


 

HEALTH CARE REIT, INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

18. Income Taxes and Distributions

 

     We elected to be taxed as a REIT commencing with our first taxable year.  To qualify as a REIT for federal income tax purposes, at least 90% of taxable income (excluding 100% of net capital gains) must be distributed to stockholders. REITs that do not distribute a certain amount of current year taxable income in the current year are also subject to a 4% federal excise tax. The main differences between undistributed net income for federal income tax purposes and financial statement purposes are the recognition of straight-line rent for reporting purposes, basis differences in acquisitions, recording of impairments, differing useful lives and depreciation and amortization methods for real property and the provision for loan losses for reporting purposes versus bad debt expense for tax purposes.

 

Under the provisions of the REIT Investment Diversification and Empowerment Act of 2007 ( “RIDEA”), for taxable years beginning after July 30, 2008, the REIT may lease “qualified health care properties” on an arm’s-length basis to a taxable REIT subsidiary (“TRS”) if the property is operated on behalf of such subsidiary by a person who qualifies as an “eligible independent contractor.” Generally, the rent received from the TRS will meet the related party rent exception and will be treated as “rents from real property.”  A “qualified health care property” includes real property and any personal property that is, or is necessary or incidental to the use of, a hospital, nursing facility, assisted living facility, congregate care facility, qualified continuing care facility, or other licensed facility which extends medical or nursing or ancillary services to patients. We have entered into various joint ventures that were structured under RIDEA. Resident level rents and related operating expenses for these facilities are reported in the consolidated financial statements and are subject to federal and state income taxes as the operations of such facilities are included in a TRS. Certain net operating loss carryforwards could be utilized to offset taxable income in future years.

 

     Our consolidated provision for income taxes for the nine months ended September 30, 2013 and 2012 was $7,055,000 and $3,754,000, respectively.  Income tax expense reflected in the financial statements primarily represents U.S. federal and state and local income taxes as well as non-U.S. income taxes on certain investments located in jurisdictions outside the U.S.  Net deferred tax liabilities with respect to our TRS entities totaled $10,388,000 and $1,419,000 as of September 30, 2013 and December 31, 2012, respectively, and related primarily to differences between the financial reporting and tax bases of fixed and intangible assets and to net operating losses.

 

     Generally, given current statutes of limitations, we are subject to audit by the Internal Revenue Service (“IRS”) for the year ended December 31, 2010 and subsequent years and by state taxing authorities for the year ended December 31, 2009 and subsequent years.  We are also subject to audit by the Canada Revenue Agency (“CRA”) and provincial authorities generally for periods subsequent to our Chartwell investment in May 2012 related to entities acquired or formed in connection with the investments, and by HM Revenue & Customs for periods subsequent to our Sunrise-related acquisitions in August 2012 related to entities acquired or formed in connection with the acquisitions.

 

     We apply the rules under ASC 740-10 “Accounting for Uncertainty in Income Taxes” for uncertain tax positions using a “more likely than not” recognition threshold for tax positions. Pursuant to these rules, we will initially recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits of the tax position, that such a position will be sustained upon examination by the relevant tax authorities. If the tax benefit meets the “more likely than not” threshold, the measurement of the tax benefit will be based on our estimate of the ultimate tax benefit to be sustained if audited by the taxing authority.

 

     The balance of our unrecognized tax benefits as of September 30, 2013 and December 31, 2012 was $6,327,000 and $6,098,000, respectively.  As of September 30, 2013, $5,916,000 (exclusive of accrued interest and penalties) relates to the April 1, 2011 Genesis HealthCare Corporation transaction (“Genesis Acquisition”) and is included in accrued expenses and other liabilities on the consolidated balance sheet.  As a part of the Genesis Acquisition, we received a full indemnification from FC-GEN Operations Investment, LLC covering income taxes or other taxes as well as  interest and penalties relating to tax positions taken by FC-GEN Operations Investment, LLC prior to the acquisition.  Accordingly, an offsetting indemnification asset is recorded in receivables and other assets on the consolidated balance sheet.  Such indemnification asset is reviewed for collectability periodically.  Unrecognized tax benefits, as currently accrued for, have an immaterial impact on the effective tax rate to the extent that they would be recognized.  There were insignificant uncertain tax positions as of September 30, 2013 for which it is reasonably possible that the amount of unrecognized tax benefits would decrease during 2013.  Interest and penalties totaled $154,000 and $366,000 for the three and nine months ended September 30, 2013, respectively, and are included in income tax expense.

 

19. Subsequent Events

 

     Debt Activity.  On October 7, 2013, we completed the issuance of $400 million of 4.5% senior unsecured notes due 2024, generating approximately $393 million in proceeds.

 

28


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

EXECUTIVE SUMMARY

 

 

 

 

     Company Overview

     Business Strategy

     Capital Market Outlook

     Key Transactions in 2013

     Key Performance Indicators, Trends and Uncertainties

     Corporate Governance

30

30

31

31

33

35

 

 

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

 

 

 

     Sources and Uses of Cash

     Off-Balance Sheet Arrangements

     Contractual Obligations

     Capital Structure

36

36

37

37

 

 

 

 

RESULTS OF OPERATIONS

 

 

 

 

     Summary

     Seniors Housing Triple-net

     Seniors Housing Operating

     Medical Facilities

     Non-Segment/Corporate

38

39

42

45

47

 

 

 

 

NON-GAAP FINANCIAL MEASURES & OTHER

 

 

 

 

     FFO Reconciliations

     EBITDA & Adjusted EBITDA Reconciliations

     NOI and SSCNOI Reconciliations

49

50

52

 

     Health Care Reimbursements and Other Related Laws

55

 

     Critical Accounting Policies

     Forward-Looking Statements and Risk Factors

57

57

 

 

 

 

 

 

 

 

 

 

29


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

     The following discussion and analysis is based primarily on the consolidated financial statements of Health Care REIT, Inc. for the periods presented and should be read together with the notes thereto contained in this Quarterly Report on Form 10-Q. Other important factors are identified in our Annual Report on Form 10-K for the year ended December 31, 2012, as updated by our Current Report on Form 8-K filed on August 6, 2013,  including factors identified under the headings “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  References herein to “we,” “us,” “our,” or the “company” refer to Health Care REIT, Inc. and its subsidiaries unless specifically noted otherwise.

Executive Summary

Company Overview

     Health Care REIT, Inc. is a real estate investment trust (“REIT”) that has been at the forefront of seniors housing and health care real estate since the company was founded in 1970.  We are an S&P 500 company headquartered in Toledo, Ohio. Our portfolio spans the full spectrum of seniors housing and health care real estate, including seniors housing communities, skilled nursing/post-acute facilities, medical office buildings, inpatient and outpatient medical centers and life science facilities. Our capital programs, when combined with comprehensive planning, development and property management services, make us a single-source solution for acquiring, planning, developing, managing, repositioning and monetizing real estate assets.  The following table summarizes our consolidated portfolio as of September 30, 2013:

 

 

Investments

 

Percentage of

 

Number of

 

 

Type of Property

(in thousands)

 

Investments

 

Properties

 

 

Seniors housing triple-net

$

 8,905,928 

 

41.2%

 

 618 

 

 

Seniors housing operating(1)

 

 8,443,984 

 

39.1%

 

 276 

 

 

Medical facilities(2)

 

 4,256,631 

 

19.7%

 

 246 

 

 

Totals

$

 21,606,543 

 

100.0%

 

 1,140 

 

 

 

 

 

 

 

 

 

 

(1) Excludes 44 properties with an investment amount of $405,770,000 that relates to our share of investments in unconsolidated entities with Chartwell and Sunrise. Please see Note 7 to our consolidated financial statements for additional information.

(2) Excludes 13 properties with an investment amount of $367,134,000 that relates to our share of investments in unconsolidated entities with Forest City and a strategic medical partnership. Please see Note 7 to our consolidated financial statements for additional information.

 

 

 

 

 

 

 

 

                       

Business Strategy

     Our primary objectives are to protect stockholder capital and enhance stockholder value. We seek to pay consistent cash dividends to stockholders and create opportunities to increase dividend payments to stockholders as a result of annual increases in net operating income and portfolio growth. To meet these objectives, we invest across the full spectrum of seniors housing and health care real estate and diversify our investment portfolio by property type, customer and geographic location.

     Substantially all of our revenues are derived from operating lease rentals, resident fees and services, and interest earned on outstanding loans receivable. These items represent our primary sources of liquidity to fund distributions and depend upon the continued ability of our obligors to make contractual rent and interest payments to us and the profitability of our operating properties. To the extent that our customers/partners experience operating difficulties and become unable to generate sufficient cash to make payments to us, there could be a material adverse impact on our consolidated results of operations, liquidity and/or financial condition. To mitigate this risk, we monitor our investments through a variety of methods determined by the type of property. Our proactive and comprehensive asset management process for seniors housing properties generally includes review of monthly financial statements and other operating data for each property, review of obligor/partner creditworthiness, property inspections, and review of covenant compliance relating to licensure, real estate taxes, letters of credit and other collateral. Our internal property management division actively manages and monitors the medical office building portfolio with a comprehensive process including tenant relations, lease expirations, the mix of health service providers, hospital/health system relationships, property performance, capital improvement needs, and market conditions among other things. In monitoring our portfolio, our personnel use a proprietary database to collect and analyze property-specific data. Additionally, we conduct extensive research to ascertain industry trends.  We evaluate the operating environment in each property’s market to determine the likely trend in operating performance of the facility.  When we identify unacceptable trends, we seek to mitigate, eliminate or transfer the risk. Through these efforts, we are generally able to intervene at an early stage to address any negative trends, and in so doing, support both the collectability of revenue and the value of our investment.

     In addition to our asset management and research efforts, we also structure our investments to help mitigate payment risk. Operating leases and loans are normally credit enhanced by guaranties and/or letters of credit. In addition, operating leases are typically structured as master leases and loans are generally cross-defaulted and cross-collateralized with other real estate loans, operating leases or agreements between us and the obligor and its affiliates.

30


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

     For the nine months ended September 30, 2013, rental income and resident fees and services represented 43% and 55%, respectively, of total revenues (including discontinued operations).  Substantially all of our operating leases are designed with escalating rent structures. Leases with fixed annual rental escalators are generally recognized on a straight-line basis over the initial lease period, subject to a collectability assessment. Rental income related to leases with contingent rental escalators is generally recorded based on the contractual cash rental payments due for the period. Our yield on loans receivable depends upon a number of factors, including the stated interest rate, the average principal amount outstanding during the term of the loan and any interest rate adjustments.

     Our primary sources of cash include rent and interest receipts, resident fees and services, borrowings under our primary unsecured line of credit arrangement, public issuances of debt and equity securities, proceeds from investment dispositions and principal payments on loans receivable. Our primary uses of cash include dividend distributions, debt service payments (including principal and interest), real property investments (including acquisitions, capital expenditures, construction advances and transaction costs), loan advances, property operating expenses and general and administrative expenses.  Depending upon the availability and cost of external capital, we believe our liquidity is sufficient to fund these uses of cash.

     We also continuously evaluate opportunities to finance future investments.  New investments are generally funded from temporary borrowings under our primary unsecured line of credit arrangement, internally generated cash and the proceeds from investment dispositions. Our investments generate cash from net operating income and principal payments on loans receivable. Permanent financing for future investments, which replaces funds drawn under our primary unsecured line of credit arrangement, has historically been provided through a combination of the issuance of public debt and equity securities and the incurrence or assumption of secured debt.

     Depending upon market conditions, we believe that new investments will be available in the future with spreads over our cost of capital that will generate appropriate returns to our stockholders. It is also possible that investment dispositions may occur in the future. To the extent that investment dispositions exceed new investments, our revenues and cash flows from operations could be adversely affected. We expect to reinvest the proceeds from any investment dispositions in new investments. To the extent that new investment requirements exceed our available cash on-hand, we expect to borrow under our primary unsecured line of credit arrangement. At September 30, 2013, we had $164,838,000 of cash and cash equivalents, $80,890,000 of restricted cash and $1,402,330,000 of available borrowing capacity under our primary unsecured line of credit arrangement.

 

Capital Market Outlook

     We believe the capital markets remain supportive of our investment strategy.  For the year ended December 31, 2012, we raised over $6.0 billion in aggregate gross proceeds through the issuance of common and preferred stock, unsecured debt and a Canadian denominated term loan.  Through October 7, 2013, we funded a $500 million unsecured term loan, issued $400 million unsecured notes, expanded our primary unsecured line of credit arrangement to $2.25 billion and raised $1.8 billion of common equity.  The capital raised, in combination with available cash and borrowing capacity under our line of credit, supported $4.9 billion in gross new investments during 2012 and $5.3 billion year-to-date in 2013.  We expect attractive investment opportunities to remain available in the future as we continue to leverage the benefits of our relationship investment strategy.

 

Key Transactions in 2013

     Capital.  In January 2013, we closed a $2.75 billion unsecured line of credit arrangement consisting of a $2.25 billion revolver and a $500 million term loan.  The facility replaced our existing $2.0 billion unsecured line of credit arrangement. The revolver matures on March 31, 2017, but can be extended for an additional year at our option.  The term loan matures on March 31, 2016, but can be extended up to two years at our option.  The revolver bears interest at LIBOR plus 117.5 basis points and has an annual facility fee of 22.5 basis points.  The term loan bears interest at LIBOR plus 135 basis points. We have an option to upsize the facility by up to an additional $1.0 billion through an accordion feature, allowing for aggregate commitments of up to $3.75 billion.  The facility also allows us to borrow up to $500 million in alternate currencies. In May 2013, we completed the public issuance of 23 million shares of common stock for $1.7 billion of gross proceeds.  In October 2013, we issued $400 million of 4.5% 10-year senior unsecured notes, generating $393 million of net proceeds. In addition, for the nine months ended September 30, 2013, we raised $154 million through our dividend reinvestment program.

     Investments.  We completed $5.3 billion of gross investments during the nine months ended September 30, 2013, including 71% from existing relationships.  The following summarizes investments made during the nine months ended September 30, 2013 (dollars in thousands):

 

31


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

Properties

 

Investment Amount(1)

 

Capitalization Rates(2)

 

 

Book Amount(3)

 

Acquisitions/JVs:

 

 

 

 

 

 

 

 

 

Seniors housing triple-net

 16 

$

 268,697 

 

7.0%

 

$

 268,568 

 

Seniors housing operating(4)

 164 

 

 4,585,817 

 

6.6%

 

 

 5,202,058 

 

Medical facilities

 7 

 

 144,705 

 

8.6%

 

 

 145,364 

 

Total acquisitions/JVs

 187 

 

 4,999,219 

 

6.7%

 

 

 5,615,990 

 

Construction in progress

 

 

 193,354 

 

 

 

 

 193,354 

 

Loan advances

 

 

 77,336 

 

 

 

 

 77,336 

 

Total

 

$

 5,269,909 

 

 

 

$

 5,886,680 

 

 

 

 

 

 

 

 

 

 

 

(1) Represents stated purchase price including cash and any assumed debt but excludes fair value adjustments pursuant to U.S. GAAP.

(2) Represents annualized contractual or projected income to be received in cash divided by investment amounts.

(3) Represents amounts recorded on our books including fair value adjustments pursuant to U.S. GAAP.  See Notes 3, 6 and 7 to our consolidated financial statements for additional information.

(4) Excludes $580,834,000 for the Sunrise loan which was acquired upon merger consummation on January 9, 2013. See Note 21 to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012, as updated by our Current Report on Form 8-K filed on August 6, 2013, for additional information.

 

 

 

 

 

 

 

 

 

 

     Dispositions.  We completed $407 million of dispositions, generating $466 million in proceeds and $57 million in net gains as of September 30, 2013.  The following summarizes dispositions made for the nine months ended September 30, 2013 (dollars in thousands):

 

Properties

 

Proceeds(1)

 

Capitalization Rates(2)

 

 

Book Amount(3)

 

Property sales:

 

 

 

 

 

 

 

 

 

Seniors housing triple-net

 19 

$

 195,140 

 

10.5%

 

$

 138,650 

 

Medical facilities

 12 

 

 216,188(4)

 

6.0%

 

 

 201,845 

 

Total property sales

 31 

 

 411,328 

 

8.1%

 

 

 340,495 

 

Loan payoffs(5)

 

 

 66,414 

 

 

 

 

 66,414 

 

Total dispositions

 

$

 477,742 

 

 

 

$

 406,909 

 

 

 

 

 

 

 

 

 

 

 

(1) Represents proceeds received upon disposition including any seller financing. See Notes 5 and 6 to our consolidated financial statements for additional information.

(2) Represents annualized contractual income that was being received in cash at date of disposition divided by disposition proceeds.

(3) Represents carrying value of assets at time of disposition.

(4) Includes non-cash proceeeds attributable to an asset swap that are excluded from the statement of cash flows. See Note 5 to our consolidated financial statements for additional information.

