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WELLTOWER INC. - Quarter Report: 2015 September (Form 10-Q)

 

 

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

 

 

 

 

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

For the quarterly period ended September 30, 2015

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

WELLTOWER 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 offices)

 

(Zip Code)

(419) 247-2800

(Registrant’s telephone number, including area code)  

Health Care REIT, Inc.

(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 such filing requirements for the past 90 days. Yes  ☑  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  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  

 

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  ☑

As of October 23, 2015, the registrant had 353,879,510 shares of common stock outstanding.  

 

 

 

 


TABLE OF CONTENTS

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements (Unaudited)

 

 

 

Consolidated Balance Sheets — September 30, 2015 and December 31, 2014

3

 

 

Consolidated Statements of Comprehensive Income — Three and nine months ended September 30, 2015 and 2014

4

 

 

Consolidated Statements of Equity — Nine months ended September 30, 2015 and 2014

6

 

 

Consolidated Statements of Cash Flows — Nine months ended September 30, 2015 and 2014

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

57

 

 

Item 4. Controls and Procedures

58

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

 

Item 1A. Risk Factors

58

 

58

 

 

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

59

 

 

Item 5. Other Information

59

 

 

Item 6. Exhibits

59

 

 

Signatures

60

 

  

 


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

CONSOLIDATED BALANCE SHEETS

WELLTOWER INC. AND SUBSIDIARIES

(In thousands)

 

 

 

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

 

  

(Unaudited)

 

(Note)

Assets:  

 

 

 

 

 

Real estate investments:  

 

 

 

 

 

 

Real property owned:  

 

 

 

 

 

 

 

Land and land improvements  

$

2,241,210

 

$

2,046,541

 

 

Buildings and improvements  

 

24,273,654

 

 

21,799,313

 

 

Acquired lease intangibles  

 

1,208,510

 

 

1,135,936

 

 

Real property held for sale, net of accumulated depreciation  

 

229,038

 

 

323,818

 

 

Construction in progress  

 

197,639

 

 

186,327

 

 

 

Gross real property owned  

 

28,150,051

 

 

25,491,935

 

 

Less accumulated depreciation and amortization  

 

(3,553,171)

 

 

(3,020,908)

 

 

 

Net real property owned  

 

24,596,880

 

 

22,471,027

 

Real estate loans receivable  

 

752,912

 

 

380,169

 

Net real estate investments  

 

25,349,792

 

 

22,851,196

Other assets:  

 

 

 

 

 

 

 

Investments in unconsolidated entities  

 

558,354

 

 

744,151

 

 

Goodwill  

 

68,321

 

 

68,321

 

 

Deferred loan expenses  

 

64,190

 

 

69,282

 

 

Cash and cash equivalents  

 

292,042

 

 

473,726

 

 

Restricted cash  

 

74,758

 

 

79,697

 

 

Straight-line rent receivable

 

366,545

 

 

279,806

 

 

Receivables and other assets  

 

682,364

 

 

448,117

 

 

 

Total other assets  

 

2,106,574

 

 

2,163,100

Total assets  

$

27,456,366

 

$

25,014,296

 

 

 

 

  

 

 

 

 

 

Liabilities and equity  

 

 

 

 

 

Liabilities:  

 

 

 

 

 

 

 

Borrowings under primary unsecured credit facility  

$

490,000

 

$

-

 

 

Senior unsecured notes  

 

7,926,757

 

 

7,766,251

 

 

Secured debt  

 

2,975,639

 

 

2,977,713

 

 

Capital lease obligations  

 

75,379

 

 

84,049

 

 

Accrued expenses and other liabilities  

 

686,651

 

 

626,825

Total liabilities  

 

12,154,426

 

 

11,454,838

Redeemable noncontrolling interests  

 

164,765

  

  

86,409

Equity:  

 

 

 

 

 

 

 

Preferred stock  

 

1,006,250

 

 

1,006,250

 

 

Common stock  

 

353,023

 

 

328,835

 

 

Capital in excess of par value  

 

16,381,569

 

 

14,740,712

 

 

Treasury stock  

 

(44,336)

 

 

(35,241)

 

 

Cumulative net income  

 

3,576,490

 

 

2,842,022

 

 

Cumulative dividends  

 

(6,537,541)

 

 

(5,635,923)

 

 

Accumulated other comprehensive income (loss)  

 

(94,359)

 

 

(77,009)

 

 

Other equity  

 

3,997

 

 

5,507

 

 

 

Total Welltower Inc. stockholders’ equity  

 

14,645,093

 

 

13,175,153

 

 

Noncontrolling interests  

 

492,082

 

 

297,896

Total equity  

 

15,137,175

 

 

13,473,049

Total liabilities and equity  

$

27,456,366

 

$

25,014,296

 

NOTE: The consolidated balance sheet at December 31, 2014 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)

WELLTOWER INC. AND SUBSIDIARIES

(In thousands, except per share data)

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

 

2015

 

2014

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Rental income  

$

409,290

 

$

354,148

 

$

1,185,502

 

$

1,038,451

 

Resident fees and services

 

545,255

 

 

482,412

 

 

1,573,318

 

 

1,406,316

 

Interest income

 

22,380

 

 

9,344

 

 

59,950

 

 

26,871

 

Other income

 

2,072

 

 

1,619

 

 

11,572

 

 

4,139

 

 

Total revenues

 

978,997

 

 

847,523

 

 

2,830,342

 

 

2,475,777

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

121,130

 

 

118,435

 

 

361,071

 

 

360,334

 

Property operating expenses

 

408,703

 

 

355,157

 

 

1,183,519

 

 

1,040,342

 

Depreciation and amortization

 

205,799

 

 

200,970

 

 

603,431

 

 

648,737

 

General and administrative

 

36,950

 

 

30,803

 

 

110,562

 

 

115,327

 

Transaction costs

 

9,333

 

 

13,554

 

 

70,379

 

 

21,546

 

Loss (gain) on derivatives, net

 

-

 

 

49

 

 

(58,427)

 

 

400

 

Loss (gain) on extinguishment of debt, net

 

584

 

 

2,692

 

 

34,872

 

 

3,075

 

Impairment of assets

 

-

 

 

-

 

 

2,220

 

 

-

 

Other expenses

 

-

 

 

10,262

 

 

10,583

 

 

10,262

 

 

Total expenses

 

782,499

 

 

731,922

 

 

2,318,210

 

 

2,200,023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

 

 

 

 

 

 

 

 

 

 

 

and income from unconsolidated entities

 

196,498

 

 

115,601

 

 

512,132

 

 

275,754

Income tax (expense) benefit

 

3,344

 

 

10,198

 

 

(3,769)

 

 

6,369

Income (loss) from unconsolidated entities

 

(2,631)

 

 

(2,632)

 

 

(18,231)

 

 

(19,705)

Income (loss) from continuing operations

 

197,211

 

 

123,167

 

 

490,132

 

 

262,418

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) on sales of discontinued properties, net

 

-

 

 

-

 

 

-

 

 

6,411

 

Income (loss) from discontinued operations, net

 

-

 

 

-

 

 

-

 

 

724

 

 

Discontinued operations, net

 

-

 

 

-

 

 

-

 

 

7,135

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) on real estate dispositions, net

 

2,046

 

 

29,604

 

 

249,002

 

 

36,272

Net income

 

199,257

 

 

152,771

 

 

739,134

 

 

305,825

Less:

Preferred stock dividends

 

16,352

 

 

16,352

 

 

49,055

 

 

49,057

Less:

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

 

862

 

 

164

 

 

4,666

 

 

(1,339)

Net income (loss) attributable to common stockholders

$

182,043

 

$

136,255

 

$

685,413

 

$

258,107

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

351,765

 

 

311,117

 

 

346,425

 

 

299,137

 

Diluted

 

353,107

 

 

312,812

 

 

347,547

 

 

300,645

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations attributable to common stockholders, including real estate dispositions

$

0.52

 

$

0.44

 

$

1.98

 

$

0.84

 

Discontinued operations, net

 

-

 

 

-

 

 

-

 

 

0.02

 

Net income (loss) attributable to common stockholders*

$

0.52

 

$

0.44

 

$

1.98

 

$

0.86

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations attributable to common stockholders, including real estate dispositions

$

0.52

 

$

0.44

 

$

1.97

 

$

0.83

 

Discontinued operations, net

 

-

 

 

-

 

 

-

 

 

0.02

 

Net income (loss) attributable to common stockholders*

$

0.52

 

$

0.44

 

$

1.97

 

$

0.86

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared and paid per common share

$

0.825

 

$

0.795

 

$

2.475

 

$

2.385

* 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 (UNAUDITED)

WELLTOWER INC. AND SUBSIDIARIES

(In thousands)

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

2015

 

2014

Net income

$

199,257

 

$

152,771

 

$

739,134

 

$

305,825

 

 

 

 

 

 

 

 

  

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Unrecognized gain (loss) on equity investments

 

(3,086)

 

 

-

 

 

(18,186)

 

 

389

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on cash flow hedges

 

462

 

 

455

 

 

(1,235)

 

 

1,327

 

Foreign currency translation gain (loss)

 

(25,198)

 

 

(42,664)

 

 

(22,011)

 

 

(39,444)

Total other comprehensive income (loss)

 

(27,822)

 

 

(42,209)

 

 

(41,432)

 

 

(37,728)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

171,435

 

 

110,562

 

 

697,702

 

 

268,097

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

 

(14,271)

 

 

(7,984)

 

 

(19,416)

 

 

(10,894)

Total comprehensive income (loss) attributable to common stockholders

$

185,706

 

$

118,546

 

$

717,118

 

$

278,991

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Includes amounts attributable to redeemable noncontrolling interests.

 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements

 

5


CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

WELLTOWER INC. AND SUBSIDIARIES

(In thousands)

 

 

Nine Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

1,006,250

$

328,835

$

14,740,712

$

(35,241)

$

2,842,022

$

(5,635,923)

$

(77,009)

$

5,507

$

297,896

$

13,473,049

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

 

 

 

734,468

 

 

 

 

 

 

 

4,476

 

738,944

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

(17,350)

 

 

 

(24,082)

 

(41,432)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

697,512

Net change in noncontrolling interests

 

 

 

  

 

(4,778)

 

 

 

 

 

 

 

 

 

 

 

213,792

 

209,014

Amounts related to issuance of common stock from dividend reinvestment and stock incentive plans, net of forfeitures

 

 

 

3,308

 

236,718

 

(9,095)

 

 

 

 

 

 

 

(2,097)

 

 

 

228,834

Proceeds from issuance of common stock

 

 

 

19,550

 

1,403,486

 

 

 

 

 

 

 

 

 

 

 

 

 

1,423,036

Equity component of convertible debt

 

 

 

1,330

 

5,431

 

 

 

 

 

 

 

 

 

 

 

 

 

6,761

Option compensation expense

  

  

 

 

 

 

 

 

 

 

 

 

 

 

 

587

 

 

 

587

Cash dividends paid:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock cash dividends

 

 

 

 

 

 

 

 

 

 

 

(852,563)

 

 

 

 

 

 

 

(852,563)

 

Preferred stock cash dividends

 

 

 

 

 

 

 

 

 

 

 

(49,055)

 

 

 

 

 

 

 

(49,055)

Balances at end of period

$

1,006,250

$

353,023

$

16,381,569

$

(44,336)

$

3,576,490

$

(6,537,541)

$

(94,359)

$

3,997

$

492,082

$

15,137,175

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

1,017,361

$

289,461

$

12,418,520

$

(21,263)

$

2,329,869

$

(4,600,854)

$

(24,531)

$

6,020

$

341,748

$

11,756,331

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

 

 

 

307,164

 

 

 

 

 

 

 

(1,318)

 

305,846

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

(28,173)

 

 

 

(9,555)

 

(37,728)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

268,118

Net change in noncontrolling interests

 

 

 

 

 

(7,818)

 

 

 

 

 

 

 

 

 

 

 

(21,062)

 

(28,880)

Amounts related to issuance of common stock from dividend reinvestment and stock incentive plans, net of forfeitures

 

 

 

3,614

 

212,718

 

(13,978)

 

 

 

 

 

 

 

(486)

 

 

 

201,868

Proceeds from issuance of common stock

 

 

 

33,925

 

2,030,476

 

 

 

 

 

 

 

 

 

 

 

 

 

2,064,401

Equity component of convertible debt

 

 

 

200

 

675

 

 

 

 

 

 

 

 

 

 

 

 

 

875

Conversion of preferred stock

 

(11,111)

 

233

 

10,878

 

 

 

 

 

 

 

 

 

 

 

 

 

-

Option compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

689

 

 

 

689

Cash dividends paid:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock cash dividends

 

 

 

 

 

 

 

 

 

 

 

(708,923)

 

 

 

 

 

 

 

(708,923)

 

Preferred stock cash dividends

 

 

 

 

 

 

 

 

 

 

 

(49,057)

 

 

 

 

 

 

 

(49,057)

Balances at end of period

$

1,006,250

$

327,433

$

14,665,449

$

(35,241)

$

2,637,033

$

(5,358,834)

$

(52,704)

$

6,223

$

309,813

$

13,505,422

 

See notes to unaudited consolidated financial statements

 

6


CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

WELLTOWER INC. AND SUBSIDIARIES

(In thousands)

 

 

 

 

 

Nine Months Ended

 

 

 

  

September 30,

 

 

 

  

2015

 

2014

Operating activities:  

 

 

 

 

 

Net income  

$

739,134

 

$

305,825

Adjustments to reconcile net income to  

 

 

 

 

 

 

net cash provided from (used in) operating activities:  

 

 

 

 

 

 

 

Depreciation and amortization  

 

603,431

 

 

648,737

 

 

Other amortization expenses  

 

3,867

 

 

5,626

 

 

Impairment of assets  

 

2,220

 

 

-

 

 

Stock-based compensation expense  

 

25,655

 

 

26,108

 

 

Loss (gain) on derivatives, net  

 

(58,427)

 

 

400

 

 

Loss (gain) on extinguishment of debt, net  

 

34,872

 

 

3,075

 

 

Loss (income) from unconsolidated entities

 

18,231

 

 

19,705

 

 

Rental income in excess of cash received  

 

(86,739)

 

 

(51,017)

 

 

Amortization related to above (below) market leases, net  

 

2,863

 

 

503

 

 

Loss (gain) on sales of properties, net  

 

(249,002)

 

 

(42,683)

 

 

Distributions by unconsolidated entities

 

435

 

 

8,883

 

 

Increase (decrease) in accrued expenses and other liabilities  

 

42,759

 

 

(19,259)

 

 

Decrease (increase) in receivables and other assets  

 

(42,975)

 

 

(51,734)

Net cash provided from (used in) operating activities  

 

1,036,324

 

 

854,169

 

 

 

  

 

 

 

 

 

Investing activities:  

 

 

 

 

 

 

Cash disbursed for acquisitions  

 

(2,489,345)

 

 

(991,315)

 

Cash disbursed for capital improvements to existing properties

 

(122,640)

 

 

(86,324)

 

Cash disbursed for construction in progress

 

(165,311)

 

 

(140,829)

 

Capitalized interest  

 

(6,311)

 

 

(5,084)

 

Investment in real estate loans receivable  

 

(445,985)

 

 

(79,264)

 

Other investments, net of payments  

 

(129,311)

 

 

(39,202)

 

Principal collected on real estate loans receivable  

 

71,111

 

 

46,268

 

Contributions to unconsolidated entities  

 

(139,295)

 

 

(246,794)

 

Distributions by unconsolidated entities  

 

139,557

 

 

38,261

 

Proceeds from (payments on) derivatives  

 

103,615

 

 

-

 

Decrease (increase) in restricted cash  

 

10,512

 

 

(45,346)

 

Proceeds from sales of real property  

 

667,761

 

 

442,733

Net cash provided from (used in) investing activities  

 

(2,505,642)

 

 

(1,106,896)

 

 

 

  

 

 

 

 

 

Financing activities:  

 

 

 

 

 

 

Net increase (decrease) under unsecured credit facilities  

 

490,000

 

 

(130,000)

 

Proceeds from issuance of senior unsecured notes  

 

743,407

 

 

-

 

Payments to extinguish senior unsecured notes  

 

(534,546)

 

 

(47,591)

 

Net proceeds from the issuance of secured debt  

 

222,612

 

 

98,100

 

Payments on secured debt  

 

(469,455)

 

 

(286,162)

 

Net proceeds from the issuance of common stock  

 

1,641,981

 

 

2,260,908

 

Decrease (increase) in deferred loan expenses  

 

(7,834)

 

 

(17,429)

 

Contributions by noncontrolling interests(1)

 

163,105

 

 

5,572

 

Distributions to noncontrolling interests(1)

 

(27,439)

 

 

(30,909)

 

Acquisitions of noncontrolling interests

 

(3,154)

 

 

(1,175)

 

Cash distributions to stockholders  

 

(901,618)

 

 

(757,980)

 

Other financing activities

 

(27,114)

 

 

(844)

Net cash provided from (used in) financing activities  

 

1,289,945

 

 

1,092,490

Effect of foreign currency translation on cash and cash equivalents

 

(2,311)

 

 

135

Increase (decrease) in cash and cash equivalents  

 

(181,684)

 

 

839,898

Cash and cash equivalents at beginning of period  

 

473,726

 

 

158,780

Cash and cash equivalents at end of period  

$

292,042

 

$

998,678

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

Interest paid

$

334,511

 

$

365,738

 

Income taxes paid

 

11,489

 

 

16,672

 

 

 

 

 

 

 

 

 

(1) Includes amounts attributable to redeemable noncontrolling interests.

 

See notes to unaudited consolidated financial statements

 

7


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

1. Business

 

     Welltower Inc. (formerly Health Care REIT, Inc.), an S&P 500 company headquartered in Toledo, Ohio, is driving the transformation of health care infrastructure. The company invests with leading seniors housing operators, post-acute providers and health systems to fund the real estate and infrastructure needed to scale innovative care delivery models and improve people’s wellness and overall health care experience.  Welltower™, a real estate investment trust (REIT), owns 1,414 properties in major, high-growth markets in the United States, Canada and the United Kingdom, consisting of seniors housing and post-acute communities and outpatient medical properties.  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, 2015 are not necessarily an indication of the results that may be expected for the year ending December 31, 2015. 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, 2014.

     New Accounting Standards     

     In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). The standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted beginning after December 15, 2016.  We are currently evaluating the impact that the standard will have on our consolidated financial statements and have not yet determined the method by which we will adopt the standard.

     In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis” (“ASU 2015-02”), which makes certain changes to both the variable interest model and the voting model, including changes to (1) the identification of variable interests (fees paid to a decision maker or service provider), (2) the variable interest entity characteristics for a limited partnership or similar entity and (3) the primary beneficiary determination.  ASU 2015-02 is effective beginning January 1, 2016.  We are continuing to evaluate this guidance; however, we do not expect its adoption to have a significant impact on our consolidated financial statements.

     In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability.  The recognition and measurement guidance for debt issuance costs are not affected.  Upon adoption, we will apply the new guidance on a retrospective basis and adjust the balance sheet of each individual period presented to reflect the period-specific effects of applying the new guidance.  The guidance is effective beginning January 1, 2016.  We are continuing to evaluate this guidance; however, we do not expect its adoption to have a significant impact on our 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.  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, 2014 for information regarding our foreign currency policies.  

 

 

8


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

    Triple-net Activity

 

 

Nine Months Ended

 

(In thousands)

September 30, 2015(1)

September 30, 2014

 

Land and land improvements

 

$

111,674

 

$

36,427

 

Buildings and improvements

 

 

1,025,232

 

 

303,273

 

Acquired lease intangibles

 

 

3,888

 

 

-

 

Restricted cash

 

 

6

 

 

-

 

Receivables and other assets

 

 

60

 

 

-

 

 

Total assets acquired

 

 

1,140,860

 

 

339,700

 

Accrued expenses and other liabilities  

 

 

(2,447)

 

 

-

 

 

Total liabilities assumed

 

 

(2,447)

 

 

-

 

Non-cash acquisition related activity

 

 

(2,780)

 

 

(1,937)

 

 

Cash disbursed for acquisitions

 

 

1,135,633

 

 

337,763

 

Construction in progress additions

 

 

96,403

 

 

79,668

 

Less:

Capitalized interest

 

 

(4,453)

 

 

(3,258)

 

 

Foreign currency translation

 

 

73

 

 

116

 

Cash disbursed for construction in progress

 

 

92,023

 

  

76,526

 

Capital improvements to existing properties

 

 

35,042

 

 

14,375

 

 

Total cash invested in real property, net of cash acquired

 

$

1,262,698

 

$

428,664

 

 

 

 

 

 

 

 

 

 

(1) Includes acquisitions with an aggregate purchase price of $844,298,000 for which the allocation of the purchase price consideration is preliminary and subject to change.

