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WELLTOWER INC. - Quarter Report: 2016 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, 2016

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)  

Not Applicable

(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 31, 2016, the registrant had 362,531,659 shares of common stock outstanding.  

 

 

 

 


TABLE OF CONTENTS

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements (Unaudited)

 

 

 

Consolidated Balance Sheets — September 30, 2016 and December 31, 2015

3

 

 

Consolidated Statements of Comprehensive Income — Three and nine months ended September 30, 2016 and 2015

4

 

 

Consolidated Statements of Equity — Nine months ended September 30, 2016 and 2015

6

 

 

Consolidated Statements of Cash Flows — Nine months ended September 30, 2016 and 2015

7

 

 

Notes to Unaudited Consolidated Financial Statements

8

 

 

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

27

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

54

 

 

Item 4. Controls and Procedures

55

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

 

Item 1A. Risk Factors

56

 

56

 

 

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

56

 

 

Item 5. Other Information

56

 

 

Item 6. Exhibits

56

 

 

Signatures

58

 

  

 


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

CONSOLIDATED BALANCE SHEETS

WELLTOWER INC. AND SUBSIDIARIES

(In thousands)

 

 

 

 

 

 

September 30, 2016

 

December 31, 2015

 

 

 

 

  

(Unaudited)

 

(Note)

Assets:  

 

 

 

 

 

Real estate investments:  

 

 

 

 

 

 

Real property owned:  

 

 

 

 

 

 

 

Land and land improvements  

$

2,603,590

 

$

2,563,445

 

 

Buildings and improvements  

 

25,671,913

 

 

25,522,542

 

 

Acquired lease intangibles  

 

1,423,032

 

 

1,350,585

 

 

Real property held for sale, net of accumulated depreciation  

 

913,157

 

 

169,950

 

 

Construction in progress  

 

529,471

 

 

258,968

 

 

 

Gross real property owned  

 

31,141,163

 

 

29,865,490

 

 

Less accumulated depreciation and amortization  

 

(4,243,038)

 

 

(3,796,297)

 

 

 

Net real property owned  

 

26,898,125

 

 

26,069,193

 

Real estate loans receivable  

 

630,020

 

 

819,492

 

Net real estate investments  

 

27,528,145

 

 

26,888,685

Other assets:  

 

 

 

 

 

 

 

Investments in unconsolidated entities  

 

479,382

 

 

542,281

 

 

Goodwill  

 

68,321

 

 

68,321

 

 

Cash and cash equivalents  

 

428,617

 

 

360,908

 

 

Restricted cash  

 

83,137

 

 

61,782

 

 

Straight-line rent receivable

 

455,774

 

 

395,562

 

 

Receivables and other assets  

 

812,963

 

 

706,306

 

 

 

Total other assets  

 

2,328,194

 

 

2,135,160

Total assets  

$

29,856,339

 

$

29,023,845

 

 

 

 

  

 

 

 

 

 

Liabilities and equity  

 

 

 

 

 

Liabilities:  

 

 

 

 

 

 

 

Borrowings under primary unsecured credit facility  

$

1,350,000

 

$

835,000

 

 

Senior unsecured notes  

 

8,688,585

 

 

8,548,055

 

 

Secured debt  

 

3,317,933

 

 

3,509,142

 

 

Capital lease obligations  

 

74,370

 

 

75,489

 

 

Accrued expenses and other liabilities  

 

767,683

 

 

697,191

Total liabilities  

 

14,198,571

 

 

13,664,877

Redeemable noncontrolling interests  

 

393,530

  

  

183,083

Equity:  

 

 

 

 

 

 

 

Preferred stock  

 

1,006,250

 

 

1,006,250

 

 

Common stock  

 

362,703

 

 

354,811

 

 

Capital in excess of par value  

 

16,983,562

 

 

16,478,300

 

 

Treasury stock  

 

(52,194)

 

 

(44,372)

 

 

Cumulative net income  

 

4,454,180

 

 

3,725,772

 

 

Cumulative dividends  

 

(7,816,492)

 

 

(6,846,056)

 

 

Accumulated other comprehensive income (loss)  

 

(151,184)

 

 

(88,243)

 

 

Other equity  

 

3,020

 

 

4,098

 

 

 

Total Welltower Inc. stockholders’ equity  

 

14,789,845

 

 

14,590,560

 

 

Noncontrolling interests  

 

474,393

 

 

585,325

Total equity  

 

15,264,238

 

 

15,175,885

Total liabilities and equity  

$

29,856,339

 

$

29,023,845

 

NOTE: The consolidated balance sheet at December 31, 2015 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,

 

 

 

2016

 

2015

 

2016

 

2015

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Rental income  

$

421,152

 

$

409,290

 

$

1,259,442

 

$

1,185,502

 

Resident fees and services

 

630,017

 

 

545,255

 

 

1,847,386

 

 

1,573,318

 

Interest income

 

25,080

 

 

22,380

 

 

74,275

 

 

59,950

 

Other income

 

2,884

 

 

2,072

 

 

21,735

 

 

11,572

 

 

Total revenues

 

1,079,133

 

 

978,997

 

 

3,202,838

 

 

2,830,342

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

129,699

 

 

121,130

 

 

394,985

 

 

361,071

 

Property operating expenses

 

473,680

 

 

408,703

 

 

1,382,148

 

 

1,183,519

 

Depreciation and amortization

 

218,061

 

 

205,799

 

 

673,326

 

 

603,431

 

General and administrative

 

36,828

 

 

36,950

 

 

122,434

 

 

110,562

 

Transaction costs

 

19,842

 

 

9,333

 

 

33,207

 

 

70,379

 

Loss (gain) on derivatives, net

 

(2,516)

 

 

-

 

 

(2,516)

 

 

(58,427)

 

Loss (gain) on extinguishment of debt, net

 

-

 

 

584

 

 

9

 

 

34,872

 

Impairment of assets

 

9,705

 

 

-

 

 

24,019

 

 

2,220

 

Other expenses

 

-

 

 

-

 

 

3,161

 

 

10,583

 

 

Total expenses

 

885,299

 

 

782,499

 

 

2,630,773

 

 

2,318,210

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

 

 

 

 

 

 

 

 

 

 

 

and income from unconsolidated entities

 

193,834

 

 

196,498

 

 

572,065

 

 

512,132

Income tax (expense) benefit

 

305

 

 

3,344

 

 

2,543

 

 

(3,769)

Income (loss) from unconsolidated entities

 

(1,749)

 

 

(2,631)

 

 

(7,528)

 

 

(18,231)

Income (loss) from continuing operations

 

192,390

 

 

197,211

 

 

567,080

 

 

490,132

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) on real estate dispositions, net

 

162,351

 

 

2,046

 

 

163,881

 

 

249,002

Net income

 

354,741

 

 

199,257

 

 

730,961

 

 

739,134

Less:

Preferred stock dividends

 

16,352

 

 

16,352

 

 

49,055

 

 

49,055

Less:

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

 

3,479

 

 

862

 

 

2,553

 

 

4,666

Net income (loss) attributable to common stockholders

$

334,910

 

$

182,043

 

$

679,353

 

$

685,413

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

358,932

 

 

351,765

 

 

356,911

 

 

346,425

 

Diluted

 

361,237

 

 

353,107

 

 

358,752

 

 

347,547

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

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

$

0.93

 

$

0.52

 

$

1.90

 

$

1.98

 

Net income (loss) attributable to common stockholders*

$

0.93

 

$

0.52

 

$

1.90

 

$

1.98

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

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

$

0.93

 

$

0.52

 

$

1.89

 

$

1.97

 

Net income (loss) attributable to common stockholders*

$

0.93

 

$

0.52

 

$

1.89

 

$

1.97

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared and paid per common share

$

0.86

 

$

0.825

 

$

2.58

 

$

2.475

 

* 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,

 

 

 

2016

 

2015

 

2016

 

2015

Net income

$

354,741

 

$

199,257

 

$

730,961

 

$

739,134

 

 

 

 

 

 

 

 

  

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Unrecognized gain (loss) on equity investments

 

5,908

 

 

(3,086)

 

 

(5,252)

 

 

(18,186)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on cash flow hedges

 

401

 

 

462

 

 

1,371

 

 

(1,235)

 

Unrecognized actuarial gain (loss)

 

(2)

 

 

-

 

 

-

 

 

-

 

Foreign currency translation gain (loss)

 

516

 

 

(25,198)

 

 

(48,496)

 

 

(22,011)

Total other comprehensive income (loss)

 

6,823

 

 

(27,822)

 

 

(52,377)

 

 

(41,432)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

361,564

 

 

171,435

 

 

678,584

 

 

697,702

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

 

1,846

 

 

(14,271)

 

 

13,117

 

 

(19,416)

Total comprehensive income (loss) attributable to common stockholders

$

359,718

 

$

185,706

 

$

665,467

 

$

717,118

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

354,811

$

16,478,300

$

(44,372)

$

3,725,772

$

(6,846,056)

$

(88,243)

$

4,098

$

585,325

$

15,175,885

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

 

 

 

728,408

 

 

 

 

 

 

 

7,363

 

735,771

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

(62,941)

 

 

 

10,564

 

(52,377)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

683,394

Net change in noncontrolling interests

 

 

 

  

 

(45,765)

 

 

 

 

 

 

 

 

 

 

 

(128,859)

 

(174,624)

Amounts related to stock incentive plans, net of forfeitures

 

 

 

689

 

38,888

 

(7,822)

 

 

 

 

 

 

 

(1,285)

 

 

 

30,470

Proceeds from issuance of common stock

 

 

 

7,203

 

512,139

 

 

 

 

 

 

 

 

 

 

 

 

 

519,342

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Option compensation expense

  

  

 

 

 

 

 

 

 

 

 

 

 

 

 

207

 

 

 

207

Cash dividends paid:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock cash dividends

 

 

 

 

 

 

 

 

 

 

 

(921,381)

 

 

 

 

 

 

 

(921,381)

 

Preferred stock cash dividends

 

 

 

 

 

 

 

 

 

 

 

(49,055)

 

 

 

 

 

 

 

(49,055)

Balances at end of period

$

1,006,250

$

362,703

$

16,983,562

$

(52,194)

$

4,454,180

$

(7,816,492)

$

(151,184)

$

3,020

$

474,393

$

15,264,238

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 stock incentive plans, net of forfeitures

 

 

 

125

 

21,855

 

(9,095)

 

 

 

 

 

 

 

(2,097)

 

 

 

10,788

Proceeds from issuance of common stock

 

 

 

22,733

 

1,618,349

 

 

 

 

 

 

 

 

 

 

 

 

 

1,641,082

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

 

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,

 

 

 

  

2016

 

2015

Operating activities:  

 

 

 

 

 

Net income  

$

730,961

 

$

739,134

Adjustments to reconcile net income to  

 

 

 

 

 

 

net cash provided from (used in) operating activities:  

 

 

 

 

 

 

 

Depreciation and amortization  

 

673,326

 

 

603,431

 

 

Other amortization expenses  

 

5,419

 

 

3,867

 

 

Impairment of assets  

 

24,019

 

 

2,220

 

 

Stock-based compensation expense  

 

20,618

 

 

25,655

 

 

Loss (gain) on derivatives, net  

 

(2,516)

 

 

(58,427)

 

 

Loss (gain) on extinguishment of debt, net  

 

9

 

 

34,872

 

 

Loss (income) from unconsolidated entities

 

7,528

 

 

18,231

 

 

Rental income in excess of cash received  

 

(60,212)

 

 

(86,739)

 

 

Amortization related to above (below) market leases, net  

 

362

 

 

2,863

 

 

Loss (gain) on sales of properties, net  

 

(163,881)

 

 

(249,002)

 

 

Distributions by unconsolidated entities

 

473

 

 

435

 

 

Increase (decrease) in accrued expenses and other liabilities  

 

71,797

 

 

42,759

 

 

Decrease (increase) in receivables and other assets  

 

(35,557)

 

 

(42,975)

Net cash provided from (used in) operating activities  

 

1,272,346

 

 

1,036,324

 

 

 

  

 

 

 

 

 

Investing activities:  

 

 

 

 

 

 

Cash disbursed for acquisitions  

 

(1,448,126)

 

 

(2,489,345)

 

Cash disbursed for capital improvements to existing properties

 

(141,200)

 

 

(122,640)

 

Cash disbursed for construction in progress

 

(325,372)

 

 

(165,311)

 

Capitalized interest  

 

(12,109)

 

 

(6,311)

 

Investment in real estate loans receivable  

 

(105,496)

 

 

(445,985)

 

Other investments, net of payments  

 

(88,398)

 

 

(129,311)

 

Principal collected on real estate loans receivable  

 

225,092

 

 

71,111

 

Contributions to unconsolidated entities  

 

(41,747)

 

 

(139,295)

 

Distributions by unconsolidated entities  

 

72,564

 

 

139,557

 

Proceeds from (payments on) derivatives  

 

56,842

 

 

103,615

 

Decrease (increase) in restricted cash  

 

(21,218)

 

 

10,512

 

Proceeds from sales of real property  

 

538,032

 

 

667,761

Net cash provided from (used in) investing activities  

 

(1,291,136)

 

 

(2,505,642)

 

 

 

  

 

 

 

 

 

Financing activities:  

 

 

 

 

 

 

Net increase (decrease) under unsecured credit facilities  

 

515,000

 

 

490,000

 

Proceeds from issuance of senior unsecured notes  

 

693,560

 

 

743,407

 

Payments to extinguish senior unsecured notes  

 

(400,000)

 

 

(534,546)

 

Net proceeds from the issuance of secured debt  

 

193,541

 

 

222,612

 

Payments on secured debt  

 

(471,898)

 

 

(469,455)

 

Net proceeds from the issuance of common stock  

 

520,067

 

 

1,641,981

 

Decrease (increase) in deferred loan costs  

 

(18,831)

 

 

(7,834)

 

Contributions by noncontrolling interests(1)

 

142,381

 

 

163,105

 

Distributions to noncontrolling interests(1)

 

(106,076)

 

 

(27,439)

 

Acquisitions of noncontrolling interests

 

-

 

 

(3,154)

 

Cash distributions to stockholders  

 

(970,436)

 

 

(901,618)

 

Other financing activities

 

(1,119)

 

 

(27,114)

Net cash provided from (used in) financing activities  

 

96,189

 

 

1,289,945

Effect of foreign currency translation on cash and cash equivalents

 

(9,690)

 

 

(2,311)

Increase (decrease) in cash and cash equivalents  

 

67,709

 

 

(181,684)

Cash and cash equivalents at beginning of period  

 

360,908

 

 

473,726

Cash and cash equivalents at end of period  

$

428,617

 

$

292,042

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

Interest paid

$

360,421

 

$

334,511

 

Income taxes paid

 

7,070

 

 

11,489

 

 

 

 

 

 

 

 

 

(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., 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 interests in 1,464 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. During the three months ended March 31, 2016, we determined that an immaterial portion of our noncontrolling interests related to a 2015 transaction was misclassified in permanent equity rather than temporary equity based on a redemption feature of the partnership agreement and we have corrected the $114,714,000 misclassification by recording the change in the consolidated statement of equity for the nine months ended September 30, 2016.  Operating results for the nine months ended September 30, 2016 are not necessarily an indication of the results that may be expected for the year ending December 31, 2016. 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, 2015.

     New Accounting Standards     

     In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. 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”, 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.  We adopted ASU 2015-02 on January 1, 2016.  This guidance did not have a significant impact on our consolidated financial statements.

     In September 2015, the FASB issued ASU No. 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments” to simplify the accounting for business combinations, specifically as it relates to measurement-period adjustments.  Acquiring entities in a business combination must recognize measurement-period adjustments in the reporting period in which the adjustment amounts are determined.  Also, ASU 2015-16 requires entities to present separately on the face of the income statement (or disclose in the notes to the financial statements) the portion of the amount recorded in the current period earnings, by line item, that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date.  We adopted ASU 2015-16 on January 1, 2016. This guidance did not have a significant impact on our consolidated financial statements.

     In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities,” which will require entities to measure their investments at fair value and recognize any changes in fair value in net income unless the investments qualify for the new practicability exception.  The practicability exception will be available for equity investments that do not have readily determinable fair values. ASU 2016-01 is effective for fiscal years and interim periods within those years, beginning after December 15, 2017.  We are currently evaluating the impact that the standard will have on our consolidated financial statements.

     In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which requires lessees to recognize assets and liabilities on their balance sheet related to the rights and obligations created by most leases, while continuing to recognize expenses on their income statements over the lease term.  It will also require disclosures designed to give financial statement users information

8


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

regarding the amount, timing, and uncertainty of cash flows arising from leases.  ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted.  Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements.  We are currently evaluating the impact that the standard will have on our consolidated financial statements.

     In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting”. This standard simplifies the accounting treatment for excess tax benefits and deficiencies, forfeitures, and cash flow considerations related to share-based compensation. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted.  We are currently evaluating the impact of the standard; however, we do not expect its adoption to have a significant impact on our consolidated financial statements.

     In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments”. This standard requires a new forward-looking “expected loss” model to be used for receivables, held-to-maturity debt, loans, and other instruments. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, and early adoption is permitted for fiscal years beginning after December 15, 2018. We are currently evaluating the impact that the standard will have 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, 2015 for information regarding our foreign currency policies.  

 

    Triple-net Activity

 

 

Nine Months Ended

 

(In thousands)

September 30, 2016(1)

September 30, 2015

 

Land and land improvements

 

$

21,713

 

$

64,655

 

Buildings and improvements

 

 

220,274

 

 

727,946

 

Acquired lease intangibles

 

 

2,876

 

 

3,888

 

Restricted cash

 

 

-

 

 

6

 

Receivables and other assets

 

 

-

 

 

60

 

 

Total assets acquired

 

 

244,863

 

 

796,555

 

Accrued expenses and other liabilities  

 

 

(2,145)

 

 

(2,447)

 

 

Total liabilities assumed

 

 

(2,145)

 

 

(2,447)

 

Noncontrolling interests

 

 

(3,162)

 

 

-

 

Non-cash acquisition related activity(2)

 

 

(51,733)

 

 

(2,780)

 

 

Cash disbursed for acquisitions

 

 

187,823

 

 

791,328

 

Construction in progress additions

 

 

133,611

 

 

96,403

 

Less:

Capitalized interest

 

 

(6,263)

 

 

(4,453)

 

 

Foreign currency translation

 

 

(3,179)

 

 

73

 

Cash disbursed for construction in progress

 

 

124,169

 

  

92,023

 

Capital improvements to existing properties

 

 

21,447

 

 

35,042

 

 

Total cash invested in real property, net of cash acquired

 

$

333,439

 

$

918,393

 

 

 

 

 

 

 

 

 

 

(1) Includes acquisitions with an aggregate purchase price of $183,547,000 for which the allocation of the purchase price consideration is preliminary and subject to change.