(5) Excludes $580,834,000 for the Sunrise loan which was acquired upon merger consummation on January 9, 2013.

 

The following additional event occurred during the nine months ended September 30, 2013:

 

·         Our Board of Directors increased the annual cash dividend to $3.06 per common share ($0.765 per share quarterly), as compared to $2.96 per common share for 2012, beginning in February 2013.  The dividend declared for the quarter ended September 30, 2013 represents the 170th consecutive quarterly dividend payment.

32


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

Key Performance Indicators, Trends and Uncertainties

     We utilize several key performance indicators to evaluate the various aspects of our business. These indicators are discussed below and relate to operating performance, concentration risk and credit strength. Management uses these key performance indicators to facilitate internal and external comparisons to our historical operating results, in making operating decisions and for budget planning purposes.

     Operating Performance. We believe that net income attributable to common stockholders (“NICS”) is the most appropriate earnings measure. Other useful supplemental measures of our operating performance include funds from operations (“FFO”), net operating income from continuing operations (“NOI”) and same store cash NOI (“SSCNOI”); however, these supplemental measures are not defined by U.S. generally accepted accounting principles (“U.S. GAAP”). Please refer to the section entitled “Non-GAAP Financial Measures” for further discussion and reconciliations of FFO, NOI and SSCNOI. These earnings measures and their relative per share amounts are widely used by investors and analysts in the valuation, comparison and investment recommendations of companies. The following table reflects the recent historical trends of our operating performance measures for the periods presented (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,

 

June 30,

 

September 30,

 

December 31,

 

March 31,

 

June 30,

 

September 30,

 

 

 

2012

 

2012

 

2012

 

2012

 

 

2013

 

2013

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to common stockholders

$

 39,307 

 

$

 54,735 

 

$

 37,269 

 

$

 90,576 

 

$

 55,058 

 

$

 (8,508) 

 

$

 20,691 

Funds from operations

 

 163,857 

 

 

 157,932 

 

 

 170,725 

 

 

 205,047 

 

 

 170,878 

 

 

 230,666 

 

 

 258,263 

Net operating income from continuing operations

 

 287,644 

 

 

 302,379 

 

 

 317,416 

 

 

 338,094 

 

 

 379,408 

 

 

 403,028 

 

 

 444,200 

Same store cash net operating income

 

 226,624 

 

 

 230,660 

 

 

 231,582 

 

 

 233,759 

 

 

 233,166 

 

 

 238,900 

 

 

 241,124 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share data (fully diluted):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to common stockholders

$

 0.19 

 

$

 0.25 

 

$

 0.16 

 

$

 0.35 

 

$

 0.21 

 

$

 (0.03) 

 

$

 0.07 

 

Funds from operations

 

 0.81 

 

 

 0.73 

 

 

 0.75 

 

 

 0.78 

 

 

 0.65 

 

 

 0.83 

 

 

 0.90 

 

     Concentration Risk. We evaluate our concentration risk in terms of asset mix, investment mix, relationship mix and geographic mix. Concentration risk is a valuable measure in understanding what portion of our investments could be at risk if certain sectors were to experience downturns. Asset mix measures the portion of our investments that are real property. In order to qualify as an equity REIT, at least 75% of our real estate investments must be real property whereby each property, which includes the land, buildings, improvements, intangibles and related rights, is owned by us. Investment mix measures the portion of our investments that relate to our various property types. Relationship mix measures the portion of our investments that relate to our top five relationships. Geographic mix measures the portion of our investments that relate to our top five states (or international equivalents). The following table reflects our recent historical trends of concentration risk by investment balance for the periods presented:

 

33


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

 

 

 

March 31,

 

June 30,

 

September 30,

 

December 31,

 

March 31,

 

June 30,

 

September 30,

 

 

 

 

2012

 

2012

 

2012

 

2012

 

2013

 

2013

 

2013

Asset mix:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real property

 

95%

 

93%

 

93%

 

91%

 

91%

 

92%

 

95%

 

Real estate loans receivable

 

2%

 

2%

 

2%

 

5%

 

1%

 

1%

 

1%

 

Investments in unconsolidated entities

 

3%

 

5%

 

5%

 

4%

 

8%

 

7%

 

4%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment mix:(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seniors housing triple-net

 

53%

 

53%

 

53%

 

47%

 

43%

 

40%

 

41%

 

Seniors housing operating

 

20%

 

20%

 

20%

 

28%

 

35%

 

39%

 

39%

 

Medical facilities

 

27%

 

27%

 

27%

 

25%

 

22%

 

21%

 

20%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Relationship mix:(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sunrise Senior Living

 

 

 

 

 

 

 

6%

 

14%

 

13%

 

19%

 

Genesis HealthCare

 

18%

 

18%

 

17%

 

15%

 

14%

 

13%

 

12%

 

Revera

 

 

 

 

 

 

 

 

 

 

 

6%

 

6%

 

Belmont Village

 

 

 

 

 

 

 

5%

 

5%

 

4%

 

4%

 

Benchmark Senior Living

 

6%

 

6%

 

5%

 

5%

 

4%

 

 

 

4%

 

Merrill Gardens

 

8%

 

7%

 

7%

 

6%

 

6%

 

5%

 

 

 

Brandywine Senior Living

 

5%

 

5%

 

5%

 

 

 

 

 

 

 

 

 

Senior Living Communities

 

4%

 

4%

 

4%

 

 

 

 

 

 

 

 

 

Remaining relationships

 

59%

 

60%

 

62%

 

63%

 

57%

 

59%

 

55%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Geographic mix:(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

California

 

10%

 

9%

 

9%

 

9%

 

9%

 

8%

 

10%

 

New Jersey

 

10%

 

9%

 

9%

 

9%

 

8%

 

8%

 

8%

 

England

 

 

 

 

 

 

 

 

 

8%

 

7%

 

8%

 

Texas

 

9%

 

9%

 

9%

 

9%

 

8%

 

8%

 

7%

 

Florida

 

7%

 

7%

 

8%

 

7%

 

6%

 

5%

 

5%

 

Pennsylvania

 

6%

 

6%

 

5%

 

5%

 

 

 

 

 

 

 

Remaining geographic areas

 

58%

 

60%

 

60%

 

61%

 

61%

 

64%

 

62%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Excludes our share of investments in unconsolidated entities.

 

 

 

 

 

 

34


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

     Credit Strength. We measure our credit strength both in terms of leverage ratios and coverage ratios. The leverage ratios indicate how much of our balance sheet capitalization is related to long-term debt. The coverage ratios indicate our ability to service interest and fixed charges (interest, secured debt principal amortization and preferred dividends). We expect to maintain capitalization ratios and coverage ratios sufficient to maintain compliance with our debt covenants. The coverage ratios are based on earnings before interest, taxes, depreciation and amortization (“EBITDA”) which is discussed in further detail, and reconciled to net income, below in “Non-GAAP Financial Measures.” Leverage ratios and coverage ratios are widely used by investors, analysts and rating agencies in the valuation, comparison, investment recommendations and rating of companies. The following table reflects the recent historical trends for our credit strength measures for the periods presented:

 

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

June 30,

 

September 30,

 

December 31,

 

March 31,

 

June 30,

 

September 30,

 

 

 

 

2012

 

2012

 

2012

 

2012

 

2013

 

2013

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt to book capitalization ratio

 

45%

 

48%

 

41%

 

45%

 

49%

 

44%

 

47%

Debt to undepreciated book

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

capitalization ratio

 

41%

 

45%

 

38%

 

41%

 

45%

 

41%

 

43%

Debt to market capitalization ratio

 

34%

 

36%

 

31%

 

33%

 

34%

 

32%

 

35%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest coverage ratio

 

3.03x

 

3.21x

 

2.94x

 

3.60x

 

3.42x

 

2.88x

 

3.32x

Fixed charge coverage ratio

 

2.33x

 

2.52x

 

2.30x

 

2.82x

 

2.72x

 

2.27x

 

2.62x

 

     Lease Expirations. The following table sets forth information regarding lease expirations for certain portions of our portfolio as of September 30, 2013 (dollars in thousands):

 

 

 

 

 

Expiration Year

 

 

 

 

2013

 

 

2014

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

Thereafter

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seniors housing triple-net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Properties

 

 

1

 

 

15

 

 

1

 

 

0

 

 

36

 

 

51

 

 

0

 

 

12

 

 

23

 

 

42

 

 

412

  

Base rent(1)

 

$

769

 

 

25,947

 

 

1,435

 

 

0

 

 

16,561

 

 

37,398

 

 

0

 

 

14,982

 

 

36,372

 

 

40,270

 

 

676,064

 

% of base rent

 

 

0.1%

 

 

3.1%

 

 

0.2%

 

 

0.0%

 

 

1.9%

 

 

4.4%

 

 

0.0%

 

 

1.8%

 

 

4.3%

 

 

4.7%

 

 

79.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hospitals:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Properties

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

31

  

Base rent(1)

 

$

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

89,484

 

% of base rent

 

 

0.0%

 

 

0.0%

 

 

0.0%

 

 

0.0%

 

 

0.0%

 

 

0.0%

 

 

0.0%

 

 

0.0%

 

 

0.0%

 

 

0.0%

 

 

100.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Medical office buildings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Square feet

 

 

106,148

 

 

640,387

 

 

707,332

 

 

801,814

 

 

1,125,709

 

 

813,647

 

 

682,805

 

 

741,685

 

 

867,934

 

 

1,956,503

 

 

3,503,708

  

Base rent(1)

 

$

2,365

 

 

13,838

 

 

15,492

 

 

17,438

 

 

27,163

 

 

18,891

 

 

16,505

 

 

18,006

 

 

21,648

 

 

39,706

 

 

93,101

 

% of base rent

 

 

0.8%

 

 

4.9%

 

 

5.5%

 

 

6.1%

 

 

9.6%

 

 

6.6%

 

 

5.8%

 

 

6.3%

 

 

7.6%

 

 

14.0%

 

 

32.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) The most recent monthly base rent including straight line for leases with fixed escalators or annual cash rents for leases with contingent escalators.  Base rent does not include tenant recoveries or amortization of above and below market lease intangibles.

 

     We evaluate our key performance indicators in conjunction with current expectations to determine if historical trends are indicative of future results. Our expected results may not be achieved and actual results may differ materially from our expectations. Factors that may cause actual results to differ from expected results are described in more detail in “Forward-Looking Statements and Risk Factors” and other sections of this Quarterly Report on Form 10-Q. Management regularly monitors economic and other factors to develop strategic and tactical plans designed to improve performance and maximize our competitive position. Our ability to achieve our financial objectives is dependent upon our ability to effectively execute these plans and to appropriately respond to emerging economic and company-specific trends. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2012, as updated by our Current Report on Form 8-K filed on August 6, 2013, under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of these risk factors.

 

Corporate Governance

     Maintaining investor confidence and trust is important in today’s business environment. Our Board of Directors and management are strongly committed to policies and procedures that reflect the highest level of ethical business practices. Our corporate governance guidelines provide the framework for our business operations and emphasize our commitment to increase stockholder value while meeting all applicable legal requirements. These guidelines meet the listing standards adopted by the New York Stock Exchange and

35


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

are available on the Internet at www.hcreit.com.

 

Liquidity and Capital Resources

Sources and Uses of Cash

     Our primary sources of cash include rent and interest receipts, resident fees and services, borrowings under our primary unsecured line of credit arrangement, public issuances of debt and equity securities, proceeds from investment dispositions and principal payments on loans receivable. Our primary uses of cash include dividend distributions, debt service payments (including principal and interest), real property investments (including acquisitions, capital expenditures, construction advances and transaction costs), loan advances, property operating expenses, and general and administrative expenses. These sources and uses of cash are reflected in our Consolidated Statements of Cash Flows and are discussed in further detail below.  The following is a summary of our sources and uses of cash flows (dollars in thousands):

 

 

 

Nine Months Ended

 

 

Change

 

 

 

September 30, 2013

 

September 30, 2012

 

 

$

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$

 1,033,764 

 

$

 163,482 

 

 

$

 870,282 

 

532%

Cash provided from (used in):

 

 

 

 

 

 

 

 

 

 

 

 

   Operating activities

 

 

 625,907 

 

 

 563,470 

 

 

 

 62,437 

 

11%

   Investing activities

 

 

 (3,202,554) 

 

 

 (2,097,614) 

 

 

 

 (1,104,940) 

 

53%

   Financing activities

 

 

 1,693,312 

 

 

 2,752,914 

 

 

 

 (1,059,602) 

 

-38%

Effect of foreign currency translation on cash and cash equivalents

 

 

 14,409 

 

 

 0 

 

 

 

 14,409 

 

n/a

 

Cash and cash equivalents at end of period

 

$

 164,838 

 

$

 1,382,252 

 

 

$

 (1,217,414) 

 

-88%

 

     Operating Activities. The change in net cash provided from operating activities is primarily attributable to increases in NOI, which is primarily due to acquisitions.  Please see “Results of Operations” for further discussion. For the nine months ended September 30, 2013, cash distributions to stockholders exceeded cash flow provided from operations.  The source of funds for these excess distributions was available cash on-hand, which was $1.0 billion at December 31, 2012 and $165 million at September 30, 2013.

 

     Investing Activities.  The changes in net cash used in investing activities are primarily attributable to net changes in real property investments, real estate loans receivable and investments in unconsolidated entities, which are summarized above in “Key Transactions in 2013.”  Please refer to Notes 3, 6 and 7 of our consolidated financial statements for additional information.

 

      Financing Activities.  The changes in net cash provided from financing activities are primarily attributable to changes related to our long-term debt arrangements, the issuance/redemptions of common and preferred stock and dividend payments, which are summarized above in “Key Transactions in 2013.” Please refer to Notes 9, 10 and 13 of our consolidated financial statements for additional information.

 

Off-Balance Sheet Arrangements

 

     At September 30, 2013, we had investments in unconsolidated entities with our ownership ranging from 10% to 50%. Please see Note 7 to our consolidated financial statements for additional information.  We use financial derivative instruments to hedge interest rate and foreign currency exchange rate exposure. Please see Note 11 to our consolidated financial statements for additional information.  At September 30, 2013, we had six outstanding letter of credit obligations. Please see Note 12 to our consolidated financial statements for additional information.

36


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

Contractual Obligations

     The following table summarizes our payment requirements under contractual obligations as of September 30, 2013 (in thousands):

 

 

 

Payments Due by Period

Contractual Obligations

 

Total

 

2013

 

2014-2015

 

2016-2017

 

Thereafter

Unsecured line of credit arrangements

 

$

 847,670 

 

$

 10,000 

 

$

 0 

 

$

 837,670 

 

$

 0 

Senior unsecured notes(1)

  

 

 6,418,190 

 

 

 300,000 

 

 

 493,072 

 

 

 1,650,000 

 

 

 3,975,118 

Secured debt(1)

 

 

 3,476,041 

 

 

 86,018 

 

 

 902,135 

 

 

 847,762 

 

 

 1,640,126 

Contractual interest obligations

 

 

 3,535,574 

 

 

 110,773 

 

 

 872,432 

 

 

 670,904 

 

 

 1,881,465 

Capital lease obligations

 

 

 118,463 

 

 

 1,345 

 

 

 18,549 

 

 

 9,464 

 

 

 89,105 

Operating lease obligations

 

 

 882,088 

 

 

 3,497 

 

 

 28,213 

 

 

 30,091 

 

 

 820,287 

Purchase obligations

 

 

 321,186 

 

 

 60,805 

 

 

 260,381 

 

 

 0 

 

 

 0 

Other long-term liabilities

 

 

 6,522 

 

 

 0 

 

 

 1,580 

 

 

 2,463 

 

 

 2,479 

Total contractual obligations

 

$

 15,605,734 

 

$

 572,438 

 

$

 2,576,362 

 

$

 4,048,354 

 

$

 8,408,580 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Amounts represent principal amounts due and do not reflect unamortized premiums/discounts or other fair value adjustments as reflected on the balance sheet.

 

     At September 30, 2013, we had an unsecured line of credit arrangement with an aggregate commitment amount of $2,250,000,000.  See Note 9 to our unaudited consolidated financial statements for additional information.   Total contractual interest obligations on these arrangements totaled $32,051,000 at September 30, 2013, using interest rates in place at that date.

 

     We have $5,675,118,000 of senior unsecured notes principal outstanding with annual fixed interest rates ranging from 2.25% to 6.5%, payable semi-annually. A total of $275,118,000 of our senior unsecured notes are convertible notes that also contain put features. In addition, we have a $250,000,000 Canadian denominated unsecured term loan (approximately $243,072,000 USD at exchange rates on September 30, 2013).  The loan matures on July 27, 2015 with an option to extend for an additional year at our discretion. We also have a $500,000,000 unsecured term loan that matures on March 16, 2016 and can be extended for two additional years at our option.  See Note 10 to our unaudited consolidated financial statements for more information.  Total contractual interest obligations on senior unsecured notes, the Canadian term loan and the $500,000,000 term loan totaled $2,481,111,000 at September 30, 2013.

