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WELLTOWER INC. - Quarter Report: 2018 September (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
 
 
 
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
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)
 
(IRS 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  þ  No  ¨
Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ  No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 Large accelerated filer
 þ
 Accelerated filer
¨
 Non-accelerated filer
¨
 Smaller reporting company
¨
Emerging growth company
¨
 
 
 
 
(Do not check if a smaller reporting company)
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No  þ
As of October 25, 2018, the registrant had 375,644,415 shares of common stock outstanding. 



TABLE OF CONTENTS
 
 
Page
PART I. FINANCIAL INFORMATION
 
 
 
Item 1. Financial Statements (Unaudited)
 
 
 
Consolidated Balance Sheets — September 30, 2018 and December 31, 2017
 
 
Consolidated Statements of Comprehensive Income — Three and nine months ended September 30, 2018 and 2017
 
 
Consolidated Statements of Equity — Nine months ended September 30, 2018 and 2017
 
 
Consolidated Statements of Cash Flows — Nine months ended September 30, 2018 and 2017
 
 
Notes to Unaudited Consolidated Financial Statements
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
 
Item 4. Controls and Procedures
 
 
PART II. OTHER INFORMATION
 
 
 
Item 1. Legal Proceedings
 
 
Item 1A. Risk Factors
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
 
Item 5. Other Information
 
 
Item 6. Exhibits
 
 
Signatures



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 
CONSOLIDATED BALANCE SHEETS
WELLTOWER INC. AND SUBSIDIARIES
(In thousands) 
 
 
September 30, 2018 (Unaudited)
 
December 31, 2017 (Note)
Assets:  
 
 
 
 
Real estate investments:  
 
 
 
 
Real property owned:  
 
 
 
 
Land and land improvements  
 
$
3,193,555

 
$
2,734,467

Buildings and improvements  
 
27,980,830

 
25,373,117

Acquired lease intangibles  
 
1,562,650

 
1,502,471

Real property held for sale, net of accumulated depreciation  
 
619,141

 
734,147

Construction in progress  
 
135,343

 
237,746

Gross real property owned  
 
33,491,519

 
30,581,948

Less accumulated depreciation and amortization  
 
(5,394,274
)
 
(4,838,370
)
Net real property owned  
 
28,097,245

 
25,743,578

Real estate loans receivable  
 
409,196

 
495,871

Less allowance for losses on loans receivable  
 
(68,372
)
 
(68,372
)
Net real estate loans receivable  
 
340,824

 
427,499

Net real estate investments  
 
28,438,069

 
26,171,077

Other assets:  
 
 
 
 
Investments in unconsolidated entities  
 
423,192

 
445,585

Goodwill  
 
68,321

 
68,321

Cash and cash equivalents  
 
191,199

 
243,777

Restricted cash  
 
90,086

 
65,526

Straight-line rent receivable
 
388,045

 
389,168

Receivables and other assets  
 
650,207

 
560,991

Total other assets  
 
1,811,050

 
1,773,368

Total assets  
 
$
30,249,119

 
$
27,944,445

 
 
 
 
 
Liabilities and equity  
 
 
 
 
Liabilities:  
 
 
 
 
Borrowings under primary unsecured credit facility  
 
$
1,312,000

 
$
719,000

Senior unsecured notes  
 
9,655,022

 
8,331,722

Secured debt  
 
2,465,661

 
2,608,976

Capital lease obligations  
 
71,377

 
72,238

Accrued expenses and other liabilities  
 
1,074,994

 
911,863

Total liabilities  
 
14,579,054

 
12,643,799

Redeemable noncontrolling interests  
 
400,864

 
375,194

Equity:  
 
 
 
 
Preferred stock  
 
718,498

 
718,503

Common stock  
 
376,353

 
372,449

Capital in excess of par value  
 
17,889,514

 
17,662,681

Treasury stock  
 
(68,753
)
 
(64,559
)
Cumulative net income  
 
6,008,095

 
5,316,580

Cumulative dividends  
 
(10,478,020
)
 
(9,471,712
)
Accumulated other comprehensive income (loss)  
 
(138,491
)
 
(111,465
)
Other equity  
 
489

 
670

Total Welltower Inc. stockholders’ equity  
 
14,307,685

 
14,423,147

Noncontrolling interests  
 
961,516

 
502,305

Total equity  
 
15,269,201

 
14,925,452

Total liabilities and equity  
 
$
30,249,119

 
$
27,944,445

 
NOTE: The consolidated balance sheet at December 31, 2017 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.


3


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
WELLTOWER INC. AND SUBSIDIARIES
(In thousands, except per share data) 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
 
Rental income  
 
$
342,887

 
$
362,880

 
$
1,019,857

 
$
1,085,621

Resident fees and services
 
875,171

 
702,380

 
2,374,450

 
2,049,757

Interest income
 
14,622

 
20,187

 
42,732

 
61,836

Other income
 
3,699

 
6,036

 
22,217

 
15,169

Total revenues
 
1,236,379

 
1,091,483


3,459,256


3,212,383

 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
Interest expense
 
138,032

 
122,578

 
382,223

 
357,405

Property operating expenses
 
657,157

 
523,997

 
1,782,373

 
1,536,021

Depreciation and amortization
 
243,149

 
230,138

 
707,625

 
683,262

General and administrative
 
28,746

 
29,913

 
95,282

 
93,643

Loss (gain) on derivatives and financial instruments, net
 
8,991

 
324

 
(5,642
)
 
2,284

Loss (gain) on extinguishment of debt, net
 
4,038

 

 
16,044

 
36,870

Impairment of assets
 
6,740

 

 
39,557

 
24,662

Other expenses
 
88,626

 
99,595

 
102,396

 
117,608

Total expenses
 
1,175,479

 
1,006,545

 
3,119,858

 
2,851,755

 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations before income taxes
 
 
 
 
 
 
 
 
and income from unconsolidated entities
 
60,900

 
84,938

 
339,398

 
360,628

Income tax (expense) benefit
 
(1,741
)
 
(669
)
 
(7,170
)
 
5,535

Income (loss) from unconsolidated entities
 
344

 
3,408

 
(836
)
 
(23,676
)
Income (loss) from continuing operations
 
59,503

 
87,677

 
331,392

 
342,487

Gain (loss) on real estate dispositions, net
 
24,723

 
1,622

 
373,662

 
287,869

Net income
 
84,226

 
89,299

 
705,054

 
630,356

Less: Preferred stock dividends
 
11,676

 
11,676

 
35,028

 
37,734

Less: Preferred stock redemption charge
 

 

 

 
9,769

Less: Net income (loss) attributable to noncontrolling interests(1)
 
8,166

 
3,580

 
13,539

 
7,735

Net income (loss) attributable to common stockholders
 
$
64,384

 
$
74,043

 
$
656,487

 
$
575,118

 
 
 
 
 
 
 
 
 
Average number of common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
373,023

 
369,089

 
372,052

 
366,096

Diluted
 
374,487

 
370,740

 
373,638

 
367,894

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
0.16

 
$
0.24

 
$
0.89

 
$
0.94

Net income (loss) attributable to common stockholders
 
$
0.17

 
$
0.20

 
$
1.76

 
$
1.57

Diluted:
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
0.16

 
$
0.24

 
$
0.89

 
$
0.93

Net income (loss) attributable to common stockholders
 
$
0.17

 
$
0.20

 
$
1.76

 
$
1.56

 
 
 
 
 
 
 
 
 
Dividends declared and paid per common share
 
$
0.87

 
$
0.87

 
$
2.61

 
$
2.61

 
(1) Includes amounts attributable to redeemable noncontrolling interests.


4


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
WELLTOWER INC. AND SUBSIDIARIES
(In thousands) 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
Net income
 
$
84,226

 
$
89,299

 
$
705,054

 
$
630,356

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Unrecognized gain (loss) on available-for-sale securities
 

 
(3,808
)
 

 
(20,285
)
Unrealized gains (losses) on cash flow hedges
 

 
2

 

 
2

Foreign currency translation gain (loss)
 
(3,093
)
 
37,343

 
(36,890
)
 
70,769

Total other comprehensive income (loss)
 
(3,093
)
 
33,537

 
(36,890
)
 
50,486

 
 
 
 
 
 
 
 
 
Total comprehensive income (loss)
 
81,133

 
122,836

 
668,164

 
680,842

Less: Total comprehensive income (loss) attributable
to noncontrolling interests(1)
 
10,933

 
14,732

 
3,675

 
29,930

Total comprehensive income (loss) attributable to common stockholders
 
$
70,200

 
$
108,104

 
$
664,489

 
$
650,912

 
 
 
 
 
 
 
 
 
(1) Includes amounts attributable to redeemable noncontrolling interests.
 
