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WELLTOWER INC. - Quarter Report: 2017 March (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 March 31, 2017

or

 

 

 

 

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 April 28, 2017, the registrant had 366,166,605 shares of common stock outstanding.  

 

 

 

 


TABLE OF CONTENTS

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements (Unaudited)

 

 

 

Consolidated Balance Sheets — March 31, 2017 and December 31, 2016

3

 

 

Consolidated Statements of Comprehensive Income — Three months ended March 31, 2017 and 2016

4

 

 

Consolidated Statements of Equity — Three months ended March 31, 2017 and 2016

6

 

 

Consolidated Statements of Cash Flows — Three months ended March 31, 2017 and 2016

7

 

 

Notes to Unaudited Consolidated Financial Statements

8

 

 

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

26

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

47

 

 

Item 4. Controls and Procedures

48

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

 

Item 1A. Risk Factors

48

 

49

 

 

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

49

 

 

Item 5. Other Information

49

 

 

Item 6. Exhibits

49

 

 

Signatures

50

 

  

 


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

CONSOLIDATED BALANCE SHEETS

WELLTOWER INC. AND SUBSIDIARIES

(In thousands)

 

 

 

 

 

 

March 31, 2017

 

December 31, 2016

 

 

 

 

  

(Unaudited)

 

(Note)

Assets:  

 

 

 

 

 

Real estate investments:  

 

 

 

 

 

 

Real property owned:  

 

 

 

 

 

 

 

Land and land improvements  

$

2,650,473

 

$

2,591,071

 

 

Buildings and improvements  

 

24,930,472

 

 

24,496,153

 

 

Acquired lease intangibles  

 

1,421,277

 

 

1,402,884

 

 

Real property held for sale, net of accumulated depreciation  

 

178,260

 

 

1,044,859

 

 

Construction in progress  

 

390,180

 

 

506,091

 

 

 

Gross real property owned  

 

29,570,662

 

 

30,041,058

 

 

Less accumulated depreciation and amortization  

 

(4,335,160)

 

 

(4,093,494)

 

 

 

Net real property owned  

 

25,235,502

 

 

25,947,564

 

Real estate loans receivable  

 

574,080

 

 

622,628

 

 

Less allowance for losses on loans receivable  

 

(6,196)

 

 

(6,563)

 

 

 

Net real estate loans receivable  

 

567,884

 

 

616,065

 

Net real estate investments  

 

25,803,386

 

 

26,563,629

Other assets:  

 

 

 

 

 

 

 

Investments in unconsolidated entities  

 

416,110

 

 

457,138

 

 

Goodwill  

 

68,321

 

 

68,321

 

 

Cash and cash equivalents  

 

380,360

 

 

419,378

 

 

Restricted cash  

 

42,777

 

 

187,842

 

 

Straight-line rent receivable

 

348,085

 

 

342,578

 

 

Receivables and other assets  

 

708,238

 

 

826,298

 

 

 

Total other assets  

 

1,963,891

 

 

2,301,555

Total assets  

$

27,767,277

 

$

28,865,184

 

 

 

 

  

 

 

 

 

 

Liabilities and equity  

 

 

 

 

 

Liabilities:  

 

 

 

 

 

 

 

Borrowings under primary unsecured credit facility  

$

522,000

 

$

645,000

 

 

Senior unsecured notes  

 

8,188,928

 

 

8,161,619

 

 

Secured debt  

 

2,669,787

 

 

3,477,699

 

 

Capital lease obligations  

 

73,470

 

 

73,927

 

 

Accrued expenses and other liabilities  

 

817,411

 

 

827,034

Total liabilities  

 

12,271,596

 

 

13,185,279

Redeemable noncontrolling interests  

 

385,418

  

  

398,433

Equity:  

 

 

 

 

 

 

 

Preferred stock  

 

718,750

 

 

1,006,250

 

 

Common stock  

 

365,187

 

 

363,071

 

 

Capital in excess of par value  

 

17,134,490

 

 

16,999,691

 

 

Treasury stock  

 

(62,306)

 

 

(54,741)

 

 

Cumulative net income  

 

5,130,593

 

 

4,803,575

 

 

Cumulative dividends  

 

(8,474,775)

 

 

(8,144,981)

 

 

Accumulated other comprehensive income (loss)  

 

(177,200)

 

 

(169,531)

 

 

Other equity  

 

1,464

 

 

3,059

 

 

 

Total Welltower Inc. stockholders’ equity  

 

14,636,203

 

 

14,806,393

 

 

Noncontrolling interests  

 

474,060

 

 

475,079

Total equity  

 

15,110,263

 

 

15,281,472

Total liabilities and equity  

$

27,767,277

 

$

28,865,184

 

NOTE: The consolidated balance sheet at December 31, 2016 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

 

 

 

March 31,

 

 

 

2017

 

2016

Revenues:

 

 

 

 

 

 

Rental income  

$

367,141

 

$

415,663

 

Resident fees and services

 

670,337

 

 

602,149

 

Interest income

 

20,748

 

 

25,188

 

Other income

 

4,072

 

 

4,050

 

 

Total revenues

 

1,062,298

 

 

1,047,050

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

Interest expense

 

118,597

 

 

132,960

 

Property operating expenses

 

510,169

 

 

449,636

 

Depreciation and amortization

 

228,276

 

 

228,696

 

General and administrative

 

31,101

 

 

45,691

 

Transaction costs

 

-

 

 

8,208

 

Loss (gain) on derivatives, net

 

1,224

 

 

-

 

Loss (gain) on extinguishment of debt, net

 

31,356

 

 

(24)

 

Impairment of assets

 

11,031

 

 

14,314

 

Other expenses

 

11,675

 

 

-

 

 

Total expenses

 

943,429

 

 

879,481

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

 

 

 

 

 

and income from unconsolidated entities

 

118,869

 

 

167,569

Income tax (expense) benefit

 

(2,245)

 

 

1,725

Income (loss) from unconsolidated entities

 

(23,106)

 

 

(3,820)

Income (loss) from continuing operations

 

93,518

 

 

165,474

Gain (loss) on real estate dispositions, net

 

244,092

 

 

-

Net income

 

337,610

 

 

165,474

Less:

Preferred stock dividends

 

14,379

 

 

16,352

Less:

Preferred stock redemption charge

 

9,769

 

 

-

Less:

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

 

823

 

 

153

Net income (loss) attributable to common stockholders

$

312,639

 

$

148,969

 

 

 

 

 

 

 

 

Average number of common shares outstanding:

 

 

 

 

 

 

Basic

 

362,534

 

 

355,076

 

Diluted

 

364,652

 

 

356,051

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

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

$

0.86

 

$

0.42

 

Net income (loss) attributable to common stockholders*

$

0.86

 

$

0.42

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

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

$

0.86

 

$

0.42

 

Net income (loss) attributable to common stockholders*

$

0.86

 

$

0.42

 

 

 

 

 

 

 

 

Dividends declared and paid per common share

$

0.87

 

$

0.86

 

* 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 March 31,

 

 

 

 

2017

 

2016

 

Net income

$

337,610

 

$

165,474

 

 

 

 

 

 

 

 

 

  

Other comprehensive income (loss):

 

 

 

 

 

 

 

Unrecognized gain (loss) on available for sale securities

 

(10,569)

 

 

(7,549)

 

 

Unrealized gains (losses) on cash flow hedges

 

-

 

 

483

 

 

Unrecognized actuarial gain (loss)

 

-

 

 

2

 

 

Foreign currency translation gain (loss)

 

5,713

 

 

1,372

 

Total other comprehensive income (loss)

 

(4,856)

 

 

(5,692)

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

332,754

 

 

159,782

 

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

 

3,636

 

 

15,271

 

Total comprehensive income (loss) attributable to common stockholders

$

329,118

 

$

144,511

 

 

 

 

 

 

 

 

 

 

(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)

 

 

Three Months Ended March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

363,071

$

16,999,691

$

(54,741)

$

4,803,575

$

(8,144,981)

$

(169,531)

$

3,059

$

475,079

$

15,281,472

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

 

 

 

336,787

 

 

 

 

 

 

 

1,780

 

338,567

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,669)

 

 

 

2,813

 

(4,856)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

333,711

Net change in noncontrolling interests

 

 

 

  

 

932

 

 

 

 

 

 

 

 

 

 

 

(5,612)

 

(4,680)

Amounts related to stock incentive plans, net of forfeitures

 

 

 

336

 

6,903

 

(7,565)

 

 

 

 

 

 

 

(1,605)

 

 

 

(1,931)

Proceeds from issuance of common stock

 

 

 

1,780

 

117,204

 

 

 

 

 

 

 

 

 

 

 

 

 

118,984

Redemption of preferred stock

 

(287,500)

 

 

 

9,760

 

 

 

(9,769)

 

 

 

 

 

 

 

 

 

(287,509)

Option compensation expense

  

  

 

 

 

 

 

 

 

 

 

 

 

 

 

10

 

 

 

10

Dividends paid:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock dividends

 

 

 

 

 

 

 

 

 

 

 

(315,415)

 

 

 

 

 

 

 

(315,415)

 

Preferred stock dividends

 

 

 

 

 

 

 

 

 

 

 

(14,379)

 

 

 

 

 

 

 

(14,379)

Balances at end of period

$

718,750

$

365,187

$

17,134,490

$

(62,306)

$

5,130,593

$

(8,474,775)

$

(177,200)

$

1,464

$

474,060

$

15,110,263

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 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)

 

 

 

 

 

 

 

 

 

165,321

 

 

 

 

 

 

 

1,082

 

166,403

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

(20,810)

 

 

 

15,118

 

(5,692)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

160,711

Net change in noncontrolling interests

 

 

 

  

 

(5,717)

 

 

 

 

 

 

 

 

 

 

 

(121,325)

 

(127,042)

Amounts related to stock incentive plans, net of forfeitures

 

 

 

637

 

25,555

 

(6,899)

 

 

 

 

 

 

 

(115)

 

 

 

19,178

Proceeds from issuance of common stock

 

 

 

1,505

 

91,600

 

 

 

 

 

 

 

 

 

 

 

 

 

93,105

Option compensation expense

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

79

 

 

 

79

Dividends paid:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock dividends

 

 

 

 

 

 

 

 

 

 

 

(305,770)

 

 

 

 

 

 

 

(305,770)

 

Preferred stock dividends

 

 

 

 

 

 

 

 

 

 

 

(16,352)

 

 

 

 

 

 

 

(16,352)

Balances at end of period

$

1,006,250

 

356,953

 

16,589,738

 

(51,271)

 

3,891,093

 

(7,168,178)

 

(109,053)

 

4,062

 

480,200

$

14,999,794

 

See notes to unaudited consolidated financial statements

 

6


CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

WELLTOWER INC. AND SUBSIDIARIES

(In thousands)

 

 

 

 

 

Three Months Ended

 

 

 

  

March 31,

 

 

 

  

2017

 

2016

Operating activities:  

 

 

 

 

 

Net income  

$

337,610

 

$

165,474

Adjustments to reconcile net income to  

 

 

 

 

 

 

net cash provided from (used in) operating activities:  

 

 

 

 

 

 

 

Depreciation and amortization  

 

228,276

 

 

228,696

 

 

Other amortization expenses  

 

3,361

 

 

1,118

 

 

Impairment of assets  

 

11,031

 

 

14,314

 

 

Stock-based compensation expense  

 

4,906

 

 

8,186

 

 

Loss (gain) on derivatives, net  

 

1,224

 

 

-

 

 

Loss (gain) on extinguishment of debt, net  

 

31,356

 

 

(24)

 

 

Loss (income) from unconsolidated entities

 

23,106

 

 

3,820

 

 

Rental income in excess of cash received  

 

(18,141)

 

 

(29,669)

 

 

Amortization related to above (below) market leases, net  

 

8

 

 

230

 

 

Loss (gain) on sales of properties, net  

 

(244,092)

 

 

-

 

 

Distributions by unconsolidated entities

 

474

 

 

174

 

 

Increase (decrease) in accrued expenses and other liabilities  

 

19,478

 

 

(13,526)

 

 

Decrease (increase) in receivables and other assets  

 

(13,071)

 

 

1,816

Net cash provided from (used in) operating activities  

 

385,526

 

 

380,609

 

 

 

  

 

 

 

 

 

Investing activities:  

 

 

 

 

 

 

Cash disbursed for acquisitions  

 

(102,356)

 

 

(171,482)

 

Cash disbursed for capital improvements to existing properties

 

(42,115)

 

 

(35,025)

 

Cash disbursed for construction in progress

 

(69,334)

 

 

(66,739)

 

Capitalized interest  

 

(4,129)

 

 

(3,037)

 

Investment in real estate loans receivable  

 

(25,375)

 

 

(27,251)

 

Other investments, net of payments  

 

48,311

 

 

(30,773)

 

Principal collected on real estate loans receivable  

 

8,792

 

 

93,774

 

Contributions to unconsolidated entities  

 

(13,073)

 

 

(12,784)

 

Distributions by unconsolidated entities  

 

24,161

 

 

11,747

 

Proceeds from (payments on) derivatives  

 

8,218

 

 

-

 

Decrease (increase) in restricted cash  

 

145,065

 

 

(394)

 

Proceeds from sales of real property  

 

1,087,074

 

 

-

Net cash provided from (used in) investing activities  

 

1,065,239

 

 

(241,964)

 

 

 

  

 

 

 

 

 

Financing activities:  

 

 

 

 

 

 

Net increase (decrease) under unsecured credit facilities  

 

(123,000)

 

 

(190,000)

 

Proceeds from issuance of senior unsecured notes  

 

-

 

 

688,560

 

Payments to extinguish senior unsecured notes  

 

-

 

 

(400,000)

 

Net proceeds from the issuance of secured debt  

 

12,536

 

 

75,136

 

Payments on secured debt  

 

(822,438)

 

 

(130,343)

 

Net proceeds from the issuance of common stock  

 

119,651

 

 

93,433

 

Redemption of preferred stock  

 

(287,500)

 

 

-

 

Payments for deferred financing costs and prepayment penalties  

 

(36,674)

 

 

(1,217)

 

Contributions by noncontrolling interests(1)

 

2,667

 

 

126,142

 

Distributions to noncontrolling interests(1)

 

(20,014)

 

 

(76,222)

 

Acquisitions of noncontrolling interests

 

(38)

 

 

-

 

Cash distributions to stockholders  

 

(329,794)

 

 

(322,122)

 

Other financing activities

 

(8,022)

 

 

(7,294)

Net cash provided from (used in) financing activities  

 

(1,492,626)

 

 

(143,927)

Effect of foreign currency translation on cash and cash equivalents

 

2,843

 

 

323

Increase (decrease) in cash and cash equivalents  

 

(39,018)

 

 

(4,959)

Cash and cash equivalents at beginning of period  

 

419,378

 

 

360,908

Cash and cash equivalents at end of period  

$

380,360

 

$

355,949

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

Interest paid

$

109,438

 

$

134,872

 

Income taxes paid

 

3,349

 

 

2,431

 

 

 

 

 

 

 

 

 

(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 properties concentrated in major, high-growth markets in the United States, Canada and the United Kingdom, consisting of seniors housing and post-acute communities and outpatient medical properties.  Founded in 1970, we were the first real estate investment trust to invest exclusively in health care facilities.