     We have consolidated secured debt with total outstanding principal of $3,065,923,000, collateralized by owned properties, with fixed annual interest rates ranging from 1.0% to 9.1%, payable monthly. The carrying values of the properties securing the debt totaled $6,336,955,000 at September 30, 2013. Total contractual interest obligations on consolidated secured debt totaled $959,989,000 at September 30, 2013.  Additionally, our share of non-recourse debt associated with unconsolidated entities (as reflected in the contractual obligations table above) is $410,118,000 at September 30, 2013.  Our share of contractual interest obligations on our unconsolidated entities’ secured debt is $62,423,000 at September 30, 2013. 

     At September 30, 2013, we had operating lease obligations of $882,088,000 relating primarily to ground leases at certain of our properties and office space leases and capital lease obligations of $118,463,000 relating to certain leased investment properties that contain bargain purchase options.

    Purchase obligations include unfunded construction commitments and contingent purchase obligations. At September 30, 2013, we had outstanding construction financings of $158,006,000 for leased properties and were committed to providing additional financing of approximately $261,625,000 to complete construction. At September 30, 2013, we had contingent purchase obligations totaling $59,561,000. These contingent purchase obligations relate to unfunded capital improvement obligations and contingent obligations on acquisitions. Upon funding, amounts due from the tenant are increased to reflect the additional investment in the property. 

     Other long-term liabilities relate to our Supplemental Executive Retirement Plan, which is discussed in Note 19 to the financial statement included in our Annual Report on Form 10-K for the year ended December 31, 2012, as updated by our Current Report on Form 8-K filed on August 6, 2013.

 

Capital Structure

          Please refer to “Credit Strength” above for a discussion of our leverage and coverage ratio trends.  Our debt agreements contain various covenants, restrictions and events of default. Certain agreements require us to maintain certain financial ratios and minimum net worth and impose certain limits on our ability to incur indebtedness, create liens and make investments or acquisitions. As of September 30, 2013, we were in compliance with all of the covenants under our debt agreements. Please refer to the section entitled “Non-GAAP Financial Measures” for further discussion. None of our debt agreements contain provisions for acceleration which could

37


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

be triggered by our debt ratings. However, under our primary unsecured line of credit arrangement, the ratings on our senior unsecured notes are used to determine the fees and interest charged.  A summary of certain covenants and our results as of September 30, 2013 is as follows:

 

 

Per Agreement

 

 

 

 

Unsecured Line of Credit(1)

 

Senior Unsecured Notes

 

Actual at

Covenant

 

 

September 30, 2013

Total Indebtedness to Book Capitalization Ratio maximum

 

60%

 

n/a

 

47%

Secured Indebtedness to Total Assets Ratio maximum

 

30%

 

40%

 

14%

Total Indebtedness to Total Assets maximum

 

n/a

 

60%

 

45%

Unsecured Debt to Unencumbered Assets maximum

 

60%

 

n/a

 

41%

Adjusted Interest Coverage Ratio minimum

 

n/a

 

1.50x

 

3.33x

Adjusted Fixed Charge Coverage minimum

 

1.50x

 

n/a

 

2.62x

 

 

 

 

 

 

 

(1) Canadian denominated term loan covenants are the same as those contained in our primary unsecured line of credit agreement.

 

     We plan to manage the company to maintain compliance with our debt covenants and with a capital structure consistent with our current profile. Any downgrades in terms of ratings or outlook by any or all of the rating agencies could have a material adverse impact on our cost and availability of capital, which could in turn have a material adverse impact on our consolidated results of operations, liquidity and/or financial condition.

 

     On May 4, 2012, we filed an open-ended automatic or “universal” shelf registration statement with the Securities and Exchange Commission covering an indeterminate amount of future offerings of debt securities, common stock, preferred stock, depositary shares, warrants and units. As of October 31, 2013, we had an effective registration statement on file in connection with our enhanced dividend reinvestment plan under which we may issue up to 10,000,000 shares of common stock. As of October 31, 2013, 8,162,812 shares of common stock remained available for issuance under this registration statement. We have entered into separate Equity Distribution Agreements with each of UBS Securities LLC, RBS Securities Inc., KeyBanc Capital Markets Inc. and Credit Agricole Securities (USA) Inc. relating to the offer and sale from time to time of up to $630,015,000 aggregate amount of our common stock (“Equity Shelf Program”). As of October 31, 2013, we had $457,112,000 of remaining capacity under the Equity Shelf Program. Depending upon market conditions, we anticipate issuing securities under our registration statements to invest in additional properties and to repay borrowings under our unsecured line of credit arrangements.

 

Results of Operations

 

Summary

 

     Our primary sources of revenue include rent and resident fees and services. Our primary expenses include interest expense, depreciation and amortization, property operating expenses, transaction costs and general and administrative expenses. We evaluate our business and make resource allocations on our three business segments: seniors housing triple-net, seniors housing operating and medical facilities. The primary performance measures for our properties are NOI and SSCNOI, which are discussed below.  Please see Note 17 to our consolidated financial statements for additional information. The following is a summary of our results of operations (dollars in thousands, except per share amounts):

 

38


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

 

 

Three Months Ended

 

Change

 

Nine Months Ended

 

Change

 

 

 

September 30,

 

September 30,

 

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

 

 

2013

 

2012

 

Amount

 

%

 

2013

 

2012

 

Amount

 

%

Net income (loss) attributable to common stockholders

 

$

 20,691 

 

$

 37,269 

 

$

 (16,578) 

 

-44%

 

$

 67,245 

 

$

 131,308 

 

$

 (64,063) 

 

-49%

Funds from operations

 

  

 258,263 

 

 

 170,725 

 

 

 87,538 

 

51%

 

 

 659,810 

 

 

 492,511 

 

 

 167,299 

 

34%

EBITDA

 

  

 396,205 

 

 

 283,443 

 

 

 112,762 

 

40%

 

 

 1,088,342 

 

 

 871,560 

 

 

 216,782 

 

25%

Net operating income from continuing operations (NOI)

 

  

 444,200 

 

 

 317,416 

 

 

 126,784 

 

40%

 

 

 1,226,638 

 

 

 907,443 

 

 

 319,195 

 

35%

Same store cash NOI

 

 

 241,124 

 

 

 231,582 

 

 

 9,542 

 

4%

 

 

 713,188 

 

 

 688,866 

 

 

 24,322 

 

4%

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share data (fully diluted):

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to common stockholders

 

$

 0.07 

 

$

 0.16 

 

$

 (0.09) 

 

-56%

 

$

 0.24 

 

$

 0.61 

 

$

 (0.37) 

 

-61%

Funds from operations

 

  

 0.90 

 

$

 0.75 

 

$

 0.15 

 

20%

 

$

 2.40 

 

$

 2.30 

 

$

 0.10 

 

4%

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest coverage ratio

 

  

3.32x

 

 

2.94x

 

 

0.38x

 

13%

 

 

3.21x

 

 

3.06x

 

 

0.15x

 

5%

Fixed charge coverage ratio

 

  

2.62x

 

 

2.30x

 

 

0.32x

 

14%

 

 

2.54x

 

 

2.38x

 

 

0.16x

 

7%

 

Seniors Housing Triple-net

     The following is a summary of our NOI for the seniors housing triple-net segment (dollars in thousands):

 

 

 

 

Three Months Ended

 

Change

Nine Months Ended

 

Change

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

 

 

 

 

2013

 

2012

 

$

 

%

 

2013

 

2012

 

$

 

%

SSCNOI(1)

 

 $ 

 142,269 

 

 $ 

 136,889 

 

 $ 

 5,380 

 

4%

 

 $ 

 421,744 

 

 $ 

 406,894 

 

 $ 

 14,850 

 

4%

Non-cash NOI attributable to same store properties(1)

 

 

 8,111 

 

 

 8,561 

 

 

 (450) 

 

-5%

 

 

 24,744 

 

 

 25,007 

 

 

 (263) 

 

-1%

NOI attributable to non same store properties(2)

 

 

 54,841 

 

 

 39,521 

 

 

 15,320 

 

39%

 

 

 144,118 

 

 

 96,348 

 

 

 47,770 

 

50%

NOI

 

 $ 

 205,221 

 

 $ 

 184,971 

 

 $ 

 20,250 

 

11%

 

 $ 

 590,606 

 

 $ 

 528,249 

 

 $ 

 62,357 

 

12%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Due to increases in cash and non-cash revenues (described below) related to 445 same store properties.

 

 

(2) Primarily due to acquisitions of 122 properties and conversions of 16 construction projects into revenue-generating properties subsequent to January 1, 2012.

 

 

 

     The following is a summary of our results of operations for the seniors housing triple-net segment (dollars in thousands):

 

39


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

 

 

 

Three Months Ended

 

Change

 

Nine Months Ended

 

Change

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

 

 

 

2013

 

2012

 

$

 

%

 

2013

 

2012

 

$

 

%

Revenues:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

 $ 

 199,408 

 

 $ 

 178,193 

 

 $ 

 21,215 

 

12%

 

 $ 

 573,112 

 

 $ 

 508,004 

 

 $ 

 65,108 

 

13%

 

Interest income

 

  

 5,035 

 

 

 6,116 

 

 

 (1,081) 

 

-18%

 

 

 16,311 

 

 

 17,977 

 

 

 (1,666) 

 

-9%

 

Other income

 

  

 778 

 

 

 662 

 

 

 116 

 

18%

 

 

 1,183 

 

 

 2,268 

 

 

 (1,085) 

 

-48%

 

 

Net operating income from continuing operations (NOI)

 

  

 205,221 

 

 

 184,971 

 

 

 20,250 

 

11%

 

 

 590,606 

 

 

 528,249 

 

 

 62,357 

 

12%

Expenses:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

  

 5,968 

 

 

 347 

 

 

 5,621 

 

1620%

 

 

 15,841 

 

 

 602 

 

 

 15,239 

 

2531%

 

Loss (gain) on derivatives, net

 

 

 4,872 

 

 

 0 

 

 

 4,872 

 

n/a

 

 

 4,872 

 

 

 96 

 

 

 4,776 

 

4975%

 

Depreciation and amortization

 

  

 58,148 

 

 

 52,294 

 

 

 5,854 

 

11%

 

 

 169,603 

 

 

 147,074 

 

 

 22,529 

 

15%

 

Transaction costs

 

 

 4,026 

 

 

 5,590 

 

 

 (1,564) 

 

-28%

 

 

 15,730 

 

 

 30,796 

 

 

 (15,066) 

 

-49%

 

Loss (gain) on extinguishment of debt, net

 

  

 0 

 

 

 126 

 

 

 (126) 

 

-100%

 

 

 0 

 

 

 2,363 

 

 

 (2,363) 

 

-100%

 

Provision for loan losses

 

  

 0 

 

 

 27,008 

 

 

 (27,008) 

 

-100%

 

 

 0 

 

 

 27,008 

 

 

 (27,008) 

 

-100%

 

 

 

 

  

 73,014 

 

 

 85,365 

 

 

 (12,351) 

 

-14%

 

 

 206,046 

 

 

 207,939 

 

 

 (1,893) 

 

-1%

Income from continuing operations before income taxes and income (loss) from unconsolidated entities

 

  

 132,207 

 

 

 99,606 

 

 

 32,601 

 

33%

 

 

 384,560 

 

 

 320,310 

 

 

 64,250 

 

20%

Income tax benefit (expense)

 

  

 (1,582) 

 

 

 (735) 

 

 

 (847) 

 

115%

 

 

 (2,113) 

 

 

 (1,505) 

 

 

 (608) 

 

40%

Income (loss) from unconsolidated entities

 

 

 1,200 

 

 

 28 

 

 

 1,172 

 

4186%

 

 

 3,680 

 

 

 26 

 

 

 3,654 

 

14054%

Income from continuing operations

 

  

 131,825 

 

 

 98,899 

 

 

 32,926 

 

33%

 

 

 386,127 

 

 

 318,831 

 

 

 67,296 

 

21%

Discontinued operations:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) on sales of properties, net

 

  

 (1,247) 

 

 

 25,348 

 

 

 (26,595) 

 

n/a

 

 

 49,457 

 

 

 57,710 

 

 

 (8,253) 

 

-14%

 

Impairment of assets

 

  

 - 

 

 

 (6,952) 

 

 

 6,952 

 

-100%

 

 

 - 

 

 

 (6,952) 

 

 

 6,952 

 

-100%

 

Income (loss) from discontinued operations, net

 

  

0

 

 

9,683

 

 

(9,683)

 

-100%

 

 

1,062

 

 

30,583

 

 

(29,521)

 

-97%

 

Discontinued operations, net

 

  

 (1,247) 

 

 

 28,079 

 

 

 (29,326) 

 

n/a

 

 

 50,519 

 

 

 81,341 

 

 

 (30,822) 

 

-38%

Net income

 

 

 130,578 

 

 

 126,978 

 

 

 3,600 

 

3%

 

 

 436,646 

 

 

 400,172 

 

 

 36,474 

 

9%

Less: Net income (loss) attributable to noncontrolling interests

 

  

 374 

 

 

 101 

 

 

 273 

 

270%

 

 

 1,113 

 

 

 108 

 

 

 1,005 

 

931%

Net income attributable to common stockholders

 

$

 130,204 

 

$

 126,877 

 

$

 3,327 

 

3%

 

$

 435,533 

 

$

 400,064 

 

$

 35,469 

 

9%

 

     The increase in rental income is primarily attributable to the acquisitions of new properties, the conversion of newly constructed seniors housing triple-net properties from which we receive rent and the transition of 38 properties from the seniors housing operating segment on September 1, 2013. Certain of our leases contain annual rental escalators that are contingent upon changes in the Consumer Price Index and/or changes in the gross operating revenues of the tenant’s properties.  These escalators are not fixed, so no straight-line rent is recorded; however, rental income is recorded based on the contractual cash rental payments due for the period.  If gross operating revenues at our facilities and/or the Consumer Price Index do not increase, a portion of our revenues may not continue to increase.  Sales of real property would offset revenue increases and, to the extent that they exceed new acquisitions, could result in decreased revenues.  Our leases could renew above or below current rent rates, resulting in an increase or decrease in rental income.  For the three months ended September 30, 2013, we had no lease renewals but we had 20 leases with rental rate increasers ranging from 0.15% to 0.50% in our seniors housing triple-net portfolio.  The decrease in interest income is attributable to loan payoffs (see Note 6 to our consolidated financial statements for additional information).

     Interest expense for the nine months ended September 30, 2013 and 2012 represents $16,503,000 and $9,645,000, respectively, of secured debt interest expense, which is offset by interest allocated to discontinued operations.  The change in secured debt interest expense is due to the net effect and timing of assumptions, extinguishments and principal amortizations.  The following is a summary of our seniors housing triple-net property secured debt principal activity (dollars in thousands):

 

40


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 2013

 

September 30, 2012

 

September 30, 2013

 

September 30, 2012

 

 

 

 

 

Wtd. Avg.

 

 

 

 

Wtd. Avg.

 

 

 

 

Wtd. Avg.

 

 

 

 

Wtd. Avg.

 

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

Beginning balance

 

$

 216,421 

 

5.390%

 

$

 201,901 

 

5.278%

 

$

 218,741 

 

5.393%

 

$

 259,000 

 

5.105%

Debt transferred

 

 

 367,997 

 

5.298%

 

 

 - 

 

0.000%

 

 

 367,997 

 

5.298%

 

 

 - 

 

0.000%

Debt issued

 

  

 13,800 

 

5.480%

 

 

 - 

 

0.000%

 

 

 13,800 

 

5.480%

 

 

 - 

 

0.000%

Debt assumed

 

 

 - 

 

0.000%

 

 

 26,665 

 

6.064%

 

 

 - 

 

0.000%

 

 

 83,002 

 

5.304%

Debt extinguished

 

  

 (13,526) 

 

2.587%

 

 

 (8,052) 

 

6.055%

 

 

 (13,526) 

 

2.587%

 

 

 (119,647) 

 

4.889%

Principal payments

 

  

 (1,600) 

 

5.637%

 

 

 (887) 

 

5.422%

 

 

 (3,920) 

 

5.598%

 

 

 (2,728) 

 

5.573%

Ending balance

 

$

 583,092 

 

5.399%

 

$

 219,627 

 

5.344%

 

$

 583,092 

 

5.399%

 

$

 219,627 

 

5.344%

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Monthly averages

 

$

 338,300 

 

5.395%

 

$

 202,097 

 

5.281%

 

$

 257,711 

 

5.393%

 

$

 215,500 

 

5.217%

 

     Depreciation and amortization increased primarily as a result of new property acquisitions, the conversions of newly constructed investment properties and the transition of 38 properties from the seniors housing operating segment on September 1, 2013. To the extent that we acquire or dispose of additional properties in the future, our provision for depreciation and amortization will change accordingly.  The change in year to date transaction costs is primarily due to lower transaction volume offset by a lease termination fee recorded in the current year.