 
 
 
 
 
 
 


5


CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
WELLTOWER INC. AND SUBSIDIARIES
(In thousands) 
 
 
Nine Months Ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
Preferred
Stock
 
Common
Stock
 
Capital in
Excess of
Par Value
 
Treasury
Stock
 
Cumulative
Net Income
 
Cumulative
Dividends
 
Other
Comprehensive
Income (Loss)
 
Other
Equity
 
Noncontrolling
Interests
 
Total
Balances at beginning of period
 
$
718,503

 
$
372,449

 
$
17,662,681

 
$
(64,559
)
 
$
5,316,580

 
$
(9,471,712
)
 
$
(111,465
)
 
$
670

 
$
502,305

 
$
14,925,452

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Net income (loss)
 
 
 
 
 
 
 
 
 
691,515

 
 
 
 
 
 
 
15,393

 
706,908

Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
(27,026
)
 
 
 
(9,864
)
 
(36,890
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
670,018

Net change in noncontrolling interests
 
 
 
 
 
(34,139
)
 
 
 
 
 
 
 
 
 
 
 
453,682

 
419,543

Amounts related to stock incentive plans, net of forfeitures
 
 
 
172

 
23,127

 
(4,194
)
 
 
 
 
 
 
 
(181
)
 
 
 
18,924

Proceeds from issuance of common stock
 
 
 
3,732

 
237,840

 
 
 
 
 
 
 
 
 
 
 
 
 
241,572

Conversion of preferred stock
 
(5
)
 
 
 
5

 
 
 
 
 
 
 
 
 
 
 
 
 

Dividends paid:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Common stock dividends
 
 
 
 
 
 
 
 
 
 
 
(971,280
)
 
 
 
 
 
 
 
(971,280
)
Preferred stock dividends
 
 
 
 
 
 
 
 
 
 
 
(35,028
)
 
 
 
 
 
 
 
(35,028
)
Balances at end of period
 
$
718,498

 
$
376,353

 
$
17,889,514

 
$
(68,753
)
 
$
6,008,095

 
$
(10,478,020
)
 
$
(138,491
)
 
$
489

 
$
961,516

 
$
15,269,201

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 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)
 
 
 
 
 
 
 
 
 
622,621

 
 
 
 
 
 
 
9,907

 
632,528

Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
28,291

 
 
 
22,195

 
50,486

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
683,014

Net change in noncontrolling interests
 
 
 
 
 
9,784

 
 
 
 
 
 
 
 
 
 
 
7,558

 
17,342

Amounts related to stock incentive plans, net of forfeitures
 
 
 
337

 
17,151

 
(7,611
)
 
 
 
 
 
 
 
(1,942
)
 
 
 
7,935

Proceeds from issuance of common stock
 
 
 
7,513

 
522,954

 
 
 
 
 
 
 
 
 
 
 
 
 
530,467

Redemption of preferred stock
 
(287,500
)
 
 
 
9,760

 
 
 
(9,769
)
 
 
 
 
 
 
 
 
 
(287,509
)
Redemption of equity membership units
 
 
 
91

 
5,465

 
(11
)
 
 
 
 
 
 
 
 
 
 
 
5,545

Conversion of preferred stock
 
(247
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(247
)
Option compensation expense
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10

 
 
 
10

Dividends paid:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Common stock dividends
 
 
 
 
 
 
 
 
 
 
 
(955,631
)
 
 
 
 
 
 
 
(955,631
)
Preferred stock dividends
 
 
 
 
 
 
 
 
 
 
 
(37,734
)
 
 
 
 
 
 
 
(37,734
)
Balances at end of period
 
$
718,503

 
$
371,012

 
$
17,564,805

 
$
(62,363
)
 
$
5,416,427

 
$
(9,138,346
)
 
$
(141,240
)
 
$
1,127

 
$
514,739

 
$
15,244,664



6


CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
WELLTOWER INC. AND SUBSIDIARIES
(In thousands)
 
 
Nine Months Ended
 
 
September 30,
 
 
2018
 
2017
Operating activities:  
 
 

 
 

Net income  
 
$
705,054

 
$
630,356

Adjustments to reconcile net income to net cash provided from (used in) operating activities:  
 
 
 
 
Depreciation and amortization  
 
707,625

 
683,262

Other amortization expenses  
 
12,110

 
12,095

Impairment of assets  
 
39,557

 
24,662

Stock-based compensation expense  
 
22,800

 
16,459

Loss (gain) on derivatives and financial instruments, net  
 
(5,642
)
 
2,284

Loss (gain) on extinguishment of debt, net  
 
16,044

 
36,870

Loss (income) from unconsolidated entities
 
836

 
23,676

Rental income less than (in excess of) cash received  
 
(7,830
)
 
(64,865
)
Amortization related to above (below) market leases, net  
 
1,984

 
180

Loss (gain) on real estate dispositions, net  
 
(373,662
)
 
(287,869
)
Distributions by unconsolidated entities
 
21

 
116

Increase (decrease) in accrued expenses and other liabilities  
 
103,474

 
171,713

Decrease (increase) in receivables and other assets  
 
(11,223
)
 
(86,475
)
Net cash provided from (used in) operating activities  
 
1,211,148


1,162,464

 
 
 
 
 

Investing activities:  
 
 
 
 
Cash disbursed for acquisitions  
 
(3,190,534
)
 
(574,002
)
Cash disbursed for capital improvements to existing properties
 
(173,635
)
 
(159,142
)
Cash disbursed for construction in progress
 
(88,146
)
 
(198,068
)
Capitalized interest  
 
(6,357
)
 
(10,033
)
Investment in real estate loans receivable  
 
(67,136
)
 
(70,051
)
Principal collected on real estate loans receivable  
 
149,592

 
82,263

Other investments, net of payments  
 
(49,572
)
 
50,877

Contributions to unconsolidated entities  
 
(42,697
)
 
(73,802
)
Distributions by unconsolidated entities  
 
61,253

 
58,754

Proceeds from (payments on) derivatives  
 
65,438

 
55,771

Proceeds from sales of real property  
 
1,208,501

 
1,237,851

Net cash provided from (used in) investing activities  
 
(2,133,293
)

400,418

 
 
 
 
 
Financing activities:  
 
 
 
 
Net increase (decrease) under unsecured credit facilities  
 
593,000

 
(225,000
)
Proceeds from issuance of senior unsecured notes
 
2,825,898

 
7,500

Payments to extinguish senior unsecured notes  
 
(1,450,000
)
 
(5,000
)
Net proceeds from the issuance of secured debt  
 
44,606

 
190,459

Payments on secured debt  
 
(238,867
)
 
(1,050,879
)
Net proceeds from the issuance of common stock  
 
242,411

 
530,992

Redemption of preferred stock  
 

 
(287,500
)
Payments for deferred financing costs and prepayment penalties  
 
(29,701
)
 
(54,027
)
Contributions by noncontrolling interests(1)
 
11,238

 
47,209

Distributions to noncontrolling interests(1)
 
(86,462
)
 
(51,824
)
Cash distributions to stockholders  
 
(1,006,274
)
 
(992,621
)
Other financing activities
 
(6,290
)
 
(8,416
)
Net cash provided from (used in) financing activities  
 
899,559


(1,899,107
)
Effect of foreign currency translation on cash, cash equivalents and restricted cash
 
(5,432
)

24,316

Increase (decrease) in cash, cash equivalents and restricted cash  
 
(28,018
)
 
(311,909
)
Cash, cash equivalents and restricted cash at beginning of period  
 
309,303


607,220

Cash, cash equivalents and restricted cash at end of period  
 
$
281,285

 
$
295,311

 
 
 
 
 
Supplemental cash flow information:
 
 
 
 
Interest paid
 
$
312,452

 
$
312,896

Income taxes paid (received), net
 
3,195

 
5,606
 
 
 
 
 
(1) Includes amounts attributable to redeemable noncontrolling interests.
 
 
 
 


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.  
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 (such as normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2018 are not necessarily an indication of the results that may be expected for the year ending December 31, 2018. 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, 2017.
     New Accounting Standards     
We adopted the following accounting standards, each of which did not have a material impact on our consolidated financial statements:
In 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (ASC 606),” which 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.  We adopted ASC 606 on January 1, 2018 using the modified retrospective method of adoption.  This guidance did not have a significant impact on our consolidated financial statements.
We have evaluated our various revenue streams to identify whether they would be subject to the provisions of ASC 606 and any differences in timing, measurement or presentation of revenue recognition.  A significant source of our revenue is generated through leasing arrangements, which are specifically excluded from ASC 606.  Management contracts are present in our seniors housing operating and outpatient medical segments and represent agreements to provide asset and property management, leasing, marketing and other services.  Under ASC 606, the pattern and timing of recognition of income from these contracts is consistent with the prior accounting model. 
In 2017, the FASB issued ASU No. 2017-05, “Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.”  The standard clarifies that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset.  The standard also defines the term “in substance nonfinancial asset” and clarifies that an entity should identify each distinct nonfinancial asset or in substance nonfinancial asset promised to a counterparty and derecognize each asset when a counterparty obtains control over it.  We adopted Subtopic 610-20 using a modified retrospective approach on January 1, 2018 and it did not have a material impact on our consolidated financial statements.
In 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities,” which requires 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 is available for equity investments that do not have readily determinable fair values. This standard requires us to recognize gains and losses from changes in the fair value of our available-for-sale equity securities through the consolidated statement of comprehensive income rather than through accumulated other comprehensive income.  During the nine months ended September 30, 2018, we recognized a gain of $5,642,000 in loss (gain) on derivatives and financial instruments, net on the Consolidated Statement of Comprehensive Income. There was no adjustment to accumulated other comprehensive income upon adoption at January 1, 2018 as accumulated losses were recognized as other-than-temporary impairment during the year ended December 31, 2017.