  

2. Accounting Policies and Related Matters

     Basis of Presentation

     The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2017 are not necessarily an indication of the results that may be expected for the year ending December 31, 2017. 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, 2016.

     New Accounting Standards     

     In May 2014, the Financial Accounting Standards Board (the “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.  A reporting entity may apply the new standard using either a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or a full retrospective approach.  We are currently evaluating the impact that the adoption of the standard will have on our consolidated financial statements and have not yet determined the method by which we will adopt the new standard.  A significant source of our revenue is generated through leasing arrangements, which are specifically excluded from the new standard.  We expect that the new standard will affect our accounting policies related to non-lease revenue, including certain fees in our RIDEA joint ventures, common area maintenance in our outpatient medical properties and real estate sales.  Under ASU 2014-09, revenue recognition for real estate sales is mainly based on the transfer of control versus current guidance of continuing involvement.  We expect that the new guidance will result in more transactions qualifying as sales of real estate and being recognized at an earlier date than under the current guidance.

     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 regarding 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 of this standard on our consolidated financial statements.  We believe that the adoption of this standard will likely have a material impact to our consolidated balance sheet for the recognition of certain operating leases as right-of-use assets and lease liabilities.  We are in the process of analyzing our lease portfolio and evaluating systems to comply with the standard’s retrospective adoption requirements

     In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting”.  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 adopted ASU 2016-09 on January 1, 2017.  The standard allows companies to make a policy election as to whether

8


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

they will include an estimate of awards expected to be forfeited or whether they will account for forfeitures as they occur.  We have elected to account for forfeitures as they occur. This election had an immaterial impact on our consolidated financial statements.  The standard also requires an employer to classify as a financing activity in the statement of cash flow the cash paid to a tax authority when shares are withheld to satisfy the employer’s statutory income tax withholding obligation.  This standard is required to be applied on a retrospective basis and resulted in an increase in net cash provided by operating activities and a decrease in net cash used in financing activities of $6,897,000 for the three months ended March 31, 2016.  Upon adoption, no other provisions of ASU 2016-09 had an effect on our unaudited consolidated financial statements or related footnote disclosures.

     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

     In January 2017, the FASB issued ASU No. 2017-01, “Clarifying the Definition of a Business”.  This standard changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business.  ASU 2017-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted.  A reporting entity must apply ASU 2017-01 using a prospective approach.  We adopted ASU 2017-01 on January 1, 2017 and as a result, have classified our real estate acquisitions completed during the three months ended March 31, 2017 as asset acquisitions rather than business combinations due to the fact that substantially all of the fair value of the gross assets acquired were concentrated in a single asset or group of similar identifiable assets. We have recorded identifiable assets acquired, liabilities assumed and any noncontrolling interests associated with any asset acquisitions at cost on a relative fair value basis and have capitalized transaction costs incurred.

  

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 relative 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 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.  Effective January 1, 2017, with our adoption of ASU 2017-01, transaction costs related to asset acquisitions are capitalized as a component of purchase price and all other non-capitalizable costs are reflected in “Other Expenses” on our Consolidated Statements of Comprehensive Income. Certain of our subsidiaries’ functional currencies are the local currencies of their respective countries. See Note 2 to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016 for information regarding our foreign currency policies.  

 

    Triple-net Activity

 

 

Three Months Ended

 

(In thousands)

March 31, 2017

March 31, 2016

 

Land and land improvements

 

$

4,017

 

$

15,331

 

Buildings and improvements

 

 

37,241

 

 

114,235

 

Acquired lease intangibles

 

 

-

 

 

1,623

 

 

Total assets acquired

 

 

41,258

 

 

131,189

 

Accrued expenses and other liabilities  

 

 

-

 

 

(809)

 

 

Total liabilities assumed

 

 

-

 

 

(809)

 

Non-cash acquisition related activity(1)

 

 

-

 

 

(28,621)

 

 

Cash disbursed for acquisitions

 

 

41,258

 

 

101,759

 

Construction in progress additions

 

 

46,754

 

 

43,835

 

Less:

Capitalized interest

 

 

(2,028)

 

 

(1,684)

 

 

Foreign currency translation

 

 

(164)

 

 

(583)

 

Cash disbursed for construction in progress

 

 

44,562

 

  

41,568

 

Capital improvements to existing properties

 

 

10,495

 

 

7,438

 

 

Total cash invested in real property, net of cash acquired

 

$

96,315

 

$

150,765

 

 

 

 

 

 

 

 

 

 

(1) Includes $25,691,000 related to the acquisition of assets previously financed as real estate loans receivable and $2,871,000 related to the acquisition of assets previously financed as an investment in an unconsolidated entity.

  

9


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

     Seniors Housing Operating Activity

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

(In thousands)

March 31, 2017

March 31, 2016

 

Land and land improvements

 

$

4,304

 

$

3,440

 

Building and improvements

 

 

44,075

 

 

48,218

 

Acquired lease intangibles

 

 

1,741

 

 

1,942

 

Receivables and other assets

 

 

74

 

 

36

 

  

Total assets acquired(1)

 

 

50,194

 

 

53,636

 

Accrued expenses and other liabilities  

 

 

(2,755)

 

 

(11)

 

 

Total liabilities assumed

 

 

(2,755)

 

 

(11)

 

Noncontrolling interests

 

 

(647)

 

 

(549)

 

Non-cash acquisition related activity(2)

 

 

(14,148)

 

 

-

 

 

Cash disbursed for acquisitions

 

 

32,644

 

 

53,076

 

Construction in progress additions

 

 

8,062

 

 

4,033

 

Less:

Capitalized interest

 

 

(1,707)

 

 

(565)

 

 

Foreign currency translation

 

 

691

 

 

(1,107)

 

Cash disbursed for construction in progress

 

 

7,046

 

  

2,361

 

Capital improvements to existing properties

 

 

24,254

 

 

16,808

 

 

Total cash invested in real property, net of cash acquired

 

$

63,944

 

$

72,245

 

 

 

 

 

 

 

 

 

 

(1) Excludes $400,000 and $113,000 of cash acquired during the three months ended March 31, 2017 and 2016, respectively.

(2) Includes $6,349,000 related to the acquisition of assets previously financed as real estate loans receivable and $7,799,000 previously financed as an investment in an unconsolidated entity.

 

 

 

 

 

 

 

 

 

      Outpatient Medical Activity

 

 

Three Months Ended

 

(In thousands)

March 31, 2017

 

March 31, 2016

 

Land and land improvements

 

$

2,895

 

$

-

 

Buildings and improvements

 

 

23,310

 

 

17,637

 

Acquired lease intangibles

 

 

3,496

 

 

-

 

Receivables and other assets

 

 

3

 

 

-

 

  

Total assets acquired

 

 

29,704

 

  

17,637

 

Accrued expenses and other liabilities

 

 

(1,250)

 

 

(990)

 

 

Total liabilities assumed  

 

 

 (1,250)  

 

 

 (990)  

 

 

Cash disbursed for acquisitions

 

 

28,454

 

 

16,647

 

Construction in progress additions

 

 

14,921

 

 

28,934

 

Less:

Capitalized interest

 

 

(717)

 

 

(788)

 

 

Accruals(1)

 

 

3,522

 

 

(5,336)

 

Cash disbursed for construction in progress

 

 

17,726

 

  

22,810

 

Capital improvements to existing properties

 

 

7,366

 

 

10,779

 

 

Total cash invested in real property

 

$

53,546

 

$

50,236

 

 

 

 

 

 

 

 

 

 

(1) Represents the change in non-cash consideration accruals for amounts to be paid in periods other than the period in which the construction projects converted to operations.

 

 

 

 

 

 

 

 

 

  

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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31, 2017

 

March 31, 2016

 

Development projects:

 

 

 

 

 

 

 

 

 

 

Triple-net

  

 

$

157,460

 

 

$

-

 

 

Seniors housing operating

 

 

 

3,634

 

 

 

-

 

 

Outpatient medical

 

 

 

25,910

 

 

 

35,363

 

Total development projects

 

 

 

187,004

 

 

 

35,363

Total construction in progress conversions

  

 

$

187,004

 

 

$

35,363

 

 

 

 

 

 

 

 

 

 

 

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):

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

December 31, 2016

Assets:

  

 

 

 

 

 

 

In place lease intangibles

  

$

1,267,280

 

$

1,252,143

 

Above market tenant leases

  

 

63,184

 

 

61,700

 

Below market ground leases

  

 

62,224

 

 

61,628

 

Lease commissions

  

 

28,589

 

 

27,413

 

Gross historical cost

  

 

1,421,277

 

 

1,402,884

 

Accumulated amortization

  

 

(1,010,364)

 

 

(966,714)

 

Net book value

  

$

410,913

 

$

436,170

 

 

  

 

 

 

 

 

 

Weighted-average amortization period in years

  

 

14.4

 

 

13.7

 

 

  

 

 

 

 

 

Liabilities:

  

 

 

 

 

 

 

Below market tenant leases

  

$

90,745

 

$

89,468

 

Above market ground leases

  

 

8,107

 

 

8,107

 

Gross historical cost

  

 

98,852

 

 

97,575

 

Accumulated amortization

  

 

(54,354)

 

 

(52,134)

 

Net book value

  

$

44,498

 

$

45,441

 

 

  

 

 

 

 

 

 

Weighted-average amortization period in years

  

 

15.1

 

 

15.2

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

  

 

2017

 

2016

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

 

$

304

 

$

81

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

 

 

(312)

 

 

(311)

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

 

 

(39,302)

 

 

(34,454)

 

 

 

 

 

 

 

 

11


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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

 

 

 

Assets

 

 

Liabilities

2017

 

$

105,454

 

$

4,959

2018

 

 

77,561

 

 

6,106

2019

 

 

37,948

 

 

5,685

2020

 

 

24,169

 

 

5,208

2021

 

 

20,191

 

 

4,720

Thereafter

 

 

145,590

 

 

17,820

Total

 

$

410,913

 

$

44,498

 

5. Dispositions, Assets Held for Sale and Discontinued Operations

We periodically sell properties for various reasons, including favorable market conditions, the exercise of tenant purchase options or reduction of concentrations (e.g., property type, operator or geography). During the three months ended March 31, 2017 and 2016, we recorded impairment charges on certain held-for-sale seniors housing operating and outpatient medical 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):

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 2017

March 31, 2016

Real estate dispositions:

 

 

 

 

 

 

 

Triple-net

 

$

808,204

 

$

-

 

Seniors housing operating

 

 

13,845

 

 

-

 

Total dispositions

 

 

822,049

 

 

-

Gain (loss) on real estate dispositions, net

 

 

244,092

 

 

-

 

Net other assets/liabilities disposed

 

 

20,933

 

 

-

Proceeds from real estate dispositions

 

$

1,087,074

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     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

 

 

 

 

March 31,

 

 

 

2017

 

2016

Revenues:

 

 

 

 

 

 

 

Rental income

 

$

16,734

 

$

5,477

Expenses:

 

  

 

 

 

 

 

Interest expense

 

  

1,301

 

 

851

 

Property operating expenses

 

  

1,855

 

 

1,362

 

Provision for depreciation

 

  

245

 

 

820

 

Total expenses

 

 

3,401

 

 

3,033

Income (loss) from real estate dispositions, net

 

$

13,333

 

$

2,444

 

 

 

 

 

 

 

 

  

12


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

6. Real Estate Loans Receivable

     Please see Note 2 to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016 for discussion of our accounting policies for real estate loans receivable and related interest income. 

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

  

 

 

 

Three Months Ended

 

 

 

March 31, 2017

 

March 31, 2016

 

 

 

 

 

Outpatient

 

 

 

 

 

 

Outpatient

 

 

 

 

 

 

Triple-net

 

Medical

 

Totals

 

Triple-net

 

Medical

 

Totals

Advances on real estate loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in new loans

 

$

7,828

 

$

-

 

$

7,828

 

$

8,013

 

$

-

 

$

8,013

 

Draws on existing loans

 

 

17,547

 

 

-

 

 

17,547

 

 

19,206

 

 

32

 

 

19,238

 

Net cash advances on real estate loans

 

 

25,375

 

 

-

 

 

25,375

 

 

27,219

 

 

32

 

 

27,251

Receipts on real estate loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan payoffs

 

 

14,474

 

 

60,500

 

 

74,974

 

 

104,068

 

 

12,290

 

 

116,358

 

Principal payments on loans

 

 

667

 

 

-

 

 

667

 

 

3,107

 

 

-

 

 

3,107

 

   Sub-total

 

 

15,141

 

 

60,500

 

 

75,641

 

 

107,175

 

 

12,290

 

 

119,465

 

Less: Non-cash activity(1)(2)

 

 

(6,349)

 

 

(60,500)

 

 

(66,849)

 

 

(25,691)

 

 

-

 

 

(25,691)

 

Net cash receipts on real estate loans

 

 

8,792

 

 

-

 

 

8,792

 

 

81,484

 

 

12,290

 

 

93,774

Net cash advances (receipts) on real estate loans

 

 

16,583

 

 

-

 

 

16,583

 

 

(54,265)

 

 

(12,258)

 

 

(66,523)

Change in balance due to foreign currency translation

 

 

1,718

 

 

-

 

 

1,718

 

 

(1,987)

 

 

-

 

 

(1,987)

Net change in real estate loans receivable

 

$

11,952

 

$

(60,500)

 

$

(48,548)

 

$

(81,943)

 

$

(12,258)

 

$

(94,201)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Triple-net represents acquisitions of assets previously financed as real estate loans.  Please see Note 3 for additional information.