(2) For the nine months ended September 30, 2016, $45,044,000 relates to the acquisition of assets previously financed as real estate loans receivable and $6,630,000 previously financed as equity investments.

 

 

 

 

 

 

 

 

 

9


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

     Seniors Housing Operating Activity

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

(In thousands)

September 30, 2016(1)

September 30, 2015

 

Land and land improvements

 

$

122,649

 

$

98,444

 

Building and improvements

 

 

1,108,195

 

 

1,229,017

 

Acquired lease intangibles

 

 

90,771

 

 

74,091

 

Restricted cash

 

 

137

 

 

5,567

 

Receivables and other assets

 

 

2,179

 

 

23,928

 

  

Total assets acquired(2)

 

 

1,323,931

 

 

1,431,047

 

Secured debt

 

 

(49,381)

 

 

(234,597)

 

Accrued expenses and other liabilities  

 

 

(12,328)

 

 

(19,016)

 

 

Total liabilities assumed

 

 

(61,709)

 

 

(253,613)

 

Noncontrolling interests

 

 

(1,089)

 

 

(86,842)

 

Non-cash acquisition related activity(3)

 

 

(17,477)

 

 

-

 

 

Cash disbursed for acquisitions

 

 

1,243,656

 

 

1,090,592

 

Construction in progress additions

 

 

139,160

 

 

39,493

 

Less:

Capitalized interest

 

 

(3,923)

 

 

(1,116)

 

 

Foreign currency translation

 

 

(5,953)

 

 

(1,345)

 

Cash disbursed for construction in progress

 

 

129,284

 

  

37,032

 

Capital improvements to existing properties

 

 

84,444

 

 

61,911

 

 

Total cash invested in real property, net of cash acquired

 

$

1,457,384

 

$

1,189,535

 

 

 

 

 

 

 

 

 

 

(1) Includes acquisitions with an aggregate purchase price of $1,194,765,000 for which the allocation of the purchase price consideration is preliminary and subject to change.

(2) Excludes $135,000 and $3,390,000 of cash acquired during the nine months ended September 30, 2016 and 2015, respectively.

(3) Relates to the acquisition of assets previously financed as equity investments.

 

 

 

 

 

 

 

 

 

      Outpatient Medical Activity

 

 

Nine Months Ended

 

(In thousands)

September 30, 2016

 

September 30, 2015

 

Land and land improvements

 

$

1,466

 

$

47,756

 

Buildings and improvements

 

 

27,272

 

 

723,574

 

Acquired lease intangibles

 

 

4,592

 

 

19,373

 

  

Total assets acquired(1)

 

 

33,330

 

  

790,703

 

Secured debt

 

 

-

 

 

(112,000)

 

Accrued expenses and other liabilities

 

 

(1,670)

 

 

(2,743)

 

 

Total liabilities assumed  

 

 

 (1,670)  

 

 

 (114,743)  

 

Noncontrolling interests

 

 

-

 

 

(68,535)

 

Non-cash acquisition activity(2)

 

 

(15,013)

 

 

-

 

 

Cash disbursed for acquisitions

 

 

16,647

 

 

607,425

 

Construction in progress additions

 

 

81,843

 

 

38,919

 

Less:

Capitalized interest

 

 

(2,588)

 

 

(742)

 

 

Accruals(3)

 

 

(7,336)

 

 

(1,921)

 

Cash disbursed for construction in progress

 

 

71,919

 

  

36,256

 

Capital improvements to existing properties

 

 

35,309

 

 

25,687

 

 

Total cash invested in real property

 

$

123,875

 

$

669,368

 

 

 

 

 

 

 

 

 

 

(1) Excludes $0 and $4,372,000 of cash acquired during the nine months ended September 30, 2016 and 2015, respectively.

(2) Relates to an acquisition of assets previously financed as a real estate loan. Refer to Note 6 for additional information.

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

 

 

 

 

 

 

 

 

 

 

 

10


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

     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, 2016

 

September 30, 2015

 

Development projects:

 

 

 

 

 

 

 

 

 

 

Triple-net

  

 

$

24,535

 

 

$

85,902

 

 

Seniors housing operating

 

 

 

-

 

 

 

19,869

 

 

Outpatient medical

 

 

 

44,113

 

 

 

16,592

 

Total development projects

 

 

 

68,648

 

 

 

122,363

 

Expansion projects

 

 

 

2,879

 

 

 

38,808

Total construction in progress conversions

  

 

$

71,527

 

 

$

161,171

 

 

 

 

 

 

 

 

 

 

 

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, 2016

 

December 31, 2015

Assets:

  

 

 

 

 

 

 

In place lease intangibles

  

$

1,272,177

 

$

1,179,537

 

Above market tenant leases

  

 

62,544

 

 

67,529

 

Below market ground leases

  

 

62,257

 

 

80,224

 

Lease commissions

  

 

26,054

 

 

23,295

 

Gross historical cost

  

 

1,423,032

 

 

1,350,585

 

Accumulated amortization

  

 

(971,883)

 

 

(881,096)

 

Net book value

  

$

451,149

 

$

469,489

 

 

  

 

 

 

 

 

 

Weighted-average amortization period in years

  

 

14.0

 

 

13.4

 

 

  

 

 

 

 

 

Liabilities:

  

 

 

 

 

 

 

Below market tenant leases

  

$

93,507

 

$

93,089

 

Above market ground leases

  

 

8,107

 

 

7,907

 

Gross historical cost

  

 

101,614

 

 

100,996

 

Accumulated amortization

  

 

(51,727)

 

 

(46,048)

 

Net book value

  

$

49,887

 

$

54,948

 

 

  

 

 

 

 

 

 

Weighted-average amortization period in years

  

 

15.4

 

 

14.5

 

 

 

 

 

 

 

 

     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,

  

 

2016

 

2015

 

2016

 

2015

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

 

$

278

 

$

(1,684)

 

$

569

 

$

(1,901)

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

 

 

(309)

 

 

(308)

 

 

(931)

 

 

(962)

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

 

 

(30,137)

 

 

(26,137)

 

 

(95,610)

 

 

(82,434)

 

 

 

 

 

 

 

 

 

 

 

 

 

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

11


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

thousands):

 

 

 

 

 

 

 

 

 

 

Assets

 

 

Liabilities

2016

 

$

45,156

 

$

1,810

2017

 

 

122,892

 

 

6,819

2018

 

 

70,566

 

 

6,234

2019

 

 

29,877

 

 

5,825

2020

 

 

22,830

 

 

5,344

Thereafter

 

 

159,828

 

 

23,855

Total

 

$

451,149

 

$

49,887

 

 

 

 

 

 

 

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.  Of our total sales proceeds, $27,803,000 was deposited in an Internal Revenue Code Section 1031 exchange escrow account with a qualified intermediary.  During the nine months ended September 30, 2016 and 2015, we recorded impairment charges on certain held-for-sale triple-net properties as the fair values less estimated costs to sell exceeded our carrying values. The following is a summary of our real property disposition activity for the periods presented (in thousands):

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30, 2016

September 30, 2015

Real estate dispositions:

 

 

 

 

 

 

 

Triple-net

 

$

295,365

 

$

246,116

 

Outpatient medical

 

 

78,786

 

 

 166,919 (1)

 

Land parcels

 

 

-

 

 

5,724

 

Total dispositions

 

 

374,151

 

 

418,759

Gain (loss) on real estate dispositions, net

 

 

163,881

 

 

249,002

Proceeds from real estate dispositions

 

$

538,032

 

$

667,761

 

 

 

 

 

 

 

 

(1) 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”, 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,

 

 

 

2016

 

2015

 

2016

 

2015

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

31,966

 

$

36,626

 

$

99,057

 

$

113,950

Expenses:

 

  

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

  

4,939

 

 

7,282

 

 

16,697

 

 

23,594

 

Property operating expenses

 

  

1,476

 

 

1,695

 

 

4,411

 

 

4,944

 

Provision for depreciation

 

  

4,604

 

 

9,119

 

 

20,873

 

 

31,568

 

Total expenses

 

 

11,019

 

 

18,096

 

 

41,981

 

 

60,106

Income (loss) from real estate dispositions, net

 

$

20,947

 

$

18,530

 

$

57,076

 

$

53,844

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6. Real Estate Loans Receivable

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

  

12


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 2016

 

September 30, 2015

 

 

 

 

 

Outpatient

 

 

 

 

 

 

Outpatient

 

 

 

 

 

 

Triple-net

 

Medical

 

Totals

 

Triple-net

 

Medical

 

Totals

Advances on real estate loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in new loans

 

$

8,223

 

$

-

 

$

8,223

 

$

392,278

 

$

-

 

$

392,278

 

Draws on existing loans

 

 

94,622

 

 

2,651

 

 

97,273

 

 

51,422

 

 

2,285

 

 

53,707

 

Net cash advances on real estate loans

 

 

102,845

 

 

2,651

 

 

105,496

 

 

443,700

 

 

2,285

 

 

445,985

Receipts on real estate loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan payoffs

 

 

251,293

 

 

27,303

 

 

278,596

 

 

52,088

 

 

-

 

 

52,088

 

Principal payments on loans

 

 

6,553

 

 

-

 

 

6,553

 

 

19,023

 

 

-

 

 

19,023

 

   Sub-total

 

 

257,846

 

 

27,303

 

 

285,149

 

 

71,111

 

 

-

 

 

71,111

 

Less: Non-cash activity

 

 

(45,044)

 

 

(15,013)

 

 

(60,057)

 

 

-

 

 

-

 

 

-

 

Net cash receipts on real estate loans

 

 

212,802

 

 

12,290

 

 

225,092

 

 

71,111

 

 

-

 

 

71,111

Net cash advances (receipts) on real estate loans

 

 

(109,957)

 

 

(9,639)

 

 

(119,596)

 

 

372,589

 

 

2,285

 

 

374,874

Change in balance due to foreign currency translation

 

 

(9,819)

 

 

-

 

 

(9,819)

 

 

(2,131)

 

 

-

 

 

(2,131)

Net change in real estate loans receivable

 

$

(164,820)

 

$

(24,652)

 

$

(189,472)

 

$

370,458

 

$

2,285

 

$

372,743

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

We recorded no provision for loan losses during the nine months ended September 30, 2016.  At September 30, 2016, 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, 2016

 

December 31, 2015

 

Triple-net

10% to 49%

 

$

24,499

 

$

36,351

 

Seniors housing operating

10% to 50%

 

 

447,987

 

 

499,537

 

Outpatient medical

43%

 

 

6,896

 

 

6,393

 

Total

 

 

$

479,382

 

$

542,281

 

 

 

 

 

 

 

 

 

 

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

 

 

     At September 30, 2016, the aggregate unamortized basis difference of our joint venture investments of $150,644,000 is primarily attributable to the difference between the amount for which we purchase our interest in the entity, including transaction costs, and the historical carrying value of the net assets of the entity.  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, 2016, 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

 

185

 

$

293,406

 

16%

 

Sunrise Senior Living(3)

 

151

 

 

234,313

 

13%

 

Brookdale Senior Living

 

148

 

 

126,824

 

7%

 

Revera(3)

 

97

 

 

112,211

 

6%

 

Benchmark Senior Living  

 

49

 

 

73,524

 

4%

 

Remaining portfolio  

 

769

 

 

980,412

 

54%

 

Totals  

 

1,399

 

$

1,820,690

 

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 in both our triple-net and seniors housing operating segments.

(2) NOI with our top five relationships comprised 46% of total NOI for the year ending December 31, 2015.

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

 

 

 

 

 

 

 

 

 

9. Borrowings Under Credit Facilities and Related Items

     At September 30, 2016, we had a primary unsecured credit facility with a consortium of 29 banks that includes a $3,000,000,000 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, in the aggregate, 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 $1,000,000,000 in alternate currencies (none outstanding at September 30, 2016).  Borrowings under the unsecured revolving credit facility are subject to interest payable at the applicable margin over LIBOR interest rate (1.43% at September 30, 2016). The applicable margin is based on certain of our debt ratings and was 0.90% at September 30, 2016.  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, 2016.  The term credit facilities mature on May 13, 2021. The revolving credit facility is scheduled to mature on May 13, 2020 and can be extended for two successive terms of six months each 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,

 

 

 

2016

 

2015

 

2016

 

2015

Balance outstanding at quarter end(1)

 

$

1,350,000

 

$

490,000

 

$

1,350,000

 

$

490,000

Maximum amount outstanding at any month end

 

$

1,560,000

 

$

490,000

 

$

1,560,000

 

$

535,000

Average amount outstanding (total of daily

 

  

 

 

  

 

 

  

 

 

  

 

 

principal balances divided by days in period)

 

$

1,050,217

 

$

298,370

 

$

782,427

 

$

402,619

Weighted average interest rate (actual interest

 

  

 

 

 

 

 

 

 

 

 

 

 

expense divided by average borrowings outstanding)

 

  

1.44%

 

 

1.16%

 

 

1.35%

 

 

1.17%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) As of September 30, 2016, letters of credit in the aggregate amount of $45,335,000 have been issued, which reduces the borrowing capacity on the unsecured revolving credit facility.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10. Senior Unsecured Notes and Secured Debt

 

     We may repurchase, redeem or refinance 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 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, 2016, 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

 

2016

$

 -     

 

$

76,773

 

$

76,773

 

2017

 

450,000

 

 

556,774

 

 

1,006,774

 

2018

 

450,000

 

 

660,201

 

 

1,110,201

 

2019

 

605,000

 

 

425,991

 

 

1,030,991

 

2020(4)

 

678,746

 

 

176,860

 

 

855,606

 

Thereafter(5,6,7,8,9,10)

 

6,607,196

 

 

1,404,043

 

 

8,011,239

 

Totals

$

8,790,942

 

$

3,300,642

 

$

12,091,584

 

 

 

 

 

 

 

 

 

 

 

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

 

(2) Annual interest rates range from 1.23% to 6.5%.

 

(3) Annual interest rates range from 0.89% to 7.98%.  Carrying value of the properties securing the debt totaled $5,844,048,000 at September 30, 2016.

 

(4) In November 2015, one of our wholly-owned subsidiaries issued and we guaranteed $300,000,000 of Canadian-denominated 3.35% senior unsecured notes due 2020 (approximately $228,746,000 based on the Canadian/U.S. Dollar exchange rate on September 30, 2016).

 

(5) On May 13, 2016, we refinanced the funding on a $250,000,000 Canadian-denominated unsecured term credit facility (approximately $190,621,000 based on the Canadian/U.S. Dollar exchange rate on September 30, 2016).  The loan matures on May 13, 2021 and bears interest at the Canadian Dealer Offered Rate plus 95 basis points (1.83% at September 30, 2016).

 

(6) On May 13, 2016, we refinanced the funding on a $500,000,000 unsecured term credit facility.  The loan matures on May 13, 2021 and bears interest at LIBOR plus 95 basis points (1.48% at September 30, 2016).

 

(7) On November 20, 2013, we completed the sale of £550,000,000 (approximately $715,825,000 based on the Sterling/U.S. Dollar exchange rate in effect on September 30, 2016) of 4.8% senior unsecured notes due 2028.

 

(8) On November 25, 2014, we completed the sale of £500,000,000 (approximately $650,750,000 based on the Sterling/U.S. Dollar exchange rate in effect on September 30, 2016) of 4.5% senior unsecured notes due 2034.

 

(9) 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.

 

(10) In March 2016, we issued $700,000,000 of 4.25% senior unsecured notes due 2026. 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

September 30, 2016

 

September 30, 2015

 

 

 

 

Weighted Avg.

 

 

 

 

Weighted Avg.

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

Beginning balance

 $ 

8,645,758

 

4.237%

 

 $ 

7,817,154

 

4.385%

Debt issued

 

705,000

 

4.228%

 

 

750,000

 

4.000%

Debt extinguished

  

(400,000)

 

3.625%

 

  

(300,000)

 

6.200%

Debt redeemed

 

-

 

0.000%

 

 

(215,965)

 

3.000%

Foreign currency

 

(159,816)

 

4.443%

 

 

(76,649)

 

8.065%

Ending balance

 $ 

8,790,942

 

4.264%

 

 $ 

7,974,540

 

4.210%

 

 

 

 

 

 

 

 

 

 

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

15


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Nine Months Ended

 

 

  

September 30, 2016

 

September 30, 2015

 

 

 

 

 

Weighted Avg.

 

 

 

 

Weighted Avg.

 

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

Beginning balance

 

$

3,478,207

 

4.440%

 

$

2,941,765

 

4.940%

Debt issued

 

 

193,541

 

3.053%

 

 

222,612

 

2.760%

Debt assumed

 

 

47,156

 

4.132%

 

 

339,929

 

3.340%

Debt extinguished

  

 

(416,009)

 

4.986%

 

 

(420,672)

 

4.270%

Foreign currency

 

 

53,636

 

3.631%

 

 

(89,154)

 

3.880%

Principal payments

  

 

(55,889)

 

4.478%

 

 

(48,783)

 

4.850%

Ending balance

 

$

3,300,642

 

4.272%

 

$

2,945,697

 

4.720%

 

 

 

 

 

 

 

 

 

 

 

     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, 2016, 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 $5,555,000 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, 2016 and 2015, we settled certain net investment hedges generating cash proceeds of $56,842,000 and $103,615,000, respectively.  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, 2016

 

December 31, 2015

Derivatives designated as net investment hedges:

 

 

 

 

Denominated in Canadian Dollars

$

900,000

$

1,175,000

Denominated in Pounds Sterling

£

550,000

£

550,000

 

 

 

 

 

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

$

72,000

Denominated in Pounds Sterling

£

63,000

£

60,000

 

 

 

 

 

Derivative instruments not designated:

 

 

 

 

Denominated in Canadian Dollars

$

37,000

$

47,000

Denominated in Pounds Sterling

£

20,100

£

-

 

 

 

 

 

 

 

 

 

 

 

     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

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) on forward exchange contracts recognized in income

 

Interest expense

 

$

3,420

 

$

2,347

 

$

4,789

 

$

6,285

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss (gain) on option exercise(1)

 

Loss (gain) on derivatives, net

 

 

-

 

 

-

 

 

-

 

 

(58,427)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Gain) on release of cumulative translation adjustment related to ineffectiveness on net investment hedge

 

Loss (gain) on derivatives, net

 

 

(2,516)

 

 

-

 

 

(2,516)

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

OCI

 

 

53,421

 

 

174,239

 

 

229,256

 

 

208,854

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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


12. Commitments and Contingencies

     At September 30, 2016, we had ten outstanding letter of credit obligations totaling $88,188,000 and expiring between 2016 and 2018.  At September 30, 2016, we had outstanding construction in progress of $529,471,000 and were committed to providing additional funds of approximately $515,980,000 to complete construction.  Purchase obligations include contingent purchase obligations totaling $18,566,000 which 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, 2016, we had operating lease obligations of $1,109,001,000 relating to certain ground leases and company office space and capital lease obligations of $95,018,000 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, 2016, aggregate future minimum rentals to be received under these noncancelable subleases totaled $74,069,000.