 

 

 

 

 

 

 

 

 

      Seniors Housing Operating Activity

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

(In thousands)

September 30, 2015(1)

September 30, 2014

 

Land and land improvements

 

$

98,444

 

$

40,764

 

Building and improvements

 

 

1,229,017

 

 

224,936

 

Acquired lease intangibles

 

 

74,091

 

 

10,021

 

Construction in progress

 

 

-

 

 

27,957

 

Restricted cash

 

 

5,567

 

 

-

 

Receivables and other assets

 

 

23,928

 

 

5,679

 

  

Total assets acquired(2)

 

 

1,431,047

 

 

309,357

 

Secured debt

 

 

(234,597)

 

 

(12,846)

 

Accrued expenses and other liabilities  

 

 

(19,016)

 

 

(17,011)

 

 

Total liabilities assumed

 

 

(253,613)

 

 

(29,857)

 

Noncontrolling interests

 

 

(86,842)

 

 

-

 

 

Cash disbursed for acquisitions

 

 

1,090,592

 

 

279,500

 

Construction in progress additions

 

 

39,493

 

 

6,984

 

Less:

Capitalized interest

 

 

(1,116)

 

 

(293)

 

 

Foreign currency translation

 

 

(1,345)

 

 

(810)

 

Cash disbursed for construction in progress

 

 

37,032

 

  

5,881

 

Capital improvements to existing properties

 

 

61,911

 

 

52,177

 

 

Total cash invested in real property, net of cash acquired

 

$

1,189,535

 

$

337,558

 

 

 

 

 

 

 

 

 

 

(1) Includes acquisitions with an aggregate purchase price of $1,268,031,000 for which the allocation of the purchase price consideration is preliminary and subject to change.

(2) Excludes $3,390,000 and $8,476,000 of cash acquired during the nine months ended September 30, 2015 and 2014, respectively.

 

 

 

 

 

 

 

 

 

9


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

     Outpatient Medical Activity

 

 

Nine Months Ended

 

(In thousands)

September 30, 2015 (1)

 

September 30, 2014

 

Land and land improvements

 

$

737

 

$

29,588

 

Buildings and improvements

 

 

426,288

 

 

471,410

 

Acquired lease intangibles

 

 

19,373

 

 

17,440

 

Receivables and other assets

 

 

-

 

 

1,245

 

  

Total assets acquired(2)

 

 

446,398

 

  

519,683

 

Secured debt

 

 

(112,000)

 

 

(50,500)

 

Accrued expenses and other liabilities

 

 

(2,743)

 

 

(9,308)

 

 

Total liabilities assumed  

 

 

 (114,743)  

 

 

 (59,808)  

 

Noncontrolling interests

 

 

(68,535)

 

 

(39,987)

 

Non-cash acquisition activity(3)

 

 

-

 

 

(45,836)

 

 

Cash disbursed for acquisitions

 

 

263,120

 

 

374,052

 

Construction in progress additions

 

 

38,919

 

 

71,245

 

Less:

Capitalized interest

 

 

(742)

 

 

(1,533)

 

 

Accruals(4)

 

 

(1,921)

 

 

(11,290)

 

Cash disbursed for construction in progress

 

 

36,256

 

  

58,422

 

Capital improvements to existing properties

 

 

25,687

 

 

19,772

 

 

Total cash invested in real property

 

$

325,063

 

$

452,246

 

 

 

 

 

 

 

 

 

 

(1) Includes acquisitions with an aggregate purchase price of $440,220,000 for which the allocation of the purchase price consideration is preliminary and subject to change.

(2) Excludes $4,372,000 and $0 of cash acquired during the nine months ended September 30, 2015 and 2014, respectively.

(3) Relates to an acquisition of assets previously financed as real estate loans.  Please refer to Note 6 for additional information.

(4) Represents non-cash consideration 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, 2015

 

September 30, 2014

 

Development projects:

 

 

 

 

 

 

 

 

 

 

Triple-net

  

 

$

85,902

 

 

$

71,569

 

 

Seniors housing operating

 

 

 

19,869

 

 

 

-

 

 

Outpatient medical

 

 

 

16,592

 

 

 

56,807

 

Total development projects

 

 

 

122,363

 

 

 

128,376

 

Expansion projects

 

 

 

38,808

 

 

 

17,586

Total construction in progress conversions

  

 

$

161,171

 

 

$

145,962

 

 

 

 

 

 

 

 

 

 

 

10


WELLTOWER 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, 2015

 

December 31, 2014

Assets:

  

 

 

 

 

 

 

In place lease intangibles

  

$

1,042,770

 

$

988,290

 

Above market tenant leases

  

 

82,083

 

 

65,684

 

Below market ground leases

  

 

61,159

 

 

62,426

 

Lease commissions

  

 

22,498

 

 

19,536

 

Gross historical cost

  

 

1,208,510

 

 

1,135,936

 

Accumulated amortization

  

 

(836,684)

 

 

(776,501)

 

Net book value

  

$

371,826

 

$

359,435

 

 

  

 

 

 

 

 

 

Weighted-average amortization period in years

  

 

17.2

 

 

17.7

 

 

  

 

 

 

 

 

Liabilities:

  

 

 

 

 

 

 

Below market tenant leases

  

$

89,891

 

$

91,168

 

Above market ground leases

  

 

7,860

 

 

7,859

 

Gross historical cost

  

 

97,751

 

 

99,027

 

Accumulated amortization

  

 

(44,609)

 

 

(40,891)

 

Net book value

  

$

53,142

 

$

58,136

 

 

  

 

 

 

 

 

 

Weighted-average amortization period in years

  

 

15.6

 

 

14.4

 

 

 

 

 

 

 

 

     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,

  

 

2015

 

2014

 

2015

 

2014

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

 

$

(1,684)

 

$

179

 

$

(1,901)

 

$

423

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

 

 

(308)

 

 

(317)

 

 

(962)

 

 

(926)

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

 

 

(26,137)

 

 

(46,366)

 

 

(82,434)

 

 

(185,363)

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

Assets

 

 

Liabilities

2015

 

$

39,972

 

$

3,279

2016

 

 

71,453

 

 

6,512

2017

 

 

43,426

 

 

6,052

2018

 

 

30,094

 

 

5,583

2019

 

 

24,033

 

 

5,325

Thereafter

 

 

162,848

 

 

26,391

Total

 

$

371,826

 

$

53,142

 

 

 

 

 

 

 

11


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

5. Dispositions, Assets Held for Sale and Discontinued Operations

We periodically sell properties for various reasons, including favorable market conditions or the exercise of tenant purchase options.  The following is a summary of our real property disposition activity for the periods presented (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30, 2015

 

September 30, 2014

Real estate dispositions:

 

 

 

 

 

 

 

 

Triple-net

 

$

246,116

 

 

$

56,713

 

Outpatient medical(1)

 

 

166,919

 

 

 

343,337

 

Land parcels

 

 

5,724

 

 

 

-

 

Total dispositions

 

 

418,759

 

 

 

400,050

Gain (loss) on real estate dispositions, net

 

 

249,002

 

 

 

42,683

Proceeds from real estate dispositions

 

$

667,761

 

 

$

442,733

 

 

 

 

 

 

 

 

 

(1) Dispositions occurring in the nine-month period ending September 30, 2015 primarily related to the disposition of an unconsolidated equity investment with Forest City Enterprises.

 

     Dispositions and Assets Held for Sale

     Pursuant to our adoption of ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”), operating results attributable to properties sold subsequent to or classified as held for sale after January 1, 2014 and which do not meet the definition of discontinued operations are no longer reclassified on our Consolidated Statements of Comprehensive Income.  The following represents the activity related to these properties for the periods presented (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

September 30,

 

 

September 30,

 

 

 

2015

 

2014

 

2015

 

2014

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

7,164

 

$

26,123

 

$

24,237

 

$

89,593

Expenses:

 

  

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

  

1,041

 

 

4,507

 

 

3,991

 

 

18,512

 

Property operating expenses

 

  

1,577

 

 

1,595

 

 

4,586

 

 

6,017

 

Provision for depreciation

 

  

123

 

 

7,878

 

 

4,760

 

 

27,106

 

Total expenses

 

 

2,741

 

 

13,980

 

 

13,337

 

 

51,635

Income (loss) from real estate dispositions, net

 

$

4,423

 

$

12,143

 

$

10,900

 

$

37,958

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued Operations

 

We have reclassified the income and expenses attributable to all properties sold prior to or held for sale at January 1, 2014 to discontinued operations in accordance with ASU 2014-08.  The following illustrates the reclassification impact as reported in our Consolidated Statements of Comprehensive Income as a result of classifying these properties as discontinued operations for the periods presented (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

September 30,

 

 

September 30,

 

 

 

2015

 

2014

 

2015

 

2014

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

-

 

$

-

 

$

-

 

$

881

Expenses:

 

  

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

  

-

 

 

-

 

 

-

 

 

157

 

Total expenses

 

 

-

 

 

-

 

 

-

 

 

157

Income (loss) from discontinued operations, net

 

$

-

 

$

-

 

$

-

 

$

724

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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, 2015

 

September 30, 2014

 

 

 

 

 

Outpatient

 

 

 

 

 

 

Outpatient

 

 

 

 

 

 

Triple-net

 

Medical

 

Totals

 

Triple-net

 

Medical

 

Totals

Advances on real estate loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in new loans

 

$

392,278

 

$

-

 

$

392,278

 

$

10,674

 

$

-

 

$

10,674

 

Draws on existing loans

 

 

51,422

 

 

2,285

 

 

53,707

 

 

50,446

 

 

18,144

 

 

68,590

 

Net cash advances on real estate loans

 

 

443,700

 

 

2,285

 

 

445,985

 

 

61,120

 

 

18,144

 

 

79,264

Receipts on real estate loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan payoffs

 

 

52,088

 

 

-

 

 

52,088

 

 

24,522

 

 

42,036

 

 

66,558

 

Principal payments on loans

 

 

19,023

 

 

-

 

 

19,023

 

 

25,494

 

 

52

 

 

25,546

 

   Sub-total

 

 

71,111

 

 

-

 

 

71,111

 

 

50,016

 

 

42,088

 

 

92,104

 

Less: Non-cash activity(1)

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(45,836)

 

 

(45,836)

 

Net cash receipts on real estate loans

 

 

71,111

 

 

-

 

 

71,111

 

 

50,016

 

 

(3,748)

 

 

46,268

Net cash advances (receipts) on real estate loans

 

 

372,589

 

 

2,285

 

 

374,874

 

 

11,104

 

 

21,892

 

 

32,996

Change in balance due to foreign currency translation

 

 

(2,131)

 

 

-

 

 

(2,131)

 

 

(1,085)

 

 

-

 

 

(1,085)

Net change in real estate loans receivable

 

$

370,458

 

$

2,285

 

$

372,743

 

$

10,019

 

$

(23,944)

 

$

(13,925)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Represents an acquisition of assets previously financed as a real estate loan.  Please see Note 3 for additional information.

 

We recorded no provision for loan losses during the nine months ended September 30, 2015.  At September 30, 2015, we had no real estate loans with outstanding balances on non-accrual status and no allowances for loan losses were recorded.

 

7. Investments in Unconsolidated Entities

 

      We participate in a number of joint ventures, which generally invest in seniors housing and health care real estate.  The results of operations for these properties have been included in our consolidated results of operations from the date of acquisition by the joint ventures and are reflected in our Consolidated Statements of Comprehensive Income as income or loss from unconsolidated entities.  The following is a summary of our investments in unconsolidated entities (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

Percentage Ownership(1)

 

September 30, 2015

 

December 31, 2014

 

Triple-net

10% to 49%

 

$

35,657

 

$

31,511

 

Seniors housing operating

10% to 50%

 

 

485,278

 

 

539,147

 

Outpatient medical

36% to 49%

 

 

37,419

 

 

173,493

 

Total

 

 

$

558,354

 

$

744,151

 

 

 

 

 

 

 

 

 

 

(1) Excludes ownership of in-substance real estate.

 

 

 

 

 

 

 

 

 

 

 

     At September 30, 2015, the aggregate unamortized basis difference of our joint venture investments of $161,882,000 is primarily attributable to appreciation of the underlying properties and transaction costs.  This difference will be amortized over the remaining useful life of the related properties and included in the reported amount of income from unconsolidated entities.

  

8. Credit Concentration

     We use net operating income from continuing operations (“NOI”) as our credit concentration metric.  See Note 17 for additional information and reconciliation. The following table summarizes certain information about our credit concentration for the nine month period ended September 30, 2015, excluding our share of NOI in unconsolidated entities (dollars in thousands):

13


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of

 

Total

 

Percent of

Concentration by relationship:(1)

 

Properties

 

NOI

 

NOI(2)

 

Genesis Healthcare

 

 180  

 

$

273,922

 

17%

 

Sunrise Senior Living(3)

 

 147  

 

 

225,580

 

14%

 

Brookdale Senior Living

 

 146  

 

 

124,843

 

8%

 

Revera(3)

 

 71  

 

 

75,973

 

5%

 

Benchmark Senior Living  

 

 50  

 

 

73,788

 

4%

 

Remaining portfolio  

 

 759  

 

 

872,717

 

52%

 

Totals  

 

 1,353  

 

$

1,646,823

 

100%

 

 

 

 

 

 

 

 

 

(1) Genesis Healthcare is in our triple-net segment.  Sunrise Senior Living and Revera are in our seniors housing operating segment.  Benchmark Senior Living and Brookdale Senior Living are both in our triple-net and seniors housing operating segments.

(2) NOI with our top five relationships comprised 49% of total NOI for the year ending December 31, 2014.

(3) Revera owns a controlling interest in Sunrise Senior Living.

 

 

 

 

 

 

 

 

 

 

9. Borrowings Under Credit Facilities and Related Items

     At September 30, 2015, we had a primary unsecured credit facility with a consortium of 28 banks that includes a $2,500,000,000 unsecured revolving credit facility, a $500,000,000 unsecured term credit facility and a $250,000,000 Canadian-denominated unsecured term credit facility.  We have an option, through an accordion feature, to upsize the unsecured revolving credit facility and the $500,000,000 unsecured term credit facility by up to an additional $1,000,000,000 and the $250,000,000 Canadian-denominated unsecured term credit facility by up to an additional $250,000,000.  The primary unsecured credit facility also allows us to borrow up to $500,000,000 in alternate currencies (none outstanding at September 30, 2015).  Borrowings under the unsecured revolving credit facility are subject to interest payable at the applicable margin over LIBOR interest rate (1.119% at September 30, 2015). The applicable margin is based on certain of our debt ratings and was 0.925% at September 30, 2015.  In addition, we pay a facility fee quarterly to each bank based on the bank’s commitment amount.  The facility fee depends on certain of our debt ratings and was 0.15% at September 30, 2015.  The primary unsecured credit facility is scheduled to expire October 31, 2018 and can be extended for an additional year at our option.

     The following information relates to aggregate borrowings under the primary unsecured revolving credit facility for the periods presented (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

2015

 

2014

Balance outstanding at quarter end(1)

 

$

490,000

 

$

-

 

$

490,000

 

$

-

Maximum amount outstanding at any month end

 

$

490,000

 

$

235,000

 

$

535,000

 

$

637,000

Average amount outstanding (total of daily

 

  

 

 

  

 

 

  

 

 

  

 

 

principal balances divided by days in period)

 

$

298,370

 

$

100,380

 

$

402,619

 

$

253,681

Weighted average interest rate (actual interest

 

  

 

 

 

 

 

 

 

 

 

 

 

expense divided by average borrowings outstanding)

 

  

1.16%

 

 

1.67%

 

 

1.17%

 

 

1.40%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) As of September 30, 2015, letters of credit in the aggregate amount of $58,484,000 have been issued, which reduces the borrowing capacity on the primary unsecured revolving credit facility.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2015, the annual principal payments due on these debt obligations were as follows (in thousands):

14


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior

 

Secured

 

 

 

 

 

Unsecured Notes(1,2)

 

Debt (1,3)

 

Totals

 

2015

$

 -     

 

$

106,190

 

$

106,190

 

2016

 

400,000

 

 

464,519

 

 

864,519

 

2017

 

450,000

 

 

399,670

 

 

849,670

 

2018

 

450,000

 

 

558,656

 

 

1,008,656

 

2019(4,5)

 

1,286,625

 

 

374,769

 

 

1,661,394

 

Thereafter(6,7,8)

 

5,387,915

 

 

1,041,893

 

 

6,429,808

 

Totals

$

7,974,540

 

$

2,945,697

 

$

10,920,237

 

 

 

 

 

 

 

 

 

 

 

(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 1.169% to 6.5%.

 

(3) Annual interest rates range from 1.0% to 7.98%.  Carrying value of the properties securing the debt totaled $5,205,803,000 at September 30, 2015.

 

(4) On July 25, 2014, we refinanced the funding on a $250,000,000 Canadian-denominated unsecured term credit facility (approximately $186,625,000 based on the Canadian/U.S. Dollar exchange rate on September 30, 2015).  The loan matures on October 31, 2018 (with an option to extend for an additional year at our discretion) and bears interest at the Canadian Dealer Offered Rate plus 97.5 basis points (1.8% at September 30, 2015).

 

(5) On July 25, 2014, we refinanced the funding on a $500,000,000 unsecured term credit facility.  The loan matures on October 31, 2018 (with an option to extend for an additional year at our discretion) and bears interest at LIBOR plus 97.5 basis points (1.17% at September 30, 2015).

 

(6) On November 20, 2013, we completed the sale of £550,000,000 (approximately $831,765,000 based on the Sterling/U.S. Dollar exchange rate in effect on September 30, 2015) of 4.8% senior unsecured notes due 2028.

 

(7) On November 25, 2014, we completed the sale of £500,000,000 (approximately $756,150,000 based on the Sterling/U.S. Dollar exchange rate in effect on September 30, 2015) of 4.5% senior unsecured notes due 2034.

 

(8) In May 2015, we issued $750,000,000 of 4.0% senior unsecured notes due 2025.  In October 2015, we issued an additional $500,000,000 of these notes under a re-opening of the offer.

 

 

 

          The following is a summary of our senior unsecured notes principal activity during the periods presented (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

September 30, 2015

 

September 30, 2014

 

 

 

 

Weighted Avg.

 

 

 

 

Weighted Avg.

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

Beginning balance

 $ 

7,817,154

 

4.385%

 

 $ 

7,421,707

 

4.400%

Debt issued

 

750,000

 

4.000%

 

 

-

 

0.000%

Debt extinguished

  

(300,000)

 

6.200%

 

  

-

 

0.000%

Debt redeemed

 

(215,965)

 

3.000%

 

 

(47,660)

 

3.000%

Foreign currency

 

(76,649)

 

8.065%

 

 

(31,719)

 

3.892%

Ending balance

 $ 

7,974,540

 

4.210%

 

 $ 

7,342,328

 

4.388%

 

 

 

 

 

 

 

 

 

 

15


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

  

Nine Months Ended

 

 

  

September 30, 2015

 

September 30, 2014

 

 

 

 

 

Weighted Avg.

 

 

 

 

Weighted Avg.

 

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

Beginning balance

 

$

2,941,765

 

4.94%

 

$

3,010,711

 

5.10%

Debt issued

 

 

222,612

 

2.76%

 

 

98,100

 

3.23%

Debt assumed

 

 

339,929

 

3.34%

 

 

62,505

 

3.11%

Debt extinguished

  

 

(420,672)

 

4.27%

 

 

(240,355)

 

5.66%

Foreign currency

 

 

(89,154)

 

3.88%

 

 

(45,807)

 

4.97%

Principal payments

  

 

(48,783)

 

4.85%

 

 

(23,434)

 

3.78%

Ending balance

 

$

2,945,697

 

4.72%

 

$

2,861,720

 

4.94%

 

 

 

 

 

 

 

 

 

 

 

     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, 2015, we were in compliance with all of the covenants under our debt agreements.

 

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 contracts and issuing debt in foreign currencies.

      Interest Rate Swap Contracts and Foreign Currency Forward 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.  Approximately $2,775,000 of gains, 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.  During the nine months ended September 30, 2015, we settled certain net investment hedges generating cash proceeds of $103,615,000.  The balance of the cumulative translation adjustment will be reclassified to earnings when the hedged investment is sold or substantially liquidated. 

     The following presents the notional amount of derivatives and other financial instruments as of the dates indicated (in thousands):      

  

16


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

September 30, 2015

 

December 31, 2014

Derivatives designated as net investment hedges:

 

 

 

 

Denominated in Canadian Dollars

$

1,175,000

$

900,000

Denominated in Pounds Sterling

£

550,000

£

350,000

 

 

 

 

 

Financial instruments designated as net investment hedges:

 

 

 

 

Denominated in Canadian Dollars

$

250,000

$

250,000

Denominated in Pounds Sterling

£

1,050,000

£

1,050,000

 

 

 

 

 

Derivatives designated as cash flow hedges

 

 

 

 

Denominated in U.S. Dollars

$

57,000

$

57,000

Denominated in Canadian Dollars

$

72,000

$

58,000

Denominated in Pounds Sterling

£

57,000

£

40,000

 

 

 

 

 

Derivative instruments not designated:(1)

 

 

 

 

Denominated in Canadian Dollars

$

700,000

$

12,000

 

 

 

 

 

(1) These non-designated instruments represent off-setting forward exchange contracts to manage against adverse movements in exchange rates with regards to the purchase price on pending foreign acquisitions.