(2) Outpatient medical represents a deed in lieu of foreclosure on a previously financed first mortgage property.

 

In 2016, we restructured two existing real estate loans in the triple-net segment with Genesis Healthcare.  The two existing loans, with a combined principal balance of $317,000,000, were scheduled to mature in 2017 and 2018.  These loans were restructured into four separate loans effective October 1, 2016.  Each loan has a five-year term, a 10% interest rate and 25 basis point annual escalator.  In 2016, we recorded a loan loss charge in the amount of $6,935,000 on one of the loans as the present value of expected future cash flows was less than the carrying value of the loan.  We expect to collect all principal amounts due under the loans and, due to the passage of time, at March 31, 2017, the allowance for loan losses related to these loans is $6,196,000.  At March 31, 2017, we had no real estate loans with outstanding balances on non-accrual status and recorded no provision for loan losses during the three months ended March 31, 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 2017

 

March 31, 2016

Balance of impaired loans at end of period

 

$

317,049

 

$

-

Allowance for loan losses

 

 

6,196

 

 

-

Balance of impaired loans not reserved

 

$

310,853

 

$

-

Average impaired loans for the period

 

$

340,920

 

$

-

Interest recognized on impaired loans(1)

 

 

8,243

 

 

-

 

 

 

 

 

 

 

 

(1) Represents interest recognized in period since loans were identified as impaired.

 

 

 

 

 

 

 

 

 

 

 

  

13


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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)

 

March 31, 2017

 

December 31, 2016

 

Triple-net

10% to 49%

 

$

23,108

 

$

27,005

 

Seniors housing operating

10% to 50%

 

 

360,260

 

 

407,172

 

Outpatient medical

43%

 

 

32,742

 

 

22,961

 

Total

 

 

$

416,110

 

$

457,138

 

 

 

 

 

 

 

 

 

 

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

 

 

     At March 31, 2017, the aggregate unamortized basis difference of our joint venture investments of $211,268,000 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 is being 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 (“NOICO”) 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 three months ended March 31, 2017, excluding our share of NOICO in unconsolidated entities (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Number of

 

Total

 

Percent of

Concentration by relationship:(1)

 

Properties

 

NOICO

 

NOICO(2)

 

Genesis Healthcare

 

86

 

$

49,048

 

9%

 

Sunrise Senior Living(3)

 

153

 

 

74,893

 

14%

 

Brookdale Senior Living

 

137

 

 

38,372

 

7%

 

Revera(3)

 

98

 

 

37,802

 

7%

 

Benchmark Senior Living  

 

48

 

 

22,614

 

4%

 

Remaining portfolio  

 

755

 

 

329,400

 

59%

 

Totals  

 

1,277

 

$

552,129

 

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) NOICO with our top five relationships comprised 45% of total NOICO for the year ending December 31, 2016.

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

 

 

 

 

 

 

 

 

 

9. Borrowings Under Credit Facilities and Related Items

 

      At March 31, 2017, 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 March 31, 2017).  Borrowings under the unsecured revolving credit facility are subject to interest payable at the applicable margin over LIBOR interest rate (1.88% at March 31, 2017). The applicable margin is based on certain of our debt ratings and was 0.90% at March 31, 2017.  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 March 31, 2017.  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.

14


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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

  

 

 

 

Three Months Ended March 31,

 

 

 

 

 

2017

 

2016

 

 

 

 

Balance outstanding at quarter end(1)

 

$

522,000

 

$

645,000

 

 

 

 

 

Maximum amount outstanding at any month end

 

$

1,010,000

 

$

945,000

 

 

 

 

 

Average amount outstanding (total of daily

 

  

 

 

  

 

 

 

 

 

 

 

principal balances divided by days in period)

 

$

796,356

 

$

671,044

 

 

 

 

 

Weighted average interest rate (actual interest

 

  

 

 

 

 

 

 

 

 

 

 

expense divided by average borrowings outstanding)

 

  

1.81%

 

 

1.29%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) As of March 31, 2017, letters of credit in the aggregate amount of $32,456,000 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 March 31, 2017, the annual principal payments due on these debt obligations were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Senior

 

Secured

 

 

 

 

 

Unsecured Notes(1,2)

 

Debt (1,3)

 

Totals

 

2017

$

 -     

 

$

284,879

 

$

284,879

 

2018

 

450,000

 

 

421,751

 

 

871,751

 

2019

 

605,000

 

 

499,895

 

 

1,104,895

 

2020(4)

 

675,208

 

 

149,888

 

 

825,096

 

2021(5,6)

 

1,137,674

 

 

228,993

 

 

1,366,667

 

Thereafter(7,8,9,10)

 

5,416,385

 

 

1,080,071

 

 

6,496,456

 

Totals

$

8,284,267

 

$

2,665,477

 

$

10,949,744

 

 

 

 

 

 

 

 

 

 

 

(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 1.6% to 6.5%.

 

(3) Annual interest rates range from 1.32% to 7.93%.  Carrying value of the properties securing the debt totaled $4,947,646,000 at March 31, 2017.

 

(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 $225,208,000 based on the Canadian/U.S. Dollar exchange rate on March 31, 2017).

 

(5) On May 13, 2016, we refinanced the funding on a $250,000,000 Canadian-denominated unsecured term credit facility (approximately $187,674,000 based on the Canadian/U.S. Dollar exchange rate on March 31, 2017).  The loan matures on May 13, 2021 and bears interest at the Canadian Dealer Offered Rate plus 95 basis points (1.84% at March 31, 2017).

 

(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 (1.83% at March 31, 2017).

 

(7) On November 20, 2013, we completed the sale of £550,000,000 (approximately $689,535,000 based on the Sterling/U.S. Dollar exchange rate in effect on March 31, 2017) of 4.8% senior unsecured notes due 2028.

 

(8) On November 25, 2014, we completed the sale of £500,000,000 (approximately $626,850,000 based on the Sterling/U.S. Dollar exchange rate in effect on March 31, 2017) 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. 

 

 

 

 

15


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

March 31, 2017

 

March 31, 2016

 

 

 

 

Weighted Avg.

 

 

 

 

Weighted Avg.

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

Beginning balance

 $ 

8,260,038

 

4.245%

 

 $ 

8,645,758

 

4.237%

Debt issued

 

-

 

0.000%

 

 

700,000

 

4.250%

Debt extinguished

  

-

 

0.000%

 

  

(400,000)

 

3.625%

Foreign currency

 

24,229

 

4.391%

 

 

(11,665)

 

3.943%

Ending balance

 $ 

8,284,267

 

4.262%

 

 $ 

8,934,093

 

4.266%

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

  

Three Months Ended

 

 

  

March 31, 2017

 

March 31, 2016

 

 

 

 

 

Weighted Avg.

 

 

 

 

Weighted Avg.

 

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

Beginning balance

 

$

3,465,066

 

4.094%

 

$

3,478,207

 

4.440%

Debt issued

 

 

12,536

 

2.340%

 

 

75,136

 

3.060%

Debt extinguished

  

 

(806,189)

 

5.580%

 

 

(111,701)

 

4.450%

Principal payments

 

 

(16,249)

 

4.469%

 

 

(18,642)

 

4.539%

Foreign currency

  

 

10,313

 

3.262%

 

 

65,488

 

3.669%

Ending balance

 

$

2,665,477

 

3.744%

 

$

3,488,488

 

4.400%

 

 

 

 

 

 

 

 

 

 

 

     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 March 31, 2017, 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 $3,395,000 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 three months ended March 31, 2017 and 2016, we settled certain net investment hedges generating cash proceeds of $8,218,000 and $0, respectively.  The balance of the cumulative translation adjustment will be reclassified to earnings when the hedged investment is sold or substantially liquidated. 

 

16


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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

  

 

 

March 31, 2017

 

December 31, 2016

Derivatives designated as net investment hedges:

 

 

 

 

Denominated in Canadian Dollars

$

875,000

$

900,000

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

Denominated in Canadian Dollars

$

72,000

$

54,000

Denominated in Pounds Sterling

£

69,000

£

48,000

 

 

 

 

 

Derivative instruments not designated:

 

 

 

 

Denominated in Canadian Dollars

$

37,000

$

37,000

 

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

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 31,

 

 

 

Location

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

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

 

Interest expense

 

$

-

 

$

(483)

 

 

 

 

 

 

 

 

 

 

Gain (loss) on forward exchange contracts recognized in income

 

Interest expense

 

 

2,457

 

 

(1,327)

 

 

 

 

 

 

 

 

 

 

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

 

OCI

 

 

(44,341)

 

 

(2,739)

 

12. Commitments and Contingencies

     At March 31, 2017, we had 14 outstanding letter of credit obligations totaling $169,961,000 and expiring between 2017 and 2024.  At March 31, 2017, we had outstanding construction in progress of $390,180,000 and were committed to providing additional funds of approximately $466,031,000 to complete construction.  At March 31, 2017, we had contingent purchase obligations totaling $17,058,000.  These contingent purchase obligations relate to unfunded capital improvement obligations and contingent obligations on acquisitions. Rents due from the tenant are increased to reflect the additional investment in the property. 

     We evaluate our leases for operating versus capital lease treatment in accordance with 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 March 31, 2017, we had operating lease obligations of $1,092,169,000 relating to certain ground leases and company office space and capital lease obligations of $93,697,000 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 March 31, 2017, aggregate future minimum rentals to be received under these noncancelable subleases totaled $73,840,000.

17


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

13. Stockholders’ Equity

 

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

 

 

 

 

 

 

 

March 31, 2017

 

December 31, 2016

Preferred Stock:

 

 

 

 

   Authorized shares

 

50,000,000

 

50,000,000

   Issued shares

 

14,375,000

 

25,875,000

   Outstanding shares

 

14,375,000

 

25,875,000

 

 

 

 

 

Common Stock, $1.00 par value:

 

 

 

 

   Authorized shares

 

700,000,000

 

700,000,000

   Issued shares

 

365,651,576

 

363,576,924

   Outstanding shares

 

364,563,653

 

362,602,173

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 2017

 

March 31, 2016

 

 

 

 

 

Weighted Avg.

 

 

 

Weighted Avg.

 

 

 

Shares

 

Dividend Rate

 

Shares

 

Dividend Rate

 

Beginning balance

 

25,875,000

 

6.500%

 

25,875,000

 

6.500%

 

Shares redeemed

 

(11,500,000)

 

6.500%

 

-

 

0.000%

 

Ending balance

 

14,375,000

 

6.500%

 

25,875,000

 

6.500%

 

 

 

 

 

 

 

 

 

 

 

     During the three months ended March 31, 2017, we recognized a charge of $9,769,000 in connection with the redemption of the Series J preferred stock.

 

     Common Stock. The following is a summary of our common stock issuances during the three months ended March 31, 2017 and 2016 (dollars in thousands, except per share amounts):

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Issued

 

 

Average Price

 

 

Gross Proceeds

 

 

Net Proceeds

2016 Dividend reinvestment plan issuances

 

1,058,085

 

$

 60.00  

 

$

63,484

 

$

63,484

2016 Option exercises

 

9,864

 

 

 21.29  

 

 

210

 

 

210

2016 Equity shelf program issuances

 

443,096

 

 

 67.12  

 

 

30,192

 

 

29,739

2016 Stock incentive plans, net of forfeitures

 

484,005

 

 

 

 

 

-

 

 

-

2016 Totals

 

1,995,050

 

 

 

 

$

93,886

 

$

93,433

 

 

 

 

 

 

 

 

 

 

 

 

2017 Dividend reinvestment plan issuances

 

1,284,719

 

$

 68.33  

 

$

87,985

 

$

87,784

2017 Option exercises

 

156,675

 

 

 52.71  

 

 

8,258

 

 

8,258

2017 Equity shelf program issuances

 

338,486

 

 

 69.75  

 

 

23,776

 

 

23,609

2017 Stock incentive plans, net of forfeitures

 

181,600

 

 

 

 

 

-

 

 

-

2017 Totals

 

1,961,480

 

 

 

 

$

120,019

 

$

119,651

 

 

 

 

 

 

 

 

 

 

 

 

     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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 2017

 

March 31, 2016

  

 

Per Share

 

Amount

 

Per Share

 

Amount

Common Stock

 

$

0.8700

 

$

315,415

 

$

0.8600

 

$

305,770

Series I Preferred Stock

 

 

0.8125

 

 

11,680

 

 

0.8125

 

 

11,680

Series J Preferred Stock

 

 

0.2347

 

 

2,699

 

 

0.4064

 

 

4,672

Totals

 

 

 

 

$

329,794

 

 

 

 

$

322,122

 

 

 

 

 

 

 

 

 

 

 

 

 

     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, 2016

 

$

(173,496)

 

$

5,120

 

$

(1,153)

 

$

(2)

 

$

(169,531)

Other comprehensive income before reclassification adjustments

 

  

2,900

 

 

(10,569)

 

 

-

 

 

-

 

 

(7,669)

Net current-period other comprehensive income

 

  

2,900

 

 

(10,569)

 

 

-

 

 

-

 

 

(7,669)

Balance at March 31, 2017

 

$

(170,596)

 

$

(5,449)

 

$

(1,153)

 

$

(2)

 

$

(177,200)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2015

 

$

(85,484)

 

$

-

 

$

(1,343)

 

$

(1,416)

 

$

(88,243)

Other comprehensive income before reclassification adjustments

 

  

(13,746)

 

 

(7,549)

 

 

2

 

 

-

 

  

(21,293)

Reclassification amount to net income

 

 

-

 

 

-

 

 

-

 

 

 483 (1)

 

 

483

Net current-period other comprehensive income

 

  

(13,746)

 

 

(7,549)

 

 

2

 

 

483

 

  

(20,810)

Balance at March 31, 2016

 

$

(99,230)

 

$

(7,549)

 

$

(1,341)

 

$

(933)

 

$

(109,053)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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 $4,906,000 for the three months ended March 31, 2017 and $8,186,000 for the same period in 2016.