8

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2017, we adopted ASU No. 2016-18, “Restricted Cash,” and ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments.”  ASU No. 2016-18 requires an entity to reconcile and explain the period over period change in total cash, cash equivalents and restricted cash within its consolidated statement of cash flows and ASU 2016-15 provides guidance clarifying how certain cash receipts and cash payments should be classified.  We adopted these accounting standards retrospectively and, accordingly, certain line items in the consolidated statement of cash flows have been reclassified to conform to the current presentation.  The following table summarizes the change in cash flows as reported and as previously reported prior to the adoption of these standards for the nine months ended September 30, 2017 (in thousands):
 
 
As Reported
 
As Previously
Reported
Cash disbursed for acquisitions
 
$
(574,002
)
 
$
(575,694
)
Decrease (increase) in restricted cash
 

 
130,470

Net cash provided from (used in) investing activities
 
400,418

 
529,196

Increase (decrease) in balance(1)
 
(311,909
)
 
(183,131
)
Balance at beginning of period(1)
 
607,220

 
419,378

Balance at end of period(1)
 
295,311

 
236,247

(1) Amounts in As Reported column include cash and cash equivalents and restricted cash as required.  Amounts in the As Previously Reported column reflect only cash and cash equivalents.


In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities,” which expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. It also includes certain targeted improvements to simplify the application of current guidance related to hedge accounting. The early adoption of this standard on April 1, 2018, did not result in a cumulative effect adjustment and all applicable changes for the company were prospectively made. Please refer to Note 11 of the consolidated financial statements for additional detail on this adoption.
 The following ASUs have been issued but not yet adopted:
In 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which requires lessees to recognize assets and liabilities on their consolidated balance sheet related to the rights and obligations created by most leases, while continuing to recognize expenses on their consolidated statements of comprehensive income 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.  The FASB issued ASU 2018-11, "Leases (Topic 842) Targeted Improvements" in July 2018, which provides lessors with a practical expedient, by class of underlying assets, to not separate non-lease components from the related lease components, and, instead, to account for those components as a single lease component, if certain criteria are met.  ASU 2016-02 is effective for us beginning January 1, 2019, with early adoption 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 consolidated financial statements.  ASU 2018-11 also provides a practical expedient that allows companies to use an optional transition method. Under the optional transition method, a cumulative adjustment to retained earnings during the period of adoption is recorded and prior periods would not require restatement. We are currently evaluating the impact of this guidance on our consolidated financial statements from both the lessee and lessor perspective.  We believe that adoption will likely have a material impact to our consolidated financial statements for the recognition of certain operating leases as right-of-use assets and lease liabilities and related amortization.  We expect to utilize the practical expedients in ASU 2018-11 as part of our adoption of this guidance. 
In 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.”  This standard requires a new forward-looking “expected loss” model to be used for receivables, held-to-maturity debt, loans, and other instruments.  ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, and early adoption is permitted for fiscal years beginning after December 15, 2018.  We are currently evaluating the impact that the standard will have on our consolidated financial statements. 
3. Real Property Acquisitions and Development 
The total purchase price for all properties acquired has been allocated to the tangible and identifiable intangible assets, liabilities and noncontrolling interests based upon their 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

9

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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.  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.
Acquisition of Quality Care Properties

On July 26, 2018, we completed the acquisition of Quality Care Properties Inc. ("QCP"), with QCP shareholders receiving $20.75 of cash for each share of QCP common stock and all existing QCP debt was repaid upon closing. Prior to the acquisition, ProMedica Health System ("ProMedica") completed the acquisition of HCR ManorCare. Immediately following the acquisition of QCP, we formed an 80/20 joint venture with ProMedica to own the real estate associated with the 218 seniors housing properties leased to ProMedica under a lease agreement with the following key terms: (i) 15-year absolute triple-net master lease with three five-year renewal options; (ii) initial annual cash rent of $179 million with a year one escalator of 1.375% and 2.75% annual escalators thereafter; and (iii) full corporate guarantee of ProMedica. Additionally, we acquired 59 seniors housing properties classified as held for sale and leased to ProMedica under a non-yielding lease, 12 seniors housing properties and one surgery center classified as held for sale and leased to operators under existing triple-net leases, 14 seniors housing properties leased to operators under existing triple-net leases and one multi-tenant medical office building leased to various tenants.

We drew on a $1.0 billion term loan facility to fund a portion of the acquisition cash consideration and other related expenses. The term loan facility matures two years from the closing. In addition to the term loan facility draw, we drew on our unsecured credit facility described in Note 9, in order to fund the acquisition. The aggregate consideration to acquire the QCP shares and repay outstanding QCP debt was approximately $3.5 billion.

We concluded that the QCP acquisition met the definition of an asset acquisition under ASU No. 2017-01, "Clarifying the Definition of a Business". The following table presents the purchase price calculation and the allocation to assets acquired and liabilities assumed based upon their relative fair value:
(In thousands)
 
 
 
Land and land improvements
 
$
417,983

 
Buildings and improvements
 
2,249,803

 
Acquired lease intangibles
 
15,512

 
Real property held for sale
 
418,297

 
Cash and cash equivalents
 
381,913

 
Restricted cash
 
4,981

 
Receivables and other assets
 
1,322

 
 
Total assets acquired
 
3,489,811

 
Accrued expenses and other liabilities  
 
(13,199
)
 
 
Total liabilities assumed
 
(13,199
)
 
Noncontrolling interests
 
(512,741
)
 
 
Net assets acquired
 
$
2,963,871

 

Net assets acquired in the QCP acquisition detailed above are included in the respective segment tables below.














10

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Triple-net Activity
 
 
 
Nine Months Ended
(In thousands)
 
September 30, 2018
 
September 30, 2017
Land and land improvements
 
$
413,588

 
$
31,948

Buildings and improvements
 
2,239,422

 
206,910

Acquired lease intangibles
 
12,383

 

Real property held for sale
 
396,265

 

Receivables and other assets
 
1,322

 

 
Total assets acquired(1)
 
3,062,980

 
238,858

Accrued expenses and other liabilities  
 
(13,199
)
 
(21,236
)
 
Total liabilities assumed
 
(13,199
)
 
(21,236
)
Noncontrolling interests
 
(512,741
)
 
(7,275
)
Non-cash acquisition related activity(2)
 

 
(54,901
)
 
Cash disbursed for acquisitions
 
2,537,040

 
155,446

Construction in progress additions
 
49,619

 
106,186

Less:
Capitalized interest
 
(1,932
)
 
(3,886
)
 
Foreign currency translation
 
180

 
(656
)
Cash disbursed for construction in progress
 
47,867

 
101,644

Capital improvements to existing properties
 
6,766

 
17,873

 
Total cash invested in real property, net of cash acquired
 
$
2,591,673

 
$
274,963

(1) Excludes $386,894,000 of unrestricted and restricted cash acquired during the nine months ended September 30, 2018.
(2) For the nine months ended September 30, 2017, $54,901,000 is related to the acquisition of assets previously financed as a real estate loan receivable.


Seniors Housing Operating Activity
 
 
 
Nine Months Ended
(In thousands)
 
September 30, 2018
 
September 30, 2017
Land and land improvements
 
$
47,865

 
$
31,006

Building and improvements
 
535,436

 
384,522

Acquired lease intangibles
 
68,084

 
48,197

Receivables and other assets
 
1,255

 
3,164

  
Total assets acquired(1)
 
652,640

 
466,889

Secured debt
 
(89,973
)
 

Accrued expenses and other liabilities  
 
(14,686
)
 
(43,364
)
 
Total liabilities assumed
 
(104,659
)
 
(43,364
)
Noncontrolling interests
 
(9,818
)
 
(4,701
)
Non-cash acquisition related activity(2)
 

 
(59,065
)
 
Cash disbursed for acquisitions
 
538,163

 
359,759

Construction in progress additions
 
28,222

 
65,282

Less:
Capitalized interest
 
(2,608
)
 
(5,996
)
 
Foreign currency translation
 
2,151

 
(6,218
)
Cash disbursed for construction in progress
 
27,765

 
53,068

Capital improvements to existing properties
 
127,274

 
110,372

 
Total cash invested in real property, net of cash acquired
 
$
693,202

 
$
523,199

(1) Excludes $2,442,000 and $6,273,000 of unrestricted and restricted cash acquired during the nine months ended September 30, 2018 and 2017, respectively.
(2) Includes $6,349,000 related to the acquisition of assets previously financed as real estate loans receivable and $51,097,000 previously financed as an investment in an unconsolidated entity during the nine months ended September 30, 2017.


11

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Outpatient Medical Activity
 
 
 
Nine Months Ended
(In thousands)
 
September 30, 2018
 
September 30, 2017
Land and land improvements
 
$
18,496

 
$
25,060

Buildings and improvements
 
79,205

 
62,336

Acquired lease intangibles
 
11,271

 
8,397

Real property held for sale
 
22,032

 

Receivables and other assets
 
6

 
3

  
Total assets acquired(1)
 
131,010

 
95,796

Secured debt
 
(14,769
)
 
(25,709
)
Accrued expenses and other liabilities
 
(910
)
 
(2,210
)
 
Total liabilities assumed  
 
(15,679
)
 
(27,919
)
Noncontrolling interests
 

 
(9,080
)
 
Cash disbursed for acquisitions
 
115,331

 
58,797

Construction in progress additions
 
16,733

 
33,495

Less:
Capitalized interest
 
(1,817
)
 
(1,847
)
 
Accruals(2)
 
(2,402
)
 
11,708

Cash disbursed for construction in progress
 
12,514

 
43,356

Capital improvements to existing properties
 
39,595

 
30,897

 
Total cash invested in real property
 
$
167,440

 
$
133,050

 
(1) Excludes $2,244,000 and $0 of unrestricted and restricted cash acquired during the nine months ended September 30, 2018 and 2017, respectively.
(2) Represents non-cash accruals for amounts to be paid in future periods for properties that converted, off-set by amounts paid in the current period.