 

13. Stockholders’ Equity

 

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

 

 

 

 

 

 

 

September 30, 2016

 

December 31, 2015

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

 

363,361,460

 

355,594,373

   Outstanding shares

 

362,424,770

 

354,777,670

 

 

 

 

 

     Common Stock. The following is a summary of our common stock issuances during the nine months ended September 30, 2016 and 2015 (dollars in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Issued

 

 

Average Price

 

 

Gross Proceeds

 

 

Net Proceeds

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

 

 

 

 

 

 

 

 

 

 

 

 

2016 Dividend reinvestment plan issuances

 

3,946,821

 

$

 70.51  

 

$

278,578

 

$

278,297

2016 Option exercises

 

137,579

 

 

 50.57  

 

 

6,958

 

 

6,958

2016 Equity shelf program issuances

 

3,119,801

 

 

 75.27  

 

 

237,131

 

 

234,812

2016 Stock incentive plans, net of forfeitures

 

442,899

 

 

 

 

 

-

 

 

-

2016 Totals

 

7,647,100

 

 

 

 

$

522,667

 

$

520,067

 

 

 

 

 

 

 

 

 

 

 

 

     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):

18


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30, 2016

 

September 30, 2015

  

 

Per Share

 

Amount

 

Per Share

 

Amount

Common Stock

 

$

2.5800

 

$

921,381

 

$

2.4750

 

$

852,563

Series I Preferred Stock

 

 

2.4375

 

 

35,039

 

 

2.4375

 

 

35,039

Series J Preferred Stock

 

 

1.2189

 

 

14,016

 

 

1.2189

 

 

14,016

Totals

 

 

 

 

$

970,436

 

 

 

 

$

901,618

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrecognized gains (losses) related to:

 

 

 

 

 

 

 Foreign Currency Translation

 

 

Available for Sale Securities

 

 

Actuarial Losses

 

 

Cash Flow Hedges

 

 

Total

Balance at December 31, 2015

 

$

(85,484)

 

$

-

 

$

(1,343)

 

$

(1,416)

 

$

(88,243)

Other comprehensive income before reclassification adjustments

 

  

(59,060)

 

 

(5,252)

 

 

-

 

 

11

 

 

(64,301)

Reclassification amount to net income

 

 

-

  

 

-

 

 

-

 

 

 1,360 (1)

 

 

1,360

Net current-period other comprehensive income

 

  

(59,060)

 

 

(5,252)

 

 

-

 

 

1,371

 

 

(62,941)

Balance at September 30, 2016

 

$

(144,544)

 

$

(5,252)

 

$

(1,343)

 

$

(45)

 

$

(151,184)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Please see Note 11 for additional information.

 

 

 

 

 

 

 

 

 

 

 

 

 

14. Stock Incentive Plans

     Our 2016 Long-Term Incentive Plan (“2016 Plan”) authorizes up to 10,000,000 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 2016 Plan. The 2016 Plan allows for the issuance of, among other things, stock options, stock appreciation rights, 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 $5,401,000 and $20,618,000 for the three and nine months ended September 30, 2016, respectively, and $5,477,000 and $25,655,000 for the same periods in 2015. 

 

15. Earnings Per Share

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

19


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

  

2016

 

2015

 

2016

 

2015

Numerator for basic and diluted earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

per share - net income (loss) attributable

  

 

 

 

 

 

 

 

 

 

 

 

 

to common stockholders

  

$

334,910

 

$

182,043

 

$

679,353

 

$

685,413

 

 

  

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per

  

 

 

 

 

 

 

 

 

 

 

 

 

share - weighted average shares

  

 

358,932

 

 

351,765

 

 

356,911

 

 

346,425

Effect of dilutive securities:

  

 

 

 

 

 

 

 

 

 

 

 

 

Employee stock options

  

 

128

 

 

114

 

 

119

 

 

155

 

Non-vested restricted shares

  

 

526

 

 

607

 

 

414

 

 

498

 

Redeemable shares

 

 

1,651

 

 

621

 

 

1,308

 

 

207

 

Convertible senior unsecured notes

  

 

-

 

 

-

 

 

-

 

 

262

Dilutive potential common shares

  

 

2,305

 

 

1,342

 

 

1,841

 

 

1,122

Denominator for diluted earnings per

  

 

 

 

 

 

 

 

 

 

 

 

 

share - adjusted weighted average shares

  

 

361,237

 

 

353,107

 

 

358,752

 

 

347,547

 

 

  

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

  

$

0.93

 

$

0.52

 

$

1.90

 

$

1.98

Diluted earnings per share

  

$

0.93

 

$

0.52

 

$

1.89

 

$

1.97

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2015 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.

 

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

 

20


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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 was estimated based on Level 1 publicly available trading prices. The carrying amount of variable rate senior unsecured notes approximates fair value because they 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, 2016

 

December 31, 2015

 

 

 

Carrying Amount

 

Fair Value

 

Carrying Amount

 

Fair Value

Financial assets:

 

  

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans receivable

 

$

498,993

 

$

525,400

 

$

635,492

 

$

663,501

 

Other real estate loans receivable

 

  

131,027

 

 

132,999

 

 

184,000

 

 

185,693

 

Available-for-sale equity investments

 

  

17,527

 

 

17,527

 

 

22,779

 

 

22,779

 

Cash and cash equivalents

 

  

428,617

 

 

428,617

 

 

360,908

 

 

360,908

 

Foreign currency forward contracts

 

  

130,454

 

 

130,454

 

 

129,520

 

 

129,520

 

 

 

  

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

  

 

 

 

 

 

 

 

 

 

 

 

Borrowings under unsecured credit facilities

 

$

1,350,000

 

$

1,350,000

 

$

835,000

 

$

835,000

 

Senior unsecured notes

 

  

8,688,585

 

 

9,823,661

 

 

8,548,055

 

 

9,020,529

 

Secured debt

 

  

3,317,933

 

 

3,509,792

 

 

3,509,142

 

 

3,678,564

 

Foreign currency forward contracts

 

 

615

 

 

615

 

 

-

 

 

-

 

 

 

  

 

 

 

 

 

 

 

 

 

 

Redeemable OP unitholder interests

 

$

123,446

 

$

123,446

 

$

112,029

 

$

112,029

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements as of September 30, 2016

 

 

Total

 

Level 1

 

Level 2

 

Level 3

Available-for-sale equity investments(1)

 

$

17,527

 

$

17,527

 

$

-

 

$

-

Foreign currency forward contracts, net(2)

 

 

129,839

 

 

-

 

 

129,839

 

 

-

Redeemable OP unitholder interests

 

 

123,446

 

 

-

 

 

123,446

 

 

-

 Totals 

 

$

270,812

 

$

17,527

 

$

253,285

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Unrealized gains or losses on equity investments are recorded in accumulated other comprehensive income (loss) at each measurement date. During the year ended December 31, 2015, we recognized an other than temporary impairment charge of $35,648,000 on the Genesis Healthcare stock investment.  Also, see Note 11 for details related to the gain on the derivative asset originally recognized.

(2) Please see Note 11 for additional information.

 

 

 

 

 

 

 

 

 

 

 

 

 

21


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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 resides 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 three operating segments: triple-net, seniors housing operating and outpatient medical.  During the three months ended March 31, 2016, we reclassified four properties previously classified in the triple-net segment to the outpatient medical segment.  Accordingly, the segment information provided in this Note has been reclassified to conform to the current presentation for all periods presented.

     Our triple-net properties include long-term/post-acute care facilities, 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 outpatient medical buildings and, during past years, life science buildings which are aggregated into our outpatient medical reportable segment. Our outpatient medical 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, 2015). The results of operations for all acquisitions described in Note 3 are included in our consolidated results of operations from the acquisition dates and are components of the appropriate segments.  There are no intersegment sales or transfers.

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

22


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2016:

 

 

Triple-net

 

 

Seniors Housing Operating

 

 

Outpatient Medical

 

 

Non-segment / Corporate

 

 

Total

Rental income

 

$

286,226

 

$

-

 

$

134,926

 

$

-

 

$

421,152

Resident fees and services

 

 

-

 

 

630,017

 

 

-

 

 

-

 

 

630,017

Interest income

 

 

23,017

 

 

1,054

 

 

1,009

 

 

-

 

 

25,080

Other income

 

 

1,621

 

 

716

 

 

358

 

 

189

 

 

2,884

Total revenues

 

 

310,864

 

 

631,787

 

 

136,293

 

 

189

 

 

1,079,133

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

-

 

 

432,292

 

 

41,388

 

 

-

 

 

473,680

Net operating income from continuing operations

 

 

310,864

 

 

199,495

 

 

94,905

 

 

189

 

 

605,453

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

985

 

 

39,927

 

 

3,986

 

 

84,801

 

 

129,699

Loss (gain) on derivatives, net

 

 

-

 

 

-

 

 

-

 

 

(2,516)

 

 

(2,516)

Depreciation and amortization

 

 

74,296

 

 

97,210

 

 

46,555

 

 

-

 

 

218,061

General and administrative

 

 

-

 

 

-

 

 

-

 

 

36,828

 

 

36,828

Transaction costs

 

 

1,613

 

 

18,083

 

 

146

 

 

-

 

 

19,842

Impairment of assets

 

 

5,070

 

 

-

 

 

4,635

 

 

-

 

 

9,705

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

 

 

228,900

 

 

44,275

 

 

39,583

 

 

(118,924)

 

 

193,834

Income tax expense

 

 

(896)

 

 

515

 

 

417

 

 

269

 

 

305

(Loss) income from unconsolidated entities

 

 

1,998

 

 

(3,891)

 

 

144

 

 

-

 

 

(1,749)

Income (loss) from continuing operations

 

 

230,002

 

 

40,899

 

 

40,144

 

 

(118,655)

 

 

192,390

Gain (loss) on real estate dispositions, net

 

 

163,579

 

 

-

 

 

(1,228)

 

 

-

 

 

162,351

Net income (loss)

 

$

393,581

 

$

40,899

 

$

38,916

 

$

(118,655)

 

$

354,741

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

11,988,519

 

$

12,580,092

 

$

4,899,012

 

$

388,716

 

$

29,856,339

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2015:

 

 

Triple-net

 

 

Seniors Housing Operating

 

 

Outpatient Medical

 

 

Non-segment / Corporate

 

 

Total

Rental income

 

$

277,614

 

$

-

 

$

131,676

 

$

-

 

$

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

 

 

298,037

 

 

547,081

 

 

133,857

 

 

22

 

 

978,997

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

-

 

 

368,050

 

 

40,653

 

 

-

 

 

408,703

Net operating income from continuing operations

 

 

298,037

 

 

179,031

 

 

93,204

 

 

22

 

 

570,294

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

11,347

 

 

30,990

 

 

6,811

 

 

71,982

 

 

121,130

Depreciation and amortization

 

 

72,589

 

 

87,306

 

 

45,904

 

 

-

 

 

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

 

 

212,375

 

 

53,105

 

 

40,651

 

 

(109,633)

 

 

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

 

 

215,313

 

 

50,713

 

 

40,952

 

 

(109,767)

 

 

197,211

Gain (loss) on real estate dispositions, net

 

 

2,155

 

 

-

 

 

(109)

 

 

-

 

 

2,046

Net income (loss)

 

$

217,468

 

$

50,713

 

$

40,843

 

$

(109,767)

 

$

199,257

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2016:

 

 

Triple-net

 

 

Seniors Housing Operating

 

 

Outpatient Medical

 

 

Non-segment / Corporate

 

 

Total

Rental income

 

$

857,184

 

$

-

 

$

402,258

 

$

-

 

$

1,259,442

Resident fees and services

 

 

-

 

 

1,847,386

 

 

-

 

 

-

 

 

1,847,386

Interest income

 

 

67,842

 

 

3,126

 

 

3,307

 

 

-

 

 

74,275

Other income

 

 

4,317

 

 

11,889

 

 

4,824

 

 

705

 

 

21,735

Total revenues

 

 

929,343

 

 

1,862,401

 

 

410,389

 

 

705

 

 

3,202,838

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

-

 

 

1,259,182

 

 

122,966

 

 

-

 

 

1,382,148

Net operating income from continuing operations

 

 

929,343

 

 

603,219

 

 

287,423

 

 

705

 

 

1,820,690

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

8,608

 

 

123,445

 

 

15,132

 

 

247,800

 

 

394,985

Loss (gain) on derivatives, net

 

 

-

 

 

-

 

 

-

 

 

(2,516)

 

 

(2,516)

Depreciation and amortization

 

 

229,906

 

 

301,354

 

 

142,066

 

 

-

 

 

673,326

General and administrative

 

 

-

 

 

-

 

 

-

 

 

122,434

 

 

122,434

Transaction costs

 

 

5,760

 

 

25,259

 

 

2,188

 

 

-

 

 

33,207

Loss (gain) on extinguishment of debt, net

 

 

97

 

 

(88)

 

 

-

 

 

-

 

 

9

Impairment of assets

 

 

19,384

 

 

-

 

 

4,635

 

 

-

 

 

24,019

Other expenses

 

 

-

 

 

-

 

 

-

 

 

3,161

 

 

3,161

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

 

 

665,588

 

 

153,249

 

 

123,402

 

 

(370,174)

 

 

572,065

Income tax expense

 

 

(1,425)

 

 

5,304

 

 

(59)

 

 

(1,277)

 

 

2,543

(Loss) income from unconsolidated

 entities 

 

 

8,097

 

 

(15,713)

 

 

88

 

 

-

 

 

(7,528)

Income (loss) from continuing operations

 

 

 

672,260

 

 

142,840

 

 

123,431

 

 

(371,451)

 

 

567,080

Gain (loss) on real estate dispositions, net

 

 

165,109

 

 

-

 

 

(1,228)

 

 

-

 

 

163,881

Net income (loss)

 

$

837,369

 

$

142,840

 

$

122,203

 

$

(371,451)

 

$

730,961

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2015:

 

 

Triple-net

 

 

Seniors Housing Operating

 

 

Outpatient Medical

 

 

Non-segment / Corporate

 

 

Total

Rental income

 

$

812,179

 

$

-

 

$

373,323

 

$

-

 

$

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

 

 

870,345

 

 

1,581,445

 

 

378,469

 

 

83

 

 

2,830,342

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

-

 

 

1,067,127

 

 

116,392

 

 

-

 

 

1,183,519

Net operating income from continuing operations

 

 

870,345

 

 

514,318

 

 

262,077

 

 

83

 

 

1,646,823

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

21,083

 

 

104,283

 

 

21,192

 

 

214,513

 

 

361,071

Loss (gain) on derivatives, net

 

 

(58,427)

 

 

-

 

 

-

 

 

-

 

 

(58,427)

Depreciation and amortization

 

 

212,537

 

 

252,785

 

 

138,109

 

 

-

 

 

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

 

 

637,221

 

 

133,640

 

 

101,622

 

 

(360,351)

 

 

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

 

 

640,301

 

 

106,110

 

 

104,939

 

 

(361,218)

 

 

490,132

Gain (loss) on real estate dispositions, net

 

 

56,251

 

 

-

 

 

192,751

 

 

-

 

 

249,002

Net income (loss)

 

$

696,552

 

$

106,110

 

$

297,690

 

$

(361,218)

 

$

739,134

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2016

 

 

September 30, 2015

 

 

September 30, 2016

 

 

September 30, 2015

Revenues:

 

 

Amount

%

 

 

Amount

%

 

 

Amount

%

 

 

Amount

%

United States

 

$

874,050

81.0%

 

$

793,429

81.0%

 

$

2,581,533

80.7%

 

$

2,309,596

81.6%

United Kingdom

 

 

95,068

8.8%

 

 

106,372

10.9%

 

 

295,203

9.1%

 

 

301,718

10.7%

Canada

 

 

110,015

10.2%

 

 

79,196

8.1%

 

 

326,102

10.2%

 

 

219,028

7.7%

Total

 

$

1,079,133

100.0%

 

$

978,997

100.0%

 

$

3,202,838

100.0%

 

$

2,830,342

100.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

 

December 31, 2015

 

 

 

 

 

 

 

 

Assets:

 

 

Amount

%

 

 

Amount

%

 

 

 

 

 

 

 

 

United States

 

$

24,600,436

82.4%

 

$

25,995,793

89.6%

 

 

 

 

 

 

 

 

United Kingdom

 

 

2,715,817

9.1%

 

 

1,741,973

6.0%

 

 

 

  

 

 

 

 

Canada

 

 

2,540,086

8.5%

 

 

1,286,079

4.4%

 

 

 

 

 

 

 

 

Total

 

$

29,856,339

100.0%

 

$

29,023,845

100.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 taxes 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 provision for income taxes for the three and nine months ended September 30, 2016 and 2015, 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, 2012 and subsequent years and by state taxing authorities for the year ended December 31, 2011 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 &

25


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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.  