19


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

15. Earnings Per Share

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

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

  

2017

 

2016

Numerator for basic and diluted earnings

 

 

 

 

 

 

 

per share - net income (loss) attributable

  

 

 

 

 

 

 

to common stockholders

  

$

312,639

 

$

148,969

 

 

  

 

 

 

 

 

Denominator for basic earnings per

  

 

 

 

 

 

 

share - weighted average shares

  

 

362,534

 

 

355,076

Effect of dilutive securities:

  

 

 

 

 

 

 

Employee stock options

  

 

70

 

 

101

 

Non-vested restricted shares

  

 

397

 

 

253

 

Redeemable shares

 

 

1,651

 

 

621

Dilutive potential common shares

  

 

2,118

 

 

975

Denominator for diluted earnings per

  

 

 

 

 

 

 

share - adjusted weighted average shares

  

 

364,652

 

 

356,051

 

 

  

 

 

 

 

 

Basic earnings per share

  

$

0.86

 

$

0.42

Diluted earnings per share

  

$

0.86

 

$

0.42

 

 

 

 

 

 

 

 

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.  Please see Note 2 to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016 for additional information.  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.

 

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.

20


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

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

 

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

 

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

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

December 31, 2016

 

 

 

Carrying Amount

 

Fair Value

 

Carrying Amount

 

Fair Value

Financial assets:

 

  

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans receivable

 

$

430,607

 

$

465,548

 

$

485,735

 

$

521,773

 

Other real estate loans receivable

 

  

143,473

 

 

149,151

 

 

136,893

 

 

138,050

 

Available-for-sale equity investments

 

  

17,330

 

 

17,330

 

 

27,899

 

 

27,899

 

Cash and cash equivalents

 

  

380,360

 

 

380,360

 

 

419,378

 

 

419,378

 

Foreign currency forward contracts

 

  

110,439

 

 

110,439

 

 

135,561

 

 

135,561

 

 

 

  

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

  

 

 

 

 

 

 

 

 

 

 

 

Borrowings under unsecured credit facilities

 

$

522,000

 

$

522,000

 

$

645,000

 

$

645,000

 

Senior unsecured notes

 

  

8,188,928

 

 

8,965,318

 

 

8,161,619

 

 

8,879,176

 

Secured debt

 

  

2,669,787

 

 

2,728,171

 

 

3,477,699

 

 

3,558,378

 

Foreign currency forward contracts

 

 

9,840

 

 

9,840

 

 

4,342

 

 

4,342

 

 

 

  

 

 

 

 

 

 

 

 

 

 

Redeemable OP unitholder interests

 

$

116,917

 

$

116,917

 

$

110,502

 

$

110,502

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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):

21


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements as of March 31, 2017

 

 

Total

 

Level 1

 

Level 2

 

Level 3

Available-for-sale equity investments(1)

 

$

17,330

 

$

17,330

 

$

-

 

$

-

Foreign currency forward contracts, net(2)

 

 

100,599

 

 

-

 

 

100,599

 

 

-

Redeemable OP unitholder interests

 

 

116,917

 

 

-

 

 

116,917

 

 

-

 Totals 

 

$

234,846

 

$

17,330

 

$

217,516

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

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

(2) Please see Note 11 for additional information.

 

 

 

 

 

 

 

 

 

 

 

 

 

Items Measured at Fair Value on a Nonrecurring Basis

 

In addition to items that are measured at fair value on a recurring basis, we also have assets and liabilities in our balance sheet that are measured at fair value on a nonrecurring basis.  As these assets and liabilities are not measured at fair value on a recurring basis, they are not included in the tables above. Assets, liabilities and noncontrolling interests that are measured at fair value on a nonrecurring basis include those acquired/assumed. Asset impairments (if applicable, see Note 5 for impairments of real property and Note 6 for impairments of loans receivable) are also measured at fair value on a nonrecurring basis. 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 December 31, 2016, we reclassified interest expense on our foreign-denominated senior notes from the seniors housing operating segment to non-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 are typically leased to multiple tenants and generally require a certain level of property management.

     We evaluate performance based upon net operating income from continuing operations (“NOICO”) of each segment. We define NOICO as total revenues, including tenant reimbursements, less property operating expenses. We believe NOICO provides investors relevant and useful information as it measures the operating performance of our properties at the property level on an unleveraged basis. We use NOICO 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 certain 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 NOICO. 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, 2016). 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 (which excludes unconsolidated entities) is as follows (in thousands):

22


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2017:

 

 

Triple-net

 

 

Seniors Housing Operating

 

 

Outpatient Medical

 

 

Non-segment / Corporate

 

 

Total

Rental income

 

$

227,290

 

$

-

 

$

139,851

 

$

-

 

$

367,141

Resident fees and services

 

 

-

 

 

670,337

 

 

-

 

 

-

 

 

670,337

Interest income

 

 

20,679

 

 

69

 

 

-

 

 

-

 

 

20,748

Other income

 

 

1,766

 

 

1,461

 

 

612

 

 

233

 

 

4,072

Total revenues

 

 

249,735

 

 

671,867

 

 

140,463

 

 

233

 

 

1,062,298

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

-

 

 

462,425

 

 

47,744

 

 

-

 

 

510,169

Net operating income from continuing operations

 

 

249,735

 

 

209,442

 

 

92,719

 

 

233

 

 

552,129

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

5,511

 

 

15,816

 

 

2,291

 

 

94,979

 

 

118,597

Loss (gain) on derivatives, net

 

 

1,224

 

 

-

 

 

-

 

 

-

 

 

1,224

Depreciation and amortization

 

 

59,608

 

 

119,737

 

 

48,931

 

 

-

 

 

228,276

General and administrative

 

 

-

 

 

-

 

 

-

 

 

31,101

 

 

31,101

Loss (gain) on extinguishment of debt, net

 

 

29,084

 

 

890

 

 

1,382

 

 

-

 

 

31,356

Impairment of assets

 

 

-

 

 

5,406

 

 

5,625

 

 

-

 

 

11,031

Other expenses

 

 

5,010

 

 

1,778

 

 

360

 

 

4,527

 

 

11,675

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

 

 

149,298

 

 

65,815

 

 

34,130

 

 

(130,374)

 

 

118,869

Income tax (expense) benefit

 

 

(800)

 

 

(1,087)

 

 

(335)

 

 

(23)

 

 

(2,245)

Income (loss) from unconsolidated entities

 

 

5,638

 

 

 (29,191)(1)

 

 

447

 

 

-

 

 

(23,106)

Income (loss) from continuing operations

 

 

154,136

 

 

35,537

 

 

34,242

 

 

(130,397)

 

 

93,518

Gain (loss) on real estate dispositions, net

 

 

231,081

 

 

13,011

 

 

-

 

 

-

 

 

244,092

Net income (loss)

 

$

385,217

 

$

48,548

 

$

34,242

 

$

(130,397)

 

$

337,610

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

9,906,585

 

$

12,646,321

 

$

4,947,544

 

$

266,827

 

$

27,767,277

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Primarily due to the recognition of goodwill and intangible asset impairments, as well as non-recurring income tax expense.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2016:

 

 

Triple-net

 

 

Seniors Housing Operating

 

 

Outpatient Medical

 

 

Non-segment / Corporate

 

 

Total

Rental income

 

$

283,825

 

$

-

 

$

131,838

 

$

-

 

$

415,663

Resident fees and services

 

 

-

 

 

602,149

 

 

-

 

 

-

 

 

602,149

Interest income

 

 

22,853

 

 

1,031

 

 

1,304

 

 

-

 

 

25,188

Other income

 

 

1,490

 

 

2,189

 

 

313

 

 

58

 

 

4,050

Total revenues

 

 

308,168

 

 

605,369

 

 

133,455

 

 

58

 

 

1,047,050

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

-

 

 

408,894

 

 

40,742

 

 

-

 

 

449,636

Net operating income from continuing operations

 

 

308,168

 

 

196,475

 

 

92,713

 

 

58

 

 

597,414

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

6,364

 

 

20,523

 

 

5,744

 

 

100,329

 

 

132,960

Depreciation and amortization

 

 

79,800

 

 

101,832

 

 

47,064

 

 

-

 

 

228,696

General and administrative

 

 

-

 

 

-

 

 

-

 

 

45,691

 

 

45,691

Transaction costs

 

 

2,852

 

 

3,933

 

 

1,423

 

 

-

 

 

8,208

Loss (gain) on extinguishment of debt, net

 

 

(24)

 

 

-

 

 

-

 

 

-

 

 

(24)

Impairment of assets

 

 

14,314

 

 

-

 

 

-

 

 

-

 

 

14,314

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

 

 

204,862

 

 

70,187

 

 

38,482

 

 

(145,962)

 

 

167,569

Income tax (expense) benefit

 

 

(317)

 

 

2,767

 

 

(228)

 

 

(497)

 

 

1,725

Income (loss) from unconsolidated entities

 

 

3,081

 

 

(6,935)

 

 

34

 

 

-

 

 

(3,820)

Income (loss) from continuing operations

 

 

207,626

 

 

66,019

 

 

38,288

 

 

(146,459)

 

 

165,474

Net income (loss)

 

$

207,626

 

$

66,019

 

$

38,288

 

$

(146,459)

 

$

165,474

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23


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 the periods presented (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31, 2017

 

 

March 31, 2016

 

Revenues:

 

 

Amount

%

 

 

Amount

%

 

United States

 

$

858,668

80.9%

 

$

842,357

80.5%

 

United Kingdom

 

 

93,843

8.8%

 

 

100,555

9.6%

 

Canada

 

 

109,787

10.3%

 

 

104,138

9.9%

 

Total

 

$

1,062,298

100.0%

 

$

1,047,050

100.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

 

March 31, 2017

 

 

December 31, 2016

 

Assets:

 

 

Amount

%

 

 

Amount

%

 

United States

 

$

22,425,964

80.8%

 

$

23,572,459

81.7%

 

United Kingdom

 

 

2,835,782

10.2%

 

 

2,782,489

9.6%

 

Canada

 

 

2,505,531

9.0%

 

 

2,510,236

8.7%

 

Total

 

$

27,767,277

100.0%

 

$

28,865,184

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 months ended March 31, 2017 and 2016, 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, 2013 and subsequent years and by state taxing authorities for the year ended December 31, 2012 and subsequent

24


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

years.  The company and its subsidiaries are also subject to audit by the Canada Revenue Agency and provincial authorities generally for periods subsequent to our initial investments in Canada in May 2012, by HM Revenue & Customs for periods subsequent to our initial investments in the United Kingdom in August 2012 and by Luxembourg taxing authorities generally for periods subsequent to our establishment of certain Luxembourg-based subsidiaries during 2014.  

  

 

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):

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

 

December 31, 2016

Assets

 

 

 

 

 

 

 

 

Net real property owned

 

$

980,570

 

 

$

989,596

 

Cash and cash equivalents

 

 

7,390

 

 

 

10,501

 

Receivables and other assets

 

 

16,530

 

 

 

12,102

 

Total assets(1)

 

$

1,004,490

 

 

$

1,012,199

 

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

 

 

Secured debt

 

$

449,163

 

 

$

450,255

 

Accrued expenses and other liabilities

 

 

13,880

 

 

 

13,803

 

Redeemable noncontrolling interests

 

 

72,957

 

 

 

185,556

 

Total equity

 

 

468,490

 

 

 

362,585

 

Total liabilities and equity

 

$

1,004,490

 

 

$

1,012,199

 

 

 

 

 

 

 

 

 

(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.

 

 

 

 

 

 

 

 

 

  

25


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

 

 

 

EXECUTIVE SUMMARY

 

 

 

 

     Company Overview

     Business Strategy

     Key Transactions in 2017

     Key Performance Indicators, Trends and Uncertainties

     Corporate Governance

27

27

28

29

31

 

 

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

 

 

 

     Sources and Uses of Cash

     Off-Balance Sheet Arrangements

     Contractual Obligations

     Capital Structure

31

32

33

33

 

 

 

 

RESULTS OF OPERATIONS

 

 

 

 

     Summary

     Triple-net

     Seniors Housing Operating

     Outpatient Medical

     Non-Segment/Corporate

34

34

36

38

41

 

 

 

 

OTHER

 

 

 

 

     Cautionary Statement Regarding Forward-Looking Statements

47

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

  

26


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, 2016, 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 concentrated 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 March 31, 2017 (dollars in thousands):

  

 

 

 

 

Percentage of

 

Number of

 

Type of Property

NOICO(1)

 

NOICO

 

Properties

 

Triple-net

$

249,735

 

45.3%

 

592

 

Seniors housing operating

 

209,442

 

37.9%

 

421

 

Outpatient medical

 

92,719

 

16.8%

 

264

 

Totals

$

551,896

 

100.0%

 

1,277

 

 

 

 

 

 

 

 

 

(1) Represents net operating income from continuing operations per Note 17 of our unaudited consolidated financial statements. 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 from continuing operations 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

27


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

 

 

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.

     For the three months ended March 31, 2017, rental income and resident fees and services represented 35% and 63%, 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 from continuing operations 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 March 31, 2017, we had $380,360,000 of cash and cash equivalents, $42,777,000 of restricted cash and $2,445,544,000 of available borrowing capacity under our primary unsecured credit facility.