Construction Activity 
The following is a summary of the construction projects that were placed into service and began generating revenues during the periods presented (in thousands):
 
 
Nine Months Ended
 
 
September 30, 2018
 
September 30, 2017
Development projects:
 
 
 
 
Triple-net
 
$
90,055

 
$
283,472

Seniors housing operating
 
86,931

 
3,634

Outpatient medical
 
11,358

 
63,036

Total development projects
 
188,344

 
350,142

Expansion projects
 
8,879

 
10,336

Total construction in progress conversions
 
$
197,223

 
$
360,478

 
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):

12

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 
 
September 30, 2018
 
December 31, 2017
Assets:
 
 
 
 
In place lease intangibles
 
$
1,398,850

 
$
1,352,139

Above market tenant leases
 
59,011

 
58,443

Below market ground leases
 
65,022

 
58,784

Lease commissions
 
39,767

 
33,105

Gross historical cost
 
1,562,650

 
1,502,471

Accumulated amortization
 
(1,190,035
)
 
(1,125,437
)
Net book value
 
$
372,615

 
$
377,034

 
 
 
 
 
Weighted-average amortization period in years
 
16.0

 
15.1

 
 
 
 
 
Liabilities:
 
 
 
 
Below market tenant leases
 
$
71,566

 
$
60,430

Above market ground leases
 
8,540

 
8,540

Gross historical cost
 
80,106

 
68,970

Accumulated amortization
 
(42,834
)
 
(39,629
)
Net book value
 
$
37,272

 
$
29,341

 
 
 
 
 
Weighted-average amortization period in years
 
16.1

 
20.1

 
The following is a summary of real estate intangible amortization for the periods presented (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
  
 
2018
 
2017
 
2018
 
2017
Rental income related to above/below market tenant leases, net
 
$
(294
)
 
$
173

 
$
(978
)
 
$
745

Property operating expenses related to above/below market ground leases, net
 
(327
)
 
(306
)
 
(1,006
)
 
(925
)
Depreciation and amortization related to in place lease intangibles and lease commissions
 
(31,455
)
 
(34,270
)
 
(97,479
)
 
(109,011
)
 
The future estimated aggregate amortization of intangible assets and liabilities is as follows for the periods presented (in thousands):
 
 
Assets
 
Liabilities
2018
 
$
32,456

 
$
1,433

2019
 
87,011

 
5,437

2020
 
57,221

 
4,938

2021
 
24,300

 
4,444

2022
 
19,325

 
3,971

Thereafter
 
152,302

 
17,049

Total
 
$
372,615

 
$
37,272

 
5. Dispositions and Assets Held for Sale
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, relationship or geography). At September 30, 2018, 60 triple-net, 16 seniors housing operating and three outpatient medical properties with an aggregate real estate balance of $619,141,000 were classified as held for sale. During the nine months ended September 30, 2018, we recorded impairment charges of $39,557,000 on certain held for sale properties for which the carrying values exceeded the fair values, less estimated costs to sell if applicable. The following is a summary of our real property disposition activity for the periods presented (in thousands):

13

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 
 
Nine Months Ended
 
 
September 30, 2018
 
September 30, 2017
Real estate dispositions:
 
 
 
 
Triple-net
 
$
604,480

 
$
899,104

Seniors housing operating
 
2,200

 
16,206

Outpatient medical
 
223,069

 
12,202

Total dispositions
 
829,749

 
927,512

Gain (loss) on real estate dispositions, net
 
373,662

 
287,869

Net other assets/liabilities disposed
 
5,090

 
22,470

Proceeds from real estate dispositions
 
$
1,208,501

 
$
1,237,851

     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 September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
 
Total revenues
 
$
29,035

 
$
52,584

 
$
92,447

 
$
175,934

Expenses:
 
 
 
 
 
 
 
 
Interest expense
 
18

 
1,243

 
261

 
5,514

Property operating expenses
 
21,312

 
19,147

 
59,640

 
58,525

Provision for depreciation
 
801

 
10,999

 
6,605

 
33,806

Total expenses
 
22,131

 
31,389

 
66,506

 
97,845

Income (loss) from real estate dispositions, net
 
$
6,904

 
$
21,195

 
$
25,941

 
$
78,089

 
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, 2017 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):
 
 
Nine Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
 
Triple-net
 
Seniors Housing Operating
 
Outpatient
Medical
 
Totals
 
Triple-net
 
Outpatient
Medical
 
Totals
Advances on real estate loans receivable:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments in new loans
 
$
10,628

 
$
11,806

 
$
14,993

 
$
37,427

 
$
11,315

 
$

 
$
11,315

Draws on existing loans
 
29,709

 

 

 
29,709

 
58,736

 

 
58,736

Net cash advances on real estate loans
 
40,337

 
11,806

 
14,993

 
67,136

 
70,051

 

 
70,051

Receipts on real estate loans receivable:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan payoffs
 
116,161

 

 

 
116,161

 
142,392

 
60,500

 
202,892

Principal payments on loans
 
33,431

 

 

 
33,431

 
1,121

 

 
1,121

Sub-total
 
149,592

 

 

 
149,592

 
143,513

 
60,500

 
204,013

Less: Non-cash activity(1)
 

 

 

 

 
(61,250
)
 
(60,500
)
 
(121,750
)
Net cash receipts on real estate loans
 
149,592

 

 

 
149,592

 
82,263

 

 
82,263

Net cash advances (receipts) on real estate loans
 
$
(109,255
)
 
$
11,806

 
$
14,993

 
$
(82,456
)
 
$
(12,212
)
 
$

 
$
(12,212
)
 
(1) Triple-net represents acquisitions of assets previously financed as real estate loans. Please see Note 3 for additional information. Outpatient medical represents a deed in lieu of foreclosure on a previously financed first mortgage property.

14

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

In 2016, we restructured real estate loans with Genesis HealthCare and 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.  In 2017, we recorded an additional loan loss charge of $62,966,000 relating to real estate loans with Genesis HealthCare based on an estimation of expected future cash flows discounted at the effective interest rate of the loans. At September 30, 2018, the allowance for loan losses totals $68,372,000 and is deemed to be sufficient to absorb expected losses related to these loans.  At September 30, 2018, we had one real estate loan with an outstanding balance of $2,598,000 on non-accrual status and recorded no provision for loan losses during the nine months ended September 30, 2018.
The following is a summary of our impaired loans (in thousands):
 
 
Nine Months Ended
 
 
September 30, 2018
 
September 30, 2017
Balance of impaired loans at end of period
 
$
201,971

 
$
282,929

Allowance for loan losses
 
68,372

 
5,406

Balance of impaired loans not reserved
 
$
133,599

 
$
277,523

Average impaired loans for the period
 
$
230,645

 
$
324,255

Interest recognized on impaired loans(1)
 
13,361

 
23,957

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

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 entities have been included in our consolidated results of operations from the date of acquisition by the joint ventures and are reflected in our Consolidated Statements of Comprehensive Income as income or loss from unconsolidated entities.  The following is a summary of our investments in unconsolidated entities (dollars in thousands):  
 
 
Percentage Ownership(1)
 
September 30, 2018
 
December 31, 2017
Triple-net
 
10% to 49%
 
$
21,004

 
$
22,856

Seniors housing operating
 
10% to 50%
 
310,175

 
352,430

Outpatient medical
 
43%
 
92,013

 
70,299

Total
 
 
 
$
423,192

 
$
445,585

 
(1) Excludes in-substance real estate investments.

At September 30, 2018, the aggregate unamortized basis difference of our joint venture investments of $106,625,000 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 joint venture.  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 consolidated net operating income (“NOI”) as our credit concentration metric.  See Note 17 for additional information and reconciliation. The following table summarizes certain information about our credit concentration for the nine months ended September 30, 2018, excluding our share of NOI in unconsolidated entities (dollars in thousands):
 
 
Number of
 
Total
 
Percent of
Concentration by relationship:(1)
 
Properties
 
NOI
 
NOI(2)
Sunrise Senior Living(3)
 
161

 
$
252,111

 
15%
Brookdale Senior Living
 
137

 
117,367

 
7%
Revera(3)
 
98

 
116,158

 
7%
Genesis HealthCare
 
88

 
102,015

 
6%
Benchmark Senior Living  
 
48

 
75,435

 
4%
Remaining portfolio  
 
997

 
1,013,797

 
61%
Totals  
 
1,529

 
$
1,676,883

 
100%
 
(1) Genesis Healthcare is in our triple-net segment.  Sunrise Senior Living and Revera are in our seniors housing operating segment.  Benchmark Senior Living and Brookdale Senior Living are in both our triple-net and seniors housing operating segments.
(2) NOI with our top five relationships comprised 41% of total NOI for the year ended December 31, 2017.
(3) Revera owns a controlling interest in Sunrise Senior Living.