  

 

19. Variable Interest Entities

 

     We have entered into joint ventures to own certain seniors housing and outpatient medical assets which are deemed to be variable interest entities (“VIE”).   We have concluded that we are the primary beneficiary of these VIE’s based on a combination of operational control of the joint venture and the rights to receive residual returns or the obligation to absorb losses arising from the joint ventures.  Except for capital contributions associated with the initial joint venture formations, the joint ventures have been and are expected to be funded from the ongoing operations of the underlying properties.  Accordingly, such joint ventures have been consolidated, and the table below summarizes the balance sheets of consolidated VIE’s in the aggregate (in thousands):

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

 

December 31, 2015

Assets

 

 

 

 

 

 

 

 

Net real property owned

 

$

997,442

 

 

$

453,889

 

Cash and cash equivalents

 

 

11,124

 

 

 

8,759

 

Receivables and other assets

 

 

13,436

 

 

 

8,082

 

Total assets(1)

 

$

1,022,002

 

 

$

470,730

 

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

 

 

Secured debt

 

$

450,944

 

 

$

147,021

 

Accrued expenses and other liabilities

 

 

15,460

 

 

 

7,732

 

Redeemable noncontrolling interests

 

 

77,034

 

 

 

70,090

 

Total equity

 

 

478,564

 

 

 

245,887

 

Total liabilities and equity

 

$

1,022,002

 

 

$

470,730

 

 

 

 

 

 

 

 

 

(1) Note that assets of the consolidated variable interest entities can only be used to settle obligations relating to such variable interest entities.  Liabilities of the consolidated variable interest entities represent claims against the specific assets of the variable interest entities.

 

 

 

 

 

 

 

 

 

20. Subsequent Events

 

     On November 1, 2016, we completed a disposition of properties leased to Genesis Healthcare generating approximately $1.1 billion in proceeds.  These assets did not meet held for sale classification at September 30, 2016 due to the execution risk associated with the transaction.

  

 

26


 

EXECUTIVE SUMMARY

 

 

 

 

     Company Overview

     Business Strategy

     Capital Market Outlook

     Key Transactions in 2016

     Key Performance Indicators, Trends and Uncertainties

     Corporate Governance

28

28

29

29

30

32

 

 

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

 

 

 

     Sources and Uses of Cash

     Off-Balance Sheet Arrangements

     Contractual Obligations

     Capital Structure

33

33

34

34

 

 

 

 

RESULTS OF OPERATIONS

 

 

 

 

     Summary

     Triple-net

     Seniors Housing Operating

     Outpatient Medical

     Non-Segment/Corporate

35

35

37

39

42

 

 

 

 

OTHER

 

 

 

 

     Non-GAAP Financial Measures

     Other Disclosures

     Critical Accounting Policies

43

48

53

 

     Cautionary Statement Regarding Forward-Looking Statements

54

 

 

 

 

 

 

 

 

 

 

 

 

 

  

27


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. 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, 2015, 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, 2016 (dollars in thousands):

  

 

 

 

 

Percentage of

 

Number of

 

Type of Property

NOI(1)

 

NOI

 

Properties

 

Triple-net

$

310,864

 

51.3%

 

735

 

Seniors housing operating

 

199,495

 

33.0%

 

405

 

Outpatient medical

 

94,905

 

15.7%

 

259

 

Totals

$

605,264

 

100.0%

 

1,399

 

 

 

 

 

 

 

 

 

(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.

28


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

 

 

     For the nine months ended September 30, 2016, rental income and resident fees and services represented 39% and 58%, 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, 2016, we had $428,617,000 of cash and cash equivalents, $83,137,000 of restricted cash and $1,604,665,000 of available borrowing capacity under our primary unsecured credit facility.

  

Capital Market Outlook

     We believe the capital markets remain supportive of our investment strategy.  For the 21 months ended September 30, 2016, we raised $4,492,991,000 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 $4,819,684,000 during 2015 and $2,129,447,000 during the nine months ended September 30, 2016.  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 2016

     Capital.   In March 2016, we issued $700,000,000 of 4.25% senior unsecured notes due 2026, generating approximately $688,560,000 of net proceeds.  In May 2016, we closed on a new primary unsecured credit facility that includes a $3,000,000,000 unsecured revolving credit facility, a $500,000,000 unsecured term credit facility and a $250,000,000 Canadian-denominated unsecured term credit facility plus an option 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, in the aggregate, and the $250,000,000 Canadian-denominated unsecured term credit facility by up to an additional $250,000,000.  The facility also allows us to borrow up to $1,000,000,000 in alternate currencies.  Based on our current credit ratings, the unsecured revolving credit facility is priced at 0.90% over LIBOR with a 0.15% annual facility fee and the unsecured term credit facilities are priced at 0.95% over LIBOR for the U.S. tranche and CDOR for the Canadian tranche.  The unsecured term credit facilities mature on May 13, 2021 and the unsecured revolving credit facility matures on May 13, 2020. The unsecured revolving credit facility can be extended for two successive terms of six months each at our option.  During the nine months ended September 30, 2016, we raised $513,109,000 through our dividend reinvestment program and 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, 2016 (dollars in thousands):

 

29


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

9

$

230,416

 

7.3%

 

$

244,863

 

Seniors housing operating

22

 

1,274,654

 

6.2%

 

 

1,323,931

 

Outpatient medical

2

 

32,650

 

6.3%

 

 

33,330

 

Totals

33

$

1,537,720

 

6.3%

 

$

1,602,124

 

 

 

 

 

 

 

 

 

 

 

(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 property dispositions made during the nine months ended September 30, 2016 (dollars in thousands):

 

Properties

 

Proceeds(1)

 

Capitalization Rates(2)

 

 

Book Amount(3)

 

Triple-net

43

$

482,113

 

8.0%

 

$

295,365

 

Outpatient medical

7

 

80,300

 

7.9%

 

 

78,786

 

Totals

50

$

562,413

 

8.0%

 

$

374,151

 

 

 

 

 

 

 

 

 

 

 

(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 $3.44 per common share ($0.86 per share quarterly), as compared to $3.30 per common share for 2015, beginning in February 2016.  The dividend declared for the quarter ended September 30, 2016 represents the 182nd 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 attributable to common stockholders (“FFO”), net operating income from continuing operations (“NOI”) and same store NOI (“SSNOI”); 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 SSNOI. 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):

30


 

 

 

 

Three Months Ended

 

 

 

March 31,

 

June 30,

 

September 30,

 

December 31,

 

March 31,

 

June 30,

 

September 30,

 

 

 

2015

 

2015

 

2015

 

2015

 

 

2016

 

 

2016

 

2016

Net income (loss) attributable to common stockholders

$

190,799

 

$

312,573

 

$

182,043

 

$

132,931

 

$

148,969

 

$

195,474

 

$

334,910

Funds from operations attributable to common stockholders

 

344,250

 

 

340,588

 

 

392,295

 

 

332,509

 

 

391,264

 

 

416,974

 

 

401,870

Net operating income from continuing operations

 

517,716

 

 

558,815

 

 

570,294

 

 

590,746

 

 

597,414

 

 

617,825

 

 

605,453

Same store net operating income

 

427,764

 

 

441,492

 

 

440,517

 

 

436,884

 

 

440,614

 

 

453,362

 

 

441,677

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share data (fully diluted):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to common stockholders

$

0.56

 

$

0.89

 

$

0.52

 

$

0.37

 

$

0.42

 

$

0.54

 

$

0.93

 

Funds from operations attributable to common stockholders

 

1.02

 

 

0.97

 

 

1.11

 

 

0.94

 

 

1.10

 

 

1.16

 

 

1.11

 

     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, net of cash and IRC section 1031 deposits. 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 a capital structure consistent with our current profile. The coverage ratios are based on earnings before interest, taxes, depreciation and amortization (“EBITDA”) which is discussed in further detail, and reconciled to net income, below in “Non-GAAP Financial Measures.” Leverage ratios and coverage ratios are widely used by investors, analysts and rating agencies in the valuation, comparison, investment recommendations and rating of companies. The following table reflects the recent historical trends for our credit strength measures for the periods presented:

  

 

 

 

 

Three Months Ended

 

 

 

 

March, 31

 

June 30,

 

September 30,

 

December 31,

 

March 31,

 

June 30,

 

September 30,

 

 

 

 

2015

 

2015

 

2015

 

2015

 

2016

 

2016

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net debt to book capitalization ratio

 

42%

 

43%

 

42%

 

45%

 

45%

 

45%

 

45%

Net debt to undepreciated book

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

capitalization ratio

 

37%

 

38%

 

37%

 

40%

 

40%

 

39%

 

40%

Net debt to market capitalization ratio

 

27%

 

31%

 

30%

 

33%

 

32%

 

30%

 

31%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest coverage ratio

 

4.21x

 

5.32x

 

4.39x

 

3.88x

 

3.85x

 

4.21x

 

5.24x

Fixed charge coverage ratio

 

3.34x

 

4.19x

 

3.45x

 

3.06x

 

3.06x

 

3.34x

 

4.17x

   

      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:

  

 

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,

 

 

 

 

2015

 

2015

 

2015

 

2015

 

2016

 

2016

 

 

2016

Property mix:(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triple-net

 

55%

 

54%

 

54%

 

52%

 

52%

 

50%

 

 

51%

 

Seniors housing operating

 

30%

 

32%

 

31%

 

32%

 

32%

 

34%

 

 

33%

 

Outpatient medical

 

15%

 

14%

 

15%

 

16%

 

16%

 

16%

 

 

16%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Relationship mix:(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Genesis Healthcare

 

17%

 

17%

 

17%

 

16%

 

17%

 

16%

 

 

16%

 

Sunrise Senior Living(2)

 

14%

 

14%

 

14%

 

13%

 

13%

 

14%

 

 

12%

 

Brookdale Senior Living

 

8%

 

7%

 

7%

 

7%

 

7%

 

7%

 

 

7%

 

Revera(2)

 

4%

 

5%

 

5%

 

6%

 

6%

 

6%

 

 

6%

 

Benchmark Senior Living

 

4%

 

5%

 

5%

 

4%

 

4%

 

4%

 

 

4%

 

Remaining relationships

 

53%

 

52%

 

52%

 

54%

 

53%

 

53%

 

 

55%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Geographic mix:(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

California

 

10%

 

9%

 

10%

 

9%

 

10%

 

10%

 

 

10%

 

New Jersey

 

8%

 

8%

 

8%

 

8%

 

8%

 

8%

 

 

8%

 

United Kingdom

 

8%

 

10%

 

10%

 

9%

 

9%

 

8%

 

 

7%

 

Canada

 

5%

 

6%

 

6%

 

7%

 

7%

 

7%

 

 

7%

 

Pennsylvania

 

6%

 

6%

 

7%

 

7%

 

7%

 

7%

 

 

7%

 

Remaining geographic areas

 

63%

 

61%

 

59%

 

60%

 

59%

 

60%

 

 

61%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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.

 

 

 

 

     Lease Expirations. The following table sets forth information regarding lease expirations for certain portions of our portfolio as of September 30, 2016 (dollars in thousands):

  

 

 

 

 

 

Expiration Year

 

 

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

2023

 

 

2024

 

 

2025

 

 

Thereafter

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triple-net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Properties

 

 

-

 

 

30

 

 

56

 

 

1

 

 

14

 

 

12

 

 

7

 

 

4

 

 

5

 

 

61

 

 

458

 

 

  

Base rent(1)

 

$

0

 

$

12,936

 

$

42,329

 

$

1,267

 

$

17,300

 

$

24,873

 

$

7,272

 

$

4,175

 

$

10,938

 

$

72,833

 

$

853,202

 

 

 

% of base rent

 

 

0.0%

 

 

1.2%

 

 

4.0%

 

 

0.1%

 

 

1.7%

 

 

2.4%

 

 

0.7%

 

 

0.4%

 

 

1.0%

 

 

7.0%

 

 

81.5%

 

 

 

Units/beds

 

 

-

 

 

1,165

 

 

3,655

 

 

123

 

 

1,225

 

 

2,289

 

 

690

 

 

317

 

 

762

 

 

4,538

 

 

50,554

 

 

 

% of Units/beds

 

 

0.0%

 

 

1.8%

 

 

5.6%

 

 

0.2%

 

 

1.9%

 

 

3.5%

 

 

1.1%

 

 

0.5%

 

 

1.2%

 

 

6.9%

 

 

77.4%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outpatient medical:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Square feet

 

 

218,745

 

 

1,069,927

 

 

943,335

 

 

1,167,571

 

 

1,259,403

 

 

1,413,300

 

 

2,213,269

 

 

1,161,666

 

 

1,451,074

 

 

612,093

 

 

4,292,345

 

 

  

Base rent(1)

 

$

6,789

 

$

27,136

 

$

24,681

 

$

30,328

 

$

32,599

 

$

37,764

 

$

46,782

 

$

28,693

 

$

39,069

 

$

17,604

 

$

103,826

 

 

 

% of base rent

 

 

1.7%

 

 

6.9%

 

 

6.2%

 

 

7.7%

 

 

8.2%

 

 

9.6%

 

 

11.8%

 

 

7.3%

 

 

9.9%

 

 

4.5%

 

 

26.4%

 

 

 

Leases

 

 

104

 

 

283

 

 

264

 

 

290

 

 

252

 

 

245

 

 

197

 

 

171

 

 

104

 

 

76

 

 

227

 

 

 

% of Leases

 

 

4.7%

 

 

12.8%

 

 

11.9%

 

 

13.1%

 

 

11.4%

 

 

11.1%

 

 

8.9%

 

 

7.7%

 

 

4.7%

 

 

3.4%

 

 

10.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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, 2015, 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

32


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

 

 

     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.

 

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, 2016

 

September 30, 2015

 

 

$

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$

360,908

 

$

473,726

 

 

$

(112,818)

 

-24%

   Cash provided from (used in) operating activities

 

 

1,272,346

 

 

1,036,324

 

 

 

236,022

 

23%

   Cash provided from (used in) investing activities

 

 

(1,291,136)

 

 

(2,505,642)

 

 

 

1,214,506

 

-48%

   Cash provided from (used in) financing activities

 

 

96,189

 

 

1,289,945

 

 

 

(1,193,756)

 

-93%

Effect of foreign currency translation

 

 

(9,690)

 

 

(2,311)

 

 

 

(7,379)

 

319%

Cash and cash equivalents at end of period

 

$

428,617

 

$

292,042

 

 

$

136,575

 

47%

 

     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, 2016 and 2015, 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 2016” 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,

 

 

 

 

 

 

 

2016

 

2015

 

$

 

%

New development

 

$

325,372

 

$

165,311

 

$

160,061

 

97%

Recurring capital expenditures, tenant improvements and lease commissions

 

 

48,055

 

 

13,650

 

 

34,405

 

252%

Renovations, redevelopments and other capital improvements

 

 

93,145

 

 

108,990

 

 

(15,845)

 

-15%

Total

 

$

466,572

 

$

287,951

 

$

178,621

 

62%

 

    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

 

33


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

 

 

     At September 30, 2016, 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, 2016, we had ten outstanding letter of credit obligations. Please see Note 12 to our unaudited consolidated financial statements for additional information.

  

Contractual Obligations

     The following table summarizes our payment requirements under contractual obligations as of September 30, 2016 (in thousands):

  

 

 

Payments Due by Period

Contractual Obligations

 

Total

 

2016

 

2017-2018

 

2019-2020

 

Thereafter

Unsecured revolving credit facility(1)

 

$

1,350,000

 

$

-

 

$

-

 

$

-

 

$

1,350,000

Senior unsecured notes and term credit facilities:(2)

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     U.S. Dollar senior unsecured notes

 

 

6,500,000

 

 

-

 

 

900,000

 

 

1,050,000

 

 

4,550,000

     Pounds Sterling senior unsecured notes(3)

 

 

1,366,575

 

 

-

 

 

-

 

 

-

 

 

1,366,575

     Canadian Dollar senior unsecured notes(3)

 

 

228,746

 

 

-

 

 

-

 

 

228,746

 

 

-

     U.S. Dollar term credit facility

 

 

505,000

 

 

-

 

 

-

 

 

5,000

 

 

500,000

     Canadian Dollar term credit facility(3)

 

 

190,621

 

 

-

 

 

-

 

 

-

 

 

190,621

Secured debt:(2,3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Consolidated

 

 

3,300,642

 

 

76,773

 

 

1,216,975

 

 

602,851

 

 

1,404,043

     Unconsolidated  

 

 

528,689

 

 

11,396

 

 

45,275

 

 

28,234

 

 

443,784

Contractual interest obligations:(4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Unsecured revolving credit facility

 

 

101,290

 

 

4,823

 

 

38,587

 

 

38,587

 

 

19,293

     Senior unsecured notes and term loans(3)

 

 

3,573,642

 

 

138,537

 

 

726,263

 

 

642,106

 

 

2,066,736

     Consolidated secured debt(3)

 

 

593,684

 

 

35,886

 

 

221,205

 

 

134,392

 

 

202,201

     Unconsolidated secured debt(3)

 

 

144,640

 

 

4,662

 

 

36,694

 

 

33,922

 

 

69,362

Capital lease obligations(5)

 

 

95,018

 

 

1,183

 

 

9,409

 

 

8,506

 

 

75,920

Operating lease obligations(5)

 

 

1,109,001

 

 

4,222

 

 

34,098

 

 

34,163

 

 

1,036,518

Purchase obligations(5)

 

 

534,546

 

 

61,695

 

 

471,538

 

 

830

 

 

483

Other long-term liabilities(6)

 

 

4,548

 

 

369

 

 

2,950

 

 

1,229

 

 

-

Total contractual obligations

 

$

20,126,642

 

$

339,546

 

$

3,702,994

 

$

2,808,566

 

$

13,275,536

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Relates to unsecured revolving credit facility with an aggregate commitment of $3,000,000,000. 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

     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, 2016, we were in compliance with all of the covenants under our debt agreements. 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.  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 31, 2016, 7,861,039 shares of common stock

34


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

 

 

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 31, 2016, we had $171,757,000 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 SSNOI, 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,

 

 

 

 

 

 

 

2016

 

2015

 

Amount

 

%

 

2016

 

2015

 

Amount

 

%

Net income (loss) attributable to common stockholders

 

$

334,910

 

$

182,043

 

$

152,867

 

84%

 

$

679,353

 

$

685,413

 

$

(6,060)

 

-1%

Funds from operations attributable to common stockholders

 

  

401,870

 

 

392,295

 

 

9,575

 

2%

 

 

 1,210,108  

 

 

1,077,132

 

 

132,976

 

12%

EBITDA

 

  

702,196

 

 

522,842

 

 

179,354

 

34%

 

 

1,796,729

 

 

1,707,405

 

 

89,324

 

5%

Net operating income from continuing operations (NOI)

 

  

605,453

 

 

570,294

 

 

35,159

 

6%

 

 

1,820,690

 

 

1,646,823

 

 

173,867

 

11%

Same store NOI

 

 

441,677

 

 

440,517

 

 

1,160

 

0%

 

 

1,335,651

 

 

1,309,770

 

 

25,881

 

2%

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share data (fully diluted):

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to common stockholders

 

$

0.93

 

$

0.52

 

$

0.41

 

79%

 

$

1.89

 

$

1.97

 

$

(0.08)

 

-4%

Funds from operations attributable to common stockholders

 

$

1.11

 

$

1.11

 

$

-

 

0%

 

$

3.37

 

$

3.10

 

$

0.27

 

9%

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest coverage ratio

 

  

5.24x

 

 

4.39x

 

 

0.85x

 

19%

 

 

4.43x

 

 

4.64x

 

 

-0.21x

 

-5%

Fixed charge coverage ratio

 

  

4.17x

 

 

3.45x

 

 

0.72x

 

21%

 

 

3.52x

 

 

3.67x

 

 

-0.15x

 

-4%

 

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,

 

 

 

 

 

 

 

 

 

2016

 

2015

 

$

 

%

 

2016

 

2015

 

$

 

%

SSNOI(1)

 

 $ 

210,622

 

 $ 

206,645

 

 $ 

3,977

 

2%

 

 $ 

628,896

 

 $ 

613,984

 

 $ 

14,912

 

2%

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

 

 

20,874

 

 

24,676

 

 

(3,802)

 

-15%

 

 

65,505

 

 

73,964

 

 

(8,459)

 

-11%

NOI attributable to non same store properties(2)

 

 

79,368

 

 

66,716

 

 

12,652

 

19%

 

 

234,942

 

 

182,397

 

 

52,545

 

29%

NOI

 

 $ 

310,864

 

 $ 

298,037

 

 $ 

12,827

 

4%

 

 $ 

929,343

 

 $ 

870,345

 

 $ 

58,998

 

7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Change is due to increases in cash NOI and decreases in non-cash NOI (described below) related to 569 same store properties.