 

 

 

 

 

     The following presents the impact of derivative instruments on the Consolidated Statements of Comprehensive Income for the periods presented (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

 

September 30,

 

September 30,

 

 

 

Location

 

 

2015

 

 

2014

 

 

2015

 

 

2014

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

 

OCI

 

$

-

 

$

(4)

 

$

(1)

 

$

(11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Interest expense

 

 

(462)

 

 

(459)

 

 

(1,390)

 

 

(1,338)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) on forward exchange contracts recognized in income

 

Interest expense

 

 

2,347

 

 

-

 

 

6,285

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) on forward exchange contracts recognized in income

 

Gain (loss) on derivatives, net

 

 

-

 

 

(49)

 

 

-

 

 

(400)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss (gain) on option exercise(1)

 

Loss (gain) on derivatives, net

 

 

-

 

 

-

 

 

(58,427)

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on release of cumulative translation adjustment related to net investment hedge of an equity investment

 

Income (loss) from unconsolidated entities

 

 

-

 

 

528

 

 

-

 

 

528

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

OCI

 

 

174,239

 

 

12,880

 

 

208,854

 

 

6,833

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) In April 2011, we completed the acquisition of substantially all of the real estate assets of privately-owned Genesis Healthcare Corporation. In conjunction with this transaction, we received the option to acquire an ownership interest in Genesis Healthcare. In February 2015, Genesis Healthcare closed on a transaction to merge with Skilled Healthcare Group to become a publicly traded company which required us to record the value of the derivative asset due to the net settlement feature.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

12. Commitments and Contingencies

     At September 30, 2015, we had eight outstanding letter of credit obligations totaling $73,655,000 and expiring between 2015 and 2018.  At September 30, 2015, we had outstanding construction in progress of $197,639,000 and were committed to providing additional funds of approximately $408,372,000 to complete construction.  Purchase obligations also include $236,068,000 representing the cash portion of an acquisition that occurred in October 2015 and contingent purchase obligations totaling $29,427,000. 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, 2015, we had operating lease obligations of $988,564,000 relating to certain ground leases and company office space and capital lease obligations of $99,751,000 relating primarily to certain investment properties. 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, 2015, aggregate future minimum rentals to be received under these noncancelable subleases totaled $27,126,000.

 

13. Stockholders’ Equity

 

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

 

 

 

 

 

 

 

September 30, 2015

 

December 31, 2014

Preferred Stock:

 

 

 

 

   Authorized shares

 

50,000,000

 

50,000,000

   Issued shares

 

25,875,000

 

25,875,000

   Outstanding shares

 

25,875,000

 

25,875,000

 

 

 

 

 

Common Stock, $1.00 par value:

 

 

 

 

   Authorized shares

 

700,000,000

 

700,000,000

   Issued shares

 

353,814,909

 

329,487,615

   Outstanding shares

 

352,998,274

 

328,790,066

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 2015

 

September 30, 2014

 

 

 

 

 

Weighted Avg.

 

 

 

Weighted Avg.

 

 

 

Shares

 

Dividend Rate

 

Shares

 

Dividend Rate

 

Beginning balance

 

25,875,000

 

6.500%

 

26,108,236

 

6.496%

 

Shares converted

 

-

 

0.000%

 

(233,236)

 

6.000%

 

Ending balance

 

25,875,000

 

6.500%

 

25,875,000

 

6.500%

 

 

 

 

 

 

 

 

 

 

 

     Common Stock. The following is a summary of our common stock issuances during the nine months ended September 30, 2015 and 2014 (dollars in thousands, except per share amounts):


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Issued

 

 

Average Price

 

 

Gross Proceeds

 

 

Net Proceeds

June 2014 public issuance

 

16,100,000

 

$

 62.35  

 

$

1,003,835

 

$

968,517

September 2014 public issuance

 

17,825,000

 

 

 63.75  

 

 

1,136,344

 

 

1,095,883

2014 Dividend reinvestment plan issuances

 

3,114,052

 

 

 60.05  

 

 

186,996

 

 

186,996

2014 Option exercises

 

207,046

 

 

 45.94  

 

 

9,512

 

 

9,512

2014 Stock incentive plans, net of forfeitures

 

186,837

 

 

 

 

 

-

 

 

-

2014 Senior note conversions

 

199,943

 

 

 

 

 

-

 

 

-

2014 Preferred stock conversions

 

233,236

 

 

 

 

 

-

 

 

-

2014 Totals

 

37,866,114

 

 

 

 

$

2,336,687

 

$

2,260,908

 

 

 

 

 

 

 

 

 

 

 

 

February 2015 public issuance

 

19,550,000

 

$

 75.50  

 

$

1,476,025

 

$

1,423,935

2015 Dividend reinvestment plan issuances

 

2,935,950

 

  

 70.28  

 

  

206,334

 

  

206,334

2015 Option exercises

 

247,005

 

 

 47.42  

 

 

11,712

 

 

11,712

2015 Stock incentive plans, net of forfeitures

 

144,779

 

 

 

 

 

-

 

 

-

2015 Senior note conversions

 

1,330,474

 

 

 

 

 

-

 

 

-

2015 Totals

 

24,208,208

 

 

 

 

$

1,694,071

 

$

1,641,981

 

 

 

 

 

 

 

 

 

 

 

 

     Dividends.  The increase in dividends is primarily attributable to increases in our common shares outstanding as described above and an increase in common dividends per share.  The following is a summary of our dividend payments (in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30, 2015

 

September 30, 2014

  

 

Per Share

 

Amount

 

Per Share

 

Amount

Common Stock

 

$

2.4750

 

$

852,563

 

$

2.3850

 

$

708,923

Series H Preferred Stock

 

 

-

 

 

-

 

 

0.0079

 

 

1

Series I Preferred Stock

 

 

2.4375

 

 

35,039

 

 

2.4375

 

 

35,040

Series J Preferred Stock

 

 

1.2189

 

 

14,016

 

 

1.2189

 

 

14,016

Totals

 

 

 

 

$

901,618

 

 

 

 

$

757,980

 

 

 

 

 

 

 

 

 

 

 

 

 

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

19


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrecognized gains (losses) related to:

 

 

 

 

 

 

 Foreign Currency Translation

 

 

Available for Sale Securities

 

 

Actuarial Losses

 

 

Cash Flow Hedges

 

 

Total

Balance at December 31, 2014

 

$

(74,770)

 

$

-

 

$

(1,589)

 

$

(650)

 

$

(77,009)

Other comprehensive income before reclassification adjustments

 

  

2,071

 

 

(18,186)

 

 

-

 

 

(2,625)

 

 

(18,740)

Reclassification amount to net income

 

 

-

  

 

-

 

 

-

 

 

 1,390 (1)

 

 

1,390

Net current-period other comprehensive income

 

  

2,071

 

 

(18,186)

 

 

-

 

 

(1,235)

 

 

(17,350)

Balance at September 30, 2015

 

$

(72,699)

 

$

(18,186)

 

$

(1,589)

 

$

(1,885)

 

$

(94,359)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

 

$

(17,631)

 

$

(389)

 

$

(1,452)

 

$

(5,059)

 

$

(24,531)

Other comprehensive income before reclassification adjustments

 

  

(29,361)

 

 

389

 

 

-

 

 

(11)

 

  

(28,983)

Reclassification amount to net income

 

 

(528)

 

 

-

 

 

-

 

 

 1,338 (1)

 

 

810

Net current-period other comprehensive income

 

  

(29,889)

 

 

389

 

 

-

 

 

1,327

 

  

(28,173)

Balance at September 30, 2014

 

$

(47,520)

 

$

-

 

$

(1,452)

 

$

(3,732)

 

$

(52,704)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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. 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 to five years. Options expire ten years from the date of grant.  Stock-based compensation expense totaled $5,477,000 and $25,655,000 for the three and nine months ended September 30, 2015, respectively, and $4,271,000 and $26,108,000 for the same periods in 2014. 

  

20


WELLTOWER 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,

 

 

  

2015

 

2014

 

2015

 

2014

Numerator for basic and diluted earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

per share - net income (loss) attributable

  

 

 

 

 

 

 

 

 

 

 

 

 

to common stockholders

  

$

182,043

 

$

136,255

 

$

685,413

 

$

258,107

 

 

  

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per

  

 

 

 

 

 

 

 

 

 

 

 

 

share - weighted average shares

  

 

351,765

 

 

311,117

 

 

346,425

 

 

299,137

Effect of dilutive securities:

  

 

 

 

 

 

 

 

 

 

 

 

 

Employee stock options

  

 

114

 

 

202

 

 

155

 

 

181

 

Non-vested restricted shares

  

 

607

 

 

505

 

 

498

 

 

506

 

Redeemable shares

 

 

621

 

 

-

 

 

207

 

 

-

 

Convertible senior unsecured notes

  

 

-

 

 

988

 

 

262

 

 

821

Dilutive potential common shares

  

 

1,342

 

 

1,695

 

 

1,122

 

 

1,508

Denominator for diluted earnings per

  

 

 

 

 

 

 

 

 

 

 

 

 

share - adjusted weighted average shares

  

 

353,107

 

 

312,812

 

 

347,547

 

 

300,645

 

 

  

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

  

$

0.52

 

$

0.44

 

$

1.98

 

$

0.86

Diluted earnings per share

  

$

0.52

 

$

0.44

 

$

1.97

 

$

0.86

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Series I Cumulative Convertible Perpetual Preferred Stock was not included in the calculations as the effect of conversions into common stock was anti-dilutive.

  

16. Disclosure about Fair Value of Financial Instruments

 

      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, 2014 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.

 

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.

 

21


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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 Primary Unsecured Credit Facility — The carrying amount of the primary unsecured credit facility approximates fair value because the borrowings are interest rate adjustable.

 

Senior Unsecured Notes — The fair value of the fixed rate senior unsecured notes payable was estimated based on Level 1 publicly available trading prices. The carrying amount of variable rate senior unsecured notes payable approximates fair value because the borrowings are interest rate adjustable.

 

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.

 

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.

 

Redeemable OP Unitholder Interests — The fair value of our redeemable unitholder interests are recorded on the balance sheet at fair value using Level 2 inputs.  The fair value is measured using the closing price of our common stock, as units may be redeemed at the election of the holder for cash or, at our option, one share of our common stock per unit, subject to adjustment in certain circumstances.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

Carrying Amount

 

Fair Value

 

Carrying Amount

 

Fair Value

Financial assets:

 

  

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans receivable

 

$

570,997

 

$

606,910

 

$

188,651

 

$

194,935

 

Other real estate loans receivable

 

  

181,915

 

 

181,585

 

 

191,518

 

 

195,375

 

Available-for-sale equity investments

 

  

40,241

 

 

40,241

 

 

-

 

 

-

 

Cash and cash equivalents

 

  

292,042

 

 

292,042

 

 

473,726

 

 

473,726

 

Foreign currency forward contracts

 

  

105,856

 

 

105,856

 

 

57,087

 

 

57,087

 

 

 

  

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

  

 

 

 

 

 

 

 

 

 

 

 

Borrowings under unsecured credit facilities

 

$

490,000

 

$

490,000

 

$

-

 

$

-

 

Senior unsecured notes

 

  

7,926,757

 

 

8,489,584

 

 

7,766,251

 

 

8,613,702

 

Secured debt

 

  

2,975,639

 

 

3,024,245

 

 

2,977,713

 

 

3,053,067

 

Foreign currency forward contracts

 

 

21,909

 

 

21,909

 

 

1,495

 

 

1,495

Redeemable OP unitholder interests

 

$

111,380

 

$

111,380

 

$

46,722

 

$

46,722

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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):

22


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements as of September 30, 2015

 

 

Total

 

Level 1

 

Level 2

 

Level 3

Available-for-sale equity investments(1)

 

$

40,241

 

$

40,241

 

$

-

 

$

-

Foreign currency forward contracts, net(2)

 

 

83,947

 

 

-

 

 

83,947

 

 

-

Redeemable OP unitholder interests

 

 

111,380

 

 

-

 

 

111,380

 

 

-

 Totals 

 

$

235,568

 

$

40,241

 

$

195,327

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

(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.

  

17. Segment Reporting

      We invest in seniors housing and health care real estate. We evaluate our business and make resource allocations on our four operating segments: triple-net, seniors housing operating, outpatient medical and life science.  During the quarter ended March 31, 2015, we changed the names of our seniors housing triple-net segment to triple-net and our medical facilities segment to outpatient medical.

     Our triple-net properties include long-term/post-acute care facilities, hospitals, assisted living facilities, independent living/continuing care retirement communities, care homes (United Kingdom), independent support living facilities (Canada), care homes with nursing (United Kingdom) and combinations thereof. Under the 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 the seniors housing communities referenced above that are owned and/or operated through RIDEA structures (see Notes 3 and 18).

     Our outpatient medical properties include medical office buildings and life science buildings which are aggregated into our outpatient medical reportable segment. Our medical office buildings are typically leased to multiple tenants and generally require a certain level of property management.  During the three months ended June 30, 2015, we disposed of our life science investments.

          We evaluate performance based upon NOI by 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.

     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, 2014). The results of operations for all acquisitions described in Note 3 are included in our consolidated results of operations from the acquisition dates and

23


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

are components of the appropriate segments.  There are no intersegment sales or transfers.

     Summary information for the reportable segments is as follows for the periods presented (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2015:

 

 

Triple-net

 

 

Seniors Housing Operating

 

 

Outpatient Medical

 

 

Non-segment / Corporate

 

 

Total

Rental income

 

$

285,027

 

$

-

 

$

124,263

 

$

-

 

$

409,290

Resident fees and services

 

 

-

 

 

545,255

 

 

-

 

 

-

 

 

545,255

Interest income

 

 

19,454

 

 

1,054

 

 

1,872

 

 

-

 

 

22,380

Other income

 

 

969

 

 

772

 

 

309

 

 

22

 

 

2,072

Total revenues

 

 

305,450

 

 

547,081

 

 

126,444

 

 

22

 

 

978,997

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

-

 

 

368,050

 

 

40,653

 

 

-

 

 

408,703

Net operating income from continuing operations

 

 

305,450

 

 

179,031

 

 

85,791

 

 

22

 

 

570,294

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciling items:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

12,359

 

 

30,990

 

 

7,120

 

 

70,661

 

 

121,130

Depreciation and amortization

 

 

74,486

 

 

87,306

 

 

44,007

 

 

-

 

 

205,799

General and administrative

 

 

-

 

 

-

 

 

-

 

 

36,950

 

 

36,950

Transaction costs

 

 

1,865

 

 

7,630

 

 

(162)

 

 

-

 

 

9,333

Loss (gain) on extinguishment of debt, net

 

 

(139)

 

 

-

 

 

-

 

 

723

 

 

584

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

 

 

216,879

 

 

53,105

 

 

34,826

 

 

(108,312)

 

 

196,498

Income tax expense

 

 

87

 

 

3,237

 

 

154

 

 

(134)

 

 

3,344

(Loss) income from unconsolidated entities

 

 

2,851

 

 

(5,629)

 

 

147

 

 

-

 

 

(2,631)

Income (loss) from continuing operations

 

 

219,817

 

 

50,713

 

 

35,127

 

 

(108,446)

 

 

197,211

Gain (loss) on real estate dispositions, net

 

 

2,155

 

 

-

 

 

(109)

 

 

-

 

 

2,046

Net income (loss)

 

$

221,972

 

$

50,713

 

$

35,018

 

$

(108,446)

 

$

199,257

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

12,346,157

 

$

10,325,540

 

$

4,699,643

 

$

85,026

 

$

27,456,366

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

24


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2014:

 

 

Triple-net

 

 

Seniors Housing Operating

 

 

Outpatient Medical

 

 

Non-segment / Corporate

 

 

Total

Rental income

 

$

250,748

 

$

-

 

$

103,400

 

$

-

 

$

354,148

Resident fees and services

 

 

-

 

 

482,412

 

 

-

 

 

-

 

 

482,412

Interest income

 

 

7,520

 

 

1,054

 

 

770

 

 

-

 

 

9,344

Other income

 

 

981

 

 

325

 

 

207

 

 

106

 

 

1,619

Total revenues

 

 

259,249

 

 

483,791

 

 

104,377

 

 

106

 

 

847,523

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

41

 

 

320,895

 

 

34,221

 

 

-

 

 

355,157

Net operating income from continuing operations

 

 

259,208

 

 

162,896

 

 

70,156

 

 

106

 

 

492,366

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciling items:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

10,294

 

 

26,612

 

 

7,692

 

 

73,837

 

 

118,435

Loss (gain) on derivatives, net

 

 

52

 

 

(3)

 

 

-

 

 

-

 

 

49

Depreciation and amortization

 

 

68,027

 

 

95,819

 

 

37,124

 

 

-

 

 

200,970

General and administrative

 

 

-

 

 

-

 

 

-

 

 

30,803

 

 

30,803

Transaction costs

 

 

1,619

 

 

10,572

 

 

1,363

 

 

-

 

 

13,554

Loss (gain) on extinguishment of debt, net

 

 

(36)

 

 

-

 

 

-

 

 

2,728

 

 

2,692

Other Expenses

 

 

8,825

 

 

1,437

 

 

-

 

 

-

 

 

10,262

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

 

 

170,427

 

 

28,459

 

 

23,977

 

 

(107,262)

 

 

115,601

Income tax expense

 

 

5,986

 

 

3,746

 

 

466

 

 

-

 

 

10,198

(Loss) income from unconsolidated entities

 

 

1,353

 

 

(5,550)

 

 

1,565

 

 

-

 

 

(2,632)

Income (loss) from continuing operations

 

 

177,766

 

 

26,655

 

 

26,008

 

 

(107,262)

 

 

123,167

Gain (loss) on real estate dispositions, net

 

 

29,604

 

 

-

 

 

-

 

 

-

 

 

29,604

Net income (loss)

 

$

207,370

 

$

26,655

 

$

26,008

 

$

(107,262)

 

$

152,771

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2015:

 

 

Triple-net

 

 

Seniors Housing Operating

 

 

Outpatient Medical

 

 

Non-segment / Corporate

 

 

Total

Rental income

 

$

829,422

 

$

-

 

$

356,080

 

$

-

 

$

1,185,502

Resident fees and services

 

 

-

 

 

1,573,318

 

 

-

 

 

-

 

 

1,573,318

Interest income

 

 

52,343

 

 

3,126

 

 

4,481

 

 

-

 

 

59,950

Other income

 

 

5,823

 

 

5,001

 

 

665

 

 

83

 

 

11,572

Total revenues

 

 

887,588

 

 

1,581,445

 

 

361,226

 

 

83

 

 

2,830,342

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

-

 

 

1,067,127

 

 

116,392

 

 

-

 

 

1,183,519

Net operating income from continuing operations

 

 

887,588

 

 

514,318

 

 

244,834

 

 

83

 

 

1,646,823

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciling items:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

25,064

 

 

104,245

 

 

21,929

 

 

209,833

 

 

361,071

Loss (gain) on derivatives, net

 

 

(58,427)

 

 

-

 

 

-

 

 

-

 

 

(58,427)

Depreciation and amortization

 

 

216,921

 

 

252,785

 

 

133,725

 

 

-

 

 

603,431

General and administrative

 

 

-

 

 

-

 

 

-

 

 

110,562

 

 

110,562

Transaction costs

 

 

45,615

 

 

23,610

 

 

1,154

 

 

-

 

 

70,379

Loss (gain) on extinguishment of debt, net

 

 

10,096

 

 

-

 

 

-

 

 

24,776

 

 

34,872

Impairment of assets

 

 

2,220

 

 

-

 

 

-

 

 

-

 

 

2,220

Other expenses

 

 

-

 

 

-

 

 

-

 

 

10,583

 

 

10,583

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

 

 

646,099

 

 

133,678

 

 

88,026

 

 

(355,671)

 

 

512,132

Income tax expense

 

 

(2,617)

 

 

(745)

 

 

460

 

 

(867)

 

 

(3,769)

(Loss) income from unconsolidated

 entities 

 

 

5,697

 

 

(26,785)

 

 

2,857

 

 

-

 

 

(18,231)

Income (loss) from continuing operations

 

 

 

649,179

 

 

106,148

 

 

91,343

 

 

(356,538)

 

 

490,132

Gain (loss) on real estate dispositions, net

 

 

56,251

 

 

-

 

 

192,751

 

 

-

 

 

249,002

Net income (loss)

 

$

705,430

 

$

106,148

 

$

284,094

 

$

(356,538)

 

$

739,134

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2014:

 

 

Triple-net

 

 

Seniors Housing Operating

 

 

Outpatient Medical

 

 

Non-segment / Corporate

 

 

Total

Rental income

 

$

736,599

 

$

-

 

$

301,852

 

$

-

 

$

1,038,451

Resident fees and services

 

 

-

 

 

1,406,316

 

 

-

 

 

-

 

 

1,406,316

Interest income

 

 

23,220

 

 

1,065

 

 

2,586

 

 

-

 

 

26,871

Other income

 

 

1,448

 

 

1,643

 

 

850

 

 

198

 

 

4,139

Total revenues

 

 

761,267

 