     Changes in gains on sales of properties are related to property sales, which totaled 19 and 29 for the nine months ended September 30, 2013 and 2012, respectively.  The following illustrates the reclassification impact as a result of classifying the properties sold prior to or held for sale at September 30, 2013 as discontinued operations for the periods presented.  Please refer to Note 5 to our consolidated financial statements for further discussion.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

  

2013

 

2012

 

2013

 

2012

 

 

  

 

 

 

 

 

 

 

 

 

 

 

Rental income

  

$

 0 

 

$

 14,218 

 

$

 2,486 

 

$

 49,614 

Expenses:

  

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

  

 

 0 

 

 

 2,373 

 

 

 662 

 

 

 9,043 

 

Provision for depreciation

  

 

 0 

 

 

 2,162 

 

 

 762 

 

 

 9,988 

Income from discontinued operations, net

  

$

 0 

 

$

 9,683 

 

$

 1,062 

 

$

 30,583 

41


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

Seniors Housing Operating

     The following is a summary of our NOI for the seniors housing operating segment (dollars in thousands):

 

 

 

 

Three Months Ended

 

Change

Nine Months Ended

 

Change

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

 

 

 

 

2013

 

2012

 

$

 

%

 

2013

 

2012

 

$

 

%

SSCNOI(1)

 

 $ 

 38,505 

 

 $ 

 35,967 

 

 $ 

 2,538 

 

7%

 

 $ 

 111,923 

 

 $ 

 106,730 

 

 $ 

 5,193 

 

5%

NOI attributable to non same store properties(2)

 

 

 116,214 

 

 

 20,128 

 

 

 96,086 

 

477%

 

 

 268,399 

 

 

 54,613 

 

 

 213,786 

 

391%

NOI

 

 $ 

 154,719 

 

 $ 

 56,095 

 

 $ 

 98,624 

 

176%

 

 $ 

 380,322 

 

 $ 

 161,343 

 

 $ 

 218,979 

 

136%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Due to increases in revenues (described below) related to 74 same store properties.

(2) Primarily due to the acquisition of 202 properties subsequent to January 1, 2012 and the transfer of 38 properties to Seniors Housing Triple-net on September 1, 2013.

 

As discussed in Note 3 to our consolidated financial statements, we completed additional acquisitions within our seniors housing operating segment during the nine months ended September 30, 2013. The results of operations for these properties have been included in our consolidated results of operations from the dates of acquisition. The seniors housing operating acquisitions were structured under RIDEA, which is discussed in Note 18 to our consolidated financial statements. When considering new acquisitions utilizing the RIDEA structure, we look for opportunities with best-in-class operators with a strong seasoned leadership team, high-quality real estate in attractive markets, growth potential above the standard rent escalators in our triple-net lease seniors housing portfolio, and alignment of economic interests with our operating partner.  Our seniors housing operating properties offer us the opportunity for external growth because we have the right to fund future seniors housing investment opportunities sourced by our operating partners. The increases in NOI are almost entirely attributable to 202 property acquisitions that have occurred subsequent to January 1, 2012. The following is a summary of our seniors housing operating results of operations (dollars in thousands):

 

42


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

 

 

 

Three Months Ended

 

Change

 

Nine Months Ended

 

Change

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

 

 

 

2013

 

2012

 

$

 

%

 

2013

 

2012

 

$

 

%

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Resident fees and services

 

 $ 

 466,127 

 

$

 174,464 

 

$

 291,663 

 

167%

 

 $ 

 1,164,446 

 

$

 498,295 

 

$

 666,151 

 

134%

 

Interest income

 

 

 - 

 

 

 - 

 

 

 - 

 

n/a

 

 

 757 

 

 

 - 

 

 

 757 

 

n/a

 

Other income

 

 

 167 

 

 

 - 

 

 

 167 

 

n/a

 

 

 169 

 

 

 - 

 

 

 169 

 

n/a

 

 

 

 466,294 

 

 

 174,464 

 

 

 291,830 

 

167%

 

 

 1,165,372 

 

 

 498,295 

 

 

 667,077 

 

134%

Property operating expenses

 

 

 311,575 

 

 

 118,369 

 

 

 193,206 

 

163%

 

 

 785,050 

 

 

 336,952 

 

 

 448,098 

 

133%

 

Net operating income from continuing operations (NOI)

 

 

 154,719 

 

 

 56,095 

 

 

 98,624 

 

176%

 

 

 380,322 

 

 

 161,343 

 

 

 218,979 

 

136%

Other expenses:

 

  

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

Interest expense

 

  

 24,693 

 

 

 17,474 

 

 

 7,219 

 

41%

 

  

 63,175 

 

 

 49,537 

 

 

 13,638 

 

28%

 

Loss (gain) on derivatives, net

 

 

 0 

 

 

 409 

 

 

 (409) 

 

-100%

 

 

 (407) 

 

 

 (1,808) 

 

 

 1,401 

 

-77%

 

Depreciation and amortization

 

  

 144,578 

 

 

 39,591 

 

 

 104,987 

 

265%

 

  

 338,099 

 

 

 123,820 

 

 

 214,279 

 

173%

 

Transaction costs

 

 

 18,882 

 

 

 1,966 

 

 

 16,916 

 

860%

 

 

 101,006 

 

 

 6,365 

 

 

 94,641 

 

1487%

 

Loss (gain) on extinguishment of debt, net

 

 

 (5,252) 

 

 

 89 

 

 

 (5,341) 

 

-6001%

 

 

 (5,560) 

 

 

 (1,089) 

 

 

 (4,471) 

 

411%

 

 

 

 

  

 182,901 

 

 

 59,529 

 

 

 123,372 

 

207%

 

  

 496,313 

 

 

 176,825 

 

 

 319,488 

 

181%

Income (loss) from continuing operations before income taxes and income (loss) from unconsolidated entities

 

  

 (28,182) 

 

 

 (3,434) 

 

 

 (24,748) 

 

721%

 

  

 (115,991) 

 

 

 (15,482) 

 

 

 (100,509) 

 

649%

Income tax expense

 

 

 (372) 

 

 

 265 

 

 

 (637) 

 

-240%

 

 

 (4,517) 

 

 

 (486) 

 

 

 (4,031) 

 

829%

Income (loss) from unconsolidated entities

 

  

 (4,391) 

 

 

 (3,162) 

 

 

 (1,229) 

 

39%

 

  

 (13,946) 

 

 

 (4,090) 

 

 

 (9,856) 

 

241%

Net income (loss)

 

 

 (32,945) 

 

 

 (6,331) 

 

 

 (26,614) 

 

420%

 

 

 (134,454) 

 

 

 (20,058) 

 

 

 (114,396) 

 

570%

Less: Net income (loss) attributable to noncontrolling interests

 

  

 (4,167) 

 

 

 (478) 

 

 

 (3,689) 

 

772%

 

  

 (5,830) 

 

 

 (2,489) 

 

 

 (3,341) 

 

134%

Net income (loss) attributable to common stockholders

 

$

 (28,778) 

 

$

 (5,853) 

 

$

 (22,925) 

 

392%

 

$

 (128,624) 

 

$

 (17,569) 

 

$

 (111,055) 

 

632%

 

     Fluctuations in revenues and property operating expenses are primarily a result of acquisitions subsequent to September 30, 2012, offset by the transition of 38 properties to seniors housing triple-net on September 1, 2013. The fluctuations in depreciation and amortization are due to acquisitions and variations in amortization of short-lived intangible assets. To the extent that we acquire or dispose of additional properties in the future, these amounts will change accordingly. Loss from unconsolidated entities during the three and nine month periods ended September 30, 2013 is primarily attributable to depreciation and amortization of short-lived intangible assets related to our joint ventures described in Note 7 to our consolidated financial statements. Interest income relates to the Sunrise loan that was acquired upon merger consummation on January 9, 2013.

 

      Interest expense represents secured debt interest expense as well as interest expense related to our unsecured Canadian term loan discussed in Note 10 to our consolidated financial statements. The following is a summary of our seniors housing operating property secured debt principal activity, which excludes the Canadian term loan (dollars in thousands):

 

43


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 2013

 

September 30, 2012

 

September 30, 2013

 

September 30, 2012

 

 

 

 

 

Weighted Avg.

 

 

 

 

Weighted Avg.

 

 

 

 

Weighted Avg.

 

 

 

 

Weighted Avg.

 

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

Beginning balance

 

$

 1,908,250 

 

4.738%

 

 

 1,377,933 

 

5.203%

 

$

 1,369,526 

 

4.874%

 

 

 1,318,647 

 

5.125%

Debt issued

 

 

 - 

 

0.000%

 

 

 6,318 

 

2.506%

 

 

 71,340 

 

4.961%

 

 

 145,713 

 

4.131%

Debt assumed

 

 

 678,742 

 

3.925%

 

 

 - 

 

0.000%

 

 

 1,215,598 

 

4.055%

 

 

 8,316 

 

5.624%

Debt extinguished

 

 

 (472,685) 

 

3.482%

 

 

 - 

 

0.000%

 

 

 (521,841) 

 

3.548%

 

 

 (79,990) 

 

2.644%

Debt transferred

 

 

 (367,997) 

 

5.298%

 

 

 - 

 

0.000%

 

 

 (367,997) 

 

5.298%

 

 

 - 

 

0.000%

Principal payments

 

 

 (9,492) 

 

4.575%

 

 

 (5,445) 

 

4.667%

 

 

 (22,916) 

 

4.738%

 

 

 (13,880) 

 

4.701%

Foreign currency

 

 

 9,564 

 

4.045%

 

 

 288 

 

5.624%

 

 

 2,672 

 

4.045%

 

 

 288 

 

5.624%

Ending balance

 

$

 1,746,382 

 

4.619%

 

$

 1,379,094 

 

4.832%

 

$

 1,746,382 

 

4.619%

 

$

 1,379,094 

 

4.832%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Monthly averages

 

$

 2,190,049 

 

4.824%

 

 

 1,378,980 

 

4.835%

 

$

 1,719,287 

 

4.870%

 

 

 1,394,989 

 

4.760%

 

     The increase in gains on debt extinguishment is primarily due to an increased volume of secured debt extinguishments during the three months ended September 30, 2013. The change in net derivative gains is due to foreign currency hedges relating to our international investments which are described in Note 11 to our unaudited consolidated financial statements.

 

    The change in transaction costs is due to both the volume and nature of transactions completed in the current year. The majority of our seniors housing operating properties are formed through partnership interests. Net income attributable to noncontrolling interests for the three and nine month periods ended September 30, 2013 and 2012 represents our partners’ share of net income (loss) related to those properties.

44


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

Medical Facilities

     The following is a summary of our NOI for the medical facilities segment (dollars in thousands):

 

 

 

Three Months Ended

 

Change

Nine Months Ended

 

Change

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

 

 

 

 

2013

 

2012

 

$

 

%

 

2013

 

2012

 

$

 

%

SSCNOI(1)

 

 $ 

 60,350 

 

 $ 

 58,726 

 

 $ 

 1,624 

 

3%

 

 $ 

 179,521 

 

 $ 

 175,241 

 

 $ 

 4,280 

 

2%

Non-cash NOI attributable to same store properties(1)

 

 

 1,505 

 

 

 1,650 

 

 

 (145) 

 

-9%

 

 

 4,789 

 

 

 5,380 

 

 

 (591) 

 

-11%

NOI attributable to non same store properties(2)

 

 

 22,373 

 

 

 15,697 

 

 

 6,676 

 

43%

 

 

 71,123 

 

 

 36,475 

 

 

 34,648 

 

95%

NOI

 

 $ 

 84,228 

 

 $ 

 76,073 

 

 $ 

 8,155 

 

11%

 

 $ 

 255,433 

 

 $ 

 217,096 

 

 $ 

 38,337 

 

18%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Due to increases in cash and non-cash revenues (described below) related to 169 same store properties.

(2) Primarily due to acquisitions of 41 properties and conversions of construction projects into eight revenue-generating properties subsequent to January 1, 2012.

 

     The following is a summary of our results of operations for the medical facilities segment (dollars in thousands):

 

 

 

 

 

Three Months Ended

 

Change

 

Nine Months Ended

 

Change

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

 

 

 

2013

 

2012

 

$

 

%

 

2013

 

2012

 

$

 

%

Revenues:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

 112,323 

 

$

 99,726 

 

$

 12,597 

 

13%

 

$

 336,547 

 

$

 281,744 

 

$

 54,803 

 

19%

 

Interest income

 

  

 2,594 

 

 

 1,995 

 

 

 599 

 

30%

 

 

 7,257 

 

 

 6,154 

 

 

 1,103 

 

18%

 

Other income

 

  

 466 

 

 

 400 

 

 

 66 

 

17%

 

 

 1,539 

 

 

 1,482 

 

 

 57 

 

4%

 

 

 

 

  

 115,383 

 

 

 102,121 

 

 

 13,262 

 

13%

 

 

 345,343 

 

 

 289,380 

 

 

 55,963 

 

19%

Property operating expenses

 

  

 31,155 

 

 

 26,048 

 

 

 5,107 

 

20%

 

 

 89,910 

 

 

 72,284 

 

 

 17,626 

 

24%

 

Net operating income from continuing operations (NOI)

 

  

 84,228 

 

 

 76,073 

 

 

 8,155 

 

11%

 

 

 255,433 

 

 

 217,096 

 

 

 38,337 

 

18%

Other expenses:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

  

 9,143 

 

 

 7,940 

 

 

 1,203 

 

15%

 

 

 28,441 

 

 

 22,338 

 

 

 6,103 

 

27%

 

Depreciation and amortization

 

  

 39,942 

 

 

 35,959 

 

 

 3,983 

 

11%

 

 

 120,998 

 

 

 102,450 

 

 

 18,548 

 

18%

 

Transaction costs

 

 

 683 

 

 

 708 

 

 

 (25) 

 

-4%

 

 

 971 

 

 

 5,374 

 

 

 (4,403) 

 

-82%

 

Loss (gain) on extinguishment of debt, net

 

  

 0 

 

 

 0 

 

 

 0 

 

n/a

 

 

 0 

 

 

 (483) 

 

 

 483 

 

-100%

 

 

 

 

  

 49,768 

 

 

 44,607 

 

 

 5,161 

 

12%

 

 

 150,410 

 

 

 129,679 

 

 

 20,731 

 

16%

Income from continuing operations before income taxes and income from unconsolidated entities

 

  

 34,460 

 

 

 31,466 

 

 

 2,994 

 

10%

 

 

 105,023 

 

 

 87,417 

 

 

 17,606 

 

20%

Income tax expense

 

  

 (1,123) 

 

 

 (143) 

 

 

 (980) 

 

685%

 

 

 (408) 

 

 

 (316) 

 

 

 (92) 

 

29%

Income from unconsolidated entities

 

 

 2,860 

 

 

 2,395 

 

 

 465 

 

19%

 

 

 6,737 

 

 

 6,314 

 

 

 423 

 

7%

Income from continuing operations

 

  

 36,197 

 

 

 33,718 

 

 

 2,479 

 

7%

 

 

 111,352 

 

 

 93,415 

 

 

 17,937 

 

19%

Discontinued operations:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) on sales of properties, net

 

  

5,954

 

 

(12,521)

 

 

18,475

 

n/a

 

 

7,745

 

 

(11,664)

 

 

19,409

 

n/a

 

Income (loss) from discontinued operations, net

 

  

417

 

 

1,441

 

 

(1,024)

 

-71%

 

 

1,150

 

 

2,711

 

 

(1,561)

 

-58%

 

Discontinued operations, net

 

  

 6,371 

 

 

 (11,080) 

 

 

 17,451 

 

n/a

 

 

 8,895 

 

 

 (8,953) 

 

 

 17,848 

 

n/a

Net income (loss)

 

  

 42,568 

 

 

 22,638 

 

 

 19,930 

 

88%

 

 

 120,247 

 

 

 84,462 

 

 

 35,785 

 

42%

Less: Net income (loss) attributable to noncontrolling interests

 

  

 105 

 

 

 12 

 

 

 93 

 

775%

 

 

 255 

 

 

 140 

 

 

 115 

 

82%

Net income (loss) attributable to common stockholders

 

$

 42,463 

 

$

 22,626 

 

$

 19,837 

 

88%

 

$

 119,992 

 

$

 84,322 

 

$

 35,670 

 

42%

 

45


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

     The increase in rental income is primarily attributable to the acquisitions of new properties and the construction conversions of medical facilities from which we receive rent. Certain of our leases contain annual rental escalators that are contingent upon changes in the Consumer Price Index.  These escalators are not fixed, so no straight-line rent is recorded; however, rental income is recorded based on the contractual cash rental payments due for the period.  If the Consumer Price Index does not increase, a portion of our revenues may not continue to increase.  Sales of real property would offset revenue increases and, to the extent that they exceed new acquisitions, could result in decreased revenues.  Our leases could renew above or below current rent rates, resulting in an increase or decrease in rental income.  For the three months ended September 30, 2013, our consolidated medical office building portfolio signed 56,578 square feet of new leases and 187,177 square feet of renewals.  The weighted-average term of these leases was five years, with a rate of $22.39 per square foot and tenant improvement and lease commission costs of $14.98 per square foot.  Substantially all of these leases during the referenced quarter contain an annual fixed or contingent escalation rent structure ranging from the change in CPI to 3%.  For the three months ended September 30, 2013, we had no lease renewals and one lease with a rental rate increaser of 0.27% in our hospital portfolio.