(2) Change is primarily due to the acquisition of 80 properties and the conversion of 21 construction projects into revenue-generating properties subsequent to January 1, 2015.

 

35


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

 

 

     During the nine months ended September 30, 2016, we reclassified four properties previously classified in the triple-net segment to the outpatient medical segment.  Accordingly, the information has been reclassified to conform to the current presentation for all periods presented.  The following is a summary of our results of operations for the triple-net segment (dollars in thousands):

 

 

 

 

Three Months Ended

 

Change

 

Nine Months Ended

 

Change

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

 

 

 

2016

 

2015

 

$

 

%

 

2016

 

2015

 

$

 

%

Revenues:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

 $ 

286,226

 

 $ 

277,614

 

 $ 

8,612

 

3%

 

 $ 

857,184

 

 $ 

812,179

 

 $ 

45,005

 

6%

 

Interest income

 

  

23,017

 

 

19,454

 

 

3,563

 

18%

 

 

67,842

 

 

52,343

 

 

15,499

 

30%

 

Other income

 

  

1,621

 

 

969

 

 

652

 

67%

 

 

4,317

 

 

5,823

 

 

(1,506)

 

-26%

 

 

Total revenues

 

  

310,864

 

 

298,037

 

 

12,827

 

4%

 

 

929,343

 

 

870,345

 

 

58,998

 

7%

 

 

Net operating income from continuing operations (NOI)

 

 

310,864

 

 

298,037

 

 

12,827

 

4%

 

 

929,343

 

 

870,345

 

 

58,998

 

7%

Other expenses:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

  

985

 

 

11,347

 

 

(10,362)

 

-91%

 

 

8,608

 

 

21,083

 

 

(12,475)

 

-59%

 

Loss (gain) on derivatives, net

 

 

-

 

 

-

 

 

-

 

n/a

 

 

-

 

 

(58,427)

 

 

58,427

 

-100%

 

Depreciation and amortization

 

  

74,296

 

 

72,589

 

 

1,707

 

2%

 

 

229,906

 

 

212,537

 

 

17,369

 

8%

 

Transaction costs

 

 

1,613

 

 

1,865

 

 

(252)

 

-14%

 

 

5,760

 

 

45,615

 

 

(39,855)

 

-87%

 

Loss (gain) on extinguishment of debt, net

 

  

-

 

 

(139)

 

 

139

 

-100%

 

 

97

 

 

10,096

 

 

(9,999)

 

-99%

 

Impairment of assets

 

 

5,070

 

 

-

 

 

5,070

 

n/a

 

 

19,384

 

 

2,220

 

 

17,164

 

773%

 

 

Total other expenses

 

  

81,964

 

 

85,662

 

 

(3,698)

 

-4%

 

 

263,755

 

 

233,124

 

 

30,631

 

13%

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

 

  

228,900

 

 

212,375

 

 

16,525

 

8%

 

 

665,588

 

 

637,221

 

 

28,367

 

4%

Income tax benefit (expense)

 

  

(896)

 

 

87

 

 

(983)

 

n/a

 

 

(1,425)

 

 

(2,617)

 

 

1,192

 

-46%

Income (loss) from unconsolidated entities

 

 

1,998

 

 

2,851

 

 

(853)

 

-30%

 

 

8,097

 

 

5,697

 

 

2,400

 

42%

Income from continuing operations

 

  

230,002

 

 

215,313

 

 

14,689

 

7%

 

 

672,260

 

 

640,301

 

 

31,959

 

5%

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

 

 

163,579

 

 

2,155

 

 

161,424

 

7,491%

 

 

165,109

 

 

56,251

 

 

108,858

 

194%

Net income

 

 

393,581

 

 

217,468

 

 

176,113

 

81%

 

 

837,369

 

 

696,552

 

 

140,817

 

20%

Less: Net income (loss) attributable to noncontrolling interests

 

  

926

 

 

526

 

 

400

 

76%

 

 

1,357

 

 

1,528

 

 

(171)

 

-11%

Net income attributable to common stockholders

 

$

392,655

 

$

216,942

 

$

175,713

 

81%

 

$

836,012

 

$

695,024

 

$

140,988

 

20%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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 triple-net properties from which we receive rent. 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, 2016, we had no lease renewals but we had 36 leases with rental rate increasers ranging from 0.01% 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 two first mortgage loans to Genesis Healthcare.  The decrease in other income is due to the receipt of an early prepayment fee in 2015 related to a real estate loan receivable.

 

    During the nine months ended September 30, 2016, we completed one triple-net construction project totaling $24,535,000 or $310,569 per bed/unit and one expansion project totaling $2,879,000.   The following is a summary of triple-net construction projects pending as of September 30, 2016 (dollars in thousands):

  

36


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

 

 

Location

 

Units/Beds

 

 

Commitment

 

 

Balance

 

Est. Completion

Edmond, OK

 

142

 

$

27,300

 

$

21,169

 

4Q16

Carrollton, TX

 

104

 

 

21,800

 

 

17,823

 

4Q16

Lititz, PA

 

80

 

 

15,200

 

 

9,869

 

4Q16

Raleigh, NC

 

225

 

 

93,000

 

 

73,561

 

1Q17

Tulsa, OK

 

145

 

 

28,500

 

 

15,264

 

1Q17

Lancaster, PA

 

80

 

 

15,875

 

 

9,456

 

1Q17

Livingston, NJ

 

120

 

 

51,440

 

 

31,008

 

2Q17

Piscataway, NJ

 

124

 

 

40,800

 

 

30,769

 

2Q17

Bracknell, England

 

64

 

 

14,380

 

 

8,994

 

2Q17

Alexandria, VA

 

116

 

 

60,156

 

 

16,966

 

1Q18

 

 

1,200

 

$

368,451

 

$

234,879

 

 

 

 

 

 

 

 

 

 

 

 

 

     Interest expense for the nine months ended September 30, 2016 and 2015 represents secured debt interest expense and gains and losses on forward exchange contracts.  The change in interest expense is due to the net effect and timing of assumptions, segment transitions, fluctuations in foreign currency rates, extinguishments and principal amortizations. The following is a summary of our triple-net secured debt principal activity (dollars in thousands):

 

  

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 2016

 

September 30, 2015

 

September 30, 2016

 

September 30, 2015

 

 

 

 

 

Wtd. Avg.

 

 

 

 

Wtd. Avg.

 

 

 

 

Wtd. Avg.

 

 

 

 

Wtd. Avg.

 

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

Beginning balance

 

$

460,269

 

5.509%

 

$

545,207

 

5.556%

 

$

554,014

 

5.488%

 

$

670,769

 

5.337%

Debt extinguished

 

  

(14,565)

 

5.865%

 

 

(20,338)

 

6.306%

 

 

(107,577)

 

5.028%

 

 

(132,545)

 

4.695%

Foreign currency

 

 

(503)

 

5.428%

 

 

(6,155)

 

5.316%

 

 

4,550

 

5.303%

 

 

(13,011)

 

5.316%

Principal payments

 

  

(2,514)

 

5.608%

 

 

(3,046)

 

5.566%

 

 

(8,300)

 

5.635%

 

 

(9,545)

 

5.669%

Ending balance

 

$

442,687

 

5.515%

 

$

515,668

 

5.526%

 

$

442,687

 

5.515%

 

$

515,668

 

5.526%

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Monthly averages

 

$

455,044

 

5.511%

 

$

520,244

 

5.541%

 

$

498,934

 

5.496%

 

$

549,861

 

5.528%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     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.  This event resulted in $58,427,000 gain in the first quarter of 2015.

     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 are 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 2015 transaction costs include 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. 

Changes in the gain on sales of properties are related to property sales which totaled 43 and 23 for the nine months ended September 30, 2016 and 2015, respectively.  During the nine months ended September 30, 2016 and 2015, we recorded impairment charges on certain held-for-sale triple-net properties as the fair values less estimated costs to sell exceeded our carrying values.

Seniors Housing Operating

     The following is a summary of our NOI for the seniors housing operating 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,

 

 

 

 

 

 

 

 

 

2016

 

2015

 

$

 

%

 

2016

 

2015

 

$

 

%

SSNOI(1)

 

 $ 

155,578

 

 $ 

160,227

 

 $ 

(4,649)

 

-3%

 

 $ 

481,636

 

 $ 

474,921

 

 $ 

6,715

 

1%

Non-cash NOI attributable to same store properties

 

 

(1,269)

 

 

(250)

 

 

(1,019)

 

408%

 

 

(1,759)

 

 

(754)

 

 

(1,005)

 

133%

NOI attributable to non same store properties(2)

 

 

45,186

 

 

19,054

 

 

26,132

 

137%

 

 

123,342

 

 

40,151

 

 

83,191

 

207%

NOI

 

 $ 

199,495

 

 $ 

179,031

 

 $ 

20,464

 

11%

 

 $ 

603,219

 

 $ 

514,318

 

 $ 

88,901

 

17%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Relates to 298 same store properties.

(2) Change is primarily due to the acquisition of 104 properties subsequent to January 1, 2015 and one development property.

 

     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,

 

 

 

 

 

 

 

 

2016

 

2015

 

$

 

%

 

2016

 

2015

 

$

 

%

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Resident fees and services

 

 $ 

630,017

 

$

545,255

 

$

84,762

 

16%

 

 $ 

1,847,386

 

$

1,573,318

 

$

274,068

 

17%

 

Interest income

 

 

1,054

 

 

1,054

 

 

-

 

0%

 

 

3,126

 

 

3,126

 

 

-

 

0%

 

Other income

 

 

716

 

 

772

 

 

(56)

 

-7%

 

 

11,889

 

 

5,001

 

 

6,888

 

138%

 

 

Total revenues

 

 

631,787

 

 

547,081

 

 

84,706

 

15%

 

 

1,862,401

 

 

1,581,445

 

 

280,956

 

18%

Property operating expenses

 

 

432,292

 

 

368,050

 

 

64,242

 

17%

 

 

1,259,182

 

 

1,067,127

 

 

192,055

 

18%

 

Net operating income from continuing operations (NOI)

 

 

199,495

 

 

179,031

 

 

20,464

 

11%

 

 

603,219

 

 

514,318

 

 

88,901

 

17%

Other expenses:

 

  

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

Interest expense

 

  

39,927

 

 

30,990

 

 

8,937

 

29%

 

  

123,445

 

 

104,283

 

 

19,162

 

18%

 

Depreciation and amortization

 

  

97,210

 

 

87,306

 

 

9,904

 

11%

 

  

301,354

 

 

252,785

 

 

48,569

 

19%

 

Transaction costs

 

 

18,083

 

 

7,630

 

 

10,453

 

137%

 

 

25,259

 

 

23,610

 

 

1,649

 

7%

 

Loss (gain) on extinguishment of debt, net

 

 

-

 

 

-

 

 

-

 

n/a

 

 

(88)

 

 

-

 

 

(88)

 

n/a

 

 

Total other expenses

 

  

155,220

 

 

125,926

 

 

29,294

 

23%

 

  

449,970

 

 

380,678

 

 

69,292

 

18%

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

 

  

44,275

 

 

53,105

 

 

(8,830)

 

-17%

 

  

153,249

 

 

133,640

 

 

19,609

 

15%

Income tax benefit (expense)

 

 

515

 

 

3,237

 

 

(2,722)

 

-84%

 

 

5,304

 

 

(745)

 

 

6,049

 

-812%

Income (loss) from unconsolidated entities

 

  

(3,891)

 

 

(5,629)

 

 

1,738

 

-31%

 

  

(15,713)

 

 

(26,785)

 

 

11,072

 

-41%

Net income (loss)

 

 

40,899

 

 

50,713

 

 

(9,814)

 

-19%

 

 

142,840

 

 

106,110

 

 

36,730

 

35%

Less: Net income (loss) attributable to noncontrolling interests

 

  

1,556

 

 

(679)

 

 

2,235

 

n/a

 

  

1,739

 

 

2,114

 

 

(375)

 

-18%

Net income (loss) attributable to common stockholders

 

$

39,343

 

$

51,392

 

$

(12,049)

 

-23%

 

$

141,101

 

$

103,996

 

$

37,105

 

36%

 

     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. To the extent that we acquire or dispose of additional properties in the future, these amounts will change accordingly. 

 

     During the nine month period ended September 30, 2016, we did not complete any construction projects.  The following is a summary of our seniors housing operating construction projects, excluding expansions, pending as of September 30, 2016 (dollars in thousands):

  

38


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

 

 

Location

 

Units

 

 

Commitment

 

 

Balance

 

Est. Completion

Camberley, UK

 

102

 

$

24,599

 

$

22,776

 

4Q16

Bushey, UK

 

95

 

 

51,547

 

 

16,173

 

2Q18

Chertsey, UK

 

94

 

 

40,257

 

 

15,585

 

3Q18

 

 

291

 

$

116,403

 

 

54,534

 

 

New York, NY

 

Project in planning stage

 

 

122,571

 

 

Total

 

 

 

 

 

 

$

177,105

 

 

 

Interest expense represents secured debt interest expense as well as interest expense related to all foreign senior unsecured debt.  The increase in interest expense is attributed primarily to the $300,000,000 Canadian-denominated senior unsecured notes issued in November 2015.  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, 2016

 

September 30, 2015

 

September 30, 2016

 

September 30, 2015

 

 

 

 

 

Weighted Avg.

 

 

 

 

Weighted Avg.

 

 

 

 

Weighted Avg.

 

 

 

 

Weighted Avg.

 

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

Beginning balance

 

$

2,393,628

 

3.923%

 

$

1,827,123

 

4.353%

 

$

2,290,552

 

3.958%

 

$

1,654,531

 

4.422%

Debt issued

 

 

31,549

 

3.036%

 

 

85,811

 

2.623%

 

 

193,541

 

3.053%

 

 

222,612

 

2.759%

Debt assumed

 

 

47,156

 

4.132%

 

 

22,032

 

4.995%

 

 

47,156

 

4.132%

 

 

227,929

 

4.075%

Debt extinguished

 

 

(29,724)

 

3.655%

 

 

(79,981)

 

3.478%

 

 

(121,337)

 

3.609%

 

 

(199,946)

 

3.507%

Foreign currency

 

 

(7,980)

 

3.394%

 

 

(44,360)

 

3.588%

 

 

49,086

 

3.476%

 

 

(76,146)

 

3.639%

Principal payments

 

 

(12,326)

 

3.860%

 

 

(9,375)

 

4.217%

 

 

(36,695)

 

3.908%

 

 

(27,730)

 

4.209%

Ending balance

 

$

2,422,303

 

3.926%

 

$

1,801,250

 

4.335%

 

$

2,422,303

 

3.926%

 

$

1,801,250

 

4.335%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Monthly averages

 

$

2,413,116

 

3.910%

 

$

1,792,576

 

4.346%

 

$

2,371,211

 

3.940%

 

$

1,754,706

 

4.376%

 

     Transaction costs fluctuate based on the volume of acquisitions in a year. For the current year, transaction costs are higher because of increased acquisition volume.  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,

 

 

 

 

 

 

 

 

 

2016

 

2015

 

$

 

%

 

2016

 

2015

 

$

 

%

SSNOI(1)

 

 $ 

75,477

 

 $ 

73,645

 

 $ 

1,832

 

2%

 

 $ 

225,119

 

 $ 

220,865

 

 $ 

4,254

 

2%

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

 

 

1,462

 

 

2,116

 

 

(654)

 

-31%

 

 

4,439

 

 

6,418

 

 

(1,979)

 

-31%

NOI attributable to non same store properties(2)

 

 

17,966

 

 

17,443

 

 

523

 

3%

 

 

57,865

 

 

34,794

 

 

23,071

 

66%

NOI

 

 $ 

94,905

 

 $ 

93,204

 

 $ 

1,701

 

2%

 

 $ 

287,423

 

 $ 

262,077

 

 $ 

25,346

 

10%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Relates to 219 same store properties.

(2) Change is primarily due to acquisitions of 17 properties and conversions of construction projects into three revenue-generating properties subsequent to January 1, 2015.