 

1,409,024

 

 

305,288

 

 

198

 

 

2,475,777

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

732

 

 

939,108

 

 

100,502

 

 

-

 

 

1,040,342

Net operating income from continuing operations

 

 

760,535

 

 

469,916

 

 

204,786

 

 

198

 

 

1,435,435

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciling items:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

28,063

 

 

82,924

 

 

25,423

 

 

223,924

 

 

360,334

Loss (gain) on derivatives, net

 

 

125

 

 

275

 

 

-

 

 

-

 

 

400

Depreciation and amortization

 

 

202,668

 

 

334,625

 

 

111,444

 

 

-

 

 

648,737

General and administrative

 

 

-

 

 

-

 

 

-

 

 

115,327

 

 

115,327

Transaction costs

 

 

5,900

 

 

12,863

 

 

2,783

 

 

-

 

 

21,546

Loss (gain) on extinguishment of debt, net

 

 

(36)

 

 

383

 

 

-

 

 

2,728

 

 

3,075

Other expenses

 

 

8,825

 

 

1,437

 

 

-

 

 

-

 

 

10,262

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

 

 

514,990

 

 

37,409

 

 

65,136

 

 

(341,781)

 

 

275,754

Income tax expense

 

 

5,194

 

 

1,302

 

 

(127)

 

 

-

 

 

6,369

(Loss) income from unconsolidated entities

 

 

4,157

 

 

(29,007)

 

 

5,145

 

 

-

 

 

(19,705)

Income (loss) from continuing operations

 

 

524,341

 

 

9,704

 

 

70,154

 

 

(341,781)

 

 

262,418

Income (loss) from discontinued operations

 

 

7,135

 

 

-

 

 

-

 

 

-

 

 

7,135

Gain (loss) on real estate dispositions, net

 

 

35,366

 

 

-

 

 

906

 

 

-

 

 

36,272

Net income (loss)

 

$

566,842

 

$

9,704

 

$

71,060

 

$

(341,781)

 

$

305,825

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     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, 2015

 

 

September 30, 2014

 

 

September 30, 2015

 

 

September 30, 2014

Revenues:

 

Amount

%

 

 

Amount

%

 

 

Amount

%

 

 

Amount

%

United States

$

793,429

81.0%

 

$

707,842

83.5%

 

$

2,309,596

81.6%

 

$

2,078,863

84.0%

International

 

185,568

19.0%

 

 

139,681

16.5%

 

 

520,746

18.4%

 

 

396,914

16.0%

Total

$

978,997

100.0%

 

$

847,523

100.0%

 

$

2,830,342

100.0%

 

$

2,475,777

100.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

 

December 31, 2014

 

 

 

 

 

 

 

 

Assets:

 

Amount

%

 

 

Amount

%

 

 

 

 

 

 

 

 

United States

$

22,508,234

82.0%

 

$

20,728,477

82.9%

 

 

 

 

 

 

 

 

International

 

4,948,132

18.0%

 

 

4,285,819

17.1%

 

 

 

 

 

 

 

 

Total

$

27,456,366

100.0%

 

$

25,014,296

100.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26


WELLTOWER 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, a 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 TRS 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 unaudited consolidated financial statements and are subject to federal and state income taxes as the operations of such facilities are included in TRS entities. Certain net operating loss carryforwards could be utilized to offset taxable income in future years. 

     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 based or withholding taxes on certain investments located in jurisdictions outside the U.S.  The income tax benefit for the three months ended September 30, 2015 and 2014, was primarily due to operating income or losses, offset by certain discrete items at our TRS entities.  In 2014, we established certain wholly-owned direct and indirect subsidiaries in Luxembourg and Jersey and transferred interests in certain foreign investments into this holding company structure.  The structure includes a property holding company that is tax resident in the United Kingdom.  No material adverse current tax consequences in Luxembourg, Jersey or the United Kingdom resulted from the creation of this holding company structure and all of the subsidiary entities in the structure are treated as disregarded entities of the company for U.S. federal income tax purposes.  The company reflects current and deferred tax liabilities for any such withholding taxes incurred as a result of this holding company structure in its consolidated financial statements. 

      Generally, given current statutes of limitations, we are subject to audit by the Internal Revenue Service (“IRS”) for the year ended December 31, 2011 and subsequent years and by state taxing authorities for the year ended December 31, 2010 and subsequent years.  The company and its subsidiaries are also subject to audit by the Canada Revenue Agency and provincial authorities generally for periods subsequent to our initial investments in Canada in May 2012, by HM Revenue & Customs for periods subsequent to our initial investments in the United Kingdom in August 2012 and by Luxembourg taxing authorities generally for periods subsequent to our establishment of certain Luxembourg-based subsidiaries during 2014.

  

 

27


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 2015

     Key Performance Indicators, Trends and Uncertainties

     Corporate Governance

29

29

30

30

31

33

 

 

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

 

 

 

     Sources and Uses of Cash

     Off-Balance Sheet Arrangements

     Contractual Obligations

     Capital Structure

34

34

35

35

 

 

 

 

RESULTS OF OPERATIONS

 

 

 

 

     Summary

     Triple-net

     Seniors Housing Operating

     Outpatient Medical

     Non-Segment/Corporate

36

37

40

41

44

 

 

 

 

OTHER

 

 

 

 

     Non-GAAP Financial Measures

     Other Disclosures

     Critical Accounting Policies

45

52

56

 

     Cautionary Statement Regarding Forward-Looking Statements

56

 

 

 

 

 

 

 

 

 

 

 

 

 

  

28


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

 

 

     The following discussion and analysis is based primarily on the unaudited consolidated financial statements of Welltower Inc. (formerly 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, 2014, 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 Welltower Inc. and its subsidiaries unless specifically noted otherwise.

Executive Summary

Company Overview

     Welltower Inc. (NYSE:HCN), an S&P 500 company headquartered in Toledo, Ohio, is driving the transformation of health care infrastructure. The company invests with leading seniors housing operators, post-acute providers and health systems to fund the real estate and infrastructure needed to scale innovative care delivery models and improve people’s wellness and overall health care experience.  Welltower™, a real estate investment trust (“REIT”), owns properties in major, high-growth markets in the United States, Canada and the United Kingdom, consisting of seniors housing and post-acute communities and outpatient medical properties. 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 for the three months ended September 30, 2015 (dollars in thousands):

  

 

 

 

 

Percentage of

 

Number of

 

Type of Property

NOI(1)

 

NOI

 

Properties

 

Triple-net

$

305,450

 

53.6%

 

749

 

Seniors housing operating

 

179,031

 

31.4%

 

352

 

Outpatient medical

 

85,791

 

15.0%

 

252

 

Totals

$

570,272

 

100.0%

 

1,353

 

 

 

 

 

 

 

 

 

(1) Excludes our share of investments in unconsolidated entities. Entities in which we have a joint venture with a minority partner are shown at 100% of the joint venture amount.

 

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, relationship 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 outpatient medical 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.

29


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

 

 

     For the nine months ended September 30, 2015, rental income and resident fees and services represented 42% and 56%, respectively, of total revenues.  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 credit facility, 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 credit facility, 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 credit facility, 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 credit facility. At September 30, 2015, we had $292,042,000 of cash and cash equivalents, $74,758,000 of restricted cash and $1,951,516,000 of available borrowing capacity under our primary unsecured credit facility.

  

Capital Market Outlook

     We believe the capital markets remain supportive of our investment strategy.  In July 2014, we closed on a new primary unsecured credit facility that further enhances our access to efficient capital and financial flexibility.  For the 21 months ended September 30, 2015, we raised $5,612,494,000 in aggregate gross proceeds through the issuance of common stock and unsecured debt. The capital raised, in combination with available cash and borrowing capacity under our primary unsecured credit facility, supported pro rata gross new investments of $3,579,831,000 during 2014 and $3,330,923,000 during the nine months ended September 30, 2015.  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 2015

     Capital.  In February 2015, we completed the public issuance of 19,550,000 shares of common stock at a price of $75.50 per share for approximate gross proceeds of $1,476,025,000. This was the largest overnight common stock offering and the highest offering price in our history. In May 2015, we issued $750,000,000 of 4.0% senior unsecured notes due 2025, generating approximately $743,407,000 of net proceeds.  This was the largest single tranche U.S. debt offering in our history. In October 2015, we re-opened this tranche and issued an additional $500,000,000 of these notes, generating net proceeds of approximately $485,250,000. During the nine months ended September 30, 2015, we raised $206,334,000 through our dividend reinvestment program.  Also during October 2015, we raised approximately $47,463,000 under our Equity Shelf Program (as defined below).

     Investments.  The following summarizes our acquisitions and joint venture investments completed during the nine months ended September 30, 2015 (dollars in thousands):

 

30


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

 

 

 

Properties

 

Investment Amount(1)

 

Capitalization Rates(2)

 

 

Book Amount(3)

 

Triple-net

45

$

1,150,199

 

6.8%

 

$

1,140,860

 

Seniors housing operating

43

 

1,247,004

 

6.1%

 

 

1,431,047

 

Outpatient medical

9

 

134,999

 

5.9%

 

 

446,398

 

Totals

97

$

2,532,202

 

6.4%

 

$

3,018,305

 

 

 

 

 

 

 

 

 

 

 

(1) Represents stated pro rata 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 and 7 to our unaudited consolidated financial statements for additional information.

 

 

 

 

 

 

 

 

 

 

     Dispositions.  The following summarizes our property dispositions completed during the nine months ended September 30, 2015 (dollars in thousands):

 

Properties

 

Proceeds(1)

 

Capitalization Rates(2)

 

 

Book Amount(3)

 

Triple-net

23

$

307,961

 

7.1%

 

$

251,840

 

Outpatient medical

9

 

585,799

 

5.1%

 

 

166,919

 

Totals

32

$

893,760

 

5.8%

 

$

418,759

 

 

 

 

 

 

 

 

 

 

 

(1) Represents pro rata proceeds received upon disposition including any seller financing.

(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. See Note 5 to our unaudited consolidated financial statements for additional information.

 

     Dividends. Our Board of Directors increased the annual cash dividend to $3.30 per common share ($0.825 per share quarterly), as compared to $3.18 per common share for 2014, beginning in February 2015.  The dividend declared for the quarter ended September 30, 2015 represents the 178th consecutive quarterly dividend payment.

  

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, except per share amounts):

31


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

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

June 30,

 

September 30,

 

December 31,

 

March 31,

 

June 30,

 

September 30,

 

 

 

2014

 

2014

 

2014

 

2014

 

 

2015

 

2015

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to common stockholders

$

50,022

 

$

71,829

 

$

136,255

 

$

188,636

 

$

190,799

 

$

312,573

 

$

182,043

Funds from operations

 

288,803

 

 

284,245

 

 

316,512

 

 

284,516

 

 

344,250

 

 

340,588

 

 

392,295

Net operating income from continuing operations

 

460,376

 

 

482,692

 

 

492,366

 

 

504,754

 

 

517,716

 

 

558,815

 

 

570,294

Same store cash net operating income

 

409,723

 

 

422,227

 

 

426,260

 

 

423,847

 

 

416,400

 

 

428,791

 

 

427,948

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share data (fully diluted):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to common stockholders

$

0.17

 

$

0.24

 

$

0.44

 

$

0.57

 

$

0.56

 

$

0.89

 

$

0.52

 

Funds from operations

 

0.99

 

 

0.95

 

 

1.01

 

 

0.86

 

 

1.02

 

 

0.97

 

 

1.11

   

      Concentration Risk. We evaluate our concentration risk in terms of NOI by property mix, relationship mix and geographic mix. Concentration risk is a valuable measure in understanding what portion of our NOI could be at risk if certain sectors were to experience downturns.  Property mix measures the portion of our NOI that relates to our various property types. Relationship mix measures the portion of our NOI that relates to our top five relationships. Geographic mix measures the portion of our NOI that relates to our top five states (or international equivalents). The following table reflects our recent historical trends of concentration risk by NOI for the periods indicated below:

  

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

June 30,

 

September 30,

 

December 31,

 

March 31,

 

June 30,

 

September 30,

 

 

 

 

2014

 

2014

 

2014

 

2014

 

2015

 

2015

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property mix:(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triple-net

 

53%

 

53%

 

53%

 

53%

 

55%

 

54%

 

54%

 

Seniors housing operating

 

32%

 

33%

 

33%

 

32%

 

30%

 

32%

 

31%

 

Outpatient medical

 

15%

 

14%

 

14%

 

15%

 

15%

 

14%

 

15%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Relationship mix:(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Genesis Healthcare

 

15%

 

16%

 

16%

 

16%

 

17%

 

17%

 

17%

 

Sunrise Senior Living(2)

 

15%

 

15%

 

16%

 

15%

 

14%

 

14%

 

14%

 

Brookdale Senior Living

 

9%

 

9%

 

8%

 

8%

 

8%

 

7%

 

7%

 

Revera(2)

 

4%

 

4%

 

5%

 

4%

 

4%

 

5%

 

5%

 

Benchmark Senior Living

 

4%

 

4%

 

4%

 

4%

 

4%

 

5%

 

5%

 

Remaining relationships

 

53%

 

52%

 

51%

 

53%

 

53%

 

52%

 

52%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Geographic mix:(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

California

 

10%

 

10%

 

10%

 

10%

 

10%

 

9%

 

10%

 

United Kingdom

 

7%

 

6%

 

7%

 

7%

 

8%

 

10%

 

10%

 

New Jersey

 

8%

 

8%

 

9%

 

8%

 

8%

 

8%

 

8%

 

Pennsylvania

 

5%

 

5%

 

5%

 

5%

 

6%

 

6%

 

7%

 

Texas

 

7%

 

7%

 

7%

 

7%

 

7%

 

7%

 

7%

 

Remaining geographic areas

 

63%

 

64%

 

62%

 

63%

 

61%

 

60%

 

58%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Excludes our share of investments in unconsolidated entities.  Entities in which the company has a joint venture with a minority partner are shown at 100% of the joint venture amount.

 

 

(2) Revera owns a controlling interest in Sunrise Senior Living.

 

 

 

 

 

     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

32


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

 

 

“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,

 

 

 

 

2014

 

2014

 

2014

 

2014

 

2015

 

2015

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt to book capitalization ratio

 

48%

 

45%

 

43%

 

45%

 

42%

 

43%

 

43%

Debt to undepreciated book

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

capitalization ratio

 

43%

 

40%

 

38%

 

40%

 

38%

 

39%

 

38%

Debt to market capitalization ratio

 

37%

 

33%

 

32%

 

29%

 

28%

 

32%

 

31%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest coverage ratio

 

3.45x

 

3.51x

 

3.86x

 

4.29x

 

4.21x

 

5.32x

 

4.39x

Fixed charge coverage ratio

 

2.74x

 

2.77x

 

3.07x

 

3.39x

 

3.34x

 

4.19x

 

3.45x

 

     Lease Expirations. The following table sets forth information regarding lease expirations for certain portions of our portfolio as of September 30, 2015 (dollars in thousands):

  

 

 

 

 

 

Expiration Year

 

 

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

2023

 

 

2024

 

 

Thereafter

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triple-net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Properties

 

 

4

 

 

-

 

 

33

 

 

51

 

 

-

 

 

16

 

 

25

 

 

40

 

 

13

 

 

20

 

 

517

 

 

  

Base rent(1)

 

$

12,406

 

$

-

 

$

14,907

 

$

37,216

 

$

-

 

$

19,193

 

$

37,194

 

$

35,359

 

$

18,819

 

$

43,946

 

$

940,133

 

 

 

% of base rent

 

 

1.1%

 

 

0.0%

 

 

1.3%

 

 

3.2%

 

 

0.0%

 

 

1.7%

 

 

3.2%

 

 

3.1%

 

 

1.6%

 

 

3.8%

 

 

81.1%

 

 

 

Units/beds

 

 

432

 

 

-

 

 

1,467

 

 

3,151

 

 

-

 

 

1,391

 

 

3,725

 

 

4,964

 

 

1,390

 

 

2,164

 

 

55,711

 

 

 

% of Units/beds

 

 

0.6%

 

 

0.0%

 

 

2.0%

 

 

4.2%

 

 

0.0%

 

 

1.9%

 

 

5.0%

 

 

6.7%

 

 

1.9%

 

 

2.9%

 

 

74.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outpatient medical:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Square feet

 

 

761,227

 

 

838,863

 

 

1,104,670

 

 

936,001

 

 

1,062,052

 

 

1,210,011

 

 

1,146,299

 

 

2,162,371

 

 

1,192,960

 

 

1,353,779

 

 

4,269,748

 

 

  

Base rent(1)

 

$

18,997

 

$

18,562

 

$

27,630

 

$

22,485

 

$

26,112

 

$

30,653

 

$

28,733

 

$

44,486

 

$

26,088

 

$

35,676

 

$

84,256

 

 

 

% of base rent

 

 

5.2%

 

 

5.1%

 

 

7.6%

 

 

6.2%

 

 

7.2%

 

 

8.4%

 

 

7.9%

 

 

12.2%

 

 

7.2%

 

 

9.8%

 

 

23.3%

 

 

 

Leases

 

 

198

 

 

251

 

 

284

 

 

269

 

 

250

 

 

227

 

 

173

 

 

181

 

 

150

 

 

99

 

 

225

 

 

 

% of Leases

 

 

8.6%

 

 

10.9%

 

 

12.3%

 

 

11.7%

 

 

10.8%

 

 

9.8%

 

 

7.5%

 

 

7.8%

 

 

6.5%

 

 

4.3%

 

 

9.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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 “Cautionary Statement Regarding Forward-Looking Statements” 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, 2014, 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 are available on the Internet at www.welltower.com/#investors/governance.  The information on our website is not incorporated by reference in this Quarterly Report on Form 10-Q, and our web address is included as an inactive textual reference only.

  

33


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

 

 

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 credit facility, 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, 2015

 

September 30, 2014

 

 

$

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$

473,726

 

$

158,780

 

 

$

314,946

 

198%

Cash provided from (used in):

 

 

 

 

 

 

 

 

 

 

 

 

   Operating activities

 

 

1,036,324

 

 

854,169

 

 

 

182,155

 

21%

   Investing activities

 

 

(2,505,642)

 

 

(1,106,896)

 

 

 

(1,398,746)

 

126%

   Financing activities

 

 

1,289,945

 

 

1,092,490

 

 

 

197,455

 

18%

Effect of foreign currency translation on cash and cash equivalents

 

 

(2,311)

 

 

135

 

 

 

(2,446)

 

n/a

 

Cash and cash equivalents at end of period

 

$

292,042

 

$

998,678

 

 

$

(706,636)

 

-71%

 

     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, 2015 and 2014, cash flow provided from operations exceeded cash distributions to stockholders. 

  

     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 2015” and Notes 3 and 6 of our unaudited consolidated financial statements. The following is a summary of cash used in non-acquisition capital improvement activities (dollars in thousands):

  

 

 

Nine Months Ended

 

Change

 

 

September 30,

 

September 30,

 

 

 

 

 

 

 

2015

 

2014

 

$

 

%

New development

 

$

165,311

 

$

140,829

 

$

24,482

 

17%

Recurring capital expenditures, tenant improvements and lease commissions

 

 

13,650

 

 

43,956

 

 

(30,306)

 

-69%

Renovations, redevelopments and other capital improvements

 

 

108,990

 

 

42,368

 

 

66,622

 

157%

Total

 

$

287,951

 

$

227,153

 

$

60,798

 

27%

 

    The change in new development is primarily due to the number and size of construction projects on-going during the relevant periods.  Renovations, redevelopments and other capital improvements include expenditures to maximize property value, increase net operating income, maintain a market-competitive position and/or achieve property stabilization.  Generally, these expenditures have increased as a result of acquisitions, primarily in our seniors housing operating segment.

 

      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/conversion of common and preferred stock and dividend payments. Please refer to Notes 9, 10 and 13 of our unaudited consolidated financial statements for additional information.

  

Off-Balance Sheet Arrangements

 

     At September 30, 2015, we had investments in unconsolidated entities with our ownership generally ranging from 10% to 50%. Please see Note 7 to our unaudited 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 unaudited consolidated financial statements for additional information.  At September 30, 2015, we had eight outstanding letter of credit obligations. Please see Note 12 to our unaudited consolidated financial statements for additional information.