15

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


9. Borrowings Under Credit Facilities and Related Items 
 At September 30, 2018, we had a primary unsecured credit facility with a consortium of 31 banks that includes a $3,000,000,000 unsecured revolving credit facility, a $500,000,000 unsecured term credit facility and a $250,000,000 Canadian-denominated unsecured term credit facility.  We have an option, through an accordion feature, to upsize the unsecured revolving credit facility and the $500,000,000 unsecured term credit facility by up to an additional $1,000,000,000, in the aggregate, and the $250,000,000 Canadian-denominated unsecured term credit facility by up to an additional $250,000,000.  The primary unsecured credit facility also allows us to borrow up to $1,000,000,000 in alternate currencies (none outstanding at September 30, 2018).  Borrowings under the unsecured revolving credit facility are subject to interest payable at the applicable margin over LIBOR interest rate (3.09% at September 30, 2018). The applicable margin is based on our debt ratings and was 0.825% at September 30, 2018.  In addition, we pay a facility fee quarterly to each bank based on the bank’s commitment amount.  The facility fee depends on our debt ratings and was 0.15% at September 30, 2018.  The term credit facilities mature on July 19, 2023. The revolving credit facility is scheduled to mature on July 19, 2022 and can be extended for two successive terms of six months each at our option.
The following information relates to aggregate borrowings under the primary unsecured revolving credit facility for the periods presented (dollars in thousands): 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
Balance outstanding at quarter end
 
$
1,312,000

 
$
420,000

 
$
1,312,000

 
$
420,000

Maximum amount outstanding at any month end
 
$
2,148,000

 
$
645,000

 
$
2,148,000

 
$
1,010,000

Average amount outstanding (total of daily
 
 
 
 
 
 
 
 
principal balances divided by days in period)
 
$
1,519,000

 
$
450,130

 
$
819,516

 
$
601,346

Weighted average interest rate (actual interest
 
 
 
 
 
 
 
 
expense divided by average borrowings outstanding)
 
3.00
%
 
2.19
%
 
2.95
%
 
1.95
%
 
10. Senior Unsecured Notes and Secured Debt 
We may repurchase, redeem or refinance senior unsecured notes from time to time, taking advantage of favorable market conditions when available. We may purchase senior notes for cash through open market purchases, privately negotiated transactions, a tender offer or, in some cases, through the early redemption of such securities pursuant to their terms.   The senior unsecured notes are redeemable at our option, at any time in whole or from time to time in part, at a redemption price equal to the sum of (1) the principal amount of the notes (or portion of such notes) being redeemed plus accrued and unpaid interest thereon up to the redemption date and (2) any “make-whole” amount due under the terms of the notes in connection with early redemptions.   Redemptions and repurchases of debt, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.   At September 30, 2018, the annual principal payments due on these debt obligations were as follows (in thousands):
 
 
Senior
Unsecured Notes(1,2)
 
Secured
Debt (1,3)
 
Totals
2018
 
$

 
$
170,742

 
$
170,742

2019
 
600,000

 
489,166

 
1,089,166

2020(4)
 
689,662

 
138,938

 
828,600

2021
 
450,000

 
347,280

 
797,280

2022
 
600,000

 
225,832

 
825,832

Thereafter(5,6,7,8)
 
7,414,034

 
1,107,797

 
8,521,831

Totals
 
$
9,753,696

 
$
2,479,755

 
$
12,233,451

 
(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 2.73% to 6.50%.
(3) Annual interest rates range from 1.69% to 7.93%.  Carrying value of the properties securing the debt totaled $5,303,414,000 at September 30, 2018.
(4) Includes a $300,000,000 Canadian-denominated 3.35% senior unsecured notes due 2020 (approximately $232,162,000 based on the Canadian/U.S. Dollar exchange rate on September 30, 2018).
(5) Includes a $250,000,000 Canadian-denominated unsecured term credit facility (approximately $193,469,000 based on the Canadian/U.S. Dollar exchange rate on September 30, 2018).  The loan matures on July 19, 2023 and bears interest at the Canadian Dealer Offered Rate plus 0.9% (2.73% at September 30, 2018).
(6) Includes a $500,000,000 unsecured term credit facility.  The loan matures on July 19, 2023 and bears interest at LIBOR plus 0.9% (3.07% at September 30, 2018).
(7) Includes a £550,000,000 4.80% senior unsecured notes due 2028 (approximately $717,915,000 based on the Sterling/U.S. Dollar exchange rate in effect on September 30, 2018).
(8) Includes a £500,000,000 4.50% senior unsecured notes due 2034 (approximately $652,650,000 based on the Sterling/U.S. Dollar exchange rate in effect on September 30, 2018).


16

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):
 
 
Nine Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
 
 
 
Weighted Avg.
 
 
 
Weighted Avg.
 
 
Amount
 
Interest Rate
 
Amount
 
Interest Rate
Beginning balance
 
$
8,417,447

 
4.31%
 
$
8,260,038

 
4.25%
Debt issued
 
2,850,000

 
4.57%
 
7,500

 
1.94%
Debt extinguished
 
(1,450,000
)
 
3.46%
 
(5,000
)
 
1.83%
Foreign currency
 
(63,751
)
 
4.30%
 
141,855

 
4.24%
Ending balance
 
$
9,753,696

 
4.45%
 
$
8,404,393

 
4.29%
 
The following is a summary of our secured debt principal activity for the periods presented (dollars in thousands): 
 
 
Nine Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
 
 
 
Weighted Avg.
 
 
 
Weighted Avg.
 
 
Amount
 
Interest Rate
 
Amount
 
Interest Rate
Beginning balance
 
$
2,618,408

 
3.76%
 
$
3,465,066

 
4.09%
Debt issued
 
44,606

 
3.38%
 
190,459

 
2.73%
Debt assumed
 
99,552

 
4.30%
 
23,094

 
6.67%
Debt extinguished
 
(196,573
)
 
5.66%
 
(1,003,372
)
 
5.32%
Principal payments
 
(42,294
)
 
3.91%
 
(47,507
)
 
4.34%
Foreign currency
 
(43,944
)
 
3.29%
 
92,262

 
3.20%
Ending balance
 
$
2,479,755

 
3.79%
 
$
2,720,002

 
3.74%
 
Our debt agreements contain various covenants, restrictions and events of default. Certain agreements require us to maintain certain financial ratios and minimum net worth and impose certain limits on our ability to incur indebtedness, create liens and make investments or acquisitions. As of September 30, 2018, we were in compliance with all of the covenants under our debt agreements. 
11. Derivative Instruments
We are exposed to, among other risks, the impact of changes in foreign currency exchange rates as a result of our non-U.S. investments.  Our risk management program is designed to manage the exposure and volatility arising from these risks, and utilizes derivative financial instruments and debt issued in foreign currencies to offset a portion of these risks.
  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 deferred 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. 
     Foreign Currency Forward Contracts and Cross Currency Swap Contracts Designated as Net Investment Hedges
We use foreign currency forward and cross currency forward swap contracts to hedge a portion of the net investment in foreign subsidiaries against fluctuations in foreign exchange rates. 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. 
In the second quarter of 2018, we redesignated these derivative financial instruments that qualify as hedges of net investments in foreign operations using the spot method in order to more closely align the underlying economics of the hedged transactions. The changes in fair values and the excluded components of derivative instruments designated as net investment hedges are recognized as a cumulative translation adjustment component of OCI. The cross currency basis spread is recognized in interest expense on the Consolidated Statement of Comprehensive Income using the swap accrual process. Prior to the adoption of ASU

17

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

2017-12, all settlements and changes in fair values of these derivative instruments were recognized as a cumulative transaction adjustment component of OCI and there had been no ineffectiveness on these hedging relationships.
During the nine months ended September 30, 2018 and 2017, we settled certain net investment hedges generating cash proceeds of $70,937,000 and $55,771,000, respectively.  The balance of the cumulative translation adjustment will be reclassified to earnings if the hedged investment is sold or substantially liquidated.
Derivative Contracts Undesignated
We use foreign currency exchange contracts to manage existing exposures to foreign currency exchange risk. Gains and losses resulting from the changes in fair value of these instruments are recorded in interest expense on the consolidated statement of comprehensive income, and are substantially offset by net revaluation impacts on foreign currency denominated balance sheet exposures.
In addition, we have several interest rate cap contracts related to variable rate secured debt agreements. Gains and losses resulting from the changes in fair values of these instruments are also recorded in interest expense.
The following presents the notional amount of derivatives and other financial instruments as of the dates indicated (in thousands):     
 
 
September 30, 2018
 
December 31, 2017
Derivatives designated as net investment hedges:
 
 
 
 
Denominated in Canadian Dollars
 
$
575,000

 
$
575,000

Denominated in Pounds Sterling
 
£
890,708

 
£
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 Canadian Dollars
 
$

 
$
36,000

 
 
 
 
 
Derivative instruments not designated:
 
 
 
 
Denominated in U.S. Dollars
 
$
405,819

 
$
408,007

Forward purchase contracts denominated in Canadian Dollars
 
$
(500,000
)
 
$

Forward sales contracts denominated in Canadian Dollars
 
$
580,000

 
$
80,000

Forward purchase contracts denominated in Pounds Sterling
 
£
(350,000
)
 
£

Forward sales contracts denominated in Pounds Sterling
 
£
350,000

 
£

 

The following presents the impact of derivative instruments on the Consolidated Statements of Comprehensive Income for the periods presented (in thousands):
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
Location
 
2018
 
2017
 
2018
 
2017
Gain (loss) on derivative instruments designated as hedges recognized in income
 
Interest expense
 
$
4,185

 
$
(576
)
 
$
8,008


$
3,613

 
 
 
 
 
 
 
 
 
 
 
Gain (loss) on derivative instruments not designated as hedges recognized in income
 
Interest expense
 
$
(203
)
 
$
(294
)
 
$
2,250


$
(1,228
)
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) on foreign exchange contracts and term loans designated as net investment hedge recognized in OCI
 
OCI
 
$
12,200

 
$
(98,003
)
 
$
100,205


$
(239,884
)
 
12. Commitments and Contingencies
At September 30, 2018, we had 13 outstanding letter of credit obligations totaling $51,684,000 and expiring between 2018 and 2024.  At September 30, 2018, we had outstanding construction in progress of $135,343,000 and were committed to providing additional funds of approximately $332,834,000 to complete construction.  At September 30, 2018, we had contingent purchase

18

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

obligations totaling $10,245,000.  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 September 30, 2018, we had operating lease obligations of $1,107,336,000 relating to certain ground leases and company office space and capital lease obligations of $85,308,000 relating primarily to certain investment properties. Regarding ground leases, we have sublease agreements with certain of our operators that require the operators to reimburse us for our monthly operating lease obligations.  At September 30, 2018, aggregate future minimum rentals to be received under these noncancelable subleases totaled $73,771,000.
13. Stockholders’ Equity 
The following is a summary of our stockholders’ equity capital accounts as of the dates indicated: 
 
 
September 30, 2018
 
December 31, 2017
Preferred Stock:
 
 
 
 
Authorized shares
 
50,000,000

 
50,000,000

Issued shares
 
14,375,000

 
14,375,000

Outstanding shares
 
14,369,965

 
14,370,060

 
 
 
 
 
Common Stock, $1.00 par value:
 
 
 
 
Authorized shares
 
700,000,000

 
700,000,000

Issued shares
 
376,759,924

 
372,852,311

Outstanding shares
 
375,576,579

 
371,731,551

 
     Preferred Stock. The following is a summary of our preferred stock activity during the periods indicated: 
 
 
Nine Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
 
 
 
Weighted Avg.
 