 

      During the nine months ended September 30, 2016, we reclassified four properties previously classified in the triple-net segment to the outpatient medical segment.  Accordingly, the information has been reclassified to conform to the current presentation for all periods presented.  The following is a summary of our results of operations for the outpatient medical segment (dollars in thousands):

  

 

39


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

 

 

 

 

 

 

Three Months Ended

 

Change

 

Nine Months Ended

 

Change

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

 

 

 

2016

 

2015

 

$

 

%

 

2016

 

2015

 

$

 

%

Revenues:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

134,926

 

$

131,676

 

$

3,250

 

2%

 

$

402,258

 

$

373,323

 

$

28,935

 

8%

 

Interest income

 

  

1,009

 

 

1,872

 

 

(863)

 

-46%

 

 

3,307

 

 

4,481

 

 

(1,174)

 

-26%

 

Other income

 

  

358

 

 

309

 

 

49

 

16%

 

 

4,824

 

 

665

 

 

4,159

 

625%

 

 

Total revenues

 

  

136,293

 

 

133,857

 

 

2,436

 

2%

 

 

410,389

 

 

378,469

 

 

31,920

 

8%

Property operating expenses

 

  

41,388

 

 

40,653

 

 

735

 

2%

 

 

122,966

 

 

116,392

 

 

6,574

 

6%

 

Net operating income from continuing operations (NOI)

 

  

94,905

 

 

93,204

 

 

1,701

 

2%

 

 

287,423

 

 

262,077

 

 

25,346

 

10%

Other expenses:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

  

3,986

 

 

6,811

 

 

(2,825)

 

-41%

 

 

15,132

 

 

21,192

 

 

(6,060)

 

-29%

 

Depreciation and amortization

 

  

46,555

 

 

45,904

 

 

651

 

1%

 

 

142,066

 

 

138,109

 

 

3,957

 

3%

 

Transaction costs

 

 

146

 

 

(162)

 

 

308

 

n/a

 

 

2,188

 

 

1,154

 

 

1,034

 

90%

 

Impairment of assets

 

 

4,635

 

 

-

 

 

4,635

 

n/a

 

 

4,635

 

 

-

 

 

4,635

 

n/a

 

 

Total other expenses

 

  

55,322

 

 

52,553

 

 

2,769

 

5%

 

 

164,021

 

 

160,455

 

 

3,566

 

2%

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

 

  

39,583

 

 

40,651

 

 

(1,068)

 

-3%

 

 

123,402

 

 

101,622

 

 

21,780

 

21%

Income tax (expense) benefit

 

  

417

 

 

154

 

 

263

 

171%

 

 

(59)

 

 

460

 

 

(519)

 

n/a

Income from unconsolidated entities

 

 

144

 

 

147

 

 

(3)

 

-2%

 

 

88

 

 

2,857

 

 

(2,769)

 

-97%

Income from continuing operations

 

  

40,144

 

 

40,952

 

 

(808)

 

-2%

 

 

123,431

 

 

104,939

 

 

18,492

 

18%

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

 

 

(1,228)

 

 

(109)

 

 

(1,119)

 

1027%

 

 

(1,228)

 

 

192,751

 

 

(193,979)

 

n/a

Net income (loss)

 

  

38,916

 

 

40,843

 

 

(1,927)

 

-5%

 

 

122,203

 

 

297,690

 

 

(175,487)

 

-59%

Less: Net income (loss) attributable to noncontrolling interests

 

  

997

 

 

1,015

 

 

(18)

 

-2%

 

 

(529)

 

 

1,024

 

 

(1,553)

 

n/a

Net income (loss) attributable to common stockholders

 

$

37,919

 

$

39,828

 

$

(1,909)

 

-5%

 

$

122,732

 

$

296,666

 

$

(173,934)

 

-59%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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, 2016, our consolidated outpatient medical portfolio signed 73,024 square feet of new leases and 271,496 square feet of renewals.  The weighted-average term of these leases was eight years, with a rate of $37.78 per square foot and tenant improvement and lease commission costs of $16.24 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 4%. 

 

    During the nine months ended September 30, 2016, we completed three outpatient medical construction projects representing $44,113,000 or $281 per square foot. The following is a summary of the outpatient medical construction projects, excluding expansions, pending as of September 30, 2016 (dollars in thousands):

  

40


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

 

 

Location

 

Square Feet

 

 

Commitment

 

 

Balance

 

Est. Completion

Stamford, CT

 

92,345

 

 

41,735

 

 

34,311

 

4Q16

Marietta, GA

 

103,156

 

 

24,893

 

 

10,033

 

4Q16

Wausau, WI

 

43,883

 

 

14,100

 

 

13,512

 

1Q17

Castle Rock, CO

 

56,822

 

 

13,148

 

 

4,223

 

1Q17

Timmonium, MD

 

46,000

 

 

20,996

 

 

9,836

 

2Q17

Howell, MI

 

56,211

 

 

15,509

 

 

4,815

 

2Q17

Brooklyn, NY

 

140,955

 

 

103,624

 

 

30,159

 

3Q17

Total

 

539,372

 

$

234,005

 

$

106,889

 

 

 

 

 

 

 

 

 

 

 

 

 

     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, 2016

 

September 30, 2015

 

September 30, 2016

 

September 30, 2015

 

 

 

 

 

Weighted Avg.

 

 

 

 

Weighted Avg.

 

 

 

 

Weighted Avg.

 

 

 

 

Weighted Avg.

 

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

Beginning balance

 

$

563,232

 

5.129%

 

$

654,990

 

5.193%

 

$

627,689

 

5.177%

 

$

609,268

 

5.838%

Debt assumed

 

 

-

 

0.000%

 

 

-

 

0.000%

 

 

-

 

0.000%

 

 

112,000

 

1.837%

Debt extinguished

 

  

(128,406)

 

5.847%

 

  

(29,370)

 

5.381%

 

  

(185,914)

 

5.892%

 

  

(88,182)

 

5.355%

Principal payments

 

  

(3,014)

 

5.373%

 

  

(3,065)

 

6.023%

 

  

(9,963)

 

5.471%

 

  

(10,531)

 

5.724%

Ending balance

 

$

431,812

 

4.929%

 

$

622,555

 

5.181%

 

$

431,812

 

4.929%

 

$

622,555

 

5.181%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Monthly averages

 

$

521,636

 

5.077%

 

$

640,971

 

5.188%

 

$

571,466

 

5.152%

 

$

608,489

 

5.523%

 

     The increase in property operating expenses 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. Income from unconsolidated entities represents our share of net income or losses related to the periods for which we held a joint venture investment with Forest City Enterprises and certain unconsolidated property investments. Changes in gains/losses on sales of properties are related to volume of property sales and the sales prices. A portion of our outpatient medical properties were formed through partnerships. Net income attributable to noncontrolling interests represents our partners’ share of net income or loss relating to those partnerships where we are the controlling partner.

 

  

41


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,

 

 

 

 

 

 

 

 

2016

 

2015

 

$

 

%

 

2016

 

2015

 

$

 

%

Revenues:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income

 

$

189

 

$

22

 

$

167

 

759%

 

$

705

 

$

83

 

$

622

 

749%

Expenses:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

  

84,801

 

 

71,982

 

 

12,819

 

18%

 

 

247,800

 

 

214,513

 

 

33,287

 

16%

 

 

Loss (gain) on derivatives, net

 

  

(2,516)

 

 

-

 

 

(2,516)

 

n/a

 

 

(2,516)

 

 

-

 

 

(2,516)

 

n/a

 

 

General and administrative

 

  

36,828

 

 

36,950

 

 

(122)

 

0%

 

 

122,434

 

 

110,562

 

 

11,872

 

11%

 

 

Loss on extinguishment of debt, net

 

  

-

 

 

723

 

 

(723)

 

-100%

 

 

-

 

 

24,776

 

 

(24,776)

 

-100%

 

 

Other expenses

 

 

-

 

 

-

 

 

-

 

n/a

 

 

3,161

 

 

10,583

 

 

(7,422)

 

-70%

 

 

Total expenses

 

  

119,113

 

 

109,655

 

 

9,458

 

9%

 

 

370,879

 

 

360,434

 

 

10,445

 

3%

Loss from continuing operations before income taxes

 

  

(118,924)

 

 

(109,633)

 

 

(9,291)

 

8%

 

 

(370,174)

 

 

(360,351)

 

 

(9,823)

 

3%

Income tax (expense) benefit

 

  

269

 

 

(134)

 

 

403

 

n/a

 

 

(1,277)

 

 

(867)

 

 

(410)

 

47%

Loss from continuing operations

 

  

(118,655)

 

 

(109,767)

 

 

(8,888)

 

8%

 

 

(371,451)

 

 

(361,218)

 

 

(10,233)

 

3%

Less: Preferred stock dividends

 

  

16,352

 

 

16,352

 

 

-

 

0%

 

 

49,055

 

 

49,055

 

 

-

 

0%

Net loss attributable to common stockholders

 

$

(135,007)

 

$

(126,119)

 

$

(8,888)

 

7%

 

$

(420,506)

 

$

(410,273)

 

$

(10,233)

 

2%

 

     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,

 

 

 

 

 

 

2016

 

2015

 

$

 

%

 

2016

 

2015

 

$

 

%

Senior unsecured notes

 

$

76,167

 

$

66,679

 

$

9,488

 

14%

 

$

225,837

 

$

196,752

 

$

29,085

 

15%

Secured debt

 

  

69

 

  

94

 

  

(25)

 

-27%

 

  

245

 

  

281

 

  

(36)

 

-13%

Primary unsecured credit facility

 

  

5,137

 

  

2,042

 

  

3,095

 

152%

 

  

12,142

 

  

7,806

 

  

4,336

 

56%

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Swap loss (savings)

 

  

-

 

  

(11)

 

  

11

 

-100%

 

  

-

 

  

(23)

 

  

23

 

-100%

Loan expense

 

  

3,428

 

  

3,178

 

  

250

 

8%

 

  

9,576

 

  

9,697

 

  

(121)

 

-1%

Totals

 

$

84,801

 

$

71,982

 

$

12,819

 

18%

 

$

247,800

 

$

214,513

 

$

33,287

 

16%

The change in interest expense on senior unsecured notes is due to the net effect of issuances and extinguishments, excluding our foreign senior unsecured debt, which is in our seniors housing operating segment.  Please refer to Note 10 to our unaudited consolidated financial statements for additional information.  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 as a percentage of consolidated revenues for the three months ended September 30, 2016 and 2015 were 3.41% and 3.77%, respectively.  The increase in general and administrative expenses for the nine months ended September 30, 2016 is primarily related to professional service fees for tax and legal consulting and costs associated with our initiatives to attract and retain appropriate personnel to achieve our business objectives. Other expenses in both years included costs associated with the retirement of executive officers.  Other expenses for the nine months ended September 30, 2015 also included costs associated with the termination of our investment in a strategic medical office partnership.


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, SSNOI, EBITDA and Adjusted 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 funds from operations attributable to common stockholders (“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 NOI (“SSNOI”) 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, 2015.  Land parcels, loans and sub-leases as well as any properties acquired, developed/redeveloped, transitioned, sold or classified as held for sale during that period are excluded from the same store amounts.  We believe NOI and SSNOI 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 SSNOI 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 items per our covenant. 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 to demonstrate our compliance with a comparable 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.

 

     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.

43


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,

FFO Reconciliations:

  

2015

 

2015

 

2015

 

2015

 

2016

 

2016

 

2016

Net income (loss) attributable to common stockholders

  

$

190,799

 

$

312,573

 

$

182,043

 

$

132,931

 

$

148,969

 

$

195,474

 

$

334,910

Depreciation and amortization

  

 

188,829

 

 

208,802

 

 

205,799

 

 

222,809

 

 

228,696

 

 

226,569

 

 

218,061

Impairment of assets

 

 

2,220

 

 

-

 

 

-

 

 

-

 

 

14,314

 

 

-

 

 

9,705

Loss (gain) on sales of properties, net

  

 

(56,845)

 

 

(190,111)

 

 

(2,046)

 

 

(31,385)

 

 

-

 

 

(1,530)

 

 

(162,351)

Noncontrolling interests

 

 

(7,249)

 

 

(10,467)

 

 

(11,647)

 

 

(9,908)

 

 

(17,319)

 

 

(20,616)

 

 

(15,695)

Unconsolidated entities

  

 

26,496

 

 

19,791

 

 

18,146

 

 

18,062

 

 

16,604

 

 

17,077

 

 

17,240

Funds from operations attributable to common stockholders

  

$

344,250

 

$

340,588

 

$

392,295

 

$

332,509

 

$

391,264

 

$

416,974

 

$

401,870

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

  

 

336,754

 

 

350,399

 

 

351,765

 

 

353,604

 

 

355,076

 

 

356,646

 

 

358,932

 

Diluted

  

 

337,812

 

 

351,366

 

 

353,107

 

 

354,972

 

 

356,051

 

 

358,891

 

 

361,237

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share data:

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

common stockholders

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

  

$

0.57

 

$

0.89

 

$

0.52

 

$

0.38

 

$

0.42

 

$

0.55

 

$

0.93

 

Diluted

  

 

0.56

 

 

0.89

 

 

0.52

 

 

0.37

 

 

0.42

 

 

0.54

 

 

0.93

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funds from operations attributable to common stockholders

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

  

$

1.02

 

$

0.97

 

$

1.12

 

$

0.94

 

$

1.10

 

$

1.17

 

$

1.12

 

Diluted

  

 

1.02

 

 

0.97

 

 

1.11

 

 

0.94

 

 

1.10

 

 

1.16

 

 

1.11

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

FFO Reconciliations:

  

2015

 

2016

Net income attributable to common stockholders

  

$

685,413

 

$

679,353

Depreciation and amortization

  

 

603,431

 

 

673,326

Impairment of assets

 

 

2,220

 

 

24,019

Loss (gain) on sales of properties, net

  

 

(249,002)

 

 

(163,881)

Noncontrolling interests

 

 

(29,363)

 

 

(53,630)

Unconsolidated entities

  

 

64,433

 

 

50,921

Funds from operations attributable to common stockholders

  

$

1,077,132

 

$

1,210,108

 

 

  

 

 

 

 

 

Average common shares outstanding:

 

 

 

 

 

 

 

Basic

  

 

346,425

 

 

356,911

 

Diluted

  

 

347,547

 

 

358,752

 

 

  

 

 

 

 

 

Per share data:

  

 

 

 

 

 

Net income attributable to

  

 

 

 

 

 

 

common stockholders

  

 

 

 

 

 

 

Basic

  

$

1.98

 

$

1.90

 

Diluted

  

 

1.97

 

 

1.89

 

 

  

 

 

 

 

 

Funds from operations attributable to common stockholders

  

 

 

 

 

 

 

Basic

  

$

3.11

 

$

3.39

 

Diluted

  

 

3.10

 

 

3.37

 

     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.

44


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,

EBITDA Reconciliations:

 

2015

 

2015

 

2015

 

2015

 

2016

 

 

2016

 

2016

Net income

 

$

209,422

 

$

330,459

 

$

199,257

 

$

149,416

 

$

165,474

 

$

210,749

 

$

354,741

Interest expense

 

  

121,080

 

  

118,861

 

  

121,130

 

  

131,097

 

  

132,960

 

 

132,326

 

  

129,699

Income tax expense (benefit)

 

  

(304)

 

  

7,417

 

  

(3,344)

 

  

2,682

 

  

(1,725)

 

 

(513)

 

  

(305)

Depreciation and amortization

 

  

188,829

 

  

208,802

 

  

205,799

 

  

222,809

 

  

228,696

 

 

226,569

 

  

218,061

EBITDA

 

$

519,027

 

$

665,539

 

$

522,842

 

$

506,004

 

$

525,405

 

$

569,131

 

$

702,196

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

  

 

Interest Coverage Ratio:

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

  

 

Interest expense

 

$

121,080

 

$

118,861

 

$

121,130

 

$

131,097

 

$

132,960

 

$

132,326

 

$

129,699

Non-cash interest expense

 

  

(119)

 

  

4,202

 

  

(3,791)

 

  

(2,878)

 

  

599

 

 

(1,519)

 

  

(543)

Capitalized interest

 

  

2,387

 

  

2,060

 

  

1,865

 

  

2,358

 

  

3,037

 

 

4,306

 

  

4,766

 

Total interest

 

  

123,348

 

  

125,123

 

  

119,204

 

  

130,577

 

  

136,596

 

 

135,113

 

  

133,922

EBITDA

 

$

519,027

 

$

665,539

 

$

522,842

 

$

506,004

 

$

525,405

 

$

569,131

 

$

702,196

 

Interest coverage ratio

 

  

4.21x

 

  

5.32x

 

  

4.39x

 

  

3.88x

 

  

3.85x

 

 

4.21x

 

  

5.24x

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

  

 

Fixed Charge Coverage Ratio:

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

  

 

Total interest

 

$

123,348

 

$

125,123

 

$

119,204

 

$

130,577

 

$

136,596

 

$

135,113

 

$

133,922

Secured debt principal payments

 

  

15,630

 

  

17,336

 

  

15,817

 

  

18,281

 

  

18,642

 

 

19,096

 

 

18,151

Preferred dividends

 

  

16,352

 

  

16,352

 

  

16,352

 

  

16,352

 

  

16,352

 

 

16,352

 

 

16,352

 

Total fixed charges

 

  

155,330

 

  

158,811

 

  

151,373

 

  

165,210

 

  

171,590

 

 

170,561

 

  

168,425

EBITDA

 

$

519,027

 

$

665,539

 

$

522,842

 

$

506,004

 

$

525,405

 

$

569,131

 

$

702,196

 

Fixed charge coverage ratio

 

  

3.34x

 

 

4.19x

 

 

3.45x

 

 

3.06x

 

 

3.06x

 

 

3.34x

 

 

4.17x

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

EBITDA Reconciliations:

 

2015

 

 

2016

Net income

 

$

739,134

 

$

730,961

Interest expense

 

  

361,071

 

 

394,985

Income tax expense (benefit)

 

  

3,769

 

 

(2,543)

Depreciation and amortization

 

  

603,431

 

 

673,326

EBITDA

 

$

1,707,405

 

$

1,796,729

 

 

 

  

 

 

 

 

Interest Coverage Ratio:

 

  

 

 

 

 

Interest expense

 

$

361,071

 

$

394,985

Non-cash interest expense

 

  

291

 

 

(1,465)

Capitalized interest

 

  

6,311

 

 

12,109

 

Total interest

 

  

367,673

 

 

405,629

EBITDA

 

$

1,707,405

 

$

1,796,729

 

Interest coverage ratio

 

  

4.64x

 

 

4.43x

 

 

 

  

 

 

 

 