34


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, 2015 (in thousands):

  

 

 

Payments Due by Period

Contractual Obligations

 

Total

 

2015

 

2016-2017

 

2018-2019

 

Thereafter

Unsecured revolving credit facility(1)

 

$

490,000

 

$

-

 

$

-

 

$

490,000

 

$

-

Senior unsecured notes and credit facilities:(2)

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     U.S. Dollar senior unsecured notes

 

 

5,700,000

 

 

-

 

 

850,000

 

 

1,050,000

 

 

3,800,000

     Pounds Sterling senior unsecured notes(3)

 

 

1,587,915

 

 

-

 

 

-

 

 

-

 

 

1,587,915

     U.S. Dollar term credit facility

 

 

500,000

 

 

-

 

 

-

 

 

500,000

 

 

-

     Canadian Dollar term credit facility(3)

 

 

186,625

 

 

-

 

 

-

 

 

186,625

 

 

-

Secured debt:(2,3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Consolidated

 

 

2,945,697

 

 

106,190

 

 

864,189

 

 

933,425

 

 

1,041,893

     Unconsolidated  

 

 

499,217

 

 

8,832

 

 

53,211

 

 

27,454

 

 

409,720

Contractual interest obligations:(4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Unsecured revolving credit facility

 

 

18,966

 

 

2,842

 

 

11,368

 

 

4,756

 

 

-

     Senior unsecured notes and term loans(3)

 

 

3,547,135

 

 

118,562

 

 

665,356

 

 

595,402

 

 

2,167,815

     Consolidated secured debt(3)

 

 

608,001

 

 

35,231

 

 

225,990

 

 

129,012

 

 

217,768

     Unconsolidated secured debt(3)

 

 

144,514

 

 

4,648

 

 

34,097

 

 

30,964

 

 

74,805

Capital lease obligations(5)

 

 

99,751

 

 

1,182

 

 

9,464

 

 

9,012

 

 

80,093

Operating lease obligations(5)

 

 

988,564

 

 

3,907

 

 

30,956

 

 

31,123

 

 

922,578

Purchase obligations(5)

 

 

673,867

 

 

249,736

 

 

371,693

 

 

52,438

 

 

-

Other long-term liabilities(6)

 

 

6,022

 

 

369

 

 

2,950

 

 

2,703

 

 

-

Total contractual obligations

 

$

17,996,274

 

$

531,499

 

$

3,119,274

 

$

4,042,914

 

$

10,302,587

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Relates to unsecured revolving credit facility with an aggregate commitment of $2,500,000,000. See Note 9 to our unaudited consolidated financial statements for additional information.

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

(3) Based on foreign currency exchange rates in effect as of balance sheet date.

(4) Based on variable interest rates in effect as of balance sheet date.

(5) See Note 12 to our unaudited consolidated financial statements for additional information.

(6) Primarily relates to payments to be made under our Supplemental Executive Retirement Plan.

 

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, 2015, 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 be triggered by our debt ratings. However, under our primary unsecured credit facility, 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, 2015 is as follows:

  

 

 

Per Agreement

 

 

 

 

Primary Unsecured Credit Facility

 

Senior Unsecured Notes

 

Actual at September 30, 2015

Covenant

 

 

Total Indebtedness to Book Capitalization Ratio maximum

 

60%

 

n/a

 

43%

Secured Indebtedness to Total Assets Ratio maximum

 

30%

 

40%

 

11%

Total Indebtedness to Total Assets maximum

 

n/a

 

60%

 

42%

Unsecured Debt to Unencumbered Assets maximum

 

60%

 

n/a

 

36%

Adjusted Interest Coverage Ratio minimum

 

n/a

 

1.50x

 

4.71x

Adjusted Fixed Charge Coverage minimum

 

1.50x

 

n/a

 

3.72x

 

35


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

 

 

     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 1, 2015, we filed with the Securities and Exchange Commission (the “SEC”) (1) an open-ended automatic or “universal” shelf registration statement covering an indeterminate amount of future offerings of debt securities, common stock, preferred stock, depositary shares, warrants and units and (2) a registration statement in connection with our enhanced dividend reinvestment plan under which we may issue up to 15,000,000 shares of common stock. As of October 23, 2015, 12,800,329 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, 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 23, 2015, we had $408,926,000 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 primary unsecured credit facility.

  

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: triple-net, seniors housing operating and outpatient medical. The primary performance measures for our properties are NOI and SSCNOI, which are discussed below.  Please see Note 17 to our unaudited consolidated financial statements for additional information. The following is a summary of our results of operations (dollars in thousands, except per share amounts):

  

 

 

 

Three Months Ended

 

Change

 

Nine Months Ended

 

Change

 

 

 

September 30,

 

September 30,

 

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

 

 

2015

 

2014

 

Amount

 

%

 

2015

 

2014

 

Amount

 

%

Net income (loss) attributable to common stockholders

 

$

182,043

 

$

136,255

 

$

45,788

 

34%

 

$

685,413

 

$

258,107

 

$

427,306

 

166%

Funds from operations

 

  

392,295

 

 

316,512

 

 

75,783

 

24%

 

 

1,077,132

 

 

889,562

 

 

187,570

 

21%

EBITDA

 

  

522,842

 

 

461,978

 

 

60,864

 

13%

 

 

1,707,405

 

 

1,308,684

 

 

398,721

 

30%

Net operating income from continuing operations (NOI)

 

  

570,294

 

 

492,366

 

 

77,928

 

16%

 

 

1,646,823

 

 

1,435,435

 

 

211,388

 

15%

Same store cash NOI

 

 

427,948

 

 

426,260

 

 

1,688

 

0%

 

 

1,273,140

 

 

1,258,210

 

 

14,930

 

1%

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share data (fully diluted):

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to common stockholders

 

$

0.52

 

$

0.44

 

$

0.08

 

18%

 

$

1.97

 

$

0.86

 

$

1.11

 

129%

Funds from operations

 

$

1.11

 

$

1.01

 

$

0.10

 

10%

 

$

3.10

 

$

2.96

 

$

0.14

 

5%

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest coverage ratio

 

  

4.39x

 

 

3.86x

 

 

0.53x

 

14%

 

 

4.64x

 

 

3.60x

 

 

1.04x

 

29%

Fixed charge coverage ratio

 

  

3.45x

 

 

3.07x

 

 

0.38x

 

12%

 

 

3.67x

 

 

2.86x

 

 

0.81x

 

28%

36


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

 

 

Triple-net

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

 

 

 

Three Months Ended

 

Change

Nine Months Ended

 

Change

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

 

 

 

 

2015

 

2014

 

$

 

%

 

2015

 

2014

 

$

 

%

SSCNOI(1)

 

 $ 

211,586

 

 

204,626

 

 $ 

6,960

 

3%

 

 $ 

628,463

 

 

609,336

 

 $ 

19,127

 

3%

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

 

 

22,376

 

 

20,189

 

 

2,187

 

11%

 

 

67,456

 

 

52,565

 

 

14,891

 

28%

NOI attributable to non same store properties(2)

 

 

71,488

 

 

34,393

 

 

37,095

 

108%

 

 

191,669

 

 

98,634

 

 

93,035

 

94%

NOI

 

 $ 

305,450

 

 $ 

259,208

 

 $ 

46,242

 

18%

 

 $ 

887,588

 

 $ 

760,535

 

 $ 

127,053

 

17%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Change is due to increases in cash and non-cash NOI (described below) related to 584 same store properties.

(2) Change is primarily due to the acquisition of 149 properties and the conversion of 9 construction projects into revenue-generating properties subsequent to January 1, 2014.

 

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

37


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,

 

 

 

 

 

 

 

 

2015

 

2014

 

$

 

%

 

2015

 

2014

 

$

 

%

Revenues:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

 $ 

285,027

 

 $ 

250,748

 

 $ 

34,279

 

14%

 

 $ 

829,422

 

 $ 

736,599

 

 $ 

92,823

 

13%

 

Interest income

 

  

19,454

 

 

7,520

 

 

11,934

 

159%

 

 

52,343

 

 

23,220

 

 

29,123

 

125%

 

Other income

 

  

969

 

 

981

 

 

(12)

 

-1%

 

 

5,823

 

 

1,448

 

 

4,375

 

302%

 

 

 

 

  

305,450

 

 

259,249

 

 

46,201

 

18%

 

 

887,588

 

 

761,267

 

 

126,321

 

17%

Property operating expenses

 

 

-

 

 

41

 

 

(41)

 

-100%

 

 

-

 

 

732

 

 

(732)

 

-100%

 

 

Net operating income from continuing operations (NOI)

 

 

305,450

 

 

259,208

 

 

46,242

 

18%

 

 

887,588

 

 

760,535

 

 

127,053

 

17%

Other expenses:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

  

12,359

 

 

10,294

 

 

2,065

 

20%

 

 

25,064

 

 

28,063

 

 

(2,999)

 

-11%

 

Loss (gain) on derivatives, net

 

 

-

 

 

52

 

 

(52)

 

-100%

 

 

(58,427)

 

 

125

 

 

(58,552)

 

n/a

 

Depreciation and amortization

 

  

74,486

 

 

68,027

 

 

6,459

 

9%

 

 

216,921

 

 

202,668

 

 

14,253

 

7%

 

Transaction costs

 

 

1,865

 

 

1,619

 

 

246

 

15%

 

 

45,615

 

 

5,900

 

 

39,715

 

673%

 

Loss (gain) on extinguishment of debt, net

 

  

(139)

 

 

(36)

 

 

(103)

 

286%

 

 

10,096

 

 

(36)

 

 

10,132

 

n/a

 

Impairment of assets

 

 

-

 

 

-

 

 

-

 

n/a

 

 

2,220

 

 

-

 

 

2,220

 

n/a

 

Other expenses

 

 

-

 

 

8,825

 

 

(8,825)

 

-100%

 

 

-

 

 

8,825

 

 

(8,825)

 

-100%

 

 

 

 

  

88,571

 

 

88,781

 

 

(210)

 

0%

 

 

241,489

 

 

245,545

 

 

(4,056)

 

-2%

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

 

  

216,879

 

 

170,427

 

 

46,452

 

27%

 

 

646,099

 

 

514,990

 

 

131,109

 

25%

Income tax benefit (expense)

 

  

87

 

 

5,986

 

 

(5,899)

 

-99%

 

 

(2,617)

 

 

5,194

 

 

(7,811)

 

n/a

Income (loss) from unconsolidated entities

 

 

2,851

 

 

1,353

 

 

1,498

 

111%

 

 

5,697

 

 

4,157

 

 

1,540

 

37%

Income from continuing operations

 

  

219,817

 

 

177,766

 

 

42,051

 

24%

 

 

649,179

 

 

524,341

 

 

124,838

 

24%

Discontinued operations, net(1)

 

  

-

 

 

-

 

 

-

 

n/a

 

 

-

 

 

7,135

 

 

(7,135)

 

-100%

Gain (loss) on real estate dispositions, net(1)

 

 

2,155

 

 

29,604

 

 

(27,449)

 

-93%

 

 

56,251

 

 

35,366

 

 

20,885

 

59%

Net income

 

 

221,972

 

 

207,370

 

 

14,602

 

7%

 

 

705,430

 

 

566,842

 

 

138,588

 

24%

Less: Net income (loss) attributable to noncontrolling interests

 

  

526

 

 

500

 

 

26

 

5%

 

 

1,528

 

 

1,491

 

 

37

 

2%

Net income attributable to common stockholders

 

$

221,446

 

$

206,870

 

$

14,576

 

7%

 

$

703,902

 

$

565,351

 

$

138,551

 

25%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) See Note 5 to our unaudited consolidated financial statements.

 

     The increase in rental income is primarily attributable to the acquisitions of new properties, the conversion of newly constructed triple-net properties from which we receive rent and the modification of our lease with Genesis Healthcare to replace the CPI-based component of an annual increaser with a fixed annual increaser effective April 1, 2014 and extend the term. 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, 2015, we had no lease renewals but we had 25 leases with rental rate increasers ranging from 0.12% to 0.43% in our triple-net portfolio.

 

   The change in interest income is due to a higher loan volume in the current year, which includes a first mortgage loan to Genesis Healthcare to facilitate their merger with Skilled Healthcare Group.  The increase in other income year-to-date over the prior year includes the receipt of an early prepayment fee related to a real estate loan receivable.

 

38


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

 

 

    During the nine months ended September 30, 2015, we completed four triple-net construction projects representing $85,902,000 or $270,132 per bed/unit plus expansion projects totaling $38,808,000.  The following is a summary of triple-net construction projects pending as of September 30, 2015 (dollars in thousands):

  

Location

 

Units/Beds

 

 

Commitment

 

 

Balance

 

Est. Completion

Frederick, MD

 

130

 

 

19,000

 

 

17,863

 

4Q15

Edmond, OK

 

142

 

 

24,500

 

 

7,984

 

3Q16

Carrollton, TX

 

104

 

 

18,900

 

 

5,940

 

3Q16

Tulsa, OK

 

145

 

 

25,800

 

 

3,709

 

4Q16

Bracknell, UK

 

64

 

 

16,709

 

 

6,633

 

4Q16

Piscataway, NJ

 

124

 

 

30,600

 

 

17,062

 

4Q16

Raleigh, NC

 

225

 

 

93,000

 

 

33,891

 

1Q17

Livingston, NJ

 

120

 

 

51,440

 

 

16,744

 

1Q17

 

 

1,054

 

$

279,949

 

$

109,826

 

 

 

 

 

 

 

 

 

 

 

 

 

     Interest expense for the nine months ended September 30, 2015 and 2014 represents secured debt interest expense.  The change in secured debt interest expense is due to the net effect and timing of assumptions, segment transitions, extinguishments and principal amortizations. The following is a summary of our triple-net property secured debt principal activity (dollars in thousands):

  

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 2015

 

September 30, 2014

 

September 30, 2015

 

September 30, 2014

 

 

 

 

 

Wtd. Avg.

 

 

 

 

Wtd. Avg.

 

 

 

 

Wtd. Avg.

 

 

 

 

Wtd. Avg.

 

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

Beginning balance

 

$

545,207

 

5.556%

 

$

581,740

 

5.389%

 

$

670,769

 

5.337%

 

$

587,136

 

5.394%

Debt extinguished

 

  

(20,338)

 

6.306%

 

 

(9,019)

 

6.140%

 

 

(132,545)

 

4.695%

 

 

(9,019)

 

6.140%

Foreign Currency

 

 

(6,155)

 

5.316%

 

 

-

 

0.000%

 

 

(13,011)

 

5.316%

 

 

-

 

0.000%

Principal payments

 

  

(3,046)

 

5.566%

 

 

(2,657)

 

5.774%

 

 

(9,545)

 

5.669%

 

 

(8,053)

 

5.830%

Ending balance

 

$

515,668

 

5.526%

 

$

570,064

 

5.374%

 

$

515,668

 

5.526%

 

$

570,064

 

5.374%

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Monthly averages

 

$

520,244

 

5.541%

 

$

573,927

 

5.379%

 

$

549,861

 

5.528%

 

$

580,636

 

5.387%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     In April 2011, we completed the acquisition of substantially all of the real estate assets of privately-owned Genesis Healthcare Corporation. In conjunction with this transaction, we received the option to acquire an ownership interest in Genesis Healthcare.  In February 2015, Genesis Healthcare closed on a transaction to merge with Skilled Healthcare Group to become a publicly traded company which required us to record the value of the derivative asset due to the net settlement feature.  We elected to exercise our option during the three months ended March 31, 2015 which resulted in a $58,427,000 gain.

     Depreciation and amortization increased primarily as a result of new property acquisitions and the conversions of newly constructed triple-net properties. To the extent that we acquire or dispose of additional properties in the future, our provision for depreciation and amortization will change accordingly.  

     Transaction costs represent costs incurred with property acquisitions including due diligence costs, fees for legal and valuation services, the termination of pre-existing relationships, lease termination expenses and other similar costs.  The increase in year-to-date transaction costs over the prior year includes a charge related to the termination of pre-existing relationships, the termination of a lease obligation and overall higher transaction volume. The fluctuation in losses/gains on debt extinguishment is primarily attributable to the volume of extinguishments and the terms of the related secured debt. 

The decrease in other expenses in the third quarter is primarily related to the 2014 reversal of the indemnification asset recorded in connection with the Genesis acquisition. At that time, an income tax benefit was recorded in the same amount to reverse the unrecognized tax benefits related to the transaction.

Changes in the gain on sales of properties are related to property sales which totaled 23 and twelve for the nine months ended September 30, 2015 and 2014, respectively.  During the nine months ended September 30, 2015, we recorded an impairment of $2,200,000 related to a triple-net property and land parcel, both of which are considered held for sale.

39


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,

 

 

 

 

 

 

 

 

 

2015

 

2014

 

$

 

%

 

2015

 

2014

 

$

 

%

SSCNOI(1)

 

 $ 

154,128

 

 $ 

160,725

 

 $ 

(6,597)

 

-4%

 

 $ 

457,733

 

 $ 

466,455

 

 $ 

(8,722)

 

-2%

Non-cash NOI attributable to same store properties

 

 

(250)

 

 

(261)

 

 

11

 

-4%

 

 

(754)

 

 

(793)

 

 

39

 

-5%

NOI attributable to non same store properties(2)

 

 

25,153

 

 

2,432

 

 

22,721

 

934%

 

 

57,339

 

 

4,254

 

 

53,085

 

1248%

NOI

 

 $ 

179,031

 

 $ 

162,896

 

 $ 

16,135

 

10%

 

 $ 

514,318

 

 $ 

469,916

 

 $ 

44,402

 

9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Relates to 279 same store properties. Decrease is primarily due to unfavorable changes in USD/CAD and GBP/USD rates.

(2) Change is primarily due to the acquisition of 73 properties subsequent to January 1, 2014.

 

     The following is a summary of our seniors housing operating results of operations (dollars in thousands):

 

 

  

 

 

 

 

Three Months Ended

 

Change

 

Nine Months Ended

 

Change

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

 

 

 

2015

 

2014

 

$

 

%

 

2015

 

2014

 

$

 

%

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Resident fees and services

 

 $ 

545,255

 

$

482,412

 

$

62,843

 

13%

 

 $ 

1,573,318

 

$

1,406,316

 

$

167,002

 

12%

 

Interest income

 

 

1,054

 

 

1,054

 

 

-

 

0%

 

 

3,126

 

 

1,065

 

 

2,061

 

194%

 

Other income

 

 

772

 

 

325

 

 

447

 

138%

 

 

5,001

 

 

1,643

 

 

3,358

 

204%

 

 

 

547,081

 

 

483,791

 

 

63,290

 

13%

 

 

1,581,445

 

 

1,409,024

 

 

172,421

 

12%

Property operating expenses

 

 

368,050

 

 

320,895

 

 

47,155

 

15%

 

 

1,067,127

 

 

939,108

 

 

128,019

 

14%

 

Net operating income from continuing operations (NOI)

 

 

179,031

 

 

162,896

 

 

16,135

 

10%

 

 

514,318

 

 

469,916

 

 

44,402

 

9%

Other expenses:

 

  

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

Interest expense

 

  

30,990

 

 

26,612

 

 

4,378

 

16%

 

  

104,245

 

 

82,924

 

 

21,321

 

26%

 

Loss (gain) on derivatives, net

 

 

-

 

 

(3)

 

 

3

 

-100%

 

 

-

 

 

275

 

 

(275)

 

-100%

 

Depreciation and amortization

 

  

87,306

 

 

95,819

 

 

(8,513)

 

-9%

 

  

252,785

 

 

334,625

 

 

(81,840)

 

-24%

 

Transaction costs

 

 

7,630

 

 

10,572

 

 

(2,942)

 

-28%

 

 

23,610

 

 

12,863

 

 

10,747

 

84%

 

Loss (gain) on extinguishment of debt, net

 

 

-

 

 

-

 

 

-

 

n/a

 

 

-

 

 

383

 

 

(383)

 

-100%

 

Other expenses

 

 

-

 

 

1,437

 

 

(1,437)

 

-100%

 

 

-

 

 

1,437

 

 

(1,437)

 

-100%

 

 

 

 

  

125,926

 

 

134,437

 

 

(8,511)

 

-6%

 

  

380,640

 

 

432,507

 

 

(51,867)

 

-12%

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

 

  

53,105

 

 

28,459

 

 

24,646

 

87%

 

  

133,678

 

 

37,409

 

 

96,269

 

257%

Income tax benefit (expense)

 

 

3,237

 

 

3,746

 

 

(509)

 

-14%

 

 

(745)

 

 

1,302

 

 

(2,047)

 

-157%

Income (loss) from unconsolidated entities

 

  

(5,629)

 

 

(5,550)

 

 

(79)

 

1%

 

  

(26,785)

 

 

(29,007)

 

 

2,222

 

-8%

Net income (loss)

 

 

50,713

 

 

26,655

 

 

24,058

 

90%

 

 

106,148

 

 

9,704

 

 

96,444

 

994%

Less: Net income (loss) attributable to noncontrolling interests

 

  

(679)

 

 

(391)

 

 

(288)

 

74%

 

  

2,114

 

 

(3,104)

 

 

5,218

 

-168%

Net income (loss) attributable to common stockholders

 

$

51,392

 

$

27,046

 

$

24,346

 

90%

 

$

104,034

 

$

12,808

 

$

91,226

 

712%

 

     Fluctuations in revenues and property operating expenses are primarily a result of acquisitions and the movement of U.S. and foreign currency exchange rates. The fluctuations in depreciation and amortization are due to acquisitions and variations in amortization of short-lived intangible assets. The decrease in depreciation and amortization for the three and nine month periods ended September 30, 2015 as compared to the prior year are due primarily to a number of short lived intangible assets which became fully amortized. To the extent that we acquire or dispose of additional properties in the future, these amounts will change accordingly. 