 

     Interest expense for the nine months ended September 30, 2013 and 2012 represents $29,314,000 and $28,799,000, respectively, of secured debt interest expense, which is offset by interest allocated to discontinued operations.  The change in secured debt interest expense is primarily due to the net effect and timing of assumptions, extinguishments and principal amortizations.  The following is a summary of our medical facilities secured debt principal activity (dollars in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 2013

 

September 30, 2012

 

September 30, 2013

 

September 30, 2012

 

 

 

 

 

Weighted Avg.

 

 

 

 

Weighted Avg.

 

 

 

 

Weighted Avg.

 

 

 

 

Weighted Avg.

 

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

 705,322 

 

5.947%

 

$

 695,454 

 

5.947%

 

$

 713,720 

 

5.950%

 

$

 520,026 

 

5.981%

Debt assumed

 

 

 26,300 

 

6.439%

 

 

 - 

 

0.000%

 

 

 26,300 

 

6.439%

 

 

 220,335 

 

5.861%

Debt extinguished

 

  

 - 

 

0.000%

 

  

 - 

 

0.000%

 

  

 0 

 

0.000%

 

  

 (37,622) 

 

5.858%

Principal payments

 

  

 (3,905) 

 

6.032%

 

  

 (3,513) 

 

6.021%

 

  

 (12,303) 

 

6.132%

 

  

 (10,798) 

 

6.130%

Ending balance

 

$

 727,717 

 

5.964%

 

$

 691,941 

 

5.947%

 

$

 727,717 

 

5.964%

 

$

 691,941 

 

5.947%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Monthly averages

 

$

 709,921 

 

5.952%

 

$

 693,684 

 

5.947%

 

$

 710,146 

 

5.950%

 

$

 661,406 

 

5.953%

 

     The increase in property operating expenses and depreciation and amortization is primarily attributable to acquisitions and construction conversions of new medical facilities for which we incur certain property operating expenses offset by property operating expenses associated with discontinued operations.  The change in transaction costs is due primarily to lower transaction volume in the current year.  Income from unconsolidated entities includes our share of net income related to our joint venture investment with Forest City Enterprises and certain unconsolidated property investments related to our strategic joint venture relationship with a national medical office building company.  See Note 7 to our consolidated financial statements for additional information.

 

     Changes in gains/losses on sales of properties is related to property sales, which totaled twelve and thirteen for the nine months ended September 30, 2013, and 2012, respectively.  The following illustrates the reclassification impact as a result of classifying the properties sold prior to or held for sale at September 30, 2013 as discontinued operations for the periods presented.  Please refer to Note 5 to our consolidated financial statements for further discussion.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

  

2013

 

2012

 

2013

 

2012

 

 

  

 

 

 

 

 

 

 

 

 

 

 

Rental income

  

$

 810 

 

$

 6,529 

 

$

 3,486 

 

$

 20,553 

Expenses:

  

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

  

 

12

 

 

1,955

 

 

873

 

 

6,461

 

Property operating expenses

  

 

68

 

 

281

 

 

346

 

 

1,469

 

Provision for depreciation

  

 

313

 

 

2,852

 

 

1,117

 

 

9,912

Income from discontinued operations, net

  

$

 417 

 

$

 1,441 

 

$

 1,150 

 

$

 2,711 

46


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

     Non-Segment/Corporate

     The following is a summary of our results of operations for the non-segment/corporate activities (dollars in thousands):

 

 

 

 

 

Three Months Ended

 

Change

 

Nine Months Ended

 

Change

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

 

 

 

2013

 

2012

 

$

 

%

 

2013

 

2012

 

$

 

%

Revenues:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income

 

$

 32 

 

$

 277 

 

$

 (245) 

 

-88%

 

$

 277 

 

$

 755 

 

$

 (478) 

 

-63%

Expenses:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

  

 76,726 

 

 

 66,154 

 

 

 10,572 

 

16%

 

 

 229,128 

 

 

 198,746 

 

 

 30,382 

 

15%

 

 

General and administrative

 

  

 28,718 

 

 

 23,679 

 

 

 5,039 

 

21%

 

 

 79,799 

 

 

 77,302 

 

 

 2,497 

 

3%

 

 

Loss on extinguishment of debt, net

 

  

 1,184 

 

 

 0 

 

 

 1,184 

 

n/a

 

 

 1,184 

 

 

 0 

 

 

 1,184 

 

n/a

 

 

 

 

  

 106,628 

 

 

 89,833 

 

 

 16,795 

 

19%

 

 

 310,111 

 

 

 276,048 

 

 

 34,063 

 

12%

Loss from continuing operations before income taxes

 

  

 (106,596) 

 

 

 (89,556) 

 

 

 (17,040) 

 

19%

 

 

 (309,834) 

 

 

 (275,293) 

 

 

 (34,541) 

 

13%

Income tax (expense) benefit

 

  

 - 

 

 

 (223) 

 

 

 223 

 

-100%

 

 

 (17) 

 

 

 (1,447) 

 

 

 1,430 

 

-99%

Loss from continuing operations

 

  

 (106,596) 

 

 

 (89,779) 

 

 

 (16,817) 

 

19%

 

 

 (309,851) 

 

 

 (276,740) 

 

 

 (33,111) 

 

12%

Less: Preferred stock dividends

 

  

 16,602 

 

 

 16,602 

 

 

 - 

 

0%

 

 

 49,805 

 

 

 52,527 

 

 

 (2,722) 

 

-5%

Less: Preferred stock redemption charge

 

  

 - 

 

 

 - 

 

 

 - 

 

n/a

 

 

 - 

 

 

 6,242 

 

 

 (6,242) 

 

-100%

Net loss attributable to common stockholders

 

$

 (123,198) 

 

$

 (106,381) 

 

$

 (16,817) 

 

16%

 

$

 (359,656) 

 

$

 (335,509) 

 

$

 (24,147) 

 

7%

 

     Other income primarily represents income from non-real estate activities such as interest earned on temporary investments of cash reserves.  The following is a summary of our non-segment/corporate interest expense (dollars in thousands):

 

 

 

Three Months Ended

 

Change

 

Nine Months Ended

 

Change

 

 

September 30,

 

September 30,

 

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

 

2013

 

2012

 

$

 

%

 

2013

 

2012

 

$

 

%

Senior unsecured notes

 

$

 71,533 

 

$

 62,172 

 

$

 9,361 

 

15%

 

$

 216,688 

 

$

 186,277 

 

$

 30,411 

 

16%

Secured debt

 

  

 122 

 

  

 138 

 

  

 (16) 

 

-12%

 

  

 358 

 

  

 402 

 

  

 (44) 

 

-11%

Unsecured lines of credit

 

  

 4,445 

 

  

 3,078 

 

  

 1,367 

 

44%

 

  

 11,967 

 

  

 9,717 

 

  

 2,250 

 

23%

Capitalized interest

 

  

 (1,706) 

 

  

 (2,555) 

 

  

 849 

 

-33%

 

  

 (4,698) 

 

  

 (7,113) 

 

  

 2,415 

 

-34%

Swap savings

 

  

 (4) 

 

  

 (12) 

 

  

 8 

 

-67%

 

  

 (11) 

 

  

 (92) 

 

  

 81 

 

-88%

Loan expense

 

  

 2,336 

 

  

 3,333 

 

  

 (997) 

 

-30%

 

  

 4,824 

 

  

 9,555 

 

  

 (4,731) 

 

-50%

Totals

 

$

 76,726 

 

$

 66,154 

 

$

 10,572 

 

16%

 

$

 229,128 

 

$

 198,746 

 

$

 30,382 

 

15%

     The change in interest expense on senior unsecured notes is due to the net effect of issuances and extinguishments.  Please refer to Note 10 of our consolidated financial statements for additional information.  We capitalize certain interest costs associated with funds used for the construction of properties owned directly by us. The amount capitalized is based upon the balances outstanding during the construction period using the rate of interest that approximates our cost of financing. Our interest expense is reduced by the amount capitalized.  Please see Note 11 to our consolidated financial statements for a discussion of our interest rate swap agreements and their impact on interest expense.  Loan expense represents the amortization of deferred loan costs incurred in connection with the issuance and amendments of debt. Loan expense changes are primarily due to amortization of costs incurred for senior unsecured note issuances.  The change in interest expense on the unsecured line of credit arrangements is due primarily to the net effect and timing of draws, paydowns and variable interest rate changes.  Please refer to Note 9 of our consolidated financial statements for additional information regarding our unsecured line of credit arrangements.

 

     General and administrative expenses as a percentage of consolidated revenues (including revenues from discontinued operations) for the three months ended September 30, 2013 and 2012 were 3.65% and 4.99%, respectively.  The decline in percent of revenue is primarily related to the increasing revenue base as a result of our acquisitions.  The loss on extinguishment of debt is due to the redemption of convertible senior notes.  The changes in preferred stock dividends are primarily attributable to the net effect of issuances, redemptions and conversions.  Please see Note 13 to our consolidated financial statements for additional information.  In

47


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

connection with the preferred stock redemptions, we recognized charges of $6,242,000 for the nine months ended September 30, 2012.

 

 

Non-GAAP Financial Measures

     We believe that net income, as defined by U.S. GAAP, is the most appropriate earnings measurement. However, we consider FFO to be a useful supplemental measure of our operating performance. Historical cost accounting for real estate assets in accordance with U.S. GAAP implicitly assumes that the value of real estate assets diminishes predictably over time as evidenced by the provision for depreciation. However, since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient. In response, the National Association of Real Estate Investment Trusts (“NAREIT”) created FFO as a supplemental measure of operating performance for REITs that excludes historical cost depreciation from net income. FFO, as defined by NAREIT, means net income, computed in accordance with U.S. GAAP, excluding gains (or losses) from sales of real estate and impairment of depreciable assets, plus depreciation and amortization, and after adjustments for unconsolidated entities.

     Net operating income from continuing operations (“NOI”) is used to evaluate the operating performance of our properties. We define NOI as total revenues, including tenant reimbursements, less property level operating expenses. Property operating expenses represent costs associated with managing, maintaining and servicing tenants for our seniors housing operating and medical facility properties.  These expenses include, but are not limited to, property-related payroll and benefits, property management fees, marketing, housekeeping, food service, maintenance, utilities, property taxes and insurance.  General and administrative expenses represent costs unrelated to property operations or transaction costs.  These expenses include, but are not limited to, payroll and benefits, professional services, office expenses and depreciation of corporate fixed assets.  Same store cash NOI (“SSCNOI”) is used to evaluate the cash-based operating performance of our properties under a consistent population which eliminates changes in the composition of our portfolio.  As used herein, same store is generally defined as those revenue-generating properties in the portfolio for the reporting period subsequent to January 1, 2012.  Any properties acquired, developed, transitioned or classified in discontinued operations during that period are excluded from the same store amounts.  We believe NOI and SSCNOI provide investors relevant and useful information because they measure the operating performance of our properties at the property level on an unleveraged basis. We use NOI and SSCNOI to make decisions about resource allocations and to assess the property level performance of our properties.

     EBITDA stands for earnings before interest, taxes, depreciation and amortization. We believe that EBITDA, along with net income and cash flow provided from operating activities, is an important supplemental measure because it provides additional information to assess and evaluate the performance of our operations. We primarily utilize EBITDA to measure our interest coverage ratio, which represents EBITDA divided by total interest, and our fixed charge coverage ratio, which represents EBITDA divided by fixed charges. Fixed charges include total interest, secured debt principal amortization and preferred dividends. 

     A covenant in our primary unsecured line of credit arrangement and Canadian denominated term loan contains a financial ratio based on a definition of EBITDA that is specific to that agreement. Failure to satisfy these covenants could result in an event of default that could have a material adverse impact on our cost and availability of capital, which could in turn have a material adverse impact on our consolidated results of operations, liquidity and/or financial condition. Due to the materiality of these debt agreements and the financial covenants, we have disclosed Adjusted EBITDA, which represents EBITDA as defined above and adjusted for stock-based compensation expense, provision for loan losses and gain/loss on extinguishment of debt. We use Adjusted EBITDA to measure our adjusted fixed charge coverage ratio, which represents Adjusted EBITDA divided by fixed charges on a trailing twelve months basis. Fixed charges include total interest (excluding capitalized interest and non-cash interest expenses), secured debt principal amortization and preferred dividends. Our covenant requires an adjusted fixed charge ratio of at least 1.50 times.

     Other than Adjusted EBITDA, our supplemental reporting measures and similarly entitled financial measures are widely used by investors, equity and debt analysts and rating agencies in the valuation, comparison, rating and investment recommendations of companies. Management uses these financial measures to facilitate internal and external comparisons to our historical operating results and in making operating decisions. Additionally, these measures are utilized by the Board of Directors to evaluate management. Adjusted EBITDA is used solely to determine our compliance with a financial covenant in our primary line of credit arrangement and Canadian denominated term loan and is not being presented for use by investors for any other purpose. None of our supplemental measures represent net income or cash flow provided from operating activities as determined in accordance with U.S. GAAP and should not be considered as alternative measures of profitability or liquidity. Finally, the supplemental measures, as defined by us, may not be comparable to similarly entitled items reported by other real estate investment trusts or other companies.

48


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

     The table below reflects the reconciliation of FFO to net income attributable to common stockholders, the most directly comparable U.S. GAAP measure, for the periods presented. The provisions for depreciation and amortization include provisions for depreciation and amortization from discontinued operations. Noncontrolling interest amounts represent the noncontrolling interests’ share of transaction costs and depreciation and amortization.  Unconsolidated entity amounts represent our share of unconsolidated entities’ depreciation and amortization.  Amounts are in thousands except for per share data.

 

 

 

Three Months Ended

 

 

 

March 31,

 

June 30,

 

September 30,

 

December 31,

 

March 31,

 

June 30,

 

September 30,

FFO Reconciliations:

  

2012

 

2012

 

2012

 

2012

 

2013

 

2013

 

2013

Net income (loss) attributable to common stockholders

  

$

 39,307 

 

$

 54,735 

 

$

 37,269 

 

$

 90,576 

 

$

 55,058 

 

$

 (8,508) 

 

$

 20,691 

Depreciation and amortization

  

 

 127,422 

 

 

 132,963 

 

 

 132,858 

 

 

 140,342 

 

 

 187,122 

 

 

 200,477 

 

 

 242,981 

Impairment of assets

 

 

 0 

 

 

 0 

 

 

 6,952 

 

 

 22,335 

 

 

 0 

 

 

 0 

 

 

 0 

Loss (gain) on sales of properties, net

  

 

 (769) 

 

 

 (32,450) 

 

 

 (12,827) 

 

 

 (54,502) 

 

 

 (82,492) 

 

 

 29,997 

 

 

 (4,707) 

Noncontrolling interests

 

 

 (4,990) 

 

 

 (5,189) 

 

 

 (5,440) 

 

 

 (5,439) 

 

 

 (5,793) 

 

 

 (7,821) 

 

 

 (12,328) 

Unconsolidated entities

  

 

 2,887 

 

 

 7,873 

 

 

 11,913 

 

 

 11,735 

 

 

 16,983 

 

 

 16,521 

 

 

 11,626 

Funds from operations

  

$

 163,857 

 

$

 157,932 

 

$

 170,725 

 

$

 205,047 

 

$

 170,878 

 

$

 230,666 

 

$

 258,263 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

  

 

 199,661 

 

 

 213,498 

 

 

 224,391 

 

 

 259,290 

 

 

 260,036 

 

 

 273,091 

 

 

 286,020 

 

Diluted

  

 

 201,658 

 

 

 215,138 

 

 

 226,258 

 

 

 261,210 

 

 

 262,525 

 

 

 276,481 

 

 

 288,029 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share data:

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

common stockholders

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

  

$

 0.20 

 

$

 0.26 

 

$

 0.17 

 

$

 0.35 

 

$

 0.21 

 

$

 (0.03) 

 

$

 0.07 

 

Diluted

  

 

 0.19 

 

 

 0.25 

 

 

 0.16 

 

 

 0.35 

 

 

 0.21 

 

 

 (0.03) 

 

 

 0.07 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funds from operations

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

  

$

 0.82 

 

$

 0.74 

 

$

 0.76 

 

$

 0.79 

 

$

 0.66 

 

$

 0.84 

 

$

 0.90 

 

Diluted

  

 

 0.81 

 

 

 0.73 

 

 

 0.75 

 

 

 0.78 

 

 

 0.65 

 

 

 0.83 

 

 

 0.90 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

September 30,

 

FFO Reconciliations:

  

2012

 

2013

 

Net income attributable to common stockholders

  

$

 131,308 

 

$

 67,245 

 

Depreciation and amortization

  

 

 393,243 

 

 

 630,579 

 

Impairment of assets

 

 

 6,952 

 

 

 0 

 

Loss (gain) on sales of properties, net

  

 

 (46,046) 

 

 

 (57,202) 

 

Noncontrolling interests

 

 

 (15,619) 

 

 

 (25,942) 

 

Unconsolidated entities

  

 

 22,673 

 

 

 45,130 

 

Funds from operations

  

$

 492,511 

 

$

 659,810 

 

 

 

  

 

 

 

 

 

 

Average common shares outstanding:

 

 

 

 

 

 

 

 

Basic

  

 

 212,592 

 

 

 273,148 

 

 

Diluted

  

 

 214,075 

 

 

 275,247 

 

 

 

  

 

 

 

 

 

 

Per share data:

  

 

 

 

 

 

 

Net income attributable to

  

 

 

 

 

 

 

 

common stockholders

  

 

 

 

 

 

 

 

Basic

  

$

 0.62 

 

$

 0.25 

 

 

Diluted

  

 

 0.61 

 

 

 0.24 

 

 

 

  

 

 

 

 

 

 

Funds from operations

  

 

 

 

 

 

 

 

Basic

  

$

 2.32 

 

$

 2.42 

 

 

Diluted

  

 

 2.30 

 

 

 2.40 

 

                                                         

49


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

     The table below reflects the reconciliation of EBITDA to net income, the most directly comparable U.S. GAAP measure, for the periods presented. Interest expense and the provisions for depreciation and amortization include discontinued operations. Dollars are in thousands.