Fixed Charge Coverage Ratio:

 

  

 

 

 

 

Total interest

 

$

367,673

 

$

405,629

Secured debt principal payments

 

  

48,783

 

 

55,889

Preferred dividends

 

  

49,055

 

 

49,055

 

Total fixed charges

 

  

465,511

 

 

510,573

EBITDA

 

$

1,707,405

 

$

1,796,729

 

Fixed charge coverage ratio

 

 

3.67x

 

 

3.52x

45


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:

 

2015

 

2015

 

2015

 

2015

 

2016

 

2016

 

2016

Net income

 

$

656,521

 

$

899,126

 

$

945,612

 

$

888,549

 

$

844,606

 

$

724,894

 

$

880,380

Interest expense

 

  

481,321

 

 

479,083

 

 

481,778

 

 

492,169

 

 

504,048

 

 

517,512

 

 

526,082

Income tax expense (benefit)

 

  

(3,832)

 

 

2,016

 

 

8,870

 

 

6,451

 

 

5,030

 

 

(2,899)

 

 

139

Depreciation and amortization

 

  

799,641

 

 

793,994

 

 

798,823

 

 

826,240

 

 

866,106

 

 

883,873

 

 

896,135

 

EBITDA

 

 

1,933,651

 

 

2,174,219

 

 

2,235,083

 

 

2,213,409

 

 

2,219,790

 

 

2,123,380

 

 

2,302,736

Transaction costs

 

 

117,140

 

 

122,590

 

 

118,369

 

 

110,926

 

 

70,579

 

 

63,245

 

 

73,754

Stock-based compensation expense

 

 

33,462

 

 

30,416

 

 

31,622

 

 

30,844

 

 

29,976

 

 

25,883

 

 

25,807

Loss (gain) on extinguishment of debt, net

 

 

25,108

 

 

43,464

 

 

41,356

 

 

34,677

 

 

19,252

 

 

398

 

 

(186)

 Losses/impairments (gain) on sale of properties, net

 

 

  

(208,147)

 

 

(385,179)

 

 

(357,621)

 

 

(278,167)

 

 

(209,228)

 

 

(20,647)

 

 

(171,246)

Loss (gain) on derivatives, net

 

 

(59,922)

 

 

(60,273)

 

 

(60,322)

 

 

(58,427)

 

 

-

 

 

-

 

 

(2,516)

Other expenses

 

 

20,727

 

 

15,250

 

 

4,988

 

 

40,636

 

 

40,636

 

 

37,386

 

 

37,386

Additional other income

 

  

(2,144)

 

 

(2,144)

 

 

(2,144)

 

 

(2,144)

 

 

(2,144)

 

 

(13,955)

 

 

(11,811)

Adjusted EBITDA

 

$

1,859,875

 

$

1,938,343

 

$

2,011,331

 

$

2,091,754

 

$

2,168,861

 

$

2,215,690

 

$

2,253,924

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Adjusted Fixed Charge Coverage Ratio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

481,321

 

$

479,083

 

$

481,778

 

$

492,169

 

$

504,048

 

$

517,512

 

$

526,082

Capitalized interest

 

  

7,931

 

  

8,292

 

  

8,378

 

  

8,670

 

  

9,320

 

  

11,566

 

  

14,467

Non-cash interest expense

 

  

(2,215)

 

  

3,636

 

  

392

 

  

(2,586)

 

  

(1,868)

 

  

(7,589)

 

  

(4,341)

 

Total interest

 

 

487,037

 

 

491,011

 

 

490,548

 

 

498,253

 

 

511,500

 

 

521,489

 

 

536,208

Adjusted EBITDA

 

$

1,859,875

 

$

1,938,343

 

$

2,011,331

 

$

2,091,754

 

$

2,168,861

 

$

2,215,690

 

$

2,253,924

 

Adjusted interest coverage ratio

 

 

3.82x

 

 

3.95x

 

 

4.10x

 

 

4.20x

 

 

4.24x

 

 

4.25x

 

 

4.20x

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest

 

$

487,037

 

$

491,011

 

$

490,548

 

$

498,253

 

$

511,500

 

$

521,489

 

$

536,208

Secured debt principal payments

 

  

62,455

 

  

63,988

 

  

65,256

 

  

67,064

 

  

70,076

 

  

71,836

 

  

74,170

Preferred dividends

 

  

65,408

 

  

65,408

 

  

65,408

 

  

65,406

 

  

65,408

 

  

65,408

 

  

65,407

 

Total fixed charges

 

  

614,900

 

  

620,407

 

  

621,212

 

  

630,723

 

  

646,984

 

  

658,733

 

  

675,785

Adjusted EBITDA

 

$

1,859,875

 

$

1,938,343

 

$

2,011,331

 

$

2,091,754

 

$

2,168,861

 

$

2,215,690

 

$

2,253,924

 

Adjusted fixed charge coverage ratio

 

  

3.02x

 

 

3.12x

 

 

3.24x

 

 

3.32x

 

 

3.35x

 

 

3.36x

 

 

3.34x

 

     The following tables reflect the reconciliation of NOI (which derives directly from consolidated results) and SSNOI for the periods presented.  Dollars are in thousands.

  

46


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,

NOI Reconciliations:

 

2015

 

2015

 

2015

 

2015

 

2016

 

2016

 

2016

Consolidated revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triple-net

 

$

280,575

 

$

291,732

 

$

298,037

 

$

305,460

 

$

308,168

 

$

310,311

 

$

310,864

 

Seniors housing operating

 

 

494,561

 

 

539,805

 

 

547,081

 

 

586,826

 

 

605,369

 

 

625,251

 

 

631,787

 

Outpatient medical

 

 

119,019

 

 

125,593

 

 

133,857

 

 

136,190

 

 

133,455

 

 

140,641

 

 

136,293

 

Non-segment/corporate

 

 

22

 

 

39

 

 

22

 

 

1,008

 

 

58

 

 

454

 

 

189

 

 

Total consolidated revenues

 

 

894,177

 

 

957,169

 

 

978,997

 

 

1,029,484

 

 

1,047,050

 

 

1,076,657

 

 

1,079,133

Consolidated property operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seniors housing operating

 

 

338,507

 

 

360,569

 

 

368,050

 

 

399,882

 

 

408,894

 

 

417,996

 

 

432,292

 

Outpatient medical

 

 

37,954

 

 

37,785

 

 

40,653

 

 

38,856

 

 

40,742

 

 

40,836

 

 

41,388

 

 

Total consolidated property operating expenses

 

 

376,461

 

 

398,354

 

 

408,703

 

 

438,738

 

 

449,636

 

 

458,832

 

 

473,680

Consolidated net operating income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triple-net

 

 

280,575

 

 

291,732

 

 

298,037

 

 

305,460

 

 

308,168

 

 

310,311

 

 

310,864

 

Seniors housing operating

 

 

156,054

 

 

179,236

 

 

179,031

 

 

186,944

 

 

196,475

 

 

207,255

 

 

199,495

 

Outpatient medical

 

 

81,065

 

 

87,808

 

 

93,204

 

 

97,334

 

 

92,713

 

 

99,805

 

 

94,905

 

Non-segment/corporate

 

 

22

 

 

39

 

 

22

 

 

1,008

 

 

58

 

 

454

 

 

189

 

 

Total consolidated net operating income

 

$

517,716

 

$

558,815

 

$

570,294

 

$

590,746

 

$

597,414

 

$

617,825

 

$

605,453

 

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

September 30,

NOI Reconciliations:

 

2015

 

2016

Consolidated revenues:

 

 

 

 

 

 

 

Triple-net

 

$

870,345

 

$

929,343

 

Seniors housing operating

 

 

1,581,445

 

 

1,862,401

 

Outpatient medical

 

 

378,469

 

 

410,389

 

Non-segment/corporate

 

 

83

 

 

705

 

 

Total consolidated revenues

 

2,830,342

 

 

3,202,838

Consolidated property operating expenses:

 

 

 

 

 

Seniors housing operating

 

 

1,067,127

 

 

1,259,182

 

Outpatient medical

 

 

116,392

 

 

122,966

 

 

Total consolidated property operating expenses

 

 

1,183,519

 

 

1,382,148

Consolidated net operating income:

 

 

 

 

 

 

Triple-net

 

 

870,345

 

 

929,343

 

Seniors housing operating

 

 

514,318

 

 

603,219

 

Outpatient medical

 

 

262,077

 

 

287,423

 

Non-segment/corporate

 

 

83

 

 

705

 

 

Total consolidated net operating income

$

1,646,823

 

$

1,820,690

 

47


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 NOI Reconciliations:

 

2015

 

2015

 

2015

 

2016

 

2016

 

2016

 

2016

NOI:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triple-net

 

 

 

$

280,572

 

$

291,729

 

$

298,037

 

$

305,460

 

$

308,168

 

$

310,309

 

$

310,864

 

Seniors housing operating

 

 

 

 

156,054

 

 

179,236

 

 

179,031

 

 

186,944

 

 

196,475

 

 

207,255

 

 

199,495

 

Outpatient medical

 

 

 

 

81,065

 

 

87,808

 

 

93,204

 

 

97,333

 

 

92,713

 

 

99,805

 

 

94,905

 

 

 

Total

 

 

 

 

517,691

 

 

558,773

 

 

570,272

 

 

589,737

 

 

597,356

 

 

617,369

 

 

605,264

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triple-net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash NOI on same store properties

 

 

(24,291)

 

 

(24,997)

 

 

(24,676)

 

 

(23,892)

 

 

(23,487)

 

 

(21,144)

 

 

(20,874)

 

 

NOI attributable to non same store properties

 

 

(54,159)

 

 

(61,515)

 

 

(66,716)

 

 

(73,927)

 

 

(77,024)

 

 

(78,548)

 

 

(79,368)

 

 

 

Subtotal

 

 

 

 

(78,450)

 

 

(86,512)

 

 

(91,392)

 

 

(97,819)

 

 

(100,511)

 

 

(99,692)

 

 

(100,242)

 

Seniors housing operating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash NOI on same store properties

 

 

251

 

 

253

 

 

250

 

 

249

 

 

248

 

 

242

 

 

1,269

 

 

NOI attributable to non same store properties

 

 

(3,843)

 

 

(17,255)

 

 

(19,054)

 

 

(32,156)

 

 

(38,030)

 

 

(40,129)

 

 

(45,186)

 

 

 

Subtotal

 

 

 

 

(3,592)

 

 

(17,002)

 

 

(18,804)

 

 

(31,907)

 

 

(37,782)

 

 

(39,887)

 

 

(43,917)

 

Outpatient medical:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash NOI on same store properties

 

 

(2,258)

 

 

(2,044)

 

 

(2,116)

 

 

(2,054)

 

 

(1,499)

 

 

(1,478)

 

 

(1,462)

 

 

NOI attributable to non same store properties

 

 

(5,627)

 

 

(11,723)

 

 

(17,443)

 

 

(21,073)

 

 

(16,950)

 

 

(22,950)

 

 

(17,966)

 

 

 

Subtotal

 

 

 

 

(7,885)

 

 

(13,767)

 

 

(19,559)

 

 

(23,127)

 

 

(18,449)

 

 

(24,428)

 

 

(19,428)

Same store NOI:

 

Properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triple-net

 

569

 

 

202,122

 

 

205,217

 

 

206,645

 

 

207,641

 

 

207,657

 

 

210,617

 

 

210,622

 

Seniors housing operating

 

298

 

 

152,462

 

 

162,234

 

 

160,227

 

 

155,037

 

 

158,693

 

 

167,368

 

 

155,578

 

Outpatient medical

 

219

 

 

73,180

 

 

74,041

 

 

73,645

 

 

74,206

 

 

74,264

 

 

75,377

 

 

75,477

 

 

 

Total

 

1,086

 

$

427,764

 

$

441,492

 

$

440,517

 

$

436,884

 

$

440,614

 

$

453,362

 

$

441,677

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Store NOI Property Reconciliation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total properties

 

1,399

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions

 

(201)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Developments

 

(32)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-for-sale

 

(71)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment transitions

 

(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other(1)

 

(7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same store properties

 

1,086

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Includes six land parcels and one loan.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

September 30,

 

September 30,

Same Store NOI Reconciliations:

 

2015

 

2016

NOI:

 

 

 

 

 

 

 

 

 

Triple-net

 

 

 

$

870,345

 

$

929,343

 

Seniors housing operating

 

 

 

 

514,318

 

 

603,219

 

Outpatient medical

 

 

 

 

262,077

 

 

287,423

 

 

 

Total

 

 

 

 

1,646,740

 

 

1,819,985

Adjustments:

 

 

 

 

 

 

 

 

 

Triple-net:

 

 

 

 

 

 

 

 

 

 

Non-cash NOI on same store properties

 

 

 

 

(73,964)

 

 

(65,505)

 

 

NOI attributable to non same store properties

 

 

 

 

(182,397)

 

 

(234,942)

 

 

 

Subtotal

 

 

 

 

(256,361)

 

 

(300,447)

 

Seniors housing operating:

 

 

 

 

 

 

 

 

 

 

Non-cash NOI on same store properties

 

 

 

 

754

 

 

1,759

 

 

NOI attributable to non same store properties

 

 

 

 

(40,151)

 

 

(123,342)

 

 

 

Subtotal

 

 

 

 

(39,397)

 

 

(121,583)

 

Outpatient medical

 

 

 

 

 

 

 

 

 

 

Non-cash NOI on same store properties

 

 

 

 

(6,418)

 

 

(4,439)

 

 

NOI attributable to non same store properties

 

 

 

 

(34,794)

 

 

(57,865)

 

 

 

Subtotal

 

 

 

 

(41,212)

 

 

(62,304)

Same store NOI:

 

Properties

 

 

 

 

 

 

 

Triple-net

 

569

 

 

613,984

 

 

628,896

 

Seniors housing operating

 

298

 

 

474,921

 

 

481,636

 

Outpatient medical

 

219

 

 

220,865

 

 

225,119

 

 

 

Total

 

1,086

 

$

1,309,770

 

$

1,335,651

 

48


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

 

 

Other Disclosures

 

United States of America

 

     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 indirectly adversely affected.

 

Licensing and Certification

  

     Certain health care facilities are subject to a variety of licensure and certificate of need (“CON”) laws and regulations.  Where applicable, CON laws generally require, among other requirements, that a facility demonstrate the need for (1) constructing a new facility, (2) adding beds or expanding an existing facility, (3) investing in major capital equipment or adding new services, (4) changing the ownership or control of an existing licensed facility, or (5) terminating services that have been previously approved through the CON process.  State and federal officials, increasingly including the Federal Trade Commission (“FTC”) and the U.S. Department of Justice (“DOJ”), are challenging CON laws for reducing competition in the industry, creating barriers to entry and expansion, limiting consumer choice, and stifling innovation.  We cannot predict whether current or future efforts to repeal or amend these state laws will be successful, nor can we predict the impact that such repeals or amendments would have on our operators or tenants and their ability to meet their obligations to us. 

 

Reimbursement

 

     The Department of Health and Human Services (“HHS”) pledged to tie 30% of Medicare payments to quality or alternative payment models by the end of 2016 and to tie 50% of Medicare payments to quality or alternate payment models by the end of 2018.  In January 2015, the Administration announced that it achieved its goal of tying 30% of Medicare payments to quality ahead of schedule, by year end 2015 rather than the targeted deadline of year end 2016.  Providers increasingly are entering into value-based purchasing arrangements, which to the extent our operators and tenants enter into such agreements, could affect their reimbursement and indirectly impact our revenues and operations.  For example, the Centers for Medicare and Medicaid Services (“CMS”) launched the Hospital Value-Based Purchasing (“VBP”) Program in 2013, which is an initiative designed to reward acute-care hospitals with incentive payments for the quality of care they provide to Medicare beneficiaries.  In addition, in fiscal year 2019, CMS expects to implement the Skilled Nursing Facility Value-Based Purchasing Program (“SNFVBP”), which is intended to promote better clinical outcomes for skilled nursing facility (“SNF”) patients through the use of incentive payments to participating SNFs based on the quality of care provided.  Similarly, other public and private payors have started considering whether to base reimbursement decisions on access, price, quality, efficiency, and alignment of incentives, rewarding higher quality healthcare providers with enhanced payments and increased market share. 

 

     On October 6, 2014, the President signed into law the Improving Medicare Post-Acute Transformation Act of 2014 (“IMPACT Act”).  The law required MedPAC to submit a report to Congress by June 30, 2016, evaluating and recommending features of a post-acute payment system that establishes payment rates according to individual characteristics instead of the post-acute setting where the patient is treated.  On June 15, 2016, MedPAC submitted this report to Congress, which provides general guidelines, rather than specific details, for developing a new cross-facility payment system, including a common unit of service, a common risk adjustment system using patient characteristics, separate models to establish payments for non-therapy ancillary services and therapy services, and two outlier policies for high-cost stays and short stays.  The IMPACT Act requires MedPAC to issue another report in 2023, following CMS’s development of an actual payment prototype.

 

     On November 3, 2015, CMS published a proposed rule that would revise the discharge planning requirements that hospitals, including long-term acute care hospitals (“LTCHs”), inpatient rehabilitation facilities (“IRFs”) and home health agencies (“HHAs”) must meet in order to participate in the Medicare and Medicaid programs.  Among other things, the proposed rule would require hospitals and other facilities to evaluate patients for their discharge needs and develop specific written discharge plans for them.  The proposed rule would also implement the discharge planning requirements of the IMPACT Act.  Provider groups have expressed concern that the proposed rule, if implemented, could create burdensome paperwork requirements, resulting in the need to hire additional staff and necessarily expend more resources.

 

     On February 9, 2016, President Obama released his budget proposal for fiscal year (“FY”) 2017.  The proposed budget would cut Medicare payments to providers by $420 billion over ten years.  Among other Medicare-related changes, the President’s budget plan over ten years would: (1) reduce bad debt payments to providers by $32.9 billion, (2) reduce the payment updates for post-acute care

49


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

 

 

providers by $86.6 billion, (3) raise the “60% Rule” threshold for IRFs back to 75% for reductions of $2.2 billion, and (4) implement bundled post-acute care payments for reductions of $9.9 billion.  If these recommendations are adopted, we cannot predict whether they will have a material impact on our operators’ or tenants’ property or business.