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

 

 

 

     During the nine month period ended September 30, 2015, we completed one seniors housing operating construction project representing $19,869,000 or $283,843 per unit.  The following is a summary of our seniors housing operating construction projects, excluding expansions, pending as of September 30, 2015 (dollars in thousands):

  

Location

 

Units

 

 

Commitment

 

 

Balance

 

Est. Completion

Camberley, UK

 

102

 

$

20,982

 

$

18,279

 

3Q16

Chertsey, UK

 

93

 

 

46,778

 

 

12,390

 

3Q17

Bushey, UK

 

95

 

 

59,897

 

 

13,817

 

2Q18

Total

 

290

 

$

127,657

 

$

44,486

 

 

 

Interest expense represents secured debt interest expense as well as interest expense related to our $250,000,000 Canadian-denominated unsecured term credit facility and Sterling-denominated senior unsecured notes. The increase in interest expense from the prior year is attributed primarily to the £500,000,000 Sterling-denominated senior unsecured notes issued in November 2014.  Please refer to Note 10 to our unaudited consolidated financial statements for additional information. The following is a summary of our seniors housing operating property secured debt principal activity (dollars in thousands):

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 2015

 

September 30, 2014

 

September 30, 2015

 

September 30, 2014

 

 

 

 

 

Weighted Avg.

 

 

 

 

Weighted Avg.

 

 

 

 

Weighted Avg.

 

 

 

 

Weighted Avg.

 

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

Beginning balance

 

$

1,827,123

 

4.353%

 

$

1,637,508

 

4.499%

 

$

1,654,531

 

4.422%

 

$

1,714,714

 

4.622%

Debt issued

 

 

85,811

 

2.623%

 

 

87,410

 

3.190%

 

 

222,612

 

2.759%

 

 

98,100

 

3.228%

Debt assumed

 

 

22,032

 

4.995%

 

 

-

 

0.000%

 

 

227,929

 

4.075%

 

 

12,005

 

4.147%

Debt extinguished

 

 

(79,981)

 

3.478%

 

 

(31,167)

 

5.079%

 

 

(199,946)

 

3.507%

 

 

(112,829)

 

5.665%

Foreign currency

 

 

(44,360)

 

3.588%

 

 

(22,234)

 

3.759%

 

 

(76,146)

 

3.639%

 

 

(23,434)

 

3.775%

Principal payments

 

 

(9,375)

 

4.217%

 

 

(8,296)

 

4.325%

 

 

(27,730)

 

4.209%

 

 

(25,335)

 

4.354%

Ending balance

 

$

1,801,250

 

4.335%

 

$

1,663,221

 

4.431%

 

$

1,801,250

 

4.335%

 

$

1,663,221

 

4.431%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Monthly averages

 

$

1,792,576

 

4.346%

 

$

1,649,352

 

4.481%

 

$

1,754,706

 

4.376%

 

$

1,654,526

 

4.538%

 

     The increase in transaction costs in the current year is a result of increased acquisition and transaction volume in the current year.  The majority of our seniors housing operating properties are formed through partnership interests.  Net income attributable to noncontrolling interests represents our partners’ share of net income (loss) related to joint ventures. The fluctuations in income (loss) from unconsolidated entities is primarily due to depreciation and amortization of short-lived intangible assets and the timing of additional investments in unconsolidated entities. 

 

Outpatient Medical

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

 

 

 

Three Months Ended

 

Change

 

Nine Months Ended

 

Change

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

 

 

 

 

2015

 

2014

 

$

 

%

 

2015

 

2014

 

$

 

%

SSCNOI(1)

 

 $ 

62,234

 

 $ 

60,909

 

 $ 

1,325

 

2%

 

 $ 

186,944

 

 $ 

182,419

 

 $ 

4,525

 

2%

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

 

 

1,299

 

 

1,744

 

 

(445)

 

-26%

 

 

4,137

 

 

6,160

 

 

(2,023)

 

-33%

NOI attributable to non same store properties(2)

 

 

22,258

 

 

7,503

 

 

14,755

 

197%

 

 

53,753

 

 

16,207

 

 

37,546

 

232%

NOI

 

 $ 

85,791

 

 $ 

70,156

 

 $ 

15,635

 

22%

 

 $ 

244,834

 

 $ 

204,786

 

 $ 

40,048

 

20%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Change is due to increases in cash NOI and decreases in non-cash NOI related to 178 same store properties.

(2) Change is primarily due to acquisitions of 41 properties and conversions of construction projects into 12 revenue-generating properties subsequent to January 1, 2014.

 

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

  

41


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,

 

 

 

 

 

 

 

 

2015

 

2014

 

$

 

%

 

2015

 

2014

 

$

 

%

Revenues:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

124,263

 

$

103,400

 

$

20,863

 

20%

 

$

356,080

 

$

301,852

 

$

54,228

 

18%

 

Interest income

 

  

1,872

 

 

770

 

 

1,102

 

143%

 

 

4,481

 

 

2,586

 

 

1,895

 

73%

 

Other income

 

  

309

 

 

207

 

 

102

 

49%

 

 

665

 

 

850

 

 

(185)

 

-22%

 

 

 

 

  

126,444

 

 

104,377

 

 

22,067

 

21%

 

 

361,226

 

 

305,288

 

 

55,938

 

18%

Property operating expenses

 

  

40,653

 

 

34,221

 

 

6,432

 

19%

 

 

116,392

 

 

100,502

 

 

15,890

 

16%

 

Net operating income from continuing operations (NOI)

 

  

85,791

 

 

70,156

 

 

15,635

 

22%

 

 

244,834

 

 

204,786

 

 

40,048

 

20%

Other expenses:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

  

7,120

 

 

7,692

 

 

(572)

 

-7%

 

 

21,929

 

 

25,423

 

 

(3,494)

 

-14%

 

Depreciation and amortization

 

  

44,007

 

 

37,124

 

 

6,883

 

19%

 

 

133,725

 

 

111,444

 

 

22,281

 

20%

 

Transaction costs

 

 

(162)

 

 

1,363

 

 

(1,525)

 

n/a

 

 

1,154

 

 

2,783

 

 

(1,629)

 

-59%

 

 

 

 

  

50,965

 

 

46,179

 

 

4,786

 

10%

 

 

156,808

 

 

139,650

 

 

17,158

 

12%

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

 

  

34,826

 

 

23,977

 

 

10,849

 

45%

 

 

88,026

 

 

65,136

 

 

22,890

 

35%

Income tax (expense) benefit

 

  

154

 

 

466

 

 

(312)

 

-67%

 

 

460

 

 

(127)

 

 

587

 

n/a

Income from unconsolidated entities

 

 

147

 

 

1,565

 

 

(1,418)

 

-91%

 

 

2,857

 

 

5,145

 

 

(2,288)

 

-44%

Income from continuing operations

 

  

35,127

 

 

26,008

 

 

9,119

 

35%

 

 

91,343

 

 

70,154

 

 

21,189

 

30%

Gain (loss) on real estate dispositions, net(1)

 

 

(109)

 

 

-

 

 

(109)

 

n/a

 

 

192,751

 

 

906

 

 

191,845

 

21175%

Net income (loss)

 

  

35,018

 

 

26,008

 

 

9,010

 

35%

 

 

284,094

 

 

71,060

 

 

213,034

 

300%

Less: Net income (loss) attributable to noncontrolling interests

 

  

1,015

 

 

55

 

 

960

 

1745%

 

 

1,024

 

 

274

 

 

750

 

274%

Net income (loss) attributable to common stockholders

 

$

34,003

 

$

25,953

 

$

8,050

 

31%

 

$

283,070

 

$

70,786

 

$

212,284

 

300%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) See Note 5 to our unaudited consolidated financial statements.

 

     The increase in rental income is primarily attributable to the acquisitions of new properties and the conversion of newly constructed outpatient medical properties 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, 2015, our consolidated outpatient medical portfolio signed 65,179 square feet of new leases and 228,038 square feet of renewals.  The weighted-average term of these leases was six years, with a rate of $37.25 per square foot and tenant improvement and lease commission costs of $15.75 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 5%. 

 

    During the nine months ended September 30, 2015, we completed one outpatient medical construction project representing $16,592,000 or $325 per square foot. The following is a summary of the outpatient medical construction projects, excluding expansions, pending as of September 30, 2015 (dollars in thousands):

  

42


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

 

 

Location

 

Square Feet

 

 

Commitment

 

 

Balance

 

Est. Completion

Bel Air, MD

 

99,184

 

$

26,386

 

$

12,289

 

1Q16

Richmond, TX

 

36,475

 

 

11,670

 

 

5,062

 

1Q16

Stamford, CT

 

92,345

 

 

41,735

 

 

3,359

 

3Q16

Missouri, TX

 

23,863

 

 

9,180

 

 

1,560

 

3Q16

Brooklyn, NY

 

140,955

 

 

103,624

 

 

15,248

 

1Q17

Total

 

392,822

 

$

192,595

 

$

37,518

 

 

 

 

 

 

 

 

 

 

 

 

 

     Total interest expense represents secured debt interest expense. 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 outpatient medical secured debt principal activity (dollars in thousands):

  

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 2015

 

September 30, 2014

 

September 30, 2015

 

September 30, 2014

 

 

 

 

 

Weighted Avg.

 

 

 

 

Weighted Avg.

 

 

 

 

Weighted Avg.

 

 

 

 

Weighted Avg.

 

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

Beginning balance

 

$

654,990

 

5.193%

 

$

585,161

 

6.067%

 

$

609,268

 

5.838%

 

$

700,427

 

5.999%

Debt assumed

 

 

-

 

0.000%

 

 

50,500

 

2.863%

 

 

112,000

 

1.837%

 

 

50,500

 

2.863%

Debt extinguished

 

  

(29,370)

 

5.381%

 

  

(11,447)

 

5.700%

 

  

(88,182)

 

5.355%

 

  

(118,507)

 

5.613%

Principal payments

 

  

(3,065)

 

6.023%

 

  

(3,282)

 

6.092%

 

  

(10,531)

 

5.724%

 

  

(11,488)

 

5.682%

Ending balance

 

$

622,555

 

5.181%

 

$

620,932

 

5.812%

 

$

622,555

 

5.181%

 

$

620,932

 

5.812%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Monthly averages

 

$

640,971

 

5.188%

 

$

590,392

 

6.001%

 

$

608,489

 

5.523%

 

$

634,851

 

5.956%

 

     The increase in property operating expenses and depreciation and amortization is primarily attributable to acquisitions and construction conversions of new outpatient medical facilities for which we incur certain property operating expenses.

 

     Transaction costs represent costs incurred with property acquisitions including due diligence costs, fees for legal and valuation services, termination of pre-existing relationships, lease termination expenses and other similar costs. The fluctuations in transaction costs are primarily due to acquisition volumes in the relevant periods.

 

   Income from unconsolidated entities represents our share of net income or losses from certain unconsolidated property investments related to our strategic joint venture with a national medical office building company and the period for which we held a joint venture investment with Forest City Enterprises.

 

   Gain on real estate dispositions is due to the disposition of our interest in the joint venture with Forest City Enterprises in the second quarter of 2015.

  

43


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,

 

 

 

 

 

 

 

 

2015

 

2014

 

$

 

%

 

2015

 

2014

 

$

 

%

Revenues:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income

 

$

22

 

$

106

 

$

(84)

 

-79%

 

$

83

 

$

198

 

$

(115)

 

-58%

Expenses:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

  

70,661

 

 

73,837

 

 

(3,176)

 

-4%

 

 

209,833

 

 

223,924

 

 

(14,091)

 

-6%

 

 

General and administrative

 

  

36,950

 

 

30,803

 

 

6,147

 

20%

 

 

110,562

 

 

115,327

 

 

(4,765)

 

-4%

 

 

Loss on extinguishment of debt, net

 

  

723

 

 

2,728

 

 

(2,005)

 

-73%

 

 

24,776

 

 

2,728

 

 

22,048

 

808%

 

 

Other expenses

 

 

-

 

 

-

 

 

-

 

n/a

 

 

10,583

 

 

-

 

 

10,583

 

n/a

 

 

 

 

  

108,334

 

 

107,368

 

 

966

 

1%

 

 

355,754

 

 

341,979

 

 

13,775

 

4%

Loss from continuing operations before income taxes

 

  

(108,312)

 

 

(107,262)

 

 

(1,050)

 

1%

 

 

(355,671)

 

 

(341,781)

 

 

(13,890)

 

4%

Income tax (expense) benefit

 

  

(134)

 

 

-

 

 

(134)

 

n/a

 

 

(867)

 

 

-

 

 

(867)

 

n/a

Loss from continuing operations

 

  

(108,446)

 

 

(107,262)

 

 

(1,184)

 

1%

 

 

(356,538)

 

 

(341,781)

 

 

(14,757)

 

4%

Less: Preferred stock dividends

 

  

16,352

 

 

16,352

 

 

-

 

0%

 

 

49,055

 

 

49,057

 

 

(2)

 

0%

Net loss attributable to common stockholders

 

$

(124,798)

 

$

(123,614)

 

$

(1,184)

 

1%

 

$

(405,593)

 

$

(390,838)

 

$

(14,755)

 

4%

 

     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,

 

 

 

 

 

 

2015

 

2014

 

$

 

%

 

2015

 

2014

 

$

 

%

Senior unsecured notes

 

$

66,679

 

$

69,485

 

$

(2,806)

 

-4%

 

$

196,752

 

$

210,765

 

$

(14,013)

 

-7%

Secured debt

 

  

94

 

  

112

 

  

(18)

 

-16%

 

  

281

 

  

334

 

  

(53)

 

-16%

Primary unsecured credit facility

 

  

2,042

 

  

1,760

 

  

282

 

16%

 

  

7,806

 

  

6,884

 

  

922

 

13%

Capitalized interest

 

  

(1,321)

 

  

(1,561)

 

  

240

 

-15%

 

  

(4,680)

 

  

(4,778)

 

  

98

 

-2%

Swap loss (savings)

 

  

(11)

 

  

(4)

 

  

(7)

 

175%

 

  

(23)

 

  

(11)

 

  

(12)

 

109%

Loan expense

 

  

3,178

 

  

4,045

 

  

(867)

 

-21%

 

  

9,697

 

  

10,730

 

  

(1,033)

 

-10%

Totals

 

$

70,661

 

$

73,837

 

$

(3,176)

 

-4%

 

$

209,833

 

$

223,924

 

$

(14,091)

 

-6%

The change in interest expense on senior unsecured notes is due to the net effect of issuances and extinguishments, excluding our Sterling-denominated senior unsecured notes and Canadian-denominated unsecured term credit facility, both of which are in our seniors housing operating segment.  Please refer to Note 10 to our unaudited 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.  Loan expense represents the amortization of deferred loan costs incurred in connection with the issuance and amendments of debt. Loan expense changes are due to amortization of charges for costs incurred in connection with senior unsecured note issuances.  The change in interest expense on the primary unsecured credit facility is due primarily to the net effect and timing of draws, paydowns and variable interest rate changes.  Please refer to Note 9 of our unaudited consolidated financial statements for additional information regarding our primary unsecured credit facility.

 

     General and administrative expenses for the nine months ended September 30, 2014 included $19,688,000 related to CEO transition costs. Excluding these costs, general and administrative expenses as a percentage of consolidated revenues for the three months ended September 30, 2015 and 2014 were 3.77% and 3.63%, respectively.  The increase in general and administrative expenses excluding the CEO transition costs is primarily related to costs associated with our initiatives to attract and retain appropriate personnel to achieve our business objectives.  The loss on extinguishment of debt is due primarily to the early extinguishment of the 2016 senior unsecured notes.  The increase in other expenses in the current year is due to costs associated with the retirement of an executive officer and the termination of our investment in a strategic medical office partnership.

44


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

 

 

Other

 

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, NOI and EBITDA to be useful supplemental measures 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 attributable to common stockholders, 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 and noncontrolling interests.

     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 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, 2014.  Any properties acquired, developed, transitioned, sold or classified as held for sale 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 credit facility 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 coverage 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 unsecured credit facility 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.

45


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. Noncontrolling interest and unconsolidated entity amounts represent adjustments to reflect our share of 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:

  

2014

 

2014

 

2014

 

2014

 

2015

 

2015

 

2015

Net income (loss) attributable to common stockholders

  

$

50,022

 

$

71,829

 

$

136,255

 

$

188,636

 

$

190,799

 

$

312,573

 

$

182,043

Depreciation and amortization

  

 

233,318

 

 

214,449

 

 

200,970

 

 

195,393

 

 

188,829

 

 

208,802

 

 

205,799

Impairment of assets

 

 

-

 

 

-

 

 

-

 

 

-

 

 

2,220

 

 

-

 

 

-

Loss (gain) on sales of properties, net

  

 

-

 

 

(13,079)

 

 

(29,604)

 

 

(110,839)

 

 

(56,845)

 

 

(190,111)

 

 

(2,046)

Noncontrolling interests

 

 

(10,520)

 

 

(9,741)

 

 

(9,359)

 

 

(8,234)

 

 

(7,249)

 

 

(10,467)

 

 

(11,647)

Unconsolidated entities

  

 

15,983

 

 

20,787

 

 

18,250

 

 

19,560

 

 

26,496

 

 

19,791

 

 

18,146

Funds from operations

  

$

288,803

 

$

284,245

 

$

316,512

 

$

284,516

 

$

344,250

 

$

340,588

 

$

392,295

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

  

 

289,606

 

 

296,256

 

 

311,117

 

 

327,492

 

 

336,754

 

 

350,399

 

 

351,765

 

Diluted

  

 

290,917

 

 

297,995

 

 

312,812

 

 

329,130

 

 

337,812

 

 

351,366

 

 

353,107

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share data:

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

common stockholders

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

  

$

0.17

 

$

0.24

 

$

0.44

 

$

0.58

 

$

0.57

 

$

0.89

 

$

0.52

 

Diluted

  

 

0.17

 

 

0.24

 

 

0.44

 

 

0.57

 

 

0.56

 

 

0.89

 

 

0.52

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funds from operations

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

  

$

1.00

 

$

0.96

 

$

1.02

 

$

0.87

 

$

1.02

 

$

0.97

 

$

1.12

 

Diluted

  

 

0.99

 

 

0.95

 

 

1.01

 

 

0.86

 

 

1.02

 

 

0.97

 

 

1.11

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

FFO Reconciliations:

  

2014

 

2015

Net income attributable to common stockholders

  

$

258,107

 

$

685,413

Depreciation and amortization

  

 

648,737

 

 

603,431

Impairment of assets

 

 

-

 

 

2,220

Loss (gain) on sales of properties, net

  

 

(42,683)

 

 

(249,002)

Noncontrolling interests

 

 

(29,618)

 

 

(29,363)

Unconsolidated entities

  

 

55,019

 

 

64,433

Funds from operations

  

$

889,562

 

$

1,077,132

 

 

  

 

 

 

 

 

Average common shares outstanding:

 

 

 

 

 

 

 

Basic

  

 

299,137

 

 

346,425

 

Diluted

  

 

300,645

 

 

347,547

 

 

  

 

 

 

 

 

Per share data:

  

 

 

 

 

 

Net income attributable to

  

 

 

 

 

 

 

common stockholders

  

 

 

 

 

 

 

Basic

  

$

0.86

 

$

1.98

 

Diluted

  

 

0.86

 

 

1.97

 

 

  

 

 

 

 

 

Funds from operations

  

 

 

 

 

 

 

Basic

  

$

2.97

 

$

3.11

 

Diluted

  

 

2.96

 

 

3.10

46


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 includes 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:

 

2014

 

2014

 

2014

 

2014

 

2015

 

 

2015

 

2015

Net income

 

$

65,200

 

$

87,854

 

$

152,771

 

$

206,474

 

$

209,422

 

$

330,459

 

$

199,257

Interest expense

 

  

120,956

 

  

121,099

 

  

118,435

 

  

120,707

 

  

121,080

 

 

118,861

 

  

121,130

Income tax expense (benefit)

 

  

2,260

 

  

1,569

 

  

(10,198)

 

  

5,101

 

  

(304)

 

 

7,417

 

  

(3,344)

Depreciation and amortization

 

  

233,318

 

  

214,449

 

  

200,970

 

  

195,393

 

  

188,829

 

 

208,802

 

  

205,799

EBITDA

 

$

421,734

 

$

424,971

 

$

461,978

 

$

527,675

 

$

519,027

 

$

665,539

 

$

522,842

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

  

 

Interest Coverage Ratio:

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

  

 

Interest expense

 

$

120,956

 

$

121,099

 

$

118,435

 

$

120,707

 

$

121,080

 

$

118,861

 

$

121,130

Non-cash interest expense

 

  

(330)

 

  

(1,649)

 

  

(547)

 

  

100

 

  

(119)

 

 

4,202

 

  

(3,791)

Capitalized interest

 

  

1,605

 

  

1,700

 

  

1,779

 

  

2,066

 

  

2,387

 

 

2,060

 

  

1,865

 

Total interest

 

  

122,231

 

  

121,150

 

  

119,667

 

  

122,873

 

  

123,348

 

 

125,123

 

  

119,204

EBITDA

 

$

421,734

 

$

424,971

 

$

461,978

 

$

527,675

 

$

519,027

 

$

665,539

 

$

522,842

 

Interest coverage ratio

 