 
 
Weighted Avg.
 
 
Shares
 
Dividend Rate
 
Shares
 
Dividend Rate
Beginning balance
 
14,370,060

 
6.50%
 
25,875,000

 
6.50%
Shares redeemed
 

 
0.00%
 
(11,500,000
)
 
6.50%
Shares converted
 
(95
)
 
6.50%
 
(4,935
)
 
6.50%
Ending balance
 
14,369,965

 
6.50%
 
14,370,065

 
6.50%
 
During the nine months ended September 30, 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 nine months ended September 30, 2018 and 2017 (dollars in thousands, except average price amounts): 
 
 
Shares Issued
 
Average Price
 
Gross Proceeds
 
Net Proceeds
2017 Dividend reinvestment plan issuances
 
4,312,447

 
$71.14
 
$
306,785

 
$
305,996

2017 Option exercises
 
209,192

 
50.62
 
10,590

 
10,590

2017 Equity shelf program issuances
 
2,986,574

 
72.30
 
215,917

 
214,406

2017 Preferred stock conversions
 
4,296

 
 
 

 

2017 Redemption of equity membership units
 
91,180

 
 
 

 

2017 Stock incentive plans, net of forfeitures
 
135,773

 
 
 

 

2017 Totals
 
7,739,462

 
 
 
$
533,292

 
$
530,992

 
 
 
 
 
 
 
 
 
2018 Dividend reinvestment plan issuances
 
1,755,446

 
$64.24
 
$
112,770

 
$
112,294

2018 Option exercises
 
32,120

 
39.94
 
1,283

 
1,283

2018 Equity shelf program issuances
 
1,944,511

 
66.72
 
129,744

 
128,834

2018 Preferred stock conversions
 
83

 
 
 

 

2018 Stock incentive plans, net of forfeitures
 
112,868

 
 
 

 

2018 Totals
 
3,845,028

 
 
 
$
243,797

 
$
242,411

 
Dividends.  The increase in dividends is primarily attributable to increases in our common shares outstanding as described above.  The following is a summary of our dividend payments (in thousands, except per share amounts): 
 
 
Nine Months Ended
 
 
September 30, 2018
 
September 30, 2017
  
 
Per Share
 
Amount
 
Per Share
 
Amount
Common Stock
 
$
2.6100

 
$
971,280

 
$
2.6100

 
$
955,631

Series I Preferred Stock
 
2.4375

 
35,028

 
2.4375

 
35,035

Series J Preferred Stock
 

 

 
0.2347

 
2,699

Totals
 
 
 
$
1,006,308

 
 
 
$
993,365

 

19

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Accumulated Other Comprehensive Income.  The 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, 2017
 
$
(110,581
)
 
$

 
$
(884
)
 
$

 
$
(111,465
)
Other comprehensive income before reclassification adjustments
 
(27,026
)
 

 

 

 
(27,026
)
Net current-period other comprehensive income
 
(27,026
)
 

 

 

 
(27,026
)
Balance at September 30, 2018
 
$
(137,607
)
 
$

 
$
(884
)
 
$

 
$
(138,491
)
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
 
$
(173,496
)
 
$
5,120

 
$
(1,153
)
 
$
(2
)
 
$
(169,531
)
Other comprehensive income before reclassification adjustments
 
48,574

 
(20,285
)
 

 
2

 
28,291

Net current-period other comprehensive income
 
48,574

 
(20,285
)
 

 
2

 
28,291

Balance at September 30, 2017
 
$
(124,922
)
 
$
(15,165
)
 
$
(1,153
)
 
$

 
$
(141,240
)

20

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


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, performance 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 $6,075,000 and $22,800,000 for the three and nine months ended September 30, 2018, respectively, and $6,790,000 and $16,459,000 for the same periods in 2017.
15. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
Numerator for basic and diluted earnings
 
 
 
 
 
 
 
 
per share - net income (loss) attributable
 
 
 
 
 
 
 
 
to common stockholders
 
$
64,384

 
$
74,043

 
$
656,487

 
$
575,118

 
 
 
 
 
 
 
 
 
Denominator for basic earnings per
 
 
 
 
 
 
 
 
share - weighted average shares
 
373,023

 
369,089

 
372,052

 
366,096

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Employee stock options
 
6

 
40

 
12

 
53

Non-vested restricted shares
 
348

 
515

 
464

 
464

Redeemable shares
 
1,096

 
1,096

 
1,096

 
1,281

Employee stock purchase program
 
14

 

 
14

 

Dilutive potential common shares
 
1,464

 
1,651

 
1,586

 
1,798

Denominator for diluted earnings per
 
 
 
 
 
 
 
 
share - adjusted weighted average shares
 
374,487

 
370,740

 
373,638

 
367,894

 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
0.17

 
$
0.20

 
$
1.76

 
$
1.57

Diluted earnings per share
 
$
0.17

 
$
0.20

 
$
1.76

 
$
1.56

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, 2017 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. 


21

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 and Restricted Cash — The carrying amount approximates fair value. 
Equity Securities — Equity securities 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 and Cross Currency Swaps — Foreign currency forward contracts and cross currency swaps 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):
 
 
September 30, 2018
 
December 31, 2017
 
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Financial assets:
 
 
 
 
 
 
 
 
Mortgage loans receivable
 
$
266,286

 
$
273,620

 
$
306,120

 
$
332,508

Other real estate loans receivable
 
74,538

 
75,091

 
121,379

 
125,480

Equity securities
 
12,912

 
12,912

 
7,269

 
7,269

Cash and cash equivalents
 
191,199

 
191,199

 
243,777

 
243,777

Restricted cash
 
90,086

 
90,086

 
65,526

 
65,526

Foreign currency forward contracts and cross currency swaps
 
34,902

 
34,902

 
15,604

 
15,604

 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
Borrowings under unsecured credit facilities
 
$
1,312,000

 
$
1,312,000

 
$
719,000

 
$
719,000

Senior unsecured notes
 
9,655,022

 
10,169,806

 
8,331,722

 
9,168,432

Secured debt
 
2,465,661

 
2,464,635

 
2,608,976

 
2,641,997

Foreign currency forward contracts and cross currency swaps
 
78,566

 
78,566

 
38,654

 
38,654

 
 
 
 
 
 
 
 
 
Redeemable OP unitholder interests
 
$
97,476

 
$
97,476

 
$
97,476

 
$
97,476

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

22

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 
 
Fair Value Measurements as of September 30, 2018
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Equity securities
 
$
12,912

 
$
12,912

 
$

 
$

Foreign currency forward contracts and cross currency swaps, net asset (liability)(1)
 
(43,664
)
 

 
(43,664
)
 

Redeemable OP unitholder interests
 
97,476

 

 
97,476

 

Totals 
 
$
66,724

 
$
12,912

 
$
53,812

 
$

(1) 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 loans receivable using projected payoff valuations based on the expected future cash flows and/or the estimated fair value of collateral, net of sales costs, if the repayment of the loan is expected to be provided solely by the collateral.  We estimate the fair value of secured debt assumed in business combinations and asset acquisitions 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.  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 supportive 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 Note 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 consolidated net operating income (“NOI”) of each segment. We define NOI as total revenues, including tenant reimbursements, less property operating expenses. We believe NOI 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 NOI to make decisions about resource allocations and to assess the property level performance of our properties.    
Non-segment revenue consists mainly of interest income on 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 NOI. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2 to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017). 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): 
Three Months Ended September 30, 2018:

Triple-net

Seniors Housing Operating

Outpatient Medical

Non-segment / Corporate

Total
Rental income

$
203,039


$


$
139,848


$


$
342,887

Resident fees and services



875,171






875,171

Interest income

14,378


159


85




14,622

Other income

1,693


1,175


136


695


3,699

Total revenues

219,110

 
876,505

 
140,069

 
695


1,236,379

 
 
 
 
 
 
 
 
 
 


Property operating expenses

426


610,659


46,072




657,157

Consolidated net operating income

218,684

 
265,846

 
93,997

 
695


579,222

 
 
 
 
 
 
 
 
 
 