  

Key Transactions in 2017

     Capital.   During the three months ended March 31, 2017, we extinguished $806,189,000 of secured debt at a blended average interest rate of 5.6%.  In addition, we redeemed all 11,500,000 shares of our 6.5% Series J Cumulative Redeemable Preferred Stock.  During the three months ended March 31, 2017, we raised $111,761,000 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 three months ended March 31, 2017 (dollars in thousands):

 

 

Properties

 

Investment Amount(1)

 

Capitalization Rates(2)

 

 

Book Amount(3)

 

Triple-net

3

$

41,301

 

6.7%

 

$

41,258

 

Seniors housing operating

1

 

34,200

 

6.1%

 

 

50,194

 

Outpatient medical

2

 

28,995

 

6.5%

 

 

29,704

 

Totals

6

$

104,496

 

6.4%

 

$

121,156

 

 

 

 

 

 

 

 

 

 

 

(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 three months ended March 31, 2017 (dollars in thousands):

28


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

 

 

 

Properties

 

Proceeds(1)

 

Capitalization Rates(2)

 

 

Book Amount(3)

 

Triple-net

43

$

1,027,951

 

6.5%

 

$

808,204

 

Seniors housing operating

1

 

27,519

 

4.8%

 

 

13,845

 

Totals

44

$

1,055,470

 

6.5%

 

$

822,049

 

 

 

 

 

 

 

 

 

 

 

(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 $3.48 per common share ($0.87 per share quarterly), as compared to $3.44 per common share for 2016, beginning in February 2017.  The dividend declared for the quarter ended March 31, 2017 represents the 184th 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”) per the Statement of Comprehensive Income and net operating income from continuing operations (“NOICO”) per Note 17 to the Consolidated Financial Statements are the most appropriate earnings measures. Other useful supplemental measures of our operating performance include funds from operations attributable to common stockholders (“FFO”) 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 and SSNOI. These earnings measures (and FFO 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):

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

June 30,

 

September 30,

 

December 31,

 

March 31,

 

 

 

2016

 

2016

 

2016

 

2016

 

 

2017

Net income (loss) attributable to common stockholders

$

148,969

 

$

195,474

 

$

334,910

 

$

333,042

 

$

312,639

Funds from operations attributable to common stockholders

 

391,264

 

 

416,974

 

 

401,870

 

 

372,829

 

 

306,231

Net operating income from continuing operations

 

597,414

 

 

617,825

 

 

605,453

 

 

583,486

 

 

552,128

Same store net operating income

 

469,784

 

 

485,091

 

 

472,347

 

 

469,928

 

 

468,590

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share data (fully diluted):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to common stockholders

$

0.42

 

$

0.54

 

$

0.93

 

$

0.91

 

$

0.86

 

Funds from operations attributable to common stockholders

 

1.10

 

 

1.16

 

 

1.11

 

 

1.02

 

 

0.84

 

     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”). Please refer to the section entitled “Non-GAAP Financial Measures” for further discussion and reconciliations of these 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:

  

29


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,

 

 

 

 

2016

 

2016

 

2016

 

2016

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Net debt to book capitalization ratio

 

45%

 

45%

 

45%

 

43%

 

42%

Net debt to undepreciated book

 

 

 

 

 

 

 

 

 

 

 

capitalization ratio

 

40%

 

39%

 

39%

 

37%

 

36%

Net debt to market capitalization ratio

 

32%

 

30%

 

31%

 

31%

 

29%

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest coverage ratio

 

3.85x

 

4.21x

 

5.24x

 

5.26x

 

5.67x

Fixed charge coverage ratio

 

3.06x

 

3.34x

 

4.17x

 

4.15x

 

4.53x

   

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

  

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

June 30,

 

September 30,

 

December 31,

 

March 31,

 

 

 

 

2016

 

2016

 

2016

 

2016

 

2017

Property mix:(1)

 

 

 

 

 

 

 

 

 

 

 

Triple-net

 

52%

 

50%

 

51%

 

48%

 

45%

 

Seniors housing operating

 

32%

 

34%

 

33%

 

36%

 

38%

 

Outpatient medical

 

16%

 

16%

 

16%

 

16%

 

17%

 

 

 

 

 

 

 

 

 

 

 

 

 

Relationship mix:(1)

 

 

 

 

 

 

 

 

 

 

 

Sunrise Senior Living(2)

 

13%

 

14%

 

12%

 

13%

 

14%

 

Genesis Healthcare

 

17%

 

16%

 

16%

 

13%

 

9%

 

Brookdale Senior Living

 

7%

 

7%

 

7%

 

7%

 

7%

 

Revera(2)

 

6%

 

6%

 

6%

 

7%

 

7%

 

Benchmark Senior Living

 

4%

 

4%

 

4%

 

4%

 

4%

 

Remaining relationships

 

53%

 

53%

 

55%

 

56%

 

59%

 

 

 

 

 

 

 

 

 

 

 

 

 

Geographic mix:(1)

 

 

 

 

 

 

 

 

 

 

 

California

 

10%

 

10%

 

10%

 

12%

 

13%

 

United Kingdom

 

8%

 

8%

 

7%

 

7%

 

9%

 

Canada

 

7%

 

7%

 

7%

 

8%

 

8%

 

New Jersey

 

8%

 

8%

 

8%

 

8%

 

7%

 

Texas

 

6%

 

6%

 

7%

 

7%

 

7%

 

Remaining geographic areas

 

61%

 

61%

 

61%

 

58%

 

56%

 

 

 

 

 

 

 

 

 

 

 

 

 

(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 March 31, 2017 (dollars in thousands):

  

30


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

 

 

 

 

 

 

 

Expiration Year

 

 

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

2023

 

 

2024

 

 

2025

 

 

2026

 

 

Thereafter

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triple-net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Properties

 

 

-

 

 

51

 

 

-

 

 

14

 

 

12

 

 

8

 

 

4

 

 

5

 

 

61

 

 

32

 

 

406

 

 

  

Base rent(1)

 

$

-

 

$

37,120

 

$

-

 

$

17,740

 

$

25,239

 

$

8,784

 

$

4,175

 

$

11,076

 

$

73,478

 

$

64,327

 

$

701,046

 

 

 

% of base rent

 

 

0.0%

 

 

3.9%

 

 

0.0%

 

 

1.9%

 

 

2.7%

 

 

0.9%

 

 

0.4%

 

 

1.2%

 

 

7.8%

 

 

6.8%

 

 

74.3%

 

 

 

Units/beds

 

 

-

 

 

3,151

 

 

-

 

 

1,225

 

 

2,289

 

 

810

 

 

317

 

 

762

 

 

4,538

 

 

3,724

 

 

41,529

 

 

 

% of Units/beds

 

 

0.0%

 

 

5.4%

 

 

0.0%

 

 

2.1%

 

 

3.9%

 

 

1.4%

 

 

0.5%

 

 

1.3%

 

 

7.8%

 

 

6.4%

 

 

71.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outpatient medical:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Square feet

 

 

899,397

 

 

999,677

 

 

1,189,481

 

 

1,205,331

 

 

1,465,953

 

 

2,381,966

 

 

1,197,716

 

 

1,392,959

 

 

690,769

 

 

1,063,903

 

 

3,979,627

 

 

  

Base rent(1)

 

$

22,866

 

$

25,911

 

$

31,568

 

$

31,876

 

$

39,422

 

$

51,176

 

$

30,197

 

$

38,992

 

$

19,586

 

$

27,377

 

$

90,952

 

 

 

% of base rent

 

 

5.6%

 

 

6.3%

 

 

7.7%

 

 

7.8%

 

 

9.6%

 

 

12.5%

 

 

7.4%

 

 

9.5%

 

 

4.8%

 

 

6.7%

 

 

22.1%

 

 

 

Leases

 

 

242

 

 

275

 

 

305

 

 

276

 

 

264

 

 

252

 

 

177

 

 

109

 

 

96

 

 

118

 

 

151

 

 

 

% of Leases

 

 

10.7%

 

 

12.1%

 

 

13.5%

 

 

12.2%

 

 

11.7%

 

 

11.1%

 

 

7.8%

 

 

4.8%

 

 

4.2%

 

 

5.2%

 

 

6.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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, 2016, under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of these risk factors.

 

 

Corporate Governance

     Maintaining investor confidence and trust is important in today’s business environment. Our Board of Directors and management are strongly committed to policies and procedures that reflect the highest level of ethical business practices. Our corporate governance guidelines provide the framework for our business operations and emphasize our commitment to increase stockholder value while meeting all applicable legal requirements. These guidelines meet the listing standards adopted by the New York Stock Exchange and are available on the Internet at www.welltower.com/investors/governance.  The information on our website is not incorporated by reference in this Quarterly Report on Form 10-Q, and our web address is included as an inactive textual reference only.

 

 

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):

31


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

 

 

 

 

 

Three Months Ended

 

 

Change

 

 

 

March 31, 2017

 

March 31, 2016

 

 

$

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$

419,378

 

$

360,908

 

 

$

58,470

 

16%

   Cash provided from (used in) operating activities

 

 

385,526

 

 

380,609

 

 

 

4,917

 

1%

   Cash provided from (used in) investing activities

 

 

1,065,239

 

 

(241,964)

 

 

 

1,307,203

 

n/a

   Cash provided from (used in) financing activities

 

 

(1,492,626)

 

 

(143,927)

 

 

 

(1,348,699)

 

937%

Effect of foreign currency translation

 

 

2,843

 

 

323

 

 

 

2,520

 

780%

Cash and cash equivalents at end of period

 

$

380,360

 

$

355,949

 

 

$

24,411

 

7%

 

     Operating Activities. The change in net cash provided from operating activities was immaterial.  Please see “Results of Operations” for discussion of net income fluctuations. For the three months ended March 31, 2017 and 2016, 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 an increase in dispositions, which are summarized above in “Key Transactions in 2017” and Notes 5 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):

  

 

 

Three Months Ended

 

Change

 

 

March 31,

 

March 31,

 

 

 

 

 

 

 

2017

 

2016

 

$

 

%

New development

 

$

69,334

 

$

66,739

 

$

2,595

 

4%

Recurring capital expenditures, tenant improvements and lease commissions

 

 

13,834

 

 

12,265

 

 

1,569

 

13%

Renovations, redevelopments and other capital improvements

 

 

28,281

 

 

22,760

 

 

5,521

 

24%

Total

 

$

111,449

 

$

101,764

 

$

9,685

 

10%

 

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

 

Off-Balance Sheet Arrangements

 

     At March 31, 2017, we had investments in unconsolidated entities with our ownership 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 March 31, 2017, we had 14 outstanding letter of credit obligations. Please see Note 12 to our unaudited consolidated financial statements for additional information.

  

32


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

 

 

Contractual Obligations

     The following table summarizes our payment requirements under contractual obligations as of March 31, 2017 (in thousands):

  

 

 

Payments Due by Period

Contractual Obligations

 

Total

 

2017

 

2018-2019

 

2020-2021

 

Thereafter

Unsecured revolving credit facility(1)

 

$

522,000

 

$

-

 

$

-

 

$

522,000

 

$

-

Senior unsecured notes and term credit facilities:(2)

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     U.S. Dollar senior unsecured notes

 

 

6,050,000

 

 

-

 

 

1,050,000

 

 

900,000

 

 

4,100,000

     Canadian Dollar senior unsecured notes(3)

 

 

225,208

 

 

-

 

 

-

 

 

225,208

 

 

-

     Pounds Sterling senior unsecured notes(3)

 

 

1,316,385

 

 

-

 

 

-

 

 

-

 

 

1,316,385

     U.S. Dollar term credit facility

 

 

505,000

 

 

-

 

 

5,000

 

 

500,000

 

 

-

     Canadian Dollar term credit facility(3)

 

 

187,674

 

 

-

 

 

-

 

 

187,674

 

 

-

Secured debt:(2,3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Consolidated

 

 

2,665,477

 

 

284,879

 

 

921,646

 

 

378,881

 

 

1,080,071

     Unconsolidated  

 

 

683,574

 

 

21,195

 

 

156,839

 

 

45,426

 

 

460,114

Contractual interest obligations:(4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Unsecured revolving credit facility

 

 

49,683

 

 

7,845

 

 

20,919

 

 

20,919

 

 

-

     Senior unsecured notes and term loans(3)

 

 

3,330,186

 

 

281,365

 

 

689,321

 

 

580,751

 

 

1,778,749

     Consolidated secured debt(3)

 

 

526,087

 

 

73,890

 

 

159,552

 

 

110,453

 

 

182,192

     Unconsolidated secured debt(3)

 

 

161,651

 

 

19,443

 

 

50,734

 

 

34,700

 

 

56,774

Capital lease obligations(5)

 

 

93,697

 

 

4,592

 

 

9,012

 

 

8,346

 

 

71,747

Operating lease obligations(5)

 

 

1,092,169

 

 

12,818

 

 

34,485

 

 

33,629

 

 

1,011,237

Purchase obligations(5)

 

 

483,089

 

 

360,773

 

 

122,316

 

 

-

 

 

-

Other long-term liabilities(6)

 

 

3,810

 

 

1,106

 

 

2,704

 

 

-

 

 

-

Total contractual obligations

 

$

17,895,690

 

$

1,067,906

 

$

3,222,528

 

$

3,547,987

 

$

10,057,269

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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

     Please refer to “Credit Strength” above for a discussion of our leverage and coverage ratio trends.  Our debt agreements contain various covenants, restrictions and events of default. Certain agreements require us to maintain 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 March 31, 2017, 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 (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 (“DRIP”) under which we may issue up to 15,000,000 shares of common stock. As of April 28, 2017, 5,893,662 shares of common stock remained available for issuance under the DRIP registration statement. We have entered into separate Equity Distribution Agreements with each of Morgan Stanley & Co. LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman, Sachs & Co., UBS Securities LLC and Wells Fargo Securities, LLC relating to the offer and sale from time to time of up to $1,000,000,000 aggregate amount of our common stock (“Equity Shelf Program”). As of April 28, 2017, we had $903,411,000 of remaining capacity

33


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

 

 

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, 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 NOICO 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

 

 

 

March 31,

 

March 31,

 

 

 

 

 

 

 

2017

 

2016

 

Amount

 

%

Net income (loss) attributable to common stockholders

 

$

312,639

 

$

148,969

 

$

163,670

 

110%

Funds from operations attributable to common stockholders

 

  

306,231

 

 

391,264

 

 

(85,033)

 

-22%

EBITDA

 

  

686,728

 

 

525,405

 

 

161,323

 

31%

Net operating income from continuing operations (NOICO)

 

  

552,129

 

 

597,414

 

 

(45,285)

 

-8%

Same store NOI

 

 

468,590

 

 

469,784

 

 

(1,194)

 

0%

 

 

 

  

 

 

 

 

 

 

 

 

 

Per share data (fully diluted):

 

  

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to common stockholders

 

$

0.86

 

$

0.42

 

$

0.44

 

105%

Funds from operations attributable to common stockholders

 

$

0.84

 

$

1.10

 

$

(0.26)

 

-24%

 

 

 

  

 

 

 

 

 

 

 

 

 

Interest coverage ratio

 

  

5.67x

 

 

3.85x

 

 

1.82x

 

47%

Fixed charge coverage ratio

 

  

4.53x

 

 

3.06x

 

 

1.47x

 

48%

 

Triple-net

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

 

 

 

Three Months Ended

 

Change

 

 

 

 

March 31,

 

March 31,

 

 

 

 

 

 

 

 

 

2017

 

2016

 

$

 

%

NOICO

 

 $ 

249,735

 

 $ 

308,168

 

 $ 

(58,433)

 

-19%

Non SSNOI attributable to same store properties

 

 

(13,253)

 

 

(16,181)

 

 

2,928

 

-18%

NOICO attributable to non same store properties(1)

 

 

(46,995)

 

 

(105,327)

 

 

58,332

 

-55%

SSNOI(2)

 

 $ 

189,487

 

 $ 

186,660

 

 $ 

2,827

 

2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Change is primarily due to the acquisition of 14 properties and the conversion of 23 construction projects into revenue-generating properties subsequent to January 1, 2016 and 211 properties disposed or held for sale.