  

3.45x

 

  

3.51x

 

  

3.86x

 

  

4.29x

 

  

4.21x

 

 

5.32x

 

  

4.39x

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

  

 

Fixed Charge Coverage Ratio:

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

  

 

Total interest

 

$

122,231

 

$

121,150

 

$

119,667

 

$

122,873

 

$

123,348

 

$

125,123

 

$

119,204

Secured debt principal payments

 

  

15,455

 

  

15,803

 

  

14,549

 

  

16,473

 

  

15,630

 

 

17,336

 

 

15,817

Preferred dividends

 

  

16,353

 

  

16,352

 

  

16,352

 

  

16,352

 

  

16,352

 

 

16,352

 

 

16,352

 

Total fixed charges

 

  

154,039

 

  

153,305

 

  

150,568

 

  

155,698

 

  

155,330

 

 

158,811

 

  

151,373

EBITDA

 

$

421,734

 

$

424,971

 

$

461,978

 

$

527,675

 

$

519,027

 

$

665,539

 

$

522,842

 

Fixed charge coverage ratio

 

  

2.74x

 

 

2.77x

 

 

3.07x

 

 

3.39x

 

 

3.34x

 

 

4.19x

 

 

3.45x

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

EBITDA Reconciliations:

 

2014

 

 

2015

Net income

 

$

305,825

 

$

739,134

Interest expense

 

  

360,491

 

 

361,071

Income tax expense (benefit)

 

  

(6,369)

 

 

3,769

Depreciation and amortization

 

  

648,737

 

 

603,431

EBITDA

 

$

1,308,684

 

$

1,707,405

 

 

 

  

 

 

 

 

Interest Coverage Ratio:

 

  

 

 

 

 

Interest expense

 

$

360,491

 

$

361,071

Non-cash interest expense

 

  

(2,527)

 

 

291

Capitalized interest

 

  

5,084

 

 

6,311

 

Total interest

 

  

363,048

 

 

367,673

EBITDA

 

$

1,308,684

 

$

1,707,405

 

Interest coverage ratio

 

  

3.60x

 

 

4.64x

 

 

 

  

 

 

 

 

Fixed Charge Coverage Ratio:

 

  

 

 

 

 

Total interest

 

$

363,048

 

$

367,673

Secured debt principal payments

 

  

45,807

 

 

48,783

Preferred dividends

 

  

49,057

 

 

49,055

 

Total fixed charges

 

  

457,912

 

 

465,511

EBITDA

 

$

1,308,684

 

$

1,707,405

 

Fixed charge coverage ratio

 

 

2.86x

 

 

3.67x

47


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 includes 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:

 

2014

 

2014

 

2014

 

2014

 

2015

 

2015

 

2015

Net income

 

$

131,682

 

$

212,355

 

$

331,524

 

$

512,300

 

$

656,518

 

$

899,126

 

$

945,612

Interest expense

 

  

472,827

 

 

483,082

 

 

484,975

 

 

481,197

 

 

481,321

 

 

479,083

 

 

481,778

Income tax expense (benefit)

 

  

6,987

 

 

7,341

 

 

(5,934)

 

 

(1,267)

 

 

(3,832)

 

 

2,016

 

 

8,870

Depreciation and amortization

 

  

920,156

 

 

934,128

 

 

892,117

 

 

844,130

 

 

799,641

 

 

793,994

 

 

798,823

Stock-based compensation expense

 

  

17,336

 

 

29,320

 

 

29,635

 

 

32,075

 

 

33,462

 

 

30,416

 

 

31,622

Provision for loan losses

 

  

2,110

 

 

2,110

 

 

2,110

 

 

-

 

 

-

 

 

-

 

 

-

Loss (gain) on extinguishment of debt, net

 

  

(749)

 

 

(218)

 

 

6,542

 

 

9,558

 

 

25,108

 

 

43,464

 

 

41,356

Adjusted EBITDA

 

$

1,550,349

 

$

1,668,118

 

$

1,740,969

 

$

1,877,993

 

$

1,992,218

 

$

2,248,099

 

$

2,308,061

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Adjusted Fixed Charge Coverage Ratio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

472,827

 

$

483,082

 

$

484,975

 

$

481,197

 

$

481,321

 

$

479,083

 

$

481,778

Capitalized interest

 

  

6,700

 

  

7,014

 

  

7,087

 

  

7,150

 

  

7,931

 

  

8,292

 

  

8,378

Non-cash interest expense

 

  

(880)

 

  

(1,292)

 

  

(2,790)

 

  

(2,427)

 

  

(2,215)

 

  

3,636

 

  

392

 

Total interest

 

 

478,647

 

 

488,804

 

 

489,272

 

 

485,920

 

 

487,037

 

 

491,011

 

 

490,548

Adjusted EBITDA

 

$

1,550,349

 

$

1,668,118

 

$

1,740,969

 

$

1,877,993

 

$

1,992,218

 

$

2,248,099

 

$

2,308,061

 

Adjusted interest coverage ratio

 

 

3.24x

 

 

3.41x

 

 

3.56x

 

 

3.86x

 

 

4.09x

 

 

4.58x

 

 

4.71x

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest

 

$

478,647

 

$

488,804

 

$

489,272

 

$

485,920

 

$

487,037

 

$

491,011

 

$

490,548

Secured debt principal payments

 

  

60,341

 

  

62,867

 

  

62,119

 

  

62,280

 

  

62,455

 

  

63,988

 

  

65,256

Preferred dividends

 

  

66,088

 

  

65,838

 

  

65,588

 

  

65,408

 

  

65,408

 

  

65,408

 

  

65,408

 

Total fixed charges

 

  

605,076

 

  

617,509

 

  

616,979

 

  

613,608

 

  

614,900

 

  

620,407

 

  

621,212

Adjusted EBITDA

 

$

1,550,349

 

$

1,668,118

 

$

1,740,969

 

$

1,877,993

 

$

1,992,218

 

$

2,248,099

 

$

2,308,061

 

Adjusted fixed charge coverage ratio

 

  

2.56x

 

 

2.70x

 

 

2.82x

 

 

3.06x

 

 

3.24x

 

 

3.62x

 

 

3.72x

48


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.  Dollars are in thousands.

  

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

March 31,

 

June 30,

 

September 30,

 

December 31,

 

March 31,

 

June 30,

 

September 30,

NOI Reconciliations:

 

 

 

2014

 

2014

 

2014

 

2014

 

2015

 

2015

 

2015

Total revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triple-net

 

 

 

$

245,580

 

$

256,439

 

$

259,249

 

$

266,600

 

$

282,988

 

$

299,149

 

$

305,450

 

Seniors housing operating

 

 

 

 

456,319

 

 

468,914

 

 

483,791

 

 

488,546

 

 

494,561

 

 

539,805

 

 

547,081

 

Outpatient medical

 

 

 

 

99,893

 

 

101,017

 

 

104,377

 

 

112,144

 

 

116,606

 

 

118,176

 

 

126,444

 

Non-segment/corporate

 

 

 

 

15

 

 

76

 

 

106

 

 

479

 

 

22

 

 

39

 

 

22

 

 

Total revenues

 

 

 

 

801,807

 

 

826,446

 

 

847,523

 

 

867,769

 

 

894,177

 

 

957,169

 

 

978,997

Property operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triple-net

 

 

 

 

243

 

 

447

 

 

41

 

 

-

 

 

-

 

 

-

 

 

-

 

Seniors housing operating

 

 

 

 

308,184

 

 

310,029

 

 

320,895

 

 

327,200

 

 

338,507

 

 

360,569

 

 

368,050

 

Outpatient medical

 

 

 

 

33,004

 

 

33,278

 

 

34,221

 

 

35,815

 

 

37,954

 

 

37,785

 

 

40,653

 

 

Total property operating expenses

 

 

 

 

341,431

 

 

343,754

 

 

355,157

 

 

363,015

 

 

376,461

 

 

398,354

 

 

408,703

Net operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triple-net

 

 

 

 

245,337

 

 

255,992

 

 

259,208

 

 

266,600

 

 

282,988

 

 

299,149

 

 

305,450

 

Seniors housing operating

 

 

 

 

148,135

 

 

158,885

 

 

162,896

 

 

161,346

 

 

156,054

 

 

179,236

 

 

179,031

 

Outpatient medical

 

 

 

 

66,889

 

 

67,739

 

 

70,156

 

 

76,329

 

 

78,652

 

 

80,391

 

 

85,791

 

Non-segment/corporate

 

 

 

 

15

 

 

76

 

 

106

 

 

479

 

 

22

 

 

39

 

 

22

 

 

NOI

 

 

 

 

460,376

 

 

482,692

 

 

492,366

 

 

504,754

 

 

517,716

 

 

558,815

 

 

570,294

Reconciling items:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

(120,833)

 

 

(121,065)

 

 

(118,435)

 

 

(120,707)

 

 

(121,080)

 

 

(118,861)

 

 

(121,130)

 

Gain (loss) on derivatives, net

 

 

 

 

-

 

 

(351)

 

 

(49)

 

 

1,895

 

 

58,427

 

 

-

 

 

-

 

Depreciation and amortization

 

 

 

 

(233,318)

 

 

(214,449)

 

 

(200,970)

 

 

(195,393)

 

 

(188,829)

 

 

(208,802)

 

 

(205,799)

 

General and administrative

 

 

 

 

(32,865)

 

 

(51,660)

 

 

(30,803)

 

 

(27,616)

 

 

(35,138)

 

 

(38,474)

 

 

(36,950)

 

Transaction costs

 

 

 

 

(952)

 

 

(7,040)

 

 

(13,554)

 

 

(47,991)

 

 

(48,554)

 

 

(12,491)

 

 

(9,333)

 

Gain (loss) on extinguishment of debt, net

 

 

 

 

148

 

 

(531)

 

 

(2,692)

 

 

(6,484)

 

 

(15,401)

 

 

(18,887)

 

 

(584)

 

Impairment of assets

 

 

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(2,220)

 

 

-

 

 

-

 

Other expenses

 

 

 

 

-

 

 

-

 

 

(10,262)

 

 

-

 

 

-

 

 

(10,583)

 

 

-

 

Income tax benefit (expense)

 

 

 

 

(2,260)

 

 

(1,569)

 

 

10,198

 

 

(5,101)

 

 

304

 

 

(7,417)

 

 

3,344

 

Income (loss) from unconsolidated entities

 

 

 

 

(5,556)

 

 

(11,516)

 

 

(2,632)

 

 

(7,722)

 

 

(12,648)

 

 

(2,952)

 

 

(2,631)

 

Income (loss) from discontinued operations, net

 

 

 

 

460

 

 

6,675

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

Gain (loss) on real estate dispositions, net

 

 

 

 

-

 

 

6,668

 

 

29,604

 

 

110,839

 

 

56,845

 

 

190,111

 

 

2,046

 

Preferred dividends

 

 

 

 

(16,353)

 

 

(16,352)

 

 

(16,352)

 

 

(16,352)

 

 

(16,352)

 

 

(16,352)

 

 

(16,352)

 

Loss (income) attributable to noncontrolling interests

 

 

 

 

1,175

 

 

327

 

 

(164)

 

 

(1,486)

 

 

(2,271)

 

 

(1,534)

 

 

(862)

 

 

 

 

 

 

 

(410,354)

 

 

(410,863)

 

 

(356,111)

 

 

(316,118)

 

 

(326,917)

 

 

(246,242)

 

 

(388,251)

Net income (loss) attributable to common stockholders

 

 

 

$

50,022

 

$

71,829

 

$

136,255

 

$

188,636

 

$

190,799

 

$

312,573

 

$

182,043

49


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

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

September 30,

 

September 30,

NOI Reconciliations:

 

 

 

2014

 

2015

Total revenues:

 

 

 

 

 

 

 

 

 

Triple-net

 

 

 

$

761,267

 

$

887,588

 

Seniors housing operating

 

 

 

 

1,409,024

 

 

1,581,445

 

Outpatient medical

 

 

 

 

305,288

 

 

361,226

 

Non-segment/corporate

 

 

 

 

198

 

 

83

 

 

Total revenues

 

 

 

 

2,475,777

 

 

2,830,342

Property operating expenses:

 

 

 

 

 

 

 

 

 

Triple-net

 

 

 

 

732

 

 

-

 

Seniors housing operating

 

 

 

 

939,108

 

 

1,067,127

 

Outpatient medical

 

 

 

 

100,502

 

 

116,392

 

 

Total property operating expenses

 

 

 

 

1,040,342

 

 

1,183,519

Net operating income:

 

 

 

 

 

 

 

 

 

Triple-net

 

 

 

 

760,535

 

 

887,588

 

Seniors housing operating

 

 

 

 

469,916

 

 

514,318

 

Outpatient medical

 

 

 

 

204,786

 

 

244,834

 

Non-segment/corporate

 

 

 

 

198

 

 

83

 

 

NOI

 

 

 

 

1,435,435

 

 

1,646,823

Reconciling items:

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

(360,334)

 

 

(361,071)

 

Gain (loss) on derivatives, net

 

 

 

 

(400)

 

 

58,427

 

Depreciation and amortization

 

 

 

 

(648,737)

 

 

(603,431)

 

General and administrative

 

 

 

 

(115,327)

 

 

(110,562)

 

Transaction costs

 

 

 

 

(21,546)

 

 

(70,379)

 

Gain (loss) on extinguishment of debt, net

 

 

 

 

(3,075)

 

 

(34,872)

 

Impairment of assets

 

 

 

 

-

 

 

(2,220)

 

Other expenses

 

 

 

 

(10,262)

 

 

(10,583)

 

Income tax benefit (expense)

 

 

 

 

6,369

 

 

(3,769)

 

Income (loss) from unconsolidated entities

 

 

 

 

(19,705)

 

 

(18,231)

 

Income (loss) from discontinued operations, net

 

 

 

 

7,135

 

 

-

 

Gain (loss) on real estate dispositions, net

 

 

 

 

36,272

 

 

249,002

 

Preferred dividends

 

 

 

 

(49,057)

 

 

(49,055)

 

Loss (income) attributable to noncontrolling interests

 

 

 

 

1,339

 

 

(4,666)

 

 

 

 

 

 

 

(1,177,328)

 

 

(961,410)

Net income (loss) attributable to common stockholders

 

 

 

$

258,107

 

$

685,413

50


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

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

March 31,

 

June 30,

 

September 30,

 

December 31,

 

March 31,

 

June 30,

 

September 30,

Same Store Cash NOI Reconciliations:

 

2014

 

2014

 

2014

 

2014

 

2015

 

2015

 

2015

Net operating income from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triple-net

 

 

 

$

245,337

 

$

255,992

 

$

259,208

 

$

266,600

 

$

282,988

 

$

299,149

 

$

305,450

 

Seniors housing operating

 

 

 

 

148,135

 

 

158,885

 

 

162,896

 

 

161,346

 

 

156,054

 

 

179,236

 

 

179,031

 

Outpatient medical

 

 

 

 

66,889

 

 

67,739

 

 

70,156

 

 

76,329

 

 

78,652

 

 

80,390

 

 

85,791

 

 

 

Total

 

 

 

 

460,361

 

 

482,616

 

 

492,260

 

 

504,275

 

 

517,694

 

 

558,775

 

 

570,272

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triple-net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash NOI on same store properties

 

 

 

 

(13,022)

 

 

(19,354)

 

 

(20,189)

 

 

(19,688)

 

 

(22,241)

 

 

(22,838)

 

 

(22,377)

 

 

NOI attributable to non same store properties

 

 

 

 

(31,401)

 

 

(32,841)

 

 

(34,393)

 

 

(40,925)

 

 

(53,731)

 

 

(66,450)

 

 

(71,488)

 

 

 

Subtotal

 

 

 

 

(44,423)

 

 

(52,195)

 

 

(54,582)

 

 

(60,613)

 

 

(75,972)

 

 

(89,288)

 

 

(93,865)

 

Seniors housing operating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash NOI on same store properties

 

 

 

 

266

 

 

266

 

 

261

 

 

252

 

 

251

 

 

253

 

 

250

 

 

NOI attributable to non same store properties

 

 

 

 

(117)

 

 

(1,705)

 

 

(2,432)

 

 

(5,386)

 

 

(9,034)

 

 

(23,155)

 

 

(25,153)

 

 

 

Subtotal

 

 

 

 

149

 

 

(1,439)

 

 

(2,171)

 

 

(5,134)

 

 

(8,783)

 

 

(22,902)

 

 

(24,903)

 

Outpatient medical:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash NOI on same store properties

 

 

 

 

(2,226)

 

 

(2,190)

 

 

(1,744)

 

 

(1,560)

 

 

(1,262)

 

 

(1,577)

 

 

(1,299)

 

 

NOI attributable to non same store properties

 

 

 

 

(4,138)

 

 

(4,565)

 

 

(7,503)

 

 

(13,121)

 

 

(15,277)

 

 

(16,217)

 

 

(22,258)

 

 

 

Subtotal

 

 

 

 

(6,364)

 

 

(6,755)

 

 

(9,247)

 

 

(14,681)

 

 

(16,539)

 

 

(17,794)

 

 

(23,557)

Same store cash net operating income:

 

Properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triple-net

 

584

 

 

200,914

 

 

203,797

 

 

204,626

 

 

205,987

 

 

207,016

 

 

209,861

 

 

211,586

 

Seniors housing operating

 

279

 

 

148,284

 

 

157,446

 

 

160,725

 

 

156,212

 

 

147,271

 

 

156,334

 

 

154,128

 

Outpatient medical

 

178

 

 

60,525

 

 

60,984

 

 

60,909

 

 

61,648

 

 

62,113

 

 

62,596

 

 

62,234

 

 

 

Total

 

1,041

 

$

409,723

 

$

422,227

 

$

426,260

 

$

423,847

 

$

416,400

 

$

428,791

 

$

427,948

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store Cash NOI Property Reconciliation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Properties

 

1,353

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions

 

(263)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Developments

 

(21)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-for-sale

 

(14)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other(1)

 

(14)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same store properties

 

1,041

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Includes eleven land parcels and three loans.

 

 

 

 

 

 

 

51


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:

 

2014

 

2015

Net operating income from continuing operations:

 

 

 

 

 

 

 

 

 

Triple-net

 

 

 

$

760,535

 

$

887,588

 

Seniors housing operating

 

 

 

 

469,916

 

 

514,318

 

Outpatient medical

 

 

 

 

204,786

 

 

244,834

 

 

 

Total

 

 

 

 

1,435,237

 

 

1,646,740

Adjustments:

 

 

 

 

 

 

 

 

 

Triple-net:

 

 

 

 

 

 

 

 

 

 

Non-cash NOI on same store properties

 

 

 

 

(52,564)

 

 

(67,456)

 

 

NOI attributable to non same store properties

 

 

 

 

(98,635)

 

 

(191,669)

 

 

 

Subtotal

 

 

 

 

(151,199)

 

 

(259,125)

 

Seniors housing operating:

 

 

 

 

 

 

 

 

 

 

Non-cash NOI on same store properties

 

 

 

 

793

 

 

754

 

 

NOI attributable to non same store properties

 

 

 

 

(4,254)

 

 

(57,339)

 

 

 

Subtotal

 

 

 

 

(3,461)

 

 

(56,585)

 

Outpatient medical

 

 

 

 

 

 

 

 

 

 

Non-cash NOI on same store properties

 

 

 

 

(6,160)

 

 

(4,137)

 

 

NOI attributable to non same store properties

 

 

 

 

(16,207)

 

 

(53,753)

 

 

 

Subtotal

 

 

 

 

(22,367)

 

 

(57,890)

Same store cash net operating income:

 

Properties

 

 

 

 

 

 

 

Triple-net

 

584

 

 

609,336

 

 

628,463

 

Seniors housing operating

 

279

 

 

466,455

 

 

457,733

 

Outpatient medical

 

178

 

 

182,419

 

 

186,944

 

 

 

Total

 

1,041

 

$

1,258,210

 

$

1,273,140

 

Other Disclosures

 

United States of America

 

     Health Care Reimbursements

 

     Policy and legislative changes that increase or decrease government reimbursement impact our operators and tenants that participate in Medicare, Medicaid, or other government programs.  The reimbursement methodologies applied to health care facilities continue to evolve.  To the extent that policy or legislative changes, or new reimbursement methodologies decrease government reimbursement to our operators and tenants, our revenue and operations may be adversely affected.

 

Medicare Reimbursement and Physicians.  Historically, the Centers for Medicare and Medicaid Services (“CMS”) annually adjusted the Medicare Physician Fee Schedule payment rates based on an update formula that included application of the Sustainable Growth Rate (“SGR”).  On April 1, 2014, President Obama signed into law the Protecting Access to Medicare Act of 2014, which provided for a 0% update to the 2015 Medicare Physician Fee Schedule through March 31, 2015.  On November 13, 2014, CMS published the calendar year 2015 Physician Fee Schedule final rule, which, consistent with the Protecting Access to Medicare Act of 2014, called for a 0% update from January 1, 2015 through March 31, 2015 and a negative 21.2% update under the statutory SGR formula for April 1, 2015 through December 31, 2015.  However, on April 16, 2015, President Obama signed and enacted into law H.R. 2, the Medicare Access and CHIP Reauthorization Act of 2015, which, among other things:

·         Repeals the SGR.