Interest expense

3,500


17,319


1,643


115,570


138,032

Loss (gain) on derivatives and financial instruments, net

8,991








8,991

Depreciation and amortization

60,383


136,532


46,234




243,149

General and administrative







28,746


28,746

Loss (gain) on extinguishment of debt, net







4,038


4,038

Impairment of assets

6,178


562






6,740

Other expenses

87,076

(1) 
(811
)

1,055


1,306


88,626

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

52,556

 
112,244

 
45,065

 
(148,965
)

60,900

Income tax (expense) benefit

1,116


211


239


(3,307
)

(1,741
)
Income (loss) from unconsolidated entities

5,377


(6,705
)

1,672




344

Income (loss) from continuing operations

59,049

 
105,750

 
46,976

 
(152,272
)

59,503

Gain (loss) on real estate dispositions, net

24,782


(1
)

(58
)



24,723

Net income (loss)

$
83,831

 
$
105,749

 
$
46,918

 
$
(152,272
)

$
84,226

 
 
 
 
 
 
 
 
 
 


Total assets

$
10,163,867


$
14,989,442


$
4,953,277


$
142,533


$
30,249,119

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2017:
 
Triple-net
 
Seniors Housing Operating
 
Outpatient Medical
 
Non-segment / Corporate
 
Total
Rental income
 
$
221,555

 
$

 
$
141,325

 
$

 
$
362,880

Resident fees and services
 

 
702,380

 

 

 
702,380

Interest income
 
20,187

 

 

 

 
20,187

Other income
 
3,174

 
1,497

 
667

 
698

 
6,036

Total revenues
 
244,916

 
703,877

 
141,992

 
698

 
1,091,483

 
 
 
 
 
 
 
 
 
 


Property operating expenses
 

 
478,777

 
45,220

 

 
523,997

Consolidated net operating income
 
244,916

 
225,100

 
96,772

 
698

 
567,486

 
 
 
 
 
 
 
 
 
 


Interest expense
 
3,622

 
16,369

 
2,929

 
99,658

 
122,578

Loss (gain) on derivatives and financial instruments, net
 
324

 

 

 

 
324

Depreciation and amortization
 
62,891

 
119,089

 
48,158

 

 
230,138

General and administrative
 

 

 

 
29,913

 
29,913

Other expenses
 
89,236

(1) 
5,157

 
530

 
4,672

 
99,595

Income (loss) from continuing operations before income taxes and income from unconsolidated entities
 
88,843

 
84,485

 
45,155

 
(133,545
)
 
84,938

Income tax (expense) benefit
 
(816
)
 
(1,519
)
 
(366
)
 
2,032

 
(669
)
Income (loss) from unconsolidated entities
 
5,478

 
(2,886
)
 
816

 

 
3,408

Income (loss) from continuing operations
 
93,505

 
80,080

 
45,605

 
(131,513
)
 
87,677

Gain (loss) on real estate dispositions, net
 
(185
)
 
(197
)
 
2,004

 

 
1,622

Net income (loss)
 
$
93,320

 
$
79,883

 
$
47,609

 
$
(131,513
)
 
$
89,299

 
 
 
 
 
 
 
 
 
 
 
(1) Represents non-capitalizable transaction costs primarily related to a joint venture transaction with an existing seniors housing operator including the conversion of properties from triple-net to seniors housing operating, an exchange of PropCo/OpCo interests, and termination/restructuring of pre-existing relationships.


23

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Nine Months Ended September 30, 2018
 
Triple-net
 
Seniors Housing Operating
 
Outpatient Medical
 
Non-segment / Corporate
 
Total
Rental income
 
$
607,831

 
$

 
$
412,026

 
$

 
$
1,019,857

Resident fees and services
 

 
2,374,450

 

 

 
2,374,450

Interest income
 
42,176

 
416

 
140

 

 
42,732

Other income
 
16,282

 
3,973

 
401

 
1,561

 
22,217

Total revenues
 
666,289

 
2,378,839

 
412,567

 
1,561

 
3,459,256

 
 
 
 
 
 
 
 
 
 

Property operating expenses
 
583

 
1,648,262

 
133,528

 

 
1,782,373

Consolidated net operating income
 
665,706

 
730,577

 
279,039

 
1,561

 
1,676,883

 
 
 
 
 
 
 
 
 
 

Interest expense
 
10,742

 
51,225

 
4,975

 
315,281

 
382,223

Loss (gain) on derivatives and financial instruments, net
 
(5,642
)
 

 

 

 
(5,642
)
Depreciation and amortization
 
171,724

 
397,080

 
138,821

 

 
707,625

General and administrative
 

 

 

 
95,282

 
95,282

Loss (gain) on extinguishment of debt, net
 
(32
)
 
110

 
11,928

 
4,038

 
16,044

Impairment of assets
 
34,482

 
5,075

 

 

 
39,557

Other expenses
 
89,153

 
5,168

 
3,748

 
4,327

 
102,396

Income (loss) from continuing operations before income taxes and income from unconsolidated entities
 
365,279

 
271,919

 
119,567

 
(417,367
)
 
339,398

Income tax (expense) benefit
 
(708
)
 
(2,244
)
 
(567
)
 
(3,651
)
 
(7,170
)
Income (loss) from unconsolidated entities
 
16,260

 
(21,389
)
 
4,293

 

 
(836
)
Income (loss) from continuing operations
 
380,831

 
248,286

 
123,293

 
(421,018
)
 
331,392

Gain (loss) on real estate dispositions, net
 
158,938

 
3

 
214,721

 

 
373,662

Net income (loss)
 
$
539,769

 
$
248,289

 
$
338,014

 
$
(421,018
)
 
$
705,054

Nine Months Ended September 30, 2017
 
Triple-net
 
Seniors Housing Operating
 
Outpatient Medical
 
Non-segment / Corporate
 
Total
Rental income
 
$
666,735

 
$

 
$
418,886

 
$

 
$
1,085,621

Resident fees and services
 

 
2,049,757

 

 

 
2,049,757

Interest income
 
61,767

 
69

 

 

 
61,836

Other income
 
7,496

 
4,005

 
2,497

 
1,171

 
15,169

Total revenues
 
735,998

 
2,053,831

 
421,383

 
1,171

 
3,212,383

 
 
 
 
 
 
 
 
 
 


Property operating expenses
 

 
1,400,313

 
135,708

 

 
1,536,021

Consolidated net operating income
 
735,998

 
653,518

 
285,675

 
1,171

 
1,676,362

 
 
 
 
 
 
 
 
 
 


Interest expense
 
11,647

 
47,587

 
7,342

 
290,829

 
357,405

Loss (gain) on derivatives and financial
instruments, net
 
2,284

 

 

 

 
2,284

Depreciation and amortization
 
182,672

 
356,023

 
144,567

 

 
683,262

General and administrative
 

 

 

 
93,643

 
93,643

Loss (gain) on extinguishment of debt, net
 
29,083

 
3,414

 
4,373

 

 
36,870

Impairment of assets
 
4,846

 
14,191

 
5,625

 

 
24,662

Other expenses
 
96,425

 
8,100

 
2,201

 
10,882

 
117,608

Income (loss) from continuing operations before income taxes and income from unconsolidated entities
 
409,041

 
224,203

 
121,567

 
(394,183
)
 
360,628

Income tax (expense) benefit
 
(2,070
)
 
9,133

 
(655
)
 
(873
)
 
5,535

Income (loss) from unconsolidated entities
 
14,983

 
(40,527
)
 
1,868

 

 
(23,676
)
Income (loss) from continuing operations
 
421,954

 
192,809

 
122,780

 
(395,056
)
 
342,487

Gain (loss) on real estate dispositions, net
 
273,051

 
12,814

 
2,004

 

 
287,869

Net income (loss)
 
$
695,005

 
$
205,623

 
$
124,784

 
$
(395,056
)
 
$
630,356



24

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Our portfolio of properties and other investments are located in the United States, the United Kingdom and Canada.  Revenues and assets are attributed to the country in which the property is physically located.  The following is a summary of geographic information for the periods presented (dollars in thousands): 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
Revenues:
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
United States
 
$
1,007,203

 
81.5
%
 
$
871,431

 
79.9
%
 
$
2,766,726

 
80.0
%
 
$
2,582,042

 
80.4
%
United Kingdom
 
111,503

 
9.0
%
 
105,028

 
9.6
%
 
340,059

 
9.8
%
 
298,618

 
9.3
%
Canada
 
117,673

 
9.5
%
 
115,024

 
10.5
%
 
352,471

 
10.2
%
 
331,723

 
10.3
%
Total
 
$
1,236,379

 
100.0
%
 
$
1,091,483

 
100.0
%
 
$
3,459,256

 
100.0
%
 
$
3,212,383

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of
 
 
 
 
September 30, 2018
 
December 31, 2017
 
 
 
 
Assets:
 
Amount
 
%
 
Amount
 
%
 
 
 
 
 
 
 
 
United States
 
$
24,616,066

 
81.4
%
 
$
22,274,443

 
79.7
%
 
 
 
 
 
 
 
 
United Kingdom
 
3,150,305

 
10.4
%
 
3,239,039

 
11.6
%
 
 
 
 
 
 
 
 
Canada
 
2,482,748

 
8.2
%
 
2,430,963

 
8.7
%
 
 
 
 
 
 
 
 
Total
 
$
30,249,119

 
100.0
%
 
$
27,944,445

 
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, 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 nine months ended September 30, 2018 and 2017, 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 most 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, 2014 and subsequent years and by state taxing authorities for the year ended December 31, 2013 and subsequent years.  The company and its subsidiaries are also subject to audit by the Canada Revenue Agency and provincial authorities generally for periods subsequent to our initial investments in Canada in May 2012, by HM Revenue & Customs for periods subsequent to our initial investments in the United Kingdom in August 2012 and by Luxembourg taxing authorities generally for periods subsequent to our establishment of certain Luxembourg-based subsidiaries during 2014. 