(2) Relates to 538 same store properties.

  

34


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

 

 

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

 

 

 

 

Three Months Ended

 

Change

 

 

 

 

March 31,

 

March 31,

 

 

 

 

 

 

 

 

2017

 

2016

 

$

 

%

Revenues:

 

  

 

 

 

 

 

 

 

 

 

 

Rental income

 

 $ 

227,290

 

 $ 

283,825

 

 $ 

(56,535)

 

-20%

 

Interest income

 

  

20,679

 

 

22,853

 

 

(2,174)

 

-10%

 

Other income

 

  

1,766

 

 

1,490

 

 

276

 

19%

 

 

Total revenues

 

  

249,735

 

 

308,168

 

 

(58,433)

 

-19%

 

 

Net operating income from continuing operations (NOICO)(1)

 

 

249,735

 

 

308,168

 

 

(58,433)

 

-19%

Other expenses:

 

  

 

 

 

 

 

 

 

 

 

 

Interest expense

 

  

5,511

 

 

6,364

 

 

(853)

 

-13%

 

Loss (gain) on derivatives, net

 

 

1,224

 

 

-

 

 

1,224

 

n/a

 

Depreciation and amortization

 

  

59,608

 

 

79,800

 

 

(20,192)

 

-25%

 

Transaction costs(2)

 

 

-

 

 

2,852

 

 

(2,852)

 

-100%

 

Loss (gain) on extinguishment of debt, net

 

  

29,084

 

 

(24)

 

 

29,108

 

n/a

 

Impairment of assets

 

 

-

 

 

14,314

 

 

(14,314)

 

-100%

 

Other expenses(2)

 

 

5,010

 

 

-

 

 

5,010

 

n/a

 

 

Total other expenses

 

  

100,437

 

 

103,306

 

 

(2,869)

 

-3%

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

 

  

149,298

 

 

204,862

 

 

(55,564)

 

-27%

Income tax benefit (expense)

 

  

(800)

 

 

(317)

 

 

(483)

 

152%

Income (loss) from unconsolidated entities

 

 

5,638

 

 

3,081

 

 

2,557

 

83%

Income from continuing operations

 

  

154,136

 

 

207,626

 

 

(53,490)

 

-26%

Gain (loss) on real estate dispositions, net(3)

 

 

231,081

 

 

-

 

 

231,081

 

n/a

Net income

 

 

385,217

 

 

207,626

 

 

177,591

 

86%

Less: Net income (loss) attributable to noncontrolling interests

 

  

603

 

 

(342)

 

 

945

 

n/a

Net income attributable to common stockholders

 

$

384,614

 

$

207,968

 

$

176,646

 

85%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) See Note 17 to our unaudited consolidated financial statements.

(2) See Note 2 to our unaudited consolidated financial statements.

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

 

     The decrease in rental income is attributable to the disposition of properties exceeding new acquisitions.  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  For the three months ended March 31, 2017, we had one lease renewal and 25 leases with rental rate increasers ranging from 0.13% to 0.41% in our triple-net portfolio. The decrease in interest income is directly related to the volume of loan payoffs during 2016 and 2017.

 

     Depreciation and amortization decreased as a result of the disposition of 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.

 

During the three months ended March 31, 2016, 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.  Changes in the gain on sales of properties are related to the volume of property sales and the sales prices.

    During the three months ended March 31, 2017, we completed five triple-net construction projects totaling $157,460,000 or $257,290 per bed/unit.  The following is a summary of triple-net construction projects pending as of March 31, 2017 (dollars in thousands):

35


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

 

 

  

Location

 

Units/Beds

 

 

Commitment

 

 

Balance

 

Est. Completion

Raleigh, NC

 

60

 

$

23,925

 

$

16,415

 

2Q17

Livingston, NJ

 

120

 

 

53,440

 

 

46,048

 

2Q17

Piscataway, NJ

 

124

 

 

40,800

 

 

38,190

 

2Q17

Bracknell, UK

 

64

 

 

15,825

 

 

12,213

 

2Q17

Alexandria, VA

 

116

 

 

60,156

 

 

23,549

 

2Q18

Exton, PA

 

120

 

 

34,175

 

 

5,939

 

2Q18

 

 

604

 

$

228,321

 

$

142,354

 

 

 

 

 

 

 

 

 

 

 

 

 

     Interest expense for the three months ended March 31, 2017 and 2016 represents secured debt interest expense and related fees.  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 fluctuation in losses/gains on debt extinguishment is attributable to the large volume of extinguishments in the first quarter of 2017.  The following is a summary of our triple-net secured debt principal activity (dollars in thousands):

 

  

 

 

Three Months Ended

 

 

March 31, 2017

 

March 31, 2016

 

 

 

 

 

Wtd. Avg.

 

 

 

 

Wtd. Avg.

 

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

Beginning balance

 

$

594,199

 

4.580%

 

$

554,014

 

5.488%

Debt extinguished

 

  

(255,553)

 

5.923%

 

 

(33,919)

 

5.895%

Foreign currency

 

 

3,155

 

2.751%

 

 

5,291

 

5.315%

Principal payments

 

  

(2,531)

 

5.790%

 

 

(2,987)

 

5.587%

Ending balance

 

$

339,270

 

3.549%

 

$

522,399

 

5.467%

 

 

  

 

 

 

 

 

 

 

 

Monthly averages

 

$

531,647

 

4.441%

 

$

540,554

 

5.482%

 

 

 

 

 

 

 

 

 

 

 

   

A portion of our triple-net properties were formed through partnerships.  Income or loss from unconsolidated entities represents our share of net income or losses from partnerships where we are the noncontrolling partner.  Net income attributable to noncontrolling interest represents our partners’ share of net income relating to those partnerships where we are the controlling partner.

Seniors Housing Operating

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

  

 

 

 

Three Months Ended

 

Change

 

 

 

 

March 31,

 

March 31,

 

 

 

 

 

 

 

 

 

2017

 

2016

 

$

 

%

NOICO

 

 $ 

209,442

 

 $ 

196,475

 

 $ 

12,967

 

7%

Non SSNOI attributable to same store properties

 

 

231

 

 

248

 

 

(17)

 

-7%

NOICO attributable to non same store properties(1)

 

 

(17,109)

 

 

99

 

 

(17,208)

 

-17382%

SSNOI(2)

 

 $ 

192,564

 

 $ 

196,822

 

 $ 

(4,258)

 

-2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Change is primarily due to the acquisition of 41 properties subsequent to January 1, 2016.

(2) Relates to 376 same store properties.

 

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

 

 

  

36


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

 

 

 

 

 

 

Three Months Ended

 

Change

 

 

 

 

March 31,

 

March 31,

 

 

 

 

 

 

 

 

2017

 

2016

 

$

 

%

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Resident fees and services

 

 $ 

670,337

 

$

602,149

 

$

68,188

 

11%

 

Interest income

 

 

69

 

 

1,031

 

 

(962)

 

-93%

 

Other income

 

 

1,461

 

 

2,189

 

 

(728)

 

-33%

 

 

Total revenues

 

 

671,867

 

 

605,369

 

 

66,498

 

11%

Property operating expenses

 

 

462,425

 

 

408,894

 

 

53,531

 

13%

 

Net operating income from continuing operations (NOICO)(1)

 

 

209,442

 

 

196,475

 

 

12,967

 

7%

Other expenses:

 

  

 

 

 

 

 

 

 

 

 

 

Interest expense

 

  

15,816

 

 

20,523

 

 

(4,707)

 

-23%

 

Depreciation and amortization

 

  

119,737

 

 

101,832

 

 

17,905

 

18%

 

Transaction costs(2)

 

 

-

 

 

3,933

 

 

(3,933)

 

-100%

 

Loss (gain) on extinguishment of debt, net

 

 

890

 

 

-

 

 

890

 

n/a

 

Impairment of assets

 

 

5,406

 

 

-

 

 

5,406

 

n/a

 

Other expenses(2)

 

 

1,778

 

 

-

 

 

1,778

 

n/a

 

 

Total other expenses

 

  

143,627

 

 

126,288

 

 

17,339

 

14%

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

 

  

65,815

 

 

70,187

 

 

(4,372)

 

-6%

Income tax benefit (expense)

 

 

(1,087)

 

 

2,767

 

 

(3,854)

 

n/a

Income (loss) from unconsolidated entities

 

  

(29,191)

 

 

(6,935)

 

 

(22,256)

 

321%

Income from continuing operations

 

 

35,537

 

 

66,019

 

 

(30,482)

 

-46%

Gain (loss) on real estate dispositions, net(3)

 

 

13,011

 

 

-

 

 

13,011

 

n/a

Net income (loss)

 

 

48,548

 

 

66,019

 

 

(17,471)

 

-26%

Less: Net income (loss) attributable to noncontrolling interests

 

  

(590)

 

 

360

 

 

(950)

 

n/a

Net income (loss) attributable to common stockholders

 

$

49,138

 

$

65,659

 

$

(16,521)

 

-25%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) See Note 17 to our unaudited consolidated financial statements.

(2) See Note 2 to our unaudited consolidated financial statements.

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

 

     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 three month period ended March 31, 2017, we recorded an impairment charge related to one held-for-sale property for which the fair value less costs to sell exceeded our carrying value.  During the three month period ended March 31, 2017, we recorded a gain on sale related to the sale of one property previously classified as held-for-sale.

 

     During the three month period ended March 31, 2017, we completed one seniors housing construction project representing $3,634,000 or $302,833 per unit.  The following is a summary of our seniors housing operating construction projects, excluding expansions, pending as of March 31, 2017 (dollars in thousands):

  

37


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

 

 

Location

 

Units

 

 

Commitment

 

 

Balance

 

Est. Completion

Chertsey, UK

 

94

 

$

39,115

 

$

22,504

 

1Q18

Bushey, UK

 

95

 

 

51,088

 

 

19,851

 

2Q18

 

 

189

 

$

90,203

 

 

42,355

 

 

New York, NY

 

Project in planning stage

 

 

129,327

 

 

Total

 

 

 

 

 

 

$

171,682

 

 

 

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 seniors housing operating property secured debt principal activity (dollars in thousands):

  

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 2017

 

March 31, 2016

 

 

 

 

 

Weighted Avg.

 

 

 

 

Weighted Avg.

 

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

Beginning balance

 

$

2,463,249

 

3.936%

 

$

2,290,552

 

3.958%

Debt issued

 

 

12,536

 

2.340%

 

 

75,136

 

3.063%

Debt extinguished

 

 

(438,532)

 

5.301%

 

 

(58,533)

 

3.037%

Foreign currency

 

 

7,158

 

3.488%

 

 

60,197

 

3.524%

Principal payments

 

 

(11,259)

 

3.733%

 

 

(12,170)

 

3.959%

Ending balance

 

$

2,033,152

 

3.663%

 

$

2,355,182

 

3.980%

 

 

 

 

 

 

 

 

 

 

 

Monthly averages

 

$

2,162,185

 

3.729%

 

$

2,306,203

 

3.976%

 

     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 the recognition of goodwill and intangible asset impairments as well as non-recurring income tax expense adjustments related to our investments in unconsolidated entities during the three month period ended March 31, 2017.   

  

 

Outpatient Medical

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

 

 

 

Three Months Ended

 

Change

 

 

 

 

March 31,

 

March 31,

 

 

 

 

 

 

 

 

 

2017

 

2016

 

$

 

%

NOICO

 

 $ 

92,719

 

 $ 

92,713

 

 $ 

6

 

0%

Non SSNOI on same store properties

 

 

(2,214)

 

 

(2,373)

 

 

159

 

-7%

NOICO attributable to non same store properties(1)

 

 

(3,966)

 

 

(4,038)

 

 

72

 

-2%

SSNOI(2)

 

 $ 

86,539

 

 $ 

86,302

 

 $ 

237

 

0%

 

 

 

 

 

 

 

 

 

 

 

 

(1) Change is primarily due to acquisitions of five properties and conversions of construction projects into seven revenue-generating properties subsequent to January 1, 2016.

(2) Relates to 235 same store properties.

  

38


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

 

 

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

  

 

 

 

 

 

Three Months Ended

 

Change

 

 

 

 

March 31,

 

March 31,

 

 

 

 

 

 

 

 

2017

 

2016

 

$

 

%

Revenues:

 

  

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

139,851

 

$

131,838

 

$

8,013

 

6%

 

Interest income

 

  

-

 

 

1,304

 

 

(1,304)

 

-100%

 

Other income

 

  

612

 

 

313

 

 

299

 

96%

 

 

Total revenues

 

  

140,463

 

 

133,455

 

 

7,008

 

5%

Property operating expenses

 

  

47,744

 

 

40,742

 

 

7,002

 

17%

 

Net operating income from continuing operations (NOICO)(1)

 

  

92,719

 

 

92,713

 

 

6

 

0%

Other expenses:

 

  

 

 

 

 

 

 

 

 

 

 

Interest expense

 

  

2,291

 

 

5,744

 

 

(3,453)

 

-60%

 

Depreciation and amortization

 

  

48,931

 

 

47,064

 

 

1,867

 

4%

 

Transaction costs(2)

 

 

-

 

 

1,423

 

 

(1,423)

 

-100%

 

Impairment of assets

 

 

5,625

 

 

-

 

 

5,625

 

n/a

 

Loss (gain) on extinguishment of debt, net

 

  

1,382

 

 

-

 

 

1,382

 

n/a

 

Other expenses(2)

 

 

360

 

 

-

 

 

360

 

n/a

 

 

Total other expenses

 

  

58,589

 

 

54,231

 

 

4,358

 

8%

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

 

  

34,130

 

 

38,482

 

 

(4,352)

 

-11%

Income tax (expense) benefit

 

  

(335)

 

 

(228)

 

 

(107)

 

47%

Income from unconsolidated entities

 

 

447

 

 

34

 

 

413

 

1215%

Net income (loss)

 

  

34,242

 

 

38,288

 

 

(4,046)

 

-11%

Less: Net income (loss) attributable to noncontrolling interests

 

  

810

 

 

135

 

 

675

 

500%

Net income (loss) attributable to common stockholders

 

$

33,432

 

$

38,153

 

$

(4,721)

 

-12%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) See Note 17 to our unaudited consolidated financial statements.