·         Institutes a 0% update to the single conversion factor under the Medicare Physician Fee Schedule from January 1 through June 30, 2015, a 0.5% update for July 2015 through the end of 2019, and a 0% update for 2020 through 2025.  For 2026 and subsequent years, the update will be either 0.75% or 0.25%, depending in which Alternate Payment Model (“APM”) the physician participates. 

·         Delays the Geographic Practice Cost Indices (“GPCI”) payment adjustment until January 1, 2018.

·         Extends the therapy cap exceptions process through December 31, 2017.

·         Imposes a market basket update of 1% for skilled nursing providers for FY 2018.

 

52


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

 

 

Additionally, on April 6, 2015, CMS announced final 2016 payment rates for Medicare Advantage, with an expected average payment impact of 3.25%.  Changes in Medicare Advantage plan payments may indirectly affect our operators and tenants that contract with Medicare Advantage plans.

 

CMS also issued several additional rules (proposed and final) which could impact our tenants and operators. 

·         On August 4, 2015, CMS published a final rule regarding fiscal year 2016 (“FY16”) Medicare payment rates for skilled nursing facilities (“SNFs”).  Under the rule, CMS projects that aggregate payments to SNFs will increase by $430 million, or 1.2%, from payments in fiscal year 2015.

·         On August 17, 2015, CMS published a final rule regarding FY16 Medicare payment rates for Long-Term Care Hospitals (“LTCHs”).  Under the rule, standard LTCH Prospective Payment System (“PPS”) rates will increase 1.7%.  CMS projects overall payments to LTCHs under the rule would decrease by 4.6%, or $250 million, due to the statutory decrease in payment rates for site neutral LTCH PPS cases. Site neutral LTCH PPS cases do not meet the clinical criteria to qualify for the higher standard LTCH PPS payment rates.

·         On July 8, 2015, CMS issued a proposed rule regarding 2016 Medicare payment rates for hospital outpatient departments (“HOPDs”) and ambulatory surgery centers (“ASCs”).  Under the rule, CMS proposes to reduce payments to HOPDs by 0.1% and increase payments to ASCs by 1.1%.  The proposed rule also included updates to the “Two-Midnight” rule regarding when inpatient admissions are appropriate for payment under Medicare Part A.  If finalized, an inpatient admission lasting less than two midnights would be payable under Medicare Part A on a case-by-case basis based on the judgment of the admitting physician, supported by documentation in the medical record.

·         On July 14, 2015, CMS issued a proposal to bundle the costs for Lower Extremity Joint Replacement (“LEJR”) procedures in certain geographic areas.  The bundle would begin with the hospital admission and continue for 90 days following hospital discharge. The following services, among others, would be included:  physician services, inpatient hospital services (including readmission), LTCH, inpatient rehabilitation, SNF, and/or home health services, hospital outpatient services, outpatient therapy, clinical lab and hospice.  Hospitals subject to the bundling requirements with spending below an established target price that meet the threshold on certain quality measures could earn a reconciliation payment from Medicare.  Hospitals with spending that exceeds the target would need to pay the difference to Medicare.

·         On July 15, 2015, CMS issued a proposed rule regarding 2016 Medicare payment rates under the Physician Fee Schedule (“PFS”).  Among other proposals, CMS plans to initiate implementation of the new payment system for physicians and other practitioners, the Merit-Based Incentive Payment System (“MIPS”), required by the legislation that repealed the SGR.

·         On July 16, 2015, CMS issued a proposed rule that, for the first time in nearly 25 years, would comprehensively update the SNF requirements for participation under Medicare and Medicaid.  Among other things, the proposed rule addresses requirements relating to quality of care and quality of life, facility responsibilities and staffing considerations, resident assessments, and compliance and ethics programs. CMS estimates that this rule would result in an estimated first-year cost of approximately $46,491 per facility and a subsequent-year cost of $40,685 per facility on 15,691 LTC facilities.

 

Other Health Care Initiatives

 

Recent Quality Initiatives.  Recent government proposals have resulted in an increased emphasis by the government on the quality of care provided by providers.  For example, on February 27, 2015, CMS announced the establishment of a Health Care Payment Learning and Action Network as part of its plan to shift the Medicare program, and the healthcare system at large, toward paying providers based on quality, rather than the quantity of care they provide to patients.  Through the Learning and Action Network, CMS will work with private payers, employers, consumers, providers, states and state Medicaid programs, and other partners to expand alternative payment models into their programs.  To the extent this and similar measures impose additional obligations on our operators or tenants, or decrease the reimbursements that they receive, our revenues and operations may be indirectly adversely affected.

 

The Department of Health and Human Services, Office of Inspector General (“OIG”) Recommendations Addressing SNF Billing.  In the OIG’s March 2015 Compendium of Priority Recommendations, a report that highlights the OIG’s previous recommendations for which corrective action has not been completed, the OIG cited its prior November 2012 report addressing questionable billing practices by SNFs.  The OIG recommended, among other things, changing the current method for determining how much therapy is needed to ensure appropriate payments, monitoring compliance with new therapy assessments, and improving accuracy of data submitted by SNFs.  Similarly, in June 2015, the OIG issued a report analyzing CMS’ assessments related to changes in the amount of therapy that a beneficiary receives during stays.  The OIG concluded that CMS’ new policies create challenges for oversight and that SNFs’ use of these assessments cost Medicare $143 million over 2 years. The OIG recommended, among other things, that CMS (1) reduce the financial incentive for SNFs to use assessments differently when decreasing and increasing therapy and (2) accelerate its efforts to implement a new method for paying for therapy.  Most recently, OIG issued a report in September 2015 calling for reevaluation of the Medicare payment system for SNFs.  In particular, OIG found that Medicare payments for therapy greatly

53


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

 

 

exceeded SNFs’ costs for therapy, and that, under the current payment system, SNFs increasingly billed for the highest level of therapy even though key beneficiary characteristics remained largely the same.  OIG determined that its findings demonstrated the need for CMS to reevaluate the Medicare SNF payment system, concluding that payment reform could save Medicare billions of dollars and encourage SNFs to provide services that are better aligned with beneficiaries’ care needs.  If followed, these reports and recommendations may impact our operators and tenants. 

 

Challenges to the Health Reform Laws.  Since the enactment of the Patient Protection and Affordable Care Act of 2010, as modified by the Health Care and Education Reconciliation Act of 2010 (collectively, the “Health Reform Laws”), there have been multiple attempts through legislative action and legal challenge to repeal or amend the Health Reform Laws, including the case that was before the U.S. Supreme Court, King v. Burwell.   Although the Supreme Court in Burwell upheld the use of subsidies to individuals in federally-facilitated health care exchanges on June 25, 2015, which ultimately did not disrupt significantly the implementation of the Health Care Reform Laws, we cannot predict whether other current or future efforts to repeal or amend the Health Reform Laws will be successful, nor can we predict the impact that such a repeal or amendment would have on our operators or tenants and their ability to meet their obligations to us.

 

Canada

 

      Licensing and Regulation

 

Ontario

 

    Retirement homes in Ontario are regulated under the Retirement Homes Act, 2010 (the “Act”).  A license is required to operate a retirement home.  Licenses must be applied for and are non-transferable.  Applications for licenses are directed to the Registrar of the Retirement Homes Regulatory Authority (“RHRA”). 

 

     The Act requires a report to the RHRA when any person has reasonable grounds to suspect abuse of a resident by anyone, or neglect of a resident by staff.  Following a report to the RHRA, there is a mandatory inspection carried out by the RHRA, which results in a report that is posted on the RHRA’s public website. The most recent report must also be posted in the subject home, and be readily available for review if requested thereafter.  The Registrar of the RHRA can receive complaints about a retirement home contravening a provision of the Act, and if such a complaint is received, it must be reviewed promptly.  The Registrar may ask the retirement home that is the subject of the complaint to provide information relevant to the complaint, and has the power to conduct an inspection, issue a written warning or take other action as prescribed in the regulations.

 

British Columbia

 

    The Community Care and Assisted Living Act, the Residential Care Regulation, and the Community Care and Assisted Living Regulation (together, the “B.C. Act”) regulate “community care facilities” (long-term care facilities) in substantially the same manner as retirement homes are regulated under the Ontario Act. The B.C. Act defines such a facility as premises used for the purpose of supervising vulnerable persons who require three or more prescribed services (from a list that includes regular assistance with activities of daily living; distribution of medication; management of cash resources; monitoring of food intake; structured behavior management and intervention; and psychosocial or physical rehabilitative therapy).

 

Other Related Laws

 

Privacy

 

     Privacy laws in Canada are consent-based and require the implementation of a privacy program involving policies, procedures and the designation of an individual or team with primary responsibility for a custodian’s privacy law compliance.  Mandatory breach notification, to the affected individuals, is a requirement under some laws and amendments have been passed or proposed, but are not yet in effect, requiring breach notification to the applicable privacy regulator under some laws.  Some laws require notification where personal health information/personal information is processed or stored outside of Canada.  One provincial law (in Quebec) provides for fines where an organization fails to perform required due diligence before outsourcing activities involving personal information to a service provider outside of the province.

 

     The powers of privacy regulators and penalties for violations of privacy law vary according to the applicable law or are left to the courts.  To date, penalties have generally not been monetary, although that may change depending on decisions in connection with class actions.  Regulators have the authority to make public the identity of a health information custodian that has been found to have

54


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

 

 

committed a breach, so that there is a reputational risk associated with privacy law violations even where no monetary damages are incurred.  The notification of patients (as mentioned above, mandatory under some privacy laws and a best practice in other jurisdictions) and other activities required to manage a privacy breach can give rise to significant costs.

 

United Kingdom

 

Registration

 

In England, care home services are principally regulated by the Health and Social Care Act 2008 (the “Act”) and associated Regulations. The Act requires all persons carrying out “Regulated Activities” in England, and the managers of such persons, to be registered. Regulated Activities are defined in the Health and Social Care Act 2008 (Regulated Activities) Regulations 2014, as amended (the “2014 Regulations”), and include (among other activities):

·         The provision of personal care for persons who, by reason of old age, illness or disability are unable to provide it for themselves, and which is provided in a place where those persons are living at the time the care is provided; and

·         The provision of residential accommodation, together with nursing or personal care. 

 

     From April 1, 2015, the 2014 Regulations fully revoked the Health and Social Care Act 2008 (Regulated Activities) Regulations 2010 (the “2010 Regulations”) and while the 2014 Regulations introduce certain modifications with regard to service standards, the registration obligations under the Act remain.

 

Service Standards and Notification Obligations

 

The 2014 Regulations aim to streamline the legal obligations in the 2010 Regulations, and replace them with a set of more broadly-phrased, legally binding “Fundamental Standards”. The 2014 Regulations list the standards that must be met when providing care services. The service providers’ legal obligations include:

·         Care and treatment must be appropriate and reflect service user needs and preferences;

·         Service users must be treated with dignity and respect;

·         Care and treatment must only be provided with consent;

·         Care and treatment must be provided in a safe way for service users;

·         Service users must be protected from abuse and improper treatment;

·         Service users nutritional and hydration needs must be met;

·         All premises and equipment must be clean, secure, suitable and used properly;

·         Complaints must be investigated and appropriate action taken;

·         Systems and processes must be established to ensure compliance with fundamental standards;

·         Sufficient numbers of suitably qualified, competent, skilled and experienced staff must be deployed;

·         Persons employed must be of good character, having the necessary qualifications, skills and experience, and be able to perform the work for which they are employed; and

·         Health service bodies must be open and transparent with service users about their care and treatment. 

 

Failure to comply with certain provisions of the above Regulations is an offense, with a person guilty of the offense liable on summary conviction to a fine.  Monetary penalty notices may also be issued.

 

The Regulations also include:

·         Requirements around fit and proper persons being employed for the purposes of carrying of a regulated activity. Such persons must be of good character, have the qualifications, competence, skills and experience necessary and be able by reason of their health to perform their tasks. Recruitment procedures must also be established and effectively operated with certain specified information being available in relation to each person employed and registered where required; 

·         A new “duty of candour” to notify and apologize to affected persons, in the event of certain incidents having actually or potentially led to the death of the service user, where the death relates directly to the incident rather than to the natural course of the service user's illness or underlying condition, or severe harm, moderate harm or prolonged psychological harm to the service user;

·         A requirement for a service provider to display a performance assessment received as a rating of its performance by the Care Quality Commission (the “CQC”); and

·         A requirement that registered persons have regard to guidance issued by the CQC and any code of practice from the Secretary of State in relation to prevention or control of health care associated infections.

 

55


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

 

 

Under the Care Quality Commission (Registration) Regulations 2009 certain matters must be notified to the CQC, the government regulatory body overseeing the provision of nursing and other care services in England.  Failure to comply with notification obligations is an offense and a person guilty of an offense is liable on summary conviction to a fine of up to £2,500. 

   

Regulatory Oversight and Inspections

 

The Act also sets out the powers and responsibilities of the CQC. Among other powers, the CQC administers the compulsory registration system and issues guidance to care service providers on how to comply with applicable standards set out in legislation. 

 

The Care Act 2014 sets out certain provisions concerning (among others):

·         The duty of a local authority to meet the needs of an adult for care and support and a carer’s needs where the registered care provider is unable to carry on a regulated activity because of business failure;

·         The duty of the CQC to assess the financial sustainability of providers subject to its regulatory regime with a view to identifying any threats that such providers may face to their financial sustainability. Where the CQC identifies a significant risk to financial sustainability it can require the provider to develop a sustainability plan setting out the provider’s plan to mitigate or eliminate risk or require the provider to organize an independent review of the business with the costs being recovered from the provider;

·         The CQC informing local authorities where a registered care provider is likely to become unable to carry on a regulated activity; and

·         A new offense where certain registered care providers supply, publish or make available information that is false or misleading in a material respect which can also apply to a director, manager or person purporting to act as such of a company.  

 

Critical Accounting Policies

Our unaudited 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 unaudited 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 unaudited 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, 2014 for further information regarding significant accounting policies that impact us.  There have been no material changes to these policies in 2015.

 

Cautionary Statement Regarding Forward-Looking Statements

    This Quarterly Report on Form 10-Q may contain “forward-looking” statements as defined in the Private Securities Litigation Reform Act of 1995. When the company uses words such as “may,” “will,” “intend,” “should,” “believe,” “expect,” “anticipate,” “project,” “estimate” or similar expressions that do not relate solely to historical matters, it is making forward-looking statements. In particular, these forward-looking statements include, but are not limited to, those relating to the company’s opportunities to acquire, develop or sell properties; the company’s ability to close its anticipated acquisitions, investments or dispositions on currently anticipated terms, or within currently anticipated timeframes; the expected performance of the company’s operators/tenants and properties; the company’s expected occupancy rates; the company’s ability to declare and to make distributions to shareholders; the company’s investment and financing opportunities and plans; the company’s continued qualification as a real estate investment trust (“REIT”); the company’s ability to access capital markets or other sources of funds; and the company’s ability to meet its earnings guidance. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that may cause the company’s actual results to differ materially from the company’s expectations discussed in the forward-looking statements. 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

56


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

 

 

care and seniors housing industries; negative developments in the operating results or financial condition of operators/tenants, including, but not limited to, their ability to pay rent and repay loans; the company’s ability to transition or sell properties with profitable results; the failure to make new investments or acquisitions as and when anticipated; natural disasters and other acts of God affecting the company’s properties; 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; liability or contract claims by or against operators/tenants; unanticipated difficulties and/or expenditures relating to future investments or acquisitions; environmental laws affecting the company’s properties; changes in rules or practices governing the company’s financial reporting; the movement of U.S. and foreign currency exchange rates; the company’s ability to maintain its qualification as a REIT; 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, 2014, 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 undertakes no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events or otherwise, or to update the reasons why actual results could differ from those projected in any forward-looking statements.

  

 

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 underlying foreign currency exposures with gains and losses on derivative contracts hedging these exposures.  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 and foreign currency exchange rates.

      We historically borrow on our primary unsecured credit facility 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 our primary unsecured credit facility.  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.

      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, 2015

 

December 31, 2014

 

 

Principal

 

Change in

 

Principal

 

Change in

 

 

balance

 

fair value

 

balance

 

fair value

Senior unsecured notes

 

$

7,287,915

 

$

(500,331)

 

$

7,101,655

 

$

(547,358)

Secured debt

 

 

2,567,571

 

 

(81,472)

 

 

2,673,480

 

 

(93,580)

Totals

 

$

9,855,486

 

$

(581,803)

 

$

9,775,135

 

$

(640,938)

     Our variable rate debt, including our primary unsecured credit facility, is reflected at fair value. At September 30, 2015, we had $1,554,751,000 outstanding under our variable rate debt. Assuming no changes in outstanding balances, a 1% increase in interest rates would result in increased annual interest expense of $15,548,000.  At December 31, 2014, we had $983,783,000 outstanding under our variable rate debt.  Assuming no changes in outstanding balances, a 1% increase in interest rates would have resulted in increased annual interest expense of $9,838,000.

 

 

57


  

 

     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 impact the amount of net income we earn from our investments in Canada and the United Kingdom. Based solely on our results for the three months ended September 30, 2015, if these exchange rates were to increase or decrease by 100 basis points, our net income from these investments would decrease or increase, as applicable, by less than $1,000,000 annualized.  We seek to mitigate these underlying foreign currency exposures with non-U.S. denominated borrowings and 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 and health care properties outside the U.S., we may also decide to transact additional business or borrow funds in currencies other than U.S. Dollars, Canadian Dollars or Pounds Sterling. To illustrate the impact of changes in foreign currency markets, we performed a sensitivity analysis on our derivative portfolio whereby we modeled the change in net present values arising from a hypothetical 1% increase in foreign currency exchange rates to determine the instruments’ change in fair value.  The following table summarizes the results of the analysis performed (dollars in thousands):

  

 

 

 

September 30, 2015

 

December 31, 2014

 

 

Carrying

 

Change in

 

Carrying

 

Change in

 

 

Value

 

fair value

 

Value

 

fair value

Foreign currency forward contracts(1)

 

$

76,326

 

$

2,091

 

$

54,247

 

$

4,242

Debt designated as hedges

 

 

1,774,540

 

 

13,000

 

 

1,851,189

 

 

13,000

Totals

 

$

1,850,866

 

$

15,091

 

$

1,905,436

 

$

17,242

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Amounts exclude cross currency hedge activity.

 

     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.

 

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 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

     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, 2014.

58


  

 

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

  

 

 

 

 

 

 

 

 

 

 

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, 2015 through July 31, 2015

 

-

 

$

-

 

 

 

 

August 1, 2015 through August 31, 2015

 

246

 

 

65.08

 

 

 

 

September 1, 2015 through September 30, 2015

 

-

 

 

-

 

 

 

 

Totals

 

246

 

$

65.08

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) During the three months ended September 30, 2015, 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

On October 29, 2015, the Board of Directors of the company amended the company’s by-laws to reflect the change of its name from Health Care REIT, Inc. to Welltower Inc.

The foregoing description does not purport to be complete and is qualified in its entirety by reference to the full text of the company’s Fifth Amended and Restated By-Laws, a copy of which is filed herewith as Exhibit 3.2 to this Quarterly Report on Form 10-Q and is incorporated herein by reference.

Item 6. Exhibits

1.1              Form of Amendment No. 2, dated August 5, 2015, to the Equity Distribution Agreements entered into by and between the company and each of UBS Securities LLC, KeyBanc Capital Markets Inc. and Credit Agricole Securities (USA) Inc. (filed with the Securities and Exchange Commission as Exhibit 1.3 to the company’s Form 8-K filed August 5, 2015, and incorporated herein by reference thereto).

3.1              Certificate of Amendment of Second Restated Certificate of Incorporation of the company (filed with the Securities and Exchange Commission as Exhibit 3.1 to the company’s Form 8-K filed September 30, 2015, and incorporated herein by reference thereto).

3.2              Fifth Amended and Restated By-Laws of the company.

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, 2015 and December 31, 2014, (ii) the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 and 2014, (iii) the Consolidated Statements of Equity for the nine months ended September 30, 2015 and 2014, (iv) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014 and (v) the Notes to Unaudited Consolidated Financial Statements.

 

 

 

 

 

       

  

59


  

 

SIGNATURES

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

 

 

 

 

 

 

WELLTOWER INC.

  

 

Date: October 30, 2015 

By:  

/s/ THOMAS J. DEROSA  

 

 

Thomas J. DeRosa, 

 

 

Chief Executive Officer

 (Principal Executive Officer) 

 

 

 

 

 

Date: October 30, 2015 

By:  

/s/ SCOTT A. ESTES  

 

 

Scott A. Estes, 

 

 

Executive Vice President and Chief Financial Officer

 (Principal Financial Officer) 

 

 

 

 

 

Date: October 30, 2015 

By:  

/s/ PAUL D. NUNGESTER, JR.  

 

 

Paul D. Nungester, Jr., 

 

 

Senior Vice President and Controller

 (Principal Accounting Officer) 

 

 

60