 

 

 

Three Months Ended

 

 

 

March 31,

 

June 30,

 

September 30,

 

December 31,

 

March 31,

 

 

June 30,

 

September 30,

EBITDA Reconciliations:

 

2012

 

2012

 

2012

 

2012

 

2013

 

 

2013

 

2013

Net income

 

$

 57,458 

 

$

 76,875 

 

$

 53,506 

 

$

 107,005 

 

$

 71,799 

 

$

 7,181 

 

$

 33,605 

Interest expense

 

  

 93,722 

 

  

 96,762 

 

  

 96,243 

 

  

 96,573 

 

  

 110,734 

 

 

 110,844 

 

  

 116,542 

Income tax expense (benefit)

 

  

 1,470 

 

  

 1,447 

 

  

 836 

 

  

 3,858 

 

  

 2,763 

 

 

 1,215 

 

  

 3,077 

Depreciation and amortization

 

  

 127,422 

 

  

 132,963 

 

  

 132,858 

 

  

 140,342 

 

  

 187,122 

 

 

 200,477 

 

  

 242,981 

EBITDA

 

$

 280,072 

 

$

 308,047 

 

$

 283,443 

 

$

 347,778 

 

$

 372,418 

 

$

 319,717 

 

$

 396,205 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

  

 

Interest Coverage Ratio:

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

  

 

Interest expense

 

$

 93,722 

 

$

 96,762 

 

$

 96,243 

 

$

 96,573 

 

$

 110,734 

 

$

 110,844 

 

$

 116,542 

Non-cash interest expense

 

  

 (3,693) 

 

  

 (2,849) 

 

  

 (2,241) 

 

  

 (2,612) 

 

  

 (3,494) 

 

 

 (1,237) 

 

  

 951 

Capitalized interest

 

  

 2,420 

 

  

 2,140 

 

  

 2,556 

 

  

 2,664 

 

  

 1,606 

 

 

 1,386 

 

  

 1,706 

 

Total interest

 

  

 92,449 

 

  

 96,053 

 

  

 96,558 

 

  

 96,625 

 

  

 108,846 

 

 

 110,993 

 

  

 119,199 

EBITDA

 

$

 280,072 

 

$

 308,047 

 

$

 283,443 

 

$

 347,778 

 

$

 372,418 

 

$

 319,717 

 

$

 396,205 

 

Interest coverage ratio

 

  

3.03x

 

  

3.21x

 

  

2.94x

 

  

3.60x

 

  

3.42x

 

 

2.88x

 

  

3.32x

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

  

 

Fixed Charge Coverage Ratio:

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

  

 

Total interest

 

$

 92,449 

 

$

 96,053 

 

$

 96,558 

 

$

 96,625 

 

$

 108,846 

 

$

 110,993 

 

$

 119,199 

Secured debt principal payments

 

  

 8,529 

 

  

 9,567 

 

  

 10,141 

 

  

 10,317 

 

  

 11,319 

 

 

 13,277 

 

 

 15,297 

Preferred dividends

 

  

 19,207 

 

  

 16,719 

 

  

 16,602 

 

  

 16,602 

 

  

 16,602 

 

 

 16,602 

 

 

 16,602 

 

Total fixed charges

 

  

 120,185 

 

  

 122,339 

 

  

 123,301 

 

  

 123,544 

 

  

 136,767 

 

 

 140,872 

 

  

 151,098 

EBITDA

 

$

 280,072 

 

$

 308,047 

 

$

 283,443 

 

$

 347,778 

 

$

 372,418 

 

$

 319,717 

 

$

 396,205 

 

Fixed charge coverage ratio

 

  

2.33x

 

 

2.52x

 

 

2.30x

 

 

2.82x

 

 

2.72x

 

 

2.27x

 

 

2.62x

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

EBITDA Reconciliations:

 

2012

 

 

2013

Net income

 

$

 187,836 

 

$

 112,588 

Interest expense

 

  

 286,727 

 

 

 338,120 

Income tax expense (benefit)

 

  

 3,754 

 

 

 7,055 

Depreciation and amortization

 

  

 393,243 

 

 

 630,579 

EBITDA

 

$

 871,560 

 

$

 1,088,342 

 

 

 

  

 

 

 

 

Interest Coverage Ratio:

 

  

 

 

 

 

Interest expense

 

$

 286,727 

 

$

 338,120 

Non-cash interest expense

 

  

 (8,783) 

 

 

 (3,779) 

Capitalized interest

 

  

 7,113 

 

 

 4,698 

 

Total interest

 

  

 285,057 

 

 

 339,039 

EBITDA

 

$

 871,560 

 

$

 1,088,342 

 

Interest coverage ratio

 

  

3.06x

 

 

3.21x

 

 

 

  

 

 

 

 

Fixed Charge Coverage Ratio:

 

  

 

 

 

 

Total interest

 

$

 285,057 

 

$

 339,039 

Secured debt principal payments

 

  

 28,237 

 

 

 39,893 

Preferred dividends

 

  

 52,527 

 

 

 49,805 

 

Total fixed charges

 

  

 365,821 

 

 

 428,737 

EBITDA

 

$

 871,560 

 

$

 1,088,342 

 

Fixed charge coverage ratio

 

 

2.38x

 

 

2.54x

50


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

     The table below reflects the reconciliation of Adjusted EBITDA to net income, the most directly comparable U.S. GAAP measure, for the periods presented. Interest expense and the provisions for depreciation and amortization include discontinued operations. Dollars are in thousands.

 

 

 

Twelve Months Ended

Adjusted EBITDA

 

March 31,

 

June 30,

 

September 30,

 

December 31,

 

March 31,

 

June 30,

 

September 30,

Reconciliations:

 

2012

 

2012

 

2012

 

2012

 

2013

 

2013

 

2013

Net income

 

$

 238,363 

 

$

 229,029 

 

$

 230,181 

 

$

 294,841 

 

$

 309,183 

 

$

 239,491 

 

$

 219,590 

Interest expense

 

  

 356,390 

 

 

 368,379 

 

 

 376,811 

 

 

 383,300 

 

 

 400,312 

 

 

 414,394 

 

 

 434,693 

Income tax expense (benefit)

 

  

 2,729 

 

 

 3,965 

 

 

 4,578 

 

 

 7,611 

 

 

 8,904 

 

 

 8,672 

 

 

 10,913 

Depreciation and amortization

 

  

 476,259 

 

 

 498,169 

 

 

 515,387 

 

 

 533,585 

 

 

 593,285 

 

 

 660,799 

 

 

 770,922 

Stock-based compensation expense

 

  

 16,552 

 

 

 16,177 

 

 

 17,003 

 

 

 18,521 

 

 

 17,728 

 

 

 17,607 

 

 

 18,971 

Provision for loan losses

 

  

 1,762 

 

 

 1,595 

 

 

 28,471 

 

 

 27,008 

 

 

 27,008 

 

 

 27,008 

 

 

 0 

Loss (gain) on extinguishment of debt, net

 

  

 (979) 

 

 

 (403) 

 

 

 (188) 

 

 

 (775) 

 

 

 (1,083) 

 

 

 (1,659) 

 

 

 (5,942) 

Adjusted EBITDA

 

$

 1,091,076 

 

$

 1,116,911 

 

$

 1,172,243 

 

$

 1,264,091 

 

$

 1,355,337 

 

$

 1,366,312 

 

$

 1,449,147 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Adjusted Fixed Charge Coverage Ratio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

 356,390 

 

$

 368,379 

 

$

 376,811 

 

$

 383,300 

 

$

 400,312 

 

$

 414,394 

 

$

 434,693 

Capitalized interest

 

  

 10,919 

 

  

 10,745 

 

  

 10,190 

 

  

 9,777 

 

  

 8,964 

 

  

 8,211 

 

  

 7,362 

Non-cash interest expense

 

  

 (13,882) 

 

  

 (14,033) 

 

  

 (12,560) 

 

  

 (11,395) 

 

  

 (11,196) 

 

  

 (9,584) 

 

  

 (6,392) 

 

Total interest

 

 

 353,427 

 

 

 365,091 

 

 

 374,441 

 

 

 381,682 

 

 

 398,080 

 

 

 413,021 

 

 

 435,663 

Adjusted EBITDA

 

$

 1,091,076 

 

$

 1,116,911 

 

$

 1,172,243 

 

$

 1,264,091 

 

$

 1,355,337 

 

$

 1,366,312 

 

$

 1,449,147 

 

Adjusted interest coverage ratio

 

 

3.09x

 

 

3.06x

 

 

3.13x

 

 

3.31x

 

 

3.40x

 

 

3.31x

 

 

3.33x

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest

 

$

 353,427 

 

$

 365,091 

 

$

 374,441 

 

$

 381,682 

 

$

 398,080 

 

$

 413,021 

 

$

 435,663 

Secured debt principal payments

 

  

 30,427 

 

  

 32,983 

 

  

 35,920 

 

  

 38,554 

 

  

 41,344 

 

  

 45,054 

 

  

 50,210 

Preferred dividends

 

  

 71,028 

 

  

 70,394 

 

  

 69,762 

 

  

 69,129 

 

  

 66,525 

 

  

 66,408 

 

  

 66,408 

 

Total fixed charges

 

  

 454,882 

 

  

 468,468 

 

  

 480,123 

 

  

 489,365 

 

  

 505,949 

 

  

 524,483 

 

  

 552,281 

Adjusted EBITDA

 

$

 1,091,076 

 

$

 1,116,911 

 

$

 1,172,243 

 

$

 1,264,091 

 

$

 1,355,337 

 

$

 1,366,312 

 

$

 1,449,147 

 

Adjusted fixed charge coverage ratio

 

  

2.40x

 

 

2.38x

 

 

2.44x

 

 

2.58x

 

 

2.68x

 

 

2.61x

 

 

2.62x

51


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

     The following tables reflect the reconciliation of NOI and SSCNOI to net income attributable to common stockholders, the most directly comparable U.S. GAAP measure, for the periods presented.  Amounts are in thousands.

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

March 31,

 

June 30,

 

September 30,

 

December 31,

 

March 31,

 

June 30,

 

September 30,

NOI Reconciliations:

 

 

 

2012

 

2012

 

2012

 

2012

 

2013

 

2013

 

2013

Total revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seniors housing triple-net

 

 

 

$

 167,621 

 

$

 175,656 

 

$

 184,971 

 

$

 187,269 

 

$

 190,813 

 

$

 194,573 

 

$

 205,221 

 

Seniors housing operating

 

 

 

 

 158,174 

 

 

 165,654 

 

 

 174,464 

 

 

 205,470 

 

 

 328,081 

 

 

 370,995 

 

 

 466,294 

 

Medical facilities

 

 

 

 

 90,509 

 

 

 96,751 

 

 

 102,121 

 

 

 106,821 

 

 

 113,980 

 

 

 115,980 

 

 

 115,383 

 

Non-segment/corporate

 

 

 

 

 235 

 

 

 243 

 

 

 277 

 

 

 158 

 

 

 81 

 

 

 164 

 

 

 32 

 

 

 

Total revenues

 

 

 

 

 416,539 

 

 

 438,304 

 

 

 461,833 

 

 

 499,718 

 

 

 632,955 

 

 

 681,712 

 

 

 786,930 

Property operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seniors housing operating

 

 

 

 

 107,243 

 

 

 111,340 

 

 

 118,369 

 

 

 134,726 

 

 

 224,503 

 

 

 248,972 

 

 

 311,575 

 

Medical facilities

 

 

 

 

 21,652 

 

 

 24,585 

 

 

 26,048 

 

 

 26,898 

 

 

 29,044 

 

 

 29,712 

 

 

 31,155 

 

 

 

Total property operating expenses

 

 

 

 

 128,895 

 

 

 135,925 

 

 

 144,417 

 

 

 161,624 

 

 

 253,547 

 

 

 278,684 

 

 

 342,730 

Net operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seniors housing triple-net

 

 

 

 

 167,621 

 

 

 175,656 

 

 

 184,971 

 

 

 187,269 

 

 

 190,813 

 

 

 194,573 

 

 

 205,221 

 

Seniors housing operating

 

 

 

 

 50,931 

 

 

 54,314 

 

 

 56,095 

 

 

 70,744 

 

 

 103,578 

 

 

 122,023 

 

 

 154,719 

 

Medical facilities

 

 

 

 

 68,857 

 

 

 72,166 

 

 

 76,073 

 

 

 79,923 

 

 

 84,936 

 

 

 86,268 

 

 

 84,228 

 

Non-segment/corporate

 

 

 

 

 235 

 

 

 243 

 

 

 277 

 

 

 158 

 

 

 81 

 

 

 164 

 

 

 32 

 

 

 

Net operating income from continuing operations (NOI)

 

 

 

 

 287,644 

 

 

 302,379 

 

 

 317,416 

 

 

 338,094 

 

 

 379,408 

 

 

 403,028 

 

 

 444,200 

Reconciling items:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 (88,247) 

 

 

 (91,061) 

 

 

 (91,915) 

 

 

 (93,514) 

 

 

 (109,571) 

 

 

 (110,483) 

 

 

 (116,530) 

 

Loss (gain) on derivatives, net

 

 

 

 

 (555) 

 

 

 2,676 

 

 

 (409) 

 

 

 113 

 

 

 (2,309) 

 

 

 2,716 

 

 

 (4,872) 

 

Depreciation and amortization

 

 

 

 

 (119,219) 

 

 

 (126,281) 

 

 

 (127,844) 

 

 

 (137,041) 

 

 

 (186,332) 

 

 

 (199,701) 

 

 

 (242,668) 

 

General and administrative

 

 

 

 

 (27,751) 

 

 

 (25,870) 

 

 

 (23,679) 

 

 

 (20,039) 

 

 

 (27,179) 

 

 

 (23,902) 

 

 

 (28,718) 

 

Transaction costs

 

 

 

 

 (5,579) 

 

 

 (28,691) 

 

 

 (8,264) 

 

 

 (19,074) 

 

 

 (65,980) 

 

 

 (28,136) 

 

 

 (23,591) 

 

Loss (gain) on extinguishment of debt, net

 

 

 

 

 - 

 

 

 (576) 

 

 

 (215) 

 

 

 1,566 

 

 

 308 

 

 

 - 

 

 

 4,068 

 

Provision for loan losses

 

 

 

 

 - 

 

 

 - 

 

 

 (27,008) 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

Income tax benefit (expense)

 

 

 

 

 (1,470) 

 

 

 (1,447) 

 

 

 (836) 

 

 

 (3,858) 

 

 

 (2,763) 

 

 

 (1,215) 

 

 

 (3,077) 

 

Income (loss) from unconsolidated entities

 

 

 

 

 1,532 

 

 

 1,456 

 

 

 (739) 

 

 

 232 

 

 

 2,262 

 

 

 (5,461) 

 

 

 (331) 

 

Income (loss) from discontinued operations, net

 

 

 

 

 11,103 

 

 

 44,290 

 

 

 16,999 

 

 

 40,525 

 

 

 83,955 

 

 

 (29,665) 

 

 

 5,124 

 

Preferred dividends

 