(2) See Note 2 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 March 31, 2017, our consolidated outpatient medical portfolio signed 93,623 square feet of new leases and 163,472 square feet of renewals.  The weighted-average term of these leases was six years, with a rate of $36.86 per square foot and tenant improvement and lease commission costs of $21.36 per square foot. Substantially all of these leases during the referenced quarter contain an annual fixed or contingent escalation rent structure ranging from 0% to 5%. 

 

     The fluctuation 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.  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 three months ended March 31, 2017, we recorded impairment charges related to certain held-for-sale properties for which the fair values less estimated costs to sell exceeded our carrying values. 

 

39


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

 

 

    During the three months ended March 31, 2017, we completed two outpatient medical construction projects representing $25,910,000 or $259 per square foot. The following is a summary of the outpatient medical construction projects, excluding expansions, pending as of March 31, 2017 (dollars in thousands):

  

Location

 

Square Feet

 

 

Commitment

 

 

Balance

 

Est. Completion

Timmonium, MD

 

46,000

 

 

20,996

 

 

13,118

 

3Q17

Howell, MI

 

56,211

 

 

15,509

 

 

10,827

 

3Q17

Brooklyn, NY

 

140,955

 

 

103,624

 

 

43,236

 

2Q18

Total

 

243,166

 

$

140,129

 

$

67,181

 

 

 

 

 

 

 

 

 

 

 

 

 

     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 fluctuation in losses/gains on debt extinguishment is attributable to the large volume of extinguishments in the first quarter of 2017.  The following is a summary of our outpatient medical secured debt principal activity (dollars in thousands):

 

 

 

Three Months Ended

 

 

March 31, 2017

 

March 31, 2016

 

 

 

 

 

Weighted Avg.

 

 

 

 

Weighted Avg.

 

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

Beginning balance

 

$

404,079

 

4.846%

 

$

627,689

 

5.177%

Debt extinguished

 

  

(112,104)

 

5.889%

 

  

(19,187)

 

6.196%

Principal payments

 

  

(2,151)

 

6.491%

 

  

(3,142)

 

5.671%

Ending balance

 

$

289,824

 

4.509%

 

$

605,360

 

5.218%

 

 

 

 

 

 

 

 

 

 

 

Monthly averages

 

$

332,085

 

4.664%

 

$

619,350

 

5.237%

  

         A portion of our outpatient medical properties were formed through partnerships. Income or loss from unconsolidated entities represents our share of net income or losses related to certain unconsolidated property investments. Net income attributable to noncontrolling interests represents our partners’ share of net income relating to those partnerships where we are the controlling partner.

 

  

40


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

 

 

 

 

March 31,

 

March 31,

 

 

 

 

 

 

 

 

2017

 

2016

 

$

 

%

Revenues:

 

  

 

 

 

 

 

 

 

 

 

 

 

Other income

 

$

233

 

$

58

 

$

175

 

302%

Expenses:

 

  

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

  

94,979

 

 

100,329

 

 

(5,350)

 

-5%

 

 

General and administrative

 

  

31,101

 

 

45,691

 

 

(14,590)

 

-32%

 

 

Other expenses

 

 

4,527

 

 

-

 

 

4,527

 

n/a

 

 

Total expenses

 

  

130,607

 

 

146,020

 

 

(15,413)

 

-11%

Loss from continuing operations before income taxes

 

  

(130,374)

 

 

(145,962)

 

 

15,588

 

-11%

Income tax (expense) benefit

 

  

(23)

 

 

(497)

 

 

474

 

-95%

Loss from continuing operations

 

  

(130,397)

 

 

(146,459)

 

 

16,062

 

-11%

Less: Preferred stock dividends

 

  

14,379

 

 

16,352

 

 

(1,973)

 

-12%

Less: Preferred stock redemption charge

 

  

9,769

 

 

-

 

 

9,769

 

n/a

Net loss attributable to common stockholders

 

$

(154,545)

 

$

(162,811)

 

$

8,266

 

-5%

 

     The following is a summary of our non-segment/corporate interest expense (dollars in thousands):

  

 

 

Three Months Ended

 

Change

 

 

March 31,

 

March 31,

 

 

 

 

 

 

2017

 

2016

 

$

 

%

Senior unsecured notes

 

$

86,591

 

$

93,534

 

$

(6,943)

 

-7%

Secured debt

 

  

60

 

  

97

 

  

(37)

 

-38%

Primary unsecured credit facility

 

  

5,037

 

  

3,709

 

  

1,328

 

36%

Loan expense

 

  

3,291

 

  

2,989

 

  

302

 

10%

Totals

 

$

94,979

 

$

100,329

 

$

(5,350)

 

-5%

The change in interest expense on senior unsecured notes is due to the net effect of issuances and extinguishments.  The decrease in interest expense is attributed primarily to the $450,000,000 of 4.70% senior unsecured notes extinguished in December 2016.  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 March 31, 2017 and 2016 were 2.93% and 4.36%, respectively.  The decrease in general and administrative expenses for the three months ended March 31, 2017 is primarily related to a reduction in professional service fees for tax and legal consulting and compensation costs as a result of execution of our strategic initiatives. Other expenses for the three months ended March 31, 2017 included costs associated with the departure of certain executive officers and key employees.

41


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

 

 

Other

 

Non-GAAP Financial Measures

     We believe that net operating income from continuing operations (“NOICO”), net income and net income attributable to common stockholders (“NICS”), as defined by U.S. GAAP, are the most appropriate earnings measurements. However, we consider FFO, 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 NICS, 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.

     As discussed in Note 17 to our unaudited consolidated financial statements, NOICO is used to evaluate the operating performance of our properties. We define NOICO 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 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, 2016.  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 NOICO 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 NOICO and SSNOI to make decisions about resource allocations and to assess the property level performance of our properties.

     EBITDA stands for earnings (net income) 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. Covenants in our senior unsecured notes contain a financial ratios based on a definition of EBITDA that is specific to those agreements. 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 excluding unconsolidated entities 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.

     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. 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.

42


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

 

 

     The following table reflects the reconciliation of SSNOI to NOICO, the most directly comparable U.S. GAAP measure, for the periods presented.  Dollars are in thousands.

  

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

March 31,

 

June 30,

 

September 30,

 

December 31,

 

March 31,

SSNOI Reconciliations:

 

2016

 

2016

 

2016

 

2016

 

2017

NOICO:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triple-net

 

 

 

$

308,168

 

$

310,311

 

$

310,864

 

$

279,516

 

$

249,735

 

Seniors housing operating

 

 

 

 

196,475

 

 

207,255

 

 

199,495

 

 

210,895

 

 

209,442

 

Outpatient medical

 

 

 

 

92,713

 

 

99,805

 

 

94,905

 

 

92,841

 

 

92,719

 

 

 

Total

 

 

 

 

597,356

 

 

617,371

 

 

605,264

 

 

583,252

 

 

551,896

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triple-net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non SSNOI on same store properties

 

 

(16,181)

 

 

(14,399)

 

 

(14,251)

 

 

(14,138)

 

 

(13,253)

 

 

NOICO attributable to non same store properties

 

 

(105,327)

 

 

(106,242)

 

 

(107,491)

 

 

(76,528)

 

 

(46,995)

 

 

 

Subtotal

 

 

 

 

(121,508)

 

 

(120,641)

 

 

(121,742)

 

 

(90,666)

 

 

(60,248)

 

Seniors housing operating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non SSNOI on same store properties

 

 

248

 

 

242

 

 

1,269

 

 

231

 

 

231

 

 

NOICO attributable to non same store properties

 

 

99

 

 

71

 

 

(4,532)

 

 

(17,908)

 

 

(17,109)

 

 

 

Subtotal

 

 

 

 

347

 

 

313

 

 

(3,263)

 

 

(17,677)

 

 

(16,878)

 

Outpatient medical:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non SSNOI on same store properties

 

 

(2,373)

 

 

(2,611)

 

 

(2,636)

 

 

(1,974)

 

 

(2,214)

 

 

NOICO attributable to non same store properties

 

 

(4,038)

 

 

(9,341)

 

 

(5,276)

 

 

(3,007)

 

 

(3,966)

 

 

 

Subtotal

 

 

 

 

(6,411)

 

 

(11,952)

 

 

(7,912)

 

 

(4,981)

 

 

(6,180)

SSNOI:

 

Properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triple-net

 

538

 

 

186,660

 

 

189,670

 

 

189,122

 

 

188,850

 

 

189,487

 

Seniors housing operating

 

376

 

 

196,822

 

 

207,568

 

 

196,232

 

 

193,218

 

 

192,564

 

Outpatient medical

 

235

 

 

86,302

 

 

87,853

 

 

86,993

 

 

87,860

 

 

86,539

 

 

 

Total

 

1,149

 

$

469,784

 

$

485,091

 

$

472,347

 

$

469,928

 

$

468,590

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SSNOI Property Reconciliation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total properties

 

1,277

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions

 

(60)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Developments

 

(34)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-for-sale

 

(24)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment transitions

 

(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other(1)

 

(8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same store properties

 

1,149

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Includes eight land parcels.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

43


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

 

 

     The table below reflects the reconciliation of FFO to NICS, the most directly comparable U.S. GAAP measure, for the periods presented. Noncontrolling interest and unconsolidated entity amounts represent adjustments to reflect our share of depreciation and amortization.  Amounts are in thousands except for per share data.

 

  

 

 

 

Three Months Ended

 

 

 

March 31,

 

June 30,

 

September 30,

 

December 31,

 

March 31,

FFO Reconciliations:

  

2016

 

2016

 

2016

 

2016

 

2017

NICS

  

$

148,969

 

$

195,474

 

$

334,910

 

$

333,042

 

$

312,639

Depreciation and amortization

  

 

228,696

 

 

226,569

 

 

218,061

 

 

227,916

 

 

228,276

Impairment of assets

 

 

14,314

 

 

-

 

 

9,705

 

 

13,187

 

 

11,031

Loss (gain) on sales of properties, net

  

 

-

 

 

(1,530)

 

 

(162,351)

 

 

(200,165)

 

 

(244,092)

Noncontrolling interests

 

 

(17,319)

 

 

(20,616)

 

 

(15,695)

 

 

(17,897)

 

 

(18,107)

Unconsolidated entities

  

 

16,604

 

 

17,077

 

 

17,240

 

 

16,746

 

 

16,484

FFO

  

$

391,264

 

$

416,974

 

$

401,870

 

$

372,829

 

$

306,231

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

  

 

355,076

 

 

356,646

 

 

358,932

 

 

362,088

 

 

362,534

 

Diluted

  

 

356,051

 

 

358,891

 

 

361,237

 

 

364,369

 

 

364,652

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share data:

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NICS

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

  

$

0.42

 

$

0.55

 

$

0.93

 

$

0.92

 

$

0.86

 

Diluted

  

 

0.42

 

 

0.54

 

 

0.93

 

 

0.91

 

 

0.86

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FFO

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

  

$

1.10

 

$

1.17

 

$

1.12

 

$

1.03

 

$

0.84

 

Diluted

  

 

1.10

 

 

1.16

 

 

1.11

 

 

1.02

 

 

0.84

 

     The table below reflects the reconciliation of EBITDA to net income, the most directly comparable U.S. GAAP measure, for the periods presented. Dollars are in thousands.

 

  

 

 

 

Three Months Ended

 

 

 

March 31,

 

June 30,

 

September 30,

 

December 31,

 

March 31,

EBITDA Reconciliations:

 

2016

 

2016

 

2016

 

2016

 

2017

Net income

 

$

165,474

 

$

210,749

 

$

354,741

 

$

351,108

 

$

337,610

Interest expense

 

  

132,960

 

  

132,326

 

  

129,699

 

  

126,360

 

  

118,597

Income tax expense (benefit)

 

  

(1,725)

 

  

(513)

 

  

(305)

 

  

(16,585)

 

  

2,245

Depreciation and amortization

 

  

228,696

 

  

226,569

 

  

218,061

 

  

227,916

 

  

228,276

EBITDA

 

$

525,405

 

$

569,131

 

$

702,196

 

$

688,799

 

$

686,728

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Interest Coverage Ratio:

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Interest expense

 

$

132,960

 

$

132,326

 

$

129,699

 

$

126,360

 

$

118,597

Non-cash interest expense

 

  

599

 

  

(1,519)

 

  

(543)

 

  

(216)

 

  

(1,679)

Capitalized interest

 

  

3,037

 

  

4,306

 

  

4,766

 

  

4,834

 

  

4,129

 

Total interest

 

  

136,596

 

  

135,113

 

  

133,922

 

  

130,978

 

  

121,047

EBITDA

 

$

525,405

 

$

569,131

 

$

702,196

 

$

688,799

 

$

686,728

 

Interest coverage ratio

 

  

3.85x

 

  

4.21x

 

  

5.24x

 

  

5.26x

 

  

5.67x

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Fixed Charge Coverage Ratio:

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Total interest

 

$

136,596

 

$

135,113

 

$

133,922

 

$

130,978

 

$

121,047

Secured debt principal payments

 

  

18,642

 

  

19,096

 

  

18,151

 

  

18,577

 

  

16,249

Preferred dividends

 

  

16,352

 

  

16,352

 

  

16,352

 

  

16,352

 

  

14,379

 

Total fixed charges

 

  

171,590

 

  

170,561

 

  

168,425

 

  

165,907

 

  

151,675

EBITDA

 

$

525,405

 

$

569,131

 

$

702,196

 

$

688,799

 

$

686,728

 

Fixed charge coverage ratio

 

  

3.06x

 

 

3.34x

 

 

4.17x

 

 

4.15x

 

 

4.53x

  

44


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. Dollars are in thousands.