 

     On March 11, 2016, CMS published a proposed rule to test new models regarding Medicare Part B payments for prescription drugs.  The proposal is designed to test different physician and patient incentives to drive the prescribing of the most effective drugs and test new payment approaches to reward positive patient outcomes.  If this proposed rule is finalized, it may impact our operators’ and tenants’ Medicare reimbursement rates, and our revenues and operations may be indirectly affected.

 

     On March 15, 2016, the House Energy and Commerce Committee approved the Common Sense Act of 2016, which would lower the maximum rate for Medicaid provider tax assessments from 6.0% of taxpayer revenues to 5.5%.  If enacted, the bill could lower funds available for state Medicaid programs and may result in lower Medicaid rates to our operators. 

 

     On March 24, 2016, CMS announced the next phase of its Initiative to Reduce Avoidable Hospitalizations among Nursing Facility Residents.  Through this new payment model, CMS will encourage healthcare practitioners to provide additional treatments for especially ill or frail nursing home residents by equalizing the payments between a comprehensive assessment given at SNFs and hospitals.  Participating SNFs will also receive payment to provide additional treatment for common medical conditions that often lead to avoidable hospitalizations.  To the extent our operators and tenants participate in this initiative, it could affect their reimbursement and indirectly impact our revenues and operations.

 

     On April 1, 2016, CMS’s bundled payment program for Lower Extremity Joint Replacement (“CJR”) procedures went into effect.  The CJR bundled payment program is mandatory for all hospitals paid under the Medicare Inpatient Prospective Payment System and located in the 67 selected Metropolitan Statistical Areas.  On August 2, 2016, CMS published a proposed rule that, among other things, would expand the CJR bundles to include hip and femur fractures, as well as total knee and hip joint replacements.  This could have an effect on our SNF operators as patients are down streamed for recovery.

 

     On April 4, 2016, CMS announced the final 2017 payment rates for Medicare Advantage, with an expected average payment increase of 0.85%.  Changes in Medicare Advantage plan payments may indirectly affect our operators and tenants that contract with Medicare Advantage plans.

 

     On June 16, 2016, CMS published a proposed rule that would update the requirements that hospitals and critical access hospitals (“CAHs”) must meet to participate in the Medicare and Medicaid programs.  The rule would apply new conditions of participation to such hospitals, including revisions to reduce readmissions, advance non-discrimination protections, increase infection control, and address other quality measures.  If finalized, these new conditions of participation may potentially increase the operating costs of our tenants and operators.

 

     On July 14, 2016, CMS published a proposed rule regarding 2017 Medicare payment rates for Hospital Outpatient Departments (“HOPDs”) and Ambulatory Surgery Centers (“ASCs”).  CMS Estimates that updates in the proposed rule would increase HOPD payments by approximately 1.6% and ASC payments by 1.2% in 2017.  In addition, CMS proposes to implement section 603 of the Bipartisan Budget Act of 2015, which requires that, with the exception of dedicated emergency department services, services furnished in off-campus provider-based departments that began billing under the HOPD Prospective Payment System (“PPS”) on or after November 2, 2015 would no longer be paid under the HOPD PPS; instead, these services would be paid under other applicable Part B payment systems, including the Physician Fee Schedule (“PFS”), beginning January 1, 2017.  Specifically, CMS would pay physicians at the “nonfacility” PFS rate and there would be no payment made directly to the hospital by Medicare.

 

     On August 2, 2016, CMS published a proposed rule that would create a bundled payment program for acute myocardial infarction or coronary artery bypass graft surgery procedures.  Similar to the CJR bundled payment program, the Cardiac Care bundled payment program would be mandatory for all hospitals paid under the Medicare Inpatient Prospective Payment System and located in the 98 selected Metropolitan Statistical Areas.  If finalized, this proposed rule could have an effect on our SNF operators as patients are down streamed for recovery.

 

     On August 5, 2016, CMS published a final rule regarding FY 2017 Medicare payment policies and rates for SNFs and IRFs.  Under the final SNF rule, CMS projects that aggregate payments to SNFs will increase in FY 2017 by $920 million, or 2.4%, from payments in FY 2016.  The final SNF rule also finalized three quality and resource use measures SNFs are required to report pursuant to the Protecting Access to Medicare Act of 2014.  Beginning in FY 2018, SNFs that fail to submit the required quality data to CMS will be subject to a 2% reduction to the annual market basket percentage update.  Under the final IRF rule, CMS estimates that aggregate payments to IRFs will increase in FY 2017 by $145 million, or 1.9%, relative to payments in FY 2016.

50


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

 

 

 

     On August 16, 2016, CMS published a proposed rule that would revise and update the requirements for the Programs of All-Inclusive Care for the Elderly (“PACE”) program under Medicare and Medicaid, a unique capitated managed care benefit for the frail elderly, including strengthening protections and improving care for beneficiaries and providing administrative flexibility and regulatory relief for PACE organizations.  Among other updates, CMS is proposing to allow non-physician primary care practitioners to provide some services in the place of primary care physicians in order to expand access to PACE and allow PACE organizations the flexibility to continue to meet the needs and preferences of participants.  Additional proposed beneficiary protections include requiring PACE organizations that offer prescription drug coverage to comply with Medicare Part D prescription drug program requirements and strengthening CMS’s ability to impose sanctions and enforcement actions on PACE organizations.

 

     On August 22, 2016, CMS published a final rule regarding FY 2017 Medicare payment policies and rates for LTCHs.  As a result of the continuation of the phase-in of site neutral payment rates for specified cases in LTCHs, CMS projects FY 2017 Medicare payments to LTCHs will decrease by 7.1%, or approximately $363 million in FY 2017.  Payment rates will increase by 0.7% for cases that qualify for the higher standard LTCH Prospective Payment System rate.  The final rule also implements the proposed 25% threshold policy, under which payment adjustments are made when the number of cases an LTCH admits from a single hospital exceeds a specified threshold (generally 25%).  Finally, in response to the federal district court’s review of the “Two-Midnight” payment policy in Shands Jacksonville Medical Center, Inc., et al. v. Burwell, No. 14-263 (D.D.C.), CMS finalized its proposal to remove the 0.2% Medicare Part A hospital payment cut and also its effects for FYs 2014, 2015, and 2016 though an approximate 0.8% increase to FY 2017 payment rates.  Along with the final rule, CMS issued an interim final rule with comment period to implement section 231 of the Consolidated Appropriations Act (2016) that established a temporary exception from the site neutral payment rate for certain severe wound care discharges from certain LTCHs.

 

     On October 4, 2016, CMS published a final rule that, for the first time in nearly 25 years, comprehensively updates the SNF and LTCH requirements for participation under Medicare and Medicaid.  Among other things, the final 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 $62,900 per facility and $55,000 per facility in subsequent years.

 

HHS Office of Inspector General Recommendations Addressing SNF Billing

 

     In the HHS, Office of Inspector General’s (“OIG’s”) April 2016 Compendium of Unimplemented Recommendations, OIG cited its prior September 2014 report addressing the need to reform the Medicare payment system for SNF services.  In response to its findings that Medicare payments for therapy greatly exceeded SNF’s costs for therapy, OIG recommended, among other things, that CMS evaluate the extent to which Medicare payment rates for therapy should be reduced.  Similarly, in May 2016, OIG issued a report finding that the improper payment rate for SNF claims increased by 4.10% in FY 2015 (compared to FY 2014) due to insufficient documentation.  If followed, these reports and recommendations may impact our tenants and operators.

 

Other Related Laws, Initiatives, and Considerations

 

          Following a similar report issued in October 2015, on October 6, 2016, the U.S. Government Accountability Office (“GAO”) released a report recommending that CMS (1) improve public stakeholders’ ability to locate and use SNF expenditure data and (2) ensure the accuracy and completeness of this data.  According to the GAO, timely completion of these actions is particularly important because Medicare payments to nursing homes will be dependent on quality data, through the implementation of the value based purchasing program, starting in fiscal year 2019.  To the extent such recommendations are implemented, they could impact our operators and tenants.

 

     On February 12, 2016, CMS published a final rule regarding the obligations of Medicare providers to report and return overpayments arising under Parts A and B.  The final rule, which became effective March 14, 2016, implements § 6402(a) of the Affordable Care Act, also known as the “60-day report and return statute,” which requires providers to report and return Medicare and Medicaid overpayments within the later of (a) 60 days after the overpayment is “identified,” or (b) the date any corresponding cost report is due, if applicable.  An overpayment impermissibly retained under this statute could violate the federal False Claims Act and subject providers to potential Medicare and Medicaid program exclusion and penalties under the federal Civil Monetary Penalty statute.     

 

     On March 9, 2016, CMS released SNF utilization and payment data around facility costs and services.  In its press release, CMS expressed concern that the amount of therapy provided for ultra-high and very high resource utilization groups is often very close to the minimum amount of minutes needed to qualify a patient for these categories.  CMS referred the issue to Recovery Auditor

51


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

 

 

Contractors for further investigation.  On March 30, 2016, the DOJ launched 10 regional Elder Justice Task Forces to coordinate and enhance efforts to pursue nursing homes that provide grossly substandard care to their residents.  We cannot predict the extent to which increased monitoring and auditing activities by government agencies may impact our operators.

 

     On June 30, 2016, DOJ issued an interim rule increasing the penalties under the False Claims Act (“FCA”) from the current range of $5,500 to $11,000 per false claim, to a new range of $10,781 to $21,562.  The interim rule takes effect August 1, 2016, and applies to false claims made after November 2, 2015.

 

     On September 6, 2016, CMS published an interim rule increasing healthcare civil monetary penalties (“CMPs”) by as much as 150%.  The final rule, which also took effect on September 6, 2016, implemented the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015, which not only adjusted the CMPs to meet current inflation rates, but also requires annual adjustments moving forward.  Notably, the CMP for improper billing by hospitals, critical access hospitals, or skilled nursing homes, which was last updated in 1972, increased by 150% under the interim rule, from a maximum penalty of $2,000 to $5,000 per violation.

 

     Many of our operators and tenants are subject to federal and state privacy and security laws.  There have been increased enforcement efforts under these laws, and we expect this trend to continue.  Under the Health Information Technology for Economic and Clinical Health Act (“HITECH”), state attorney generals have the right to prosecute Health Insurance Portability and Accountability Act (“HIPAA”) violations committed against residents of their states, and several such actions have been brought to-date.  In addition, HITECH mandates that the Secretary of HHS conduct periodic compliance audits of HIPAA covered entities and business associates.  On March 21, 2016, the HHS Office of Civil Rights announced the official start of the 2016 Phase 2 HIPAA Audit Program.  Enforcement actions may stem from these audits, including civil monetary penalty fines or monetary settlements, which may impact an operator’s ability to meet their financial obligations to us. 

 

United Kingdom

 

Brexit

 

     On June 23, 2016, the United Kingdom (“UK”) held an “in-or-out referendum” on the UK’s membership of the European Union (“EU”), the result of which favored the exit of the UK from the EU (“Brexit”).  A process of negotiation will determine the future terms of the UK’s relationship with the EU which could take many forms. In the meantime, the UK remains a member of the EU. The potential impact of Brexit is currently unclear, but may include reduced economic growth and volatility, changes to the regulatory environment and uncertainty in the capital markets.  We cannot predict whether Brexit will have a material impact on our operators’ or tenants’ property or business.

 

National Minimum Wage

 

     In the July 2015 Budget the UK government announced that it would introduce the National Living Wage at a premium of 50 pence above the National Minimum Wage to take effect from April 2016.  The National Minimum Wage (Amendment) Regulations 2016 came into force on April 1, 2016 (“2016 Regulations”). The 2016 Regulations amend the Regulation of the National Minimum Wage Regulations 2015 to provide a National Living Wage rate of £7.20 an hour for workers aged 25 and over.  On October 1, 2016, the National Minimum Wage for workers aged 21 to 24 was raised to £6.95 an hour.  Starting in April 2017, both rates will change every April.  The 2016 Regulations also amend the National Minimum Wage Act 1998 by increasing the financial penalty payable by employers who underpay the National Minimum Wage from 100% to 200% of the underpayment due to each worker.  The maximum fine for non-payment will be £20,000 per worker and employers who fail to pay will be banned from being a company director for up to 15 years. 

 

Privacy

 

     In the EU, data protection is governed by the EU Data Protection Directive 95/46/EC (the “Data Protection Directive”). The Data Protection Directive has been implemented in the UK by the Data Protection Act 1998 (the “Act”) which entered into force on March 2000 and is enforced by the Information Commissioner’s Office (“ICO”).

 

     A new EU General Data Protection Regulation will replace the Data Protection Directive and impose a significant number of new obligations including, among others, a requirement to appoint data protection officers, having detailed documentation on the processing of personal data, carrying out privacy impact assessments in certain circumstances, providing standardized data protection notices, reporting security breaches without undue delay, and providing certain rights to individuals such as a right of erasure of personal data.  The EU General Data Protection Regulation is expected to have significant enforcement powers with fines proposed by

52


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

 

 

the European Commission of up to 4% of annual worldwide turnover or €20 million, whichever is greater.  The EU General Data Protection Regulation was adopted in May 2016 and will enter into force in EU Member States on May 25, 2018.  It is unclear, as a result of Brexit, whether the Regulation will become law in the UK.  If the EU General Data Protection Regulation is adopted, we cannot predict whether it will have a material impact on our operators’ or tenants’ property or business.

 

Canada

 

Licensing and Regulation

 

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) 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) and “assisted living residences,” the definition of which is anticipated to be soon changed to refer to facilities providing any of a list of assisted living services.

 

     The B.C. Act also creates a separate regime for regulating “assisted living residences,” the definition of which changed in May 2016 to facilities providing one or more prescribed care services.

 

Quebec

 

     In Québec, retirement homes are regulated by the Act Respecting Health Services and Social Services and the Regulation required to obtain a certificate of compliance based on operating standards for a private seniors’ residence.  The required certificate of compliance is issued for a period of four years, is renewable and can only be validly transferred to another person with the written permission of the regional licensing agency.

 

Privacy

 

      Some privacy regulators in Canada have order-making authority and others are ombudspersons who make recommendations that may only be enforced by a court. Under a number of privacy laws, a finding by a regulator that a custodian has breached the law creates a right to apply to a court for money damages.  In some provinces there is a statutory civil cause of action for breach of privacy and personal liability for directors and officers. In other provinces, the courts have recognized a limited common law cause of action for breach of privacy.

 

     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, monetary penalties granted have been on the low side, although that is changing with civil actions for breach of privacy and may change further as a result of class action activity.  Regulators have the authority to make public the identity of a custodian that has been found to have 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 (mandatory under some privacy laws) and other activities required to manage a privacy breach can give rise to significant costs.

 

Other Legislation

 

     In Quebec, the Safety Code was amended in December 2015 to require that private seniors’ residences be equipped with a fire alarm and detection system, as well as the installation of a sprinkler system in certain private seniors’ residences. The amendments came into force March 18, 2016, except regarding the installation of the sprinkler system, which has a five year grace period, and comes into force December 2, 2020.

 

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.

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

 

 

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, 2015 for further information regarding significant accounting policies that impact us.  There have been no material changes to these policies in 2016.

 

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 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, 2015, 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

54


  

 

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, 2016

 

December 31, 2015

 

 

Principal

 

Change in

 

Principal

 

Change in

 

 

balance

 

fair value

 

balance

 

fair value

Senior unsecured notes

 

$

8,095,320

 

$

(579,585)

 

$

7,965,107

 

$

(519,901)

Secured debt

 

 

2,521,844

 

 

(84,672)

 

 

2,757,123

 

 

(91,376)

Totals

 

$

10,617,164

 

$

(664,257)

 

$

10,722,230

 

$

(611,277)

     Our variable rate debt, including our primary unsecured credit facility, is reflected at fair value. At September 30, 2016, we had $2,824,420,000 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 $28,244,000.  At December 31, 2015, we had $2,236,733,000 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 $22,367,000.

 

     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, 2016, including the impact of existing hedging arrangements, if these exchange rates were to increase or decrease by 10%, our net income from these investments would increase or decrease, as applicable, by less than $1,200,000.  We will continue to mitigate these underlying foreign currency exposures with non-U.S. denominated borrowings and gains and losses on derivative contracts.  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, 2016

 

December 31, 2015

 

 

Carrying

 

Change in

 

Carrying

 

Change in

 

 

Value

 

fair value

 

Value

 

fair value

Foreign currency forward contracts(1)

 

$

95,031

 

$

917

 

$

117,452

 

$

1,915

Debt designated as hedges

 

 

1,557,196

 

 

13,000

 

 

1,728,979

 

 

13,000

Totals

 

$

1,652,227

 

$

13,917

 

$

1,846,431

 

$

14,915

 

 

 

 

 

 

 

 

 

 

 

 

 

(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

55


  

 

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, 2015.

 

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, 2016 through July 31, 2016

 

-

 

$

-

 

 

 

 

August 1, 2016 through August 31, 2016

 

246

 

 

76.96

 

 

 

 

September 1, 2016 through September 30, 2016

 

-

 

 

-

 

 

 

 

Totals

 

246

 

$

76.96

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) During the three months ended September 30, 2016, the company acquired shares of common stock held by employees who tendered owned shares to satisfy tax withholding obligations.

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

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

10.1            Employment Agreement, dated as of October 4, 2016, by and between Welltower Inc. and Mercedes T. Kerr*

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**

                           


  

 

*

 

**

 

Management Contract or Compensatory Plan or Arrangement

 

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, 2016 and December 31, 2015, (ii) the Consolidated Statements of Comprehensive Income for the nine months ended September 30, 2016 and 2015, (iii) the Consolidated Statements of Equity for the nine months ended September 30, 2016 and 2015, (iv) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015 and (v) the Notes to Unaudited Consolidated Financial Statements.

  

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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:  November 2, 2016 

By:  

/s/ THOMAS J. DEROSA  

 

 

Thomas J. DeRosa, 

 

 

Chief Executive Officer

 (Principal Executive Officer) 

 

 

 

 

 

Date:  November 2, 2016 

By:  

/s/ SCOTT A. ESTES  

 

 

Scott A. Estes, 

 

 

Executive Vice President and Chief Financial Officer

 (Principal Financial Officer) 

 

 

 

 

 

Date:  November 2, 2016 

By:  

/s/ PAUL D. NUNGESTER, JR.  

 

 

Paul D. Nungester, Jr., 

 

 

Senior Vice President and Controller

 (Principal Accounting Officer) 

 

 

58