 

 

 

 (19,207) 

 

 

 (16,719) 

 

 

 (16,602) 

 

 

 (16,602) 

 

 

 (16,602) 

 

 

 (16,602) 

 

 

 (16,602) 

 

Preferred stock redemption charge

 

 

 

 

 - 

 

 

 (6,242) 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

 

 - 

 

Loss (income) attributable to noncontrolling interests

 

 

 

 

 1,056 

 

 

 821 

 

 

 365 

 

 

 174 

 

 

 (139) 

 

 

 913 

 

 

 3,688 

 

 

 

 

 

 

 

 

 (248,337) 

 

 

 (247,644) 

 

 

 (280,147) 

 

 

 (247,518) 

 

 

 (324,350) 

 

 

 (411,536) 

 

 

 (423,509) 

Net income (loss) attributable to common stockholders

 

 

 

$

 39,307 

 

$

 54,735 

 

$

 37,269 

 

$

 90,576 

 

$

 55,058 

 

$

 (8,508) 

 

$

 20,691 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

September 30,

 

September 30,

 

NOI Reconciliations:

 

 

 

2012

 

2013

 

Total revenues:

 

 

 

 

 

 

 

 

 

 

Seniors housing triple-net

 

 

 

$

 528,249 

 

$

 590,606 

 

 

Seniors housing operating

 

 

 

 

 498,295 

 

 

 1,165,372 

 

 

Medical facilities

 

 

 

 

 289,380 

 

 

 345,343 

 

 

Non-segment/corporate

 

 

 

 

 755 

 

 

 277 

 

 

 

 

Total revenues

 

 

 

 

 1,316,679 

 

 

 2,101,598 

 

Property operating expenses:

 

 

 

 

 

 

 

 

 

 

Seniors housing operating

 

 

 

 

 336,952 

 

 

 785,050 

 

 

Medical facilities

 

 

 

 

 72,284 

 

 

 89,910 

 

 

 

 

Total property operating expenses

 

 

 

 

 409,236 

 

 

 874,960 

 

Net operating income:

 

 

 

 

 

 

 

 

 

 

Seniors housing triple-net

 

 

 

 

 528,249 

 

 

 590,606 

 

 

Seniors housing operating

 

 

 

 

 161,343 

 

 

 380,322 

 

 

Medical facilities

 

 

 

 

 217,096 

 

 

 255,433 

 

 

Non-segment/corporate

 

 

 

 

 755 

 

 

 277 

 

 

 

 

Net operating income from continuing operations

 

 

 

 

 907,443 

 

 

 1,226,638 

 

Reconciling items:

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 (271,223) 

 

 

 (336,585) 

 

 

Loss (gain) on derivatives, net

 

 

 

 

 1,712 

 

 

 (4,465) 

 

 

Depreciation and amortization

 

 

 

 

 (373,344) 

 

 

 (628,700) 

 

 

General and administrative

 

 

 

 

 (77,302) 

 

 

 (79,799) 

 

 

Transaction costs

 

 

 

 

 (42,535) 

 

 

 (117,707) 

 

 

Loss (gain) on extinguishment of debt, net

 

 

 

 

 (791) 

 

 

 4,376 

 

 

Provision for loan losses

 

 

 

 

 (27,008) 

 

 

 - 

 

 

Income tax benefit (expense)

 

 

 

 

 (3,754) 

 

 

 (7,055) 

 

 

Income (loss) from unconsolidated entities

 

 

 

 

 2,250 

 

 

 (3,529) 

 

 

Income (loss) from discontinued operations, net

 

 

 

 

 72,388 

 

 

 59,414 

 

 

Preferred dividends

 

 

 

 

 (52,527) 

 

 

 (49,805) 

 

 

Preferred stock redemption charge

 

 

 

 

 (6,242) 

 

 

 - 

 

 

Loss (income) attributable to noncontrolling interests

 

 

 

 

 2,241 

 

 

 4,462 

 

 

 

 

 

 

 

 

 

 (776,135) 

 

 

 (1,159,393) 

 

Net income (loss) attributable to common stockholders

 

 

 

$

 131,308 

 

$

 67,245 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

March 31,

 

June 30,

 

September 30,

 

December 31,

 

March 31,

 

June 30,

 

September 30,

 

Same Store Cash NOI Reconciliations:

 

2012

 

2012

 

2012

 

2012

 

2013

 

2013

 

2013

 

Net operating income from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seniors housing triple-net

 

 

 

$

 167,621 

 

$

 175,656 

 

$

 184,971 

 

$

 187,269 

 

$

 190,813 

 

$

 194,573 

 

$

 205,221 

 

 

Seniors housing operating

 

 

 

 

 50,931 

 

 

 54,314 

 

 

 56,095 

 

 

 70,744 

 

 

 103,578 

 

 

 122,023 

 

 

 154,719 

 

 

Medical facilities

 

 

 

 

 68,857 

 

 

 72,166 

 

 

 76,073 

 

 

 79,923 

 

 

 84,936 

 

 

 86,268 

 

 

 84,228 

 

 

 

 

Total

 

 

 

 

 287,409 

 

 

 302,136 

 

 

 317,139 

 

 

 337,936 

 

 

 379,327 

 

 

 402,864 

 

 

 444,168 

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seniors housing triple-net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash NOI on same store properties

 

 

 

 

 (8,384) 

 

 

 (8,062) 

 

 

 (8,561) 

 

 

 (8,737) 

 

 

 (8,779) 

 

 

 (7,855) 

 

 

 (8,111) 

 

 

 

NOI attributable to non same store properties

 

 

 

 

 (25,968) 

 

 

 (30,858) 

 

 

 (39,521) 

 

 

 (41,485) 

 

 

 (43,484) 

 

 

 (45,792) 

 

 

 (54,841) 

 

 

 

 

Subtotal

 

 

 

 

 (34,352) 

 

 

 (38,920) 

 

 

 (48,082) 

 

 

 (50,222) 

 

 

 (52,263) 

 

 

 (53,647) 

 

 

 (62,952) 

 

 

Seniors housing operating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOI attributable to non same store properties

 

 

 

 

 (15,928) 

 

 

 (18,553) 

 

 

 (20,128) 

 

 

 (33,216) 

 

 

 (68,401) 

 

 

 (83,781) 

 

 

 (116,214) 

 

 

 

 

Subtotal

 

 

 

 

 (15,928) 

 

 

 (18,553) 

 

 

 (20,128) 

 

 

 (33,216) 

 

 

 (68,401) 

 

 

 (83,781) 

 

 

 (116,214) 

 

 

Medical facilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash NOI on same store properties

 

 

 

 

 (2,061) 

 

 

 (1,669) 

 

 

 (1,650) 

 

 

 (1,649) 

 

 

 (1,601) 

 

 

 (1,684) 

 

 

 (1,505) 

 

 

 

NOI attributable to non same store properties

 

 

 

 

 (8,444) 

 

 

 (12,334) 

 

 

 (15,697) 

 

 

 (19,090) 

 

 

 (23,896) 

 

 

 (24,852) 

 

 

 (22,373) 

 

 

 

 

Subtotal

 

 

 

 

 (10,505) 

 

 

 (14,003) 

 

 

 (17,347) 

 

 

 (20,739) 

 

 

 (25,497) 

 

 

 (26,536) 

 

 

 (23,878) 

 

Same store cash net operating income:

 

Properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seniors housing triple-net

 

 445 

 

 

 133,269 

 

 

 136,736 

 

 

 136,889 

 

 

 137,047 

 

 

 138,550 

 

 

 140,926 

 

 

 142,269 

 

 

Seniors housing operating

 

 74 

 

 

 35,003 

 

 

 35,761 

 

 

 35,967 

 

 

 37,528 

 

 

 35,177 

 

 

 38,242 

 

 

 38,505 

 

 

Medical facilities

 

 169 

 

 

 58,352 

 

 

 58,163 

 

 

 58,726 

 

 

 59,184 

 

 

 59,439 

 

 

 59,732 

 

 

 60,350 

 

 

 

 

Total

 

 688 

 

$

 226,624 

 

$

 230,660 

 

$

 231,582 

 

$

 233,759 

 

 

 233,166 

 

$

 238,900 

 

$

 241,124 

 

                                                                                                               

52


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

September 30,

 

September 30,

Same Store Cash NOI Reconciliations:

 

2012

 

2013

Net operating income from continuing operations:

 

 

 

 

 

 

 

 

 

Seniors housing triple-net

 

 

 

$

 528,249 

 

$

 590,606 

 

Seniors housing operating

 

 

 

 

 161,343 

 

 

 380,322 

 

Medical facilities

 

 

 

 

 217,096 

 

 

 255,433 

 

 

 

Total

 

 

 

 

 906,688 

 

 

 1,226,361 

Adjustments:

 

 

 

 

 

 

 

 

 

Seniors housing triple-net:

 

 

 

 

 

 

 

 

 

 

Non-cash NOI on same store properties

 

 

 

 

 (25,007) 

 

 

 (24,744) 

 

 

NOI attributable to non same store properties

 

 

 

 

 (96,348) 

 

 

 (144,118) 

 

 

 

Subtotal

 

 

 

 

 (121,355) 

 

 

 (168,862) 

 

Seniors housing operating:

 

 

 

 

 

 

 

 

 

 

Non-cash NOI on same store properties

 

 

 

 

 - 

 

 

 - 

 

 

NOI attributable to non same store properties

 

 

 

 

 (54,613) 

 

 

 (268,399) 

 

 

 

Subtotal

 

 

 

 

 (54,613) 

 

 

 (268,399) 

 

Medical facilities:

 

 

 

 

 

 

 

 

 

 

Non-cash NOI on same store properties

 

 

 

 

 (5,380) 

 

 

 (4,789) 

 

 

NOI attributable to non same store properties

 

 

 

 

 (36,475) 

 

 

 (71,123) 

 

 

 

Subtotal

 

 

 

 

 (41,855) 

 

 

 (75,912) 

Same store cash net operating income:

 

Properties

 

 

 

 

 

 

 

Seniors housing triple-net

 

 445 

 

 

 406,894 

 

 

 421,744 

 

Seniors housing operating

 

 74 

 

 

 106,730 

 

 

 111,923 

 

Medical facilities

 

 169 

 

 

 175,241 

 

 

 179,521 

 

 

 

Total

 

 688 

 

$

 688,865 

 

$

 713,188 

54


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

Other Disclosures

 

Health Care Reimbursements

 

Policy and legislative changes that increase or decrease government reimbursement may impact our operators and tenants that participate in Medicare, Medicaid or other government programs.  To the extent that policy or legislative changes decrease government reimbursement to our operators and tenants, our revenue and operations may be indirectly adversely affected. 

 

On July 31, 2013 the Centers for Medicare and Medicaid Services (“CMS”) issued a final rule for the skilled nursing prospective payment system that sets forth payment rate changes for the 2014 fiscal year, which began on October 1, 2013.  Under the final rule, skilled nursing facilities (“SNFs”) will receive a net payment increase of 1.3%, which is based on a 2.3% increase in the SNF market basket, less a 0.5% forecast error adjustment, and less a 0.5% multi-factor productivity adjustment.  CMS is implementing a forecast error adjustment because the forecasted fiscal year 2012 market basket percentage change exceeded the actual SNF market basket percentage change by 0.51%, a figure that is in excess of the 0.5% threshold adopted by the agency for determining when a forecast error adjustment will be applied. 

 

On November 21, 2011, the Joint Select Committee on Deficit Reduction, which was created by the Budget Control Act of 2011, concluded its work and issued a statement that it was not able to make a bipartisan agreement, thus triggering the sequestration process.  On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 (“Taxpayer Relief Act”), which delayed the sequestration process until March 1, 2013.  While the sequester went into effect March 1, 2013, effective April 1, 2013, provider payments under Medicare Parts A and B, Medicare Advantage, and Medicare Part D, will be reduced up to 2% annually.  However, Medicaid spending and most of the spending on subsidies is exempt from reduction. 

 

The Balanced Budget Act of 1997 mandated caps on Medicare reimbursement for certain therapy services.  However, Congress imposed various waivers on the implementation of those caps.  The Middle Class Tax Relief and Job Creation Act of 2012 (“Job Creation Act”) made a number of changes effective on October 1, 2012, including applying the therapy caps to outpatient hospitals, creating two new threshold amounts of $3,700 (one for each therapy cap amount), and requiring a manual medical review process of claims over these new thresholds. CMS announced on March 1, 2013 that, until the agency provides further guidance, all therapy claims that are suspended for Manual Medical Review of Therapy Services above the $3,700 threshold will be subject to prepayment medical review.  On July 9, 2013, CMS released an advanced copy of its proposed calendar year 2014 Medicare Physician Fee Schedule, which proposes to extend the therapy cap limitation to services provided at critical access hospitals.  The Taxpayer Relief Act extended the Job Creation Act provisions related to payment for Medicare outpatient therapy services and extended the historical therapy cap waiver and exceptions process through December 31, 2013.  The Taxpayer Relief Act also increased the multiple procedure discount for Medicare Part B therapy services from 25% to 50% effective April 1, 2013, which will lower revenues for certain operators or tenants.

 

 CMS annually adjusts the Medicare Physician Fee Schedule payment rates based on an update formula that includes application of the Sustainable Growth Rate (“SGR”), which is an annual growth rate established by CMS and is intended to control growth in aggregate Medicare expenditures for physicians’ services and the allowed and actual expenditures for physicians’ services.  On November 1, 2012, CMS published the calendar year 2013 Physician Fee Schedule final rule that called for a negative 26.5% update under the statutory SGR formula.  The Taxpayer Relief Act provided for a zero percent update, blocking this cut through December 31, 2013.  In March 2013, CMS estimated a negative 24.4% update under the statutory SGR formula for calendar year 2014.  Additionally, in late July 2013, the House Energy and Commerce and Ways and Means Committee approved H.R. 2810, a proposal to replace the SGR updates with a quality measure system by a bipartisan vote of 51-0, but House lawmakers have yet to formally adopt the proposal.  According to a recent estimate by the Congressional Budget Office, the House bill would cost $175 billion over 10 years, through 2023.  The Senate Finance Committee is also moving forward on its own version of a bill to replace the SGR.

 

Medicaid is a major payor source for residents in our SNFs and hospitals.  The federal and state government share responsibility for financing Medicaid.  President Obama’s proposed fiscal year budget for 2013 included several proposals that were not implemented that would have lowered federal spending for Medicaid, potentially impacting provider Medicaid reimbursement rates.  The proposals included new limits on state provider taxes, phasing down the existing Medicaid provider tax, and blending the Federal matching rate for state Medicaid and the Children’s Health Insurance Program.  Although the President’s proposed fiscal year budget for 2014 did not include these proposals, provider tax reductions continue to be discussed as a potential cost savings measure. The President’s 2014 budget called for an overall reduction in federal health care spending by $401 billion over ten years, with savings stemming from several cost-saving proposals including reduced Medicare payments for long-term care hospitals, SNFs, and other post-acute care providers.  In June 2013, leaders of the House Ways and Means and Senate Finance committees solicited input from stakeholders on proposals to reform Medicare payment for post-acute services, requesting comments by August 19 on proposals by

55


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

the Medicare Payment Advisory Commission, the Obama administration, the Bipartisan Policy Center, and the Simpson-Bowles Commission for market-basket cuts, site-neutral payment, SNF readmission penalties, and bundled payments.

 

                On August 2, 2013, CMS issued a final rule for the Medicare Inpatient Prospective Payment System, which sets forth acute care and long-term care hospital payment rate changes for the 2014 fiscal year, which began on October 1, 2013.  Under the final rule, the Medicare rates for inpatient services at acute care hospitals will increase by 0.7% and rates for long-term care hospitals will increase by 0.4%, accounting for adjustments, such as the multifactor productivity adjustment and the second year adjustment for a three-year phase-in of a one-time 3.75% budget neutrality adjustment to the long-term care hospital rate.  CMS finalized its proposal to let expire the one-year extension of the existing moratorium on the 25% threshold policy, a policy that imposes lower Medicare payments, in certain circumstances, on those long-term care hospitals that admit more than 25% of their patients from a single acute care hospital.  The expiration of the moratorium on the 25% threshold policy impacts cost reporting periods that began on or after October 1, 2013.  Under the final rule, CMS also finalized a number of changes to comply with the Health Reform Laws.  Beginning in fiscal year 2014, hospitals that rank among the lowest-performing 25% with regard to hospital-acquired conditions will see a 1% reduction in Medicare payment rates.  CMS will also increase the maximum payment reduction under the Hospital Readmissions Reduction program, which began on October 1, 2012, to 2% of payment amounts in fiscal year 2014.  For fiscal year 2014, CMS is increasing the applicable percentage reduction, the portion of Medicare payments available to fund the Value-Based Purchasing Program’s value-based incentive payments, to 1.25%, as required by statute.