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Twelve Months Ended

Adjusted EBITDA

 

March 31,

 

June 30,

 

September 30,

 

December 31,

 

March 31,

Reconciliations:

 

2016

 

2016

 

2016

 

2016

 

2017

Net income

 

$

844,606

 

$

724,894

 

$

880,380

 

$

1,082,070

 

$

1,254,208

Interest expense

 

  

504,048

 

 

517,512

 

 

526,082

 

 

521,345

 

 

506,982

Income tax expense (benefit)

 

  

5,030

 

 

(2,899)

 

 

139

 

 

(19,128)

 

 

(15,158)

Depreciation and amortization

 

  

866,106

 

 

883,873

 

 

896,135

 

 

901,242

 

 

900,822

 

EBITDA

 

 

2,219,790

 

 

2,123,380

 

 

2,302,736

 

 

2,485,529

 

 

2,646,854

Loss (income) from unconsolidated entities

 

 

12,676

 

 

11,682

 

 

10,801

 

 

10,357

 

 

29,643

Transaction costs

 

 

70,579

 

 

63,245

 

 

73,754

 

 

42,910

 

 

34,702

Stock-based compensation expense

 

 

29,976

 

 

25,883

 

 

25,807

 

 

28,869

 

 

25,588

Loss (gain) on extinguishment of debt, net

 

 

19,252

 

 

398

 

 

(186)

 

 

17,214

 

 

48,593

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

 

  

(209,228)

 

 

(20,647)

 

 

(171,246)

 

 

(326,839)

 

 

(574,216)

Provision for loan losses

 

  

-

 

 

-

 

 

-

 

 

10,215

 

 

10,215

Loss (gain) on derivatives, net

 

 

-

 

 

-

 

 

(2,516)

 

 

(2,448)

 

 

(1,225)

Other expenses

 

 

40,636

 

 

37,386

 

 

37,386

 

 

7,721

 

 

19,396

Additional other income

 

  

(2,144)

 

 

(13,955)

 

 

(11,811)

 

 

(16,664)

 

 

(16,664)

Adjusted EBITDA

 

$

2,181,537

 

$

2,227,372

 

$

2,264,725

 

$

2,256,864

 

$

2,222,886

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Adjusted Fixed Charge Coverage Ratio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

504,048

 

$

517,512

 

$

526,082

 

$

521,345

 

$

506,982

Capitalized interest

 

  

9,320

 

  

11,566

 

  

14,467

 

  

16,943

 

  

18,035

Non-cash interest expense

 

  

(1,868)

 

  

(7,589)

 

  

(4,341)

 

  

(1,681)

 

  

(3,958)

 

Total interest

 

 

511,500

 

 

521,489

 

 

536,208

 

 

536,607

 

 

521,059

Adjusted EBITDA

 

$

2,181,537

 

$

2,227,372

 

$

2,264,725

 

$

2,256,864

 

$

2,222,886

 

Adjusted interest coverage ratio

 

 

4.26x

 

 

4.27x

 

 

4.22x

 

 

4.21x

 

 

4.27x

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest

 

$

511,500

 

$

521,489

 

$

536,208

 

$

536,607

 

$

521,059

Secured debt principal payments

 

  

70,076

 

  

71,836

 

  

74,170

 

  

74,466

 

  

72,073

Preferred dividends

 

  

65,408

 

  

65,408

 

  

65,407

 

  

65,406

 

  

63,434

 

Total fixed charges

 

  

646,984

 

  

658,733

 

  

675,785

 

  

676,479

 

  

656,566

Adjusted EBITDA

 

$

2,181,537

 

$

2,227,372

 

$

2,264,725

 

$

2,256,864

 

$

2,222,886

 

Adjusted fixed charge coverage ratio

 

  

3.37x

 

 

3.38x

 

 

3.35x

 

 

3.34x

 

 

3.39x

 

     Our leverage ratios include book capitalization, undepreciated book capitalization and market capitalization. Book capitalization represents the sum of net debt (defined as total long-term debt less cash and cash equivalents and any IRC section 1031 deposits), total equity and redeemable noncontrolling interests. Undepreciated book capitalization represents book capitalization adjusted for accumulated depreciation and amortization. Market capitalization represents book capitalization adjusted for the fair market value of our common stock. Our leverage ratios are defined as the proportion of net debt to total capitalization. The table below reflects the reconciliation of our leverage ratios to our balance sheets for the periods presented. Dollars are in thousands.

45


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

 

 

 

 

 

 

 

As of

 

 

 

 

March 31,

 

June 30,

 

September 30,

 

December 31,

 

March 31,

 

 

 

 

 

2016

 

 

2016

 

 

2016

 

 

2016

 

 

2017

Book capitalization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings under primary unsecured credit facility

 

$

645,000

 

$

745,000

 

$

1,350,000

 

$

645,000

 

$

522,000

Long-term debt obligations(1)

 

 

12,418,198

 

 

12,228,727

 

 

12,080,888

 

 

11,713,245

 

 

10,932,185

Cash & cash equivalents(2)

 

 

(355,949)

 

 

(466,585)

 

 

(456,420)

 

 

(557,659)

 

 

(380,360)

Total net debt

 

 

12,707,249

 

 

12,507,142

 

 

12,974,468

 

 

11,800,586

 

 

11,073,825

Total equity

 

 

14,999,794

 

 

14,868,568

 

 

15,264,238

 

 

15,281,472

 

 

15,110,263

Redeemable noncontrolling interest

 

 

359,656

 

 

394,126

 

 

393,530

 

 

398,433

 

 

385,418

Book capitalization

 

$

28,066,699

 

$

27,769,836

 

$

28,632,236

 

$

27,480,491

 

$

26,569,506

 

Net debt to book capitalization ratio

 

 

45%

 

 

45%

 

 

45%

 

 

43%

 

 

42%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Undepreciated book capitalization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net debt

 

$

12,707,249

 

$

12,507,142

 

$

12,974,468

 

$

11,800,586

 

$

11,073,825

Accumulated depreciation and amortization

 

 

4,032,726

 

 

4,109,585

 

 

4,243,038

 

 

4,093,494

 

 

4,335,160

Total equity

 

 

14,999,794

 

 

14,868,568

 

 

15,264,238

 

 

15,281,472

 

 

15,110,263

Redeemable noncontrolling interest

 

 

359,656

 

 

394,126

 

 

393,530

 

 

398,433

 

 

385,418

Undepreciated book capitalization

 

$

32,099,425

 

$

31,879,421

 

$

32,875,274

 

$

31,573,985

 

$

30,904,666

 

Net debt to undepreciated book capitalization ratio

 

 

40%

 

 

39%

 

 

39%

 

 

37%

 

 

36%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Market capitalization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net debt

 

$

12,707,249

 

$

12,507,142

 

$

12,974,468

 

$

11,800,586

 

$

11,073,825

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares outstanding

 

 

356,773

 

 

357,690

 

 

362,425

 

 

362,602

 

 

364,564

Period end share price

 

$

69.34

 

$

76.17

 

$

74.77

 

$

66.93

 

$

70.82

Common equity market capitalization

 

 

24,738,620

 

 

27,245,247

 

 

27,098,517

 

 

24,268,952

 

 

25,818,422

Noncontrolling interests

 

 

839,856

 

 

869,320

 

 

867,923

 

 

873,512

 

 

859,478

Preferred stock

 

 

1,006,250

 

 

1,006,250

 

 

1,006,250

 

 

1,006,250

 

 

718,750

Enterprise value

 

$

39,291,975

 

$

41,627,959

 

$

41,947,158

 

$

37,949,300

 

$

38,470,475

 

Net debt to market capitalization ratio

 

 

32%

 

 

30%

 

 

31%

 

 

31%

 

 

29%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Amounts include senior unsecured notes, secured debt and capital lease obligations as reflected on our consolidated balance sheet.

(2) Inclusive of IRC section 1031 deposits, if any.

 

Critical Accounting Policies

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

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

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

Management has discussed the development and selection of its critical accounting policies with the Audit Committee of the Board of Directors.  Management believes the current assumptions and other considerations used to estimate amounts reflected in our unaudited consolidated financial statements are appropriate and are not reasonably likely to change in the future.  However, since these estimates require assumptions to be made that were uncertain at the time the estimate was made, they bear the risk of change.  If actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our unaudited consolidated financial statements, the resulting changes could have a material adverse effect on our consolidated results of operations, liquidity and/or financial condition.  Please refer to Note 2 to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016 for further information regarding significant accounting policies that impact us.  There have been no material changes to these policies in 2017.

 

46


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

 

 

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, 2016, including factors identified under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Finally, the company undertakes no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events or otherwise, or to update the reasons why actual results could differ from those projected in any forward-looking statements.

  

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

      We historically borrow on our primary unsecured credit facility to acquire, construct or make loans relating to health care and seniors housing properties. Then, as market conditions dictate, we will issue equity or long-term fixed rate debt to repay the borrowings under our primary unsecured credit facility.  We are subject to risks associated with debt financing, including the risk that existing indebtedness may not be refinanced or that the terms of refinancing may not be as favorable as the terms of current indebtedness. The majority of our borrowings were completed under indentures or contractual agreements that limit the amount of indebtedness we may incur. Accordingly, in the event that we are unable to raise additional equity or borrow money because of these limitations, our ability to acquire additional properties may be limited.

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

47


  

 

analysis performed as of the dates indicated (in thousands):

 

 

March 31, 2017

 

December 31, 2016

 

 

Principal

 

Change in

 

Principal

 

Change in

 

 

balance

 

fair value

 

balance

 

fair value

Senior unsecured notes

 

$

7,591,593

 

$

(517,480)

 

$

7,568,832

 

$

(521,203)

Secured debt

 

 

1,731,448

 

 

(60,509)

 

 

2,489,276

 

 

(73,944)

Totals

 

$

9,323,041

 

$

(577,989)

 

$

10,058,108

 

$

(595,147)

     Our variable rate debt, including our primary unsecured credit facility, is reflected at fair value. At March 31, 2017, we had $2,148,703,000 outstanding related to our variable rate debt. Assuming no changes in outstanding balances, a 1% increase in interest rates would result in increased annual interest expense of $21,487,000.  At December 31, 2016, we had $2,311,996,000 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 $23,120,000.

 

     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 March 31, 2017, 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 $1,500,000.  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, excluding cross currency hedging activity (dollars in thousands):

  

 

 

March 31, 2017

 

December 31, 2016

 

 

Carrying

 

Change in

 

Carrying

 

Change in

 

 

Value

 

fair value

 

Value

 

fair value

Foreign currency forward contracts(1)

 

$

101,116

 

$

14,491

 

$

87,962

 

$

722

Debt designated as hedges

 

 

1,504,059

 

 

15,041

 

 

1,481,591

 

 

13,000

Totals

 

$

1,605,175

 

$

29,532

 

$

1,569,553

 

$

13,722

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Amounts exclude cross currency hedge activity.

 

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

 

 

Item 4. Controls and Procedures

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

  

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

     From time to time, there are various legal proceedings pending against us that arise in the ordinary course of our business. 

48


  

 

Management does not believe that the resolution of any of these legal proceedings either individually or in the aggregate will have a material adverse effect on our business, results of operations or financial condition.  Despite management’s view of the ultimate resolution of these legal proceedings, we may have significant legal expenses and costs associated with the defense of such matters.  Further, management cannot predict the outcome of these legal proceedings and if management’s expectation regarding such matters is not correct, such proceedings could have a material adverse effect on our business, results of operations or financial condition.

     From time to time, we are party to certain legal proceedings for which third parties, such as tenants, operators and/or managers, are contractually obligated to indemnify, defend and hold us harmless.  In some of these matters, the indemnitors have insurance for the potential damages.  In other matters, we are being defended by tenants and other obligated third parties and these indemnitors may not have sufficient insurance, assets, income or resources to satisfy their defense and indemnification obligations to us.  The unfavorable resolution of such legal proceedings could, individually or in the aggregate, materially adversely affect the indemnitors’ ability to satisfy their respective obligations to us, which, in turn, could have a material adverse effect on our business, results of operations or financial condition.  It is management’s opinion that there are currently no such legal proceedings pending that will, individually or in the aggregate, have such a material adverse effect.

 

  

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, 2016.

 

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

January 1, 2017 through January 31, 2017

 

101,340

 

$

66.51

 

 

 

 

February 1, 2017 through February 28, 2017

 

11,222

 

 

70.38

 

 

 

 

March 1 2017 through March 31, 2017

 

610

 

 

69.14

 

 

 

 

Totals

 

113,172

 

$

66.90

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) During the three months ended March 31, 2017, 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            Amended and Restated Employment Agreement, dated January 3, 2017, between the company and Thomas J. DeRosa (filed with the Securities and Exchange Commission as Exhibit 10.4(a) to the company’s Form 10-K filed February 22, 2017 (File No. 001-08923), and incorporated herein by reference thereto).*

10.2            Executive Retirement Agreement, dated as of February 10, 2017, by and between Jeffrey H. Miller and the company (filed with the Securities and Exchange Commission as Exhibit 10.8 to the company’s Form 10-K filed February 22, 2017 (File No. 001-08923), and incorporated herein by reference thereto).*

10.3            Separation Agreement, dated as of February 6, 2017, by and between Scott M. Brinker and the company (filed with the Securities and Exchange Commission as Exhibit 10.10 to the company’s Form 10-K filed February 22, 2017 (File No. 001-08923), and incorporated herein by reference thereto).*

10.4            Welltower Inc. 2017-2019 Long-Term Incentive Program.*

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

49


  

 

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 March 31, 2017 and December 31, 2016, (ii) the Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and 2016, (iii) the Consolidated Statements of Equity for the three months ended March 31, 2017 and 2016, (iv) the Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 and (v) the Notes to Unaudited Consolidated Financial Statements.

 

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: May 5, 2017 

By:  

/s/ THOMAS J. DEROSA  

 

 

Thomas J. DeRosa, 

 

 

Chief Executive Officer

 (Principal Executive Officer) 

 

 

 

 

 

Date: May 5, 2017 

By:  

/s/ SCOTT A. ESTES  

 

 

Scott A. Estes, 

 

 

Executive Vice President - Chief Financial Officer

 (Principal Financial Officer) 

 

 

 

 

 

Date: May 5, 2017 

By:  

/s/ PAUL D. NUNGESTER, JR.  

 

 

Paul D. Nungester, Jr., 

 

 

Senior Vice President & Controller

 (Principal Accounting Officer) 

 

 

50