 

On July 31, 2013, CMS issued a final rule for the Medicare Inpatient Rehabilitation Facilities Prospective Payment System that sets forth payment rate changes for the 2014 fiscal year, which began on October 1, 2013.  Under the final rule for fiscal year 2014, the Medicare rates for inpatient rehabilitation facilities will increase by 1.8%, which includes a 2.6% market basket increase factor, reduced by a 0.5% multi-factor productivity adjustment and an additional 0.3% point reduction as required by the Health Reform Laws.

   

A number of additional rules recently proposed by CMS could have further implications on the reimbursement for our operators and tenants if finalized.  For example, on March 18, 2013, CMS published a proposed rule that would allow Medicare to pay for additional hospital inpatient services under Medicare Part B.  Specifically, the proposed rule would allow additional Part B payment when a Medicare Part A claim is denied because the beneficiary should have been treated as an outpatient, rather than being admitted to the hospital as an inpatient. 

 

On September 18, 2013, CMS published a final rule that sets forth the annual reductions for Medicaid disproportionate share hospital (“DSH”) payments for fiscal years 2014 and 2015, which were mandated by the Health Reform Laws, based on the assumption that the number of uninsured people will fall sharply beginning in 2014.  Although the Health Reform Laws mandated reductions in Medicaid DSH spending from 2014 through 2020, the final rule addresses only DHS reductions for 2014 and 2015.  In the final rule, CMS explained that, while the President’s FY 2014 budget proposed to delay these reductions until 2015, the Department of Health and Human Services has no flexibility to institute a delay without congressional action.

 

On September 18, 2013, the Commission on Long-Term Care, a 15-member federal, bipartisan advisory commission created by the 2012 American Taxpayer Relief Act, issued a pre-publication version of its report to Congress outlining its recommendations for long-term care service delivery, workforce, and financing.  With regard to financing, such commission was unable to agree on an approach and, instead, offered two contrasting approaches – one focused on using private options for long-term care, the other focused on strengthening long-term care options, primarily though changes to Medicare.  If adopted by Congress, certain of such commission’s recommendations may decrease revenues for our operators and tenants, while other recommendations may increase revenues.  

 

The House Ways and Means Committee is currently reviewing public comments on draft legislation to significantly reform Medicare post-acute care policy, which incorporates input from stakeholders, including, the Medicare Payment Advisory Commission, the Obama administration, the Bipartisan Policy Center, and the Simpson-Bowles Commission.  The draft legislation calls for market-basket cuts, site-neutral payment, modification criteria for IRF status, the establishment of a SNF readmissions program, and bundled payments.

 

Other Related Laws

 

All health care providers are subject to a number of federal and state health care fraud and abuse laws, including, but not limited to, the Federal Anti-Kickback Statute (“AKS”), which generally prohibits persons from offering, providing, soliciting, or receiving remuneration to induce either the referral of an individual or the furnishing of a good or service for which payment may be made under a federal health care program, such as Medicare or Medicaid.  On April 17, 2013, the Department of Health and Human

56


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

Services’ (“HHS”) Office of Inspector General (“OIG”), which is the agency charged with enforcement of the AKS, released a revised provider self-disclosure protocol (“SDP”).  The SDP establishes a process for providers to voluntarily identify and disclose potential cases of fraud involving federal health care programs.  The SDP notes that damages calculations will begin at 1.5 times the amount actually paid by federal health care programs and that disclosing entities should expect minimum settlement amounts of $50,000 for kickback-related submissions and $10,000 for all other matters eligible for disclosure under the SDP.  Such settlements could have an adverse effect on a property operator’s liquidity and financial condition, which could negatively impact the operator’s ability to make payments.

 

Certain provisions in the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) require health care providers to utilize federally mandated standards for certain electronic transactions and maintain the privacy and security of medical records and other protected health information about individuals.  Operators may face significant financial and criminal liability if they fail to maintain the privacy and security of medical records and other protected health information or otherwise abide by applicable requirements.  The Health Information Technology for Economic and Clinical Health (“HITECH”) Act, passed in February 2009, strengthened the HHS Secretary’s authority to impose civil money penalties for HIPAA violations occurring after February 18, 2009.  In October 2009, the Office for Civil Rights (“OCR”) issued an interim Final Rule which conformed HIPAA enforcement regulations to the HITECH Act, increasing the maximum penalty for multiple violations of a single requirement or prohibition in a calendar year to $1.5 million.  Additionally, on January 25, 2013, OCR promulgated a final rule, which expands the applicability of HIPAA and HITECH and strengthens the government’s ability to enforce these laws.  The changes also strengthen the HITECH breach notification requirements by clarifying when breaches of unsecured health information must be reported to HHS. Generally, covered entities and business associates must come into compliance with the final rule by September 23, 2013, though some exceptions exist (e.g., a later deadline for modification of certain business associate agreements). 

 

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions.  Management considers an accounting estimate or assumption critical if:

·         the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and

·         the impact of the estimates and assumptions on financial condition or operating performance is material.

Management has discussed the development and selection of its critical accounting policies with the Audit Committee of the Board of Directors.  Management believes the current assumptions and other considerations used to estimate amounts reflected in our consolidated financial statements are appropriate and are not reasonably likely to change in the future.  However, since these estimates require assumptions to be made that were uncertain at the time the estimate was made, they bear the risk of change.  If actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our consolidated financial statements, the resulting changes could have a material adverse effect on our consolidated results of operations, liquidity and/or financial condition.  Please refer to Note 2 to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012, as updated by our Current Report on Form 8-K filed on August 6, 2013, for further information regarding significant accounting policies that impact us.  There have been no material changes to these policies in 2013.

 

Forward-Looking Statements and Risk Factors

    This Quarterly Report on Form 10-Q may contain “forward-looking” statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements concern and are based upon, among other things, the possible expansion of the company’s portfolio; the sale of facilities; the performance of its operators/tenants and facilities; its ability to enter into agreements with viable new tenants for vacant space or for facilities that the company takes back from financially troubled tenants, if any; its occupancy rates; its ability to acquire, develop and/or manage facilities; its ability to make distributions to stockholders; its policies and plans regarding investments, financings and other matters; its ability to manage the risks associated with international expansion and operations; its tax status as a real estate investment trust; its critical accounting policies; its ability to appropriately balance the use of debt and equity; its ability to access capital markets or other sources of funds; and its ability to meet its earnings guidance. When the company uses words such as “may,” “will,” “intend,” “should,” “believe,” “expect,” “anticipate,” “project,” “estimate” or similar expressions, it is making forward-looking statements.  Forward-looking statements are not guarantees of future performance and involve risks and uncertainties.  The company’s expected results may not be achieved, and actual results may differ materially from expectations.  This may be a result of various factors, including, but not limited to: the status of the economy; the status of capital markets, including availability and cost of capital; issues facing the health care industry, including compliance with, and changes to, regulations and payment policies, responding to government investigations and punitive settlements and operators’/tenants’ difficulty in cost-effectively obtaining and maintaining adequate liability and other insurance; changes in financing terms; competition within the health care, seniors housing and life science industries; negative developments in the operating results or financial condition of

57


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

operators/tenants, including, but not limited to, their ability to pay rent and repay loans; the company’s ability to transition or sell facilities with profitable results; the failure to make new investments as and when anticipated; acts of God affecting the company’s facilities; the company’s ability to re-lease space at similar rates as vacancies occur; the company’s ability to timely reinvest sale proceeds at similar rates to assets sold; operator/tenant or joint venture partner bankruptcies or insolvencies; the cooperation of joint venture partners; government regulations affecting Medicare and Medicaid reimbursement rates and operational requirements; regulatory approval and market acceptance of the products and technologies of life science tenants; liability or contract claims by or against operators/tenants; unanticipated difficulties and/or expenditures relating to future acquisitions; environmental laws affecting the company’s facilities; changes in rules or practices governing the company’s financial reporting; the movement of foreign currency exchange rates; and legal and operational matters, including real estate investment trust qualification and key management personnel recruitment and retention.  Other important factors are identified in the company’s Annual Report on Form 10-K for the year ended December 31, 2012, as updated by our Current Report on Form 8-K filed on August 6, 2013, including factors identified under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Finally, the company assumes no obligation to update or revise any forward-looking statements or to update the reasons why actual results could differ from those projected in any forward-looking statements.

 

58


 

  

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     We are exposed to various market risks, including the potential loss arising from adverse changes in interest rates and foreign currency exchange rates. We seek to mitigate the effects of fluctuations in interest rates by matching the terms of new investments with new long-term fixed rate borrowings to the extent possible. We may or may not elect to use financial derivative instruments to hedge interest rate exposure. These decisions are principally based on our policy to match our variable rate investments with comparable borrowings, but are also based on the general trend in interest rates at the applicable dates and our perception of the future volatility of interest rates. This section is presented to provide a discussion of the risks associated with potential fluctuations in interest rates.

      We historically borrow on our primary unsecured line of credit arrangement to acquire, construct or make loans relating to health care and seniors housing properties. Then, as market conditions dictate, we will issue equity or long-term fixed rate debt to repay the borrowings under the unsecured line of credit arrangements.

      A change in interest rates will not affect the interest expense associated with our fixed rate debt. Interest rate changes, however, will affect the fair value of our fixed rate debt. Changes in the interest rate environment upon maturity of this fixed rate debt could have an effect on our future cash flows and earnings, depending on whether the debt is replaced with other fixed rate debt, variable rate debt or equity or repaid by the sale of assets. To illustrate the impact of changes in the interest rate markets, we performed a sensitivity analysis on our fixed rate debt instruments whereby we modeled the change in net present values arising from a hypothetical 1% increase in interest rates to determine the instruments’ change in fair value. The following table summarizes the analysis performed as of the dates indicated (in thousands):

 

 

 

September 30, 2013

 

December 31, 2012

 

 

Principal

 

Change in

 

Principal

 

Change in

 

 

balance

 

fair value

 

balance

 

fair value

Senior unsecured notes

 

$

 6,418,190 

 

$

 (368,667) 

 

$

 6,145,457 

 

$

 (451,478) 

Secured debt

 

 

 2,809,721 

 

 

 (108,124) 

 

 

 2,024,454 

 

 

 (96,290) 

Totals

 

$

 9,227,911 

 

$

 (476,791) 

 

$

 8,169,911 

 

$

 (547,768) 

 

     Our variable rate debt, including our unsecured line of credit arrangements, is reflected at fair value. At September 30, 2013, we had $847,670,000 outstanding related to our variable rate lines of credit and $256,202,000 outstanding related to our variable rate secured debt. Assuming no changes in outstanding balances, a 1% increase in interest rates would result in increased annual interest expense of $11,039,000. At December 31, 2012, we had no amounts outstanding under our variable rate lines of credit and $223,270,000 outstanding related to our variable rate secured debt. Assuming no changes in outstanding balances, a 1% increase in interest rates would have resulted in increased annual interest expense of $2,233,000.

     We are subject to risks associated with debt financing, including the risk that existing indebtedness may not be refinanced or that the terms of refinancing may not be as favorable as the terms of current indebtedness. The majority of our borrowings were completed under indentures or contractual agreements that limit the amount of indebtedness we may incur. Accordingly, in the event that we are unable to raise additional equity or borrow money because of these limitations, our ability to acquire additional properties may be limited.

     We are subject to currency fluctuations that may, from time to time, affect our financial condition and results of operations. Increases or decreases in the value of the Canadian Dollar or Pounds Sterling relative to the U.S. Dollar impacts the amount of net income we earn from our investments in Canada and the United Kingdom. We seek to mitigate these underlying foreign currency exposures with gains and losses on derivative contracts hedging these exposures.  If we increase our international presence through investments in, or acquisitions or development of, seniors housing properties outside the United States, we may also decide to transact additional business or borrow funds in currencies other than U.S. Dollar, Canadian Dollars or Pounds Sterling.

     For additional information regarding fair values of financial instruments, see “Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” and Notes 11 and 16 to our unaudited consolidated financial statements.

59


 

  

 

Item 4. Controls and Procedures

     Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed by us in the reports we file with or submit to the Securities and Exchange Commission (“SEC”) under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. No changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

     From time to time, there are various legal proceedings pending to which we are a party or to which some of our properties are subject arising in the normal course of business. We do not believe that the ultimate resolution of these proceedings will have a material adverse effect on our consolidated financial position or results of operations.

Item 1A. Risk Factors

     Except as provided in “Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward Looking Statements and Risk Factors,” there have been no material changes from the risk factors identified under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012, as updated by our Current Report on Form 8-K filed on August 6, 2013.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

     On September 3, 2013, we issued 1,108,917 shares of our common stock to a joint venture partner in connection with our acquisition of such joint venture partner’s noncontrolling interest in the joint venture.  These shares were issued without registration in reliance upon the federal statutory exemption of Section 4(2) of the Securities Act of 1933, as amended.

 

     On September 27, 2013, we issued 9,867 shares of our common stock to a national medical office partner pursuant to the terms of our strategic partnership.   These shares were issued without registration in reliance upon the federal statutory exemption of Section 4(2) of the Securities Act of 1933, as amended, upon such partnership earning success fees in connection with the development of new projects.

 

 

 

 

 

 

 

 

 

 

Issuer Purchases of Equity Securities

Period

 

Total Number of Shares Purchased(1)

 

Average Price Paid Per Share

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2)

 

Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs

July 1, 2013 through July 31, 2013

 

 - 

 

$

 - 

 

 

 

 

August 1, 2013 through August 31, 2013

 

 247 

 

 

 61.28 

 

 

 

 

September 1, 2013 through September 30, 2013

 

 - 

 

 

 - 

 

 

 

 

Totals

 

 247 

 

$

 61.28 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) During the three months ended September 30, 2013, the company acquired shares of common stock held by employees who tendered owned shares to satisfy tax withholding obligations.

(2) No shares were purchased as part of publicly announced plans or programs.

 

Item 5. Other Information

 

None.

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Item 6. Exhibits

 

2.1              Agreement and Plan of Merger, dated as of August 21, 2012, by and among Sunrise Senior Living, Inc., Brewer Holdco, Inc., Brewer Holdco Sub, Inc., the company and Red Fox, Inc. (the exhibits and schedules to the Agreement and Plan of Merger have been omitted pursuant to Item 601(b)(2) of Regulation S-K) (filed with the SEC as Exhibit 2.1 to the company’s Form 8-K filed August 22, 2012 (File No. 001-08923), and incorporated herein by reference thereto).

3.1              Certificate of Elimination of 7 7/8% Series D Cumulative Redeemable Preferred Stock of the company (filed with the SEC as Exhibit 3.1 to the company’s Form 10-Q filed August 6, 2013 (File No. 001-08923), and incorporated herein by reference thereto).

3.2              Certificate of Elimination of 7 5/8% Series F Cumulative Redeemable Preferred Stock of the company (filed with the SEC as Exhibit 3.2 to the company’s Form 10-Q filed August 6, 2013 (File No. 001-08923), and incorporated herein by reference thereto).

10.1            Sixth Amended and Restated Employment Agreement, dated July 16, 2013, by and between the company and George L. Chapman (filed with the SEC as Exhibit 10.1 to the company’s Form 8-K filed July 17, 2013 (File No. 001-08923), and incorporated herein by reference thereto).

12               Statement Regarding Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends (Unaudited)

31.1            Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.

31.2            Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.

32.1            Certification pursuant to 18 U.S.C. Section 1350 by Chief Executive Officer.

32.2            Certification pursuant to 18 U.S.C. Section 1350 by Chief Financial Officer.

101.INS     XBRL Instance Document*

101.SCH   XBRL Taxonomy Extension Schema Document*

101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document*

101.LAB   XBRL Taxonomy Extension Label Linkbase Document*

101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document*

101.DEF    XBRL Taxonomy Extension Definition Linkbase Document*

                           

 

*

 

Attached as Exhibit 101 to this Quarterly Report on Form 10-Q are the following materials, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets at September 30, 2013 and December 31, 2012, (ii) the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2013 and 2012, (iii) the Consolidated Statements of Equity for the nine months ended September 30, 2013 and 2012, (iv) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012 and (v) the Notes to Unaudited Consolidated Financial Statements.

 

 

 

 

       

 

61


 

  

 

     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 hereunto duly authorized.

 

 

 

 

 

 

HEALTH CARE REIT, INC.

  

 

Date: November 5, 2013 

By:  

/s/ GEORGE L. CHAPMAN  

 

 

George L. Chapman, 

 

 

Chairman, Chief Executive Officer and President

 (Principal Executive Officer) 

 

 

 

 

 

Date: November 5, 2013 

By:  

/s/ SCOTT A. ESTES  

 

 

Scott A. Estes, 

 

 

Executive Vice President and Chief Financial Officer

 (Principal Financial Officer) 

 

 

 

 

 

Date: November 5, 2013 

By:  

/s/ PAUL D. NUNGESTER, JR.  

 

 

Paul D. Nungester, Jr., 

 

 

Senior Vice President and Controller

 (Principal Accounting Officer) 

 

62