25

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



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 VIEs 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 VIEs in the aggregate (in thousands):
 
 
September 30, 2018
 
December 31, 2017
Assets
 
 
 
 
Net real property owned
 
$
977,252

 
$
1,002,137

Cash and cash equivalents
 
15,059

 
12,308

Receivables and other assets
 
17,922

 
16,330

Total assets(1)
 
$
1,010,233

 
$
1,030,775

 
 
 
 
 
Liabilities and equity
 
 
 
 
Secured debt
 
$
466,772

 
$
471,103

Accrued expenses and other liabilities
 
18,144

 
14,832

Total equity
 
525,317

 
544,840

Total liabilities and equity
 
$
1,010,233

 
$
1,030,775

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


26

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

 
EXECUTIVE SUMMARY
 
 
 
 
Company Overview
 
Business Strategy
 
Key Transactions
 
Key Performance Indicators, Trends and Uncertainties
 
Corporate Governance
 
 
 
 
LIQUIDITY AND CAPITAL RESOURCES
 
 
 
 
Sources and Uses of Cash
 
Off-Balance Sheet Arrangements
 
Contractual Obligations
 
Capital Structure
 
 
 
 
RESULTS OF OPERATIONS
 
 
 
 
Summary
 
Triple-net
 
Seniors Housing Operating
 
Outpatient Medical
 
Non-Segment/Corporate
 
 
 
 
OTHER
 
 
 
 
Non-GAAP Financial Measures
 
Critical Accounting Policies
 
Cautionary Statement Regarding Forward-Looking Statements

27

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

The following discussion and analysis is based primarily on the unaudited consolidated financial statements of Welltower Inc. for the periods presented and should be read together with the notes thereto contained in this Quarterly Report on Form 10-Q. Other important factors are identified in our Annual Report on Form 10-K for the year ended December 31, 2017, 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:WELL), 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 (U.S.), Canada and the United Kingdom (U.K.), consisting of seniors housing and post-acute communities and outpatient medical properties. Our capital programs, when combined with comprehensive planning, development and property management services, make us a single-source solution for acquiring, planning, developing, managing, repositioning and monetizing real estate assets. 
The following table summarizes our consolidated portfolio for the three months ended September 30, 2018 (dollars in thousands):  
 
 
 
 
Percentage of
 
Number of
Type of Property
 
NOI(1)
 
NOI
 
Properties
Triple-net
 
$
218,684

 
37.8
%
 
749

Seniors housing operating
 
265,846

 
46.0
%
 
521

Outpatient medical
 
93,997

 
16.2
%
 
259

Totals
 
$
578,527

 
100.0
%
 
1,529

 
 
 
 
 
 
 
(1) Represents consolidated NOI and 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. See Non-GAAP Financial Measures for additional information and reconciliation.
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 NOI 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 obligors/partners experience operating difficulties and become unable to generate sufficient cash to make payments or operating distributions 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 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 manages and monitors the outpatient medical portfolio with a comprehensive process including review of 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. 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/property management and research efforts, we also structure our investments to help mitigate payment risk. Operating leases and loans are normally credit enhanced by guaranties and/or letters of credit. In addition, operating leases are typically structured as master leases and loans are generally cross-defaulted and cross-collateralized with other real estate loans, operating leases or agreements between us and the obligor and its affiliates.

28

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

For the nine months ended September 30, 2018, rental income and resident fees and services represented 29% and 69%, 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 NOI 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 likely that investment dispositions may occur in the future. To the extent that investment dispositions exceed new investments, our revenues and cash flows from operations could be adversely affected. We expect to reinvest the proceeds from any investment dispositions in new investments. To the extent that new investment requirements exceed our available cash on-hand, we expect to borrow under our primary unsecured credit facility. At September 30, 2018, we had $191,199,000 of cash and cash equivalents, $90,086,000 of restricted cash and $1,688,000,000 of available borrowing capacity under our primary unsecured credit facility.
Key Transactions
     Capital.   The following summarizes key capital transaction that occurred during the nine months ended September 30, 2018:
In April 2018, we issued $550,000,000 of 4.25% senior unsecured notes due 2028 for net proceeds of approximately $545,074,000.
In connection with the QCP acquisition, in July 2018, we drew on a $1,000,000,000 term loan facility to fund a portion of the cash consideration and other expenses.
In August 2018, we issued $200,000,000 of 4.25% senior unsecured notes due 2028, $600,000,000 of 3.95% senior unsecured notes due 2023 and $500,000,000 of 4.95% senior unsecured notes due 2048 for aggregate net proceeds of approximately $1,284,948,000. Proceeds from these issuances were used to repay advances under the $1,000,000,000 term loan facility drawn on in July 2018 and the primary unsecured credit facility.
In July 2018, we closed on a new $3,700,000,000 unsecured credit facility with improved pricing across both our line of credit and term loan facility and terminated the existing unsecured credit facility. The credit facility includes a $3,000,000,000 revolving credit facility at a borrowing rate of 0.825% over LIBOR, a $500,000,000 USD unsecured term credit facility at a borrowing rate of 0.90% over LIBOR and a $250,000,000 CAD unsecured term credit facility at 0.90% over CDOR.
We extinguished $196,573,000 of secured debt at a blended average interest rate of 5.66% and we repaid our $450,000,000 of 2.25% senior unsecured notes at par on maturity on March 15, 2018. 
We raised $241,128,000 through our dividend reinvestment program and our Equity Shelf Program (as defined below).
     Investments.  The following summarizes our property acquisitions and joint venture investments completed during the nine months ended September 30, 2018 (dollars in thousands): 

29

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

 
 
Properties
 
Investment Amount(1)
 
Capitalization Rates(2)
 
Book Amount(3)
Triple-net
 
303

 
$
2,438,899

 
6.9
%
 
$
3,062,980

Seniors housing operating
 
11

 
599,647

 
6.7
%
 
652,640

Outpatient medical
 
7

 
120,811

 
7.1
%
 
131,010

Totals
 
321

 
$
3,159,357

 
6.9
%
 
$
3,846,630

 
 
 
 
 
 
 
 
 
(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 net operating 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 Note 3 to our unaudited consolidated financial statements for additional information.
     Dispositions.  The following summarizes property dispositions made during the nine months ended September 30, 2018 (dollars in thousands): 
 
 
Properties
 
Proceeds(1)
 
Capitalization Rates(2)
 
Book Amount(3)
Triple-net
 
64

 
$
771,112

 
7.0
%
 
$
604,480

Seniors housing operating
 
2

 
6,908

 
6.5
%
 
2,200

Outpatient medical
 
18

 
428,727

 
6.0
%
 
223,069

Totals
 
84

 
$
1,206,747

 
6.7
%
 
$
829,749

 
 
 
 
 
 
 
 
 
(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 net real estate assets at time of disposition. See Note 5 to our unaudited consolidated financial statements for additional information.
 
     Dividends. Our Board of Directors announced the annual cash dividend of $3.48 per common share ($0.87 per share quarterly), consistent with 2017.  The dividend declared for the quarter ended September 30, 2018 represents the 190th 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 and net income attributable to common stockholders (“NICS”) per the Consolidated Statement of Comprehensive Income are the most appropriate earnings measures. Other useful supplemental measures of our operating performance include funds from operations attributable to common stockholders (“FFO”), consolidated net operating income (“NOI”) and same store NOI (“SSNOI”); however, these supplemental measures are not defined by U.S. generally accepted accounting principles (“U.S. GAAP”). Please refer to the section entitled “Non-GAAP Financial Measures” for further discussion and reconciliations. 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,
 
June 30,
 
September 30,
 
 
2017
 
2017
 
2017
 
2017
 
2018
 
2018
 
2018
Net income (loss)
 
$
337,610

 
$
203,441

 
$
89,299

 
$
(89,743
)
 
$
453,555

 
$
167,273

 
$
84,226

NICS
 
312,639

 
188,429

 
74,043

 
(111,523
)
 
437,671

 
154,432

 
64,384

FFO
 
306,231

 
384,390

 
295,722

 
179,224

 
353,220

 
378,725

 
285,272

NOI
 
552,129

 
556,747

 
567,486

 
556,353

 
540,500

 
557,161

 
579,222

SSNOI
 
421,328

 
432,578

 
439,807

 
434,754

 
431,400

 
438,703

 
433,523

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Per share data (fully diluted):
 
 
 
 
 
 
 
 
 
 
NICS
 
$
0.86

 
$
0.51

 
$
0.20

 
$
(0.30
)
 
$
1.17

 
$
0.41

 
$
0.17

FFO
 
0.84

 
1.04

 
0.80

 
0.48

 
0.95

 
1.02

 
0.76


30

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

Credit Strength. We measure our credit strength both in terms of leverage ratios and coverage ratios. The leverage ratios indicate how much of our balance sheet capitalization is related to long-term debt, 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: 
 
 
Three Months Ended
 
 
March, 31
 
June 30,
 
September 30,
 
December 31,
 
March 31,
 
June 30,
 
September 30,
 
 
2017
 
2017
 
2017
 
2017
 
2018
 
2018
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net debt to book capitalization ratio
 
42%
 
41%
 
42%
 
43%
 
42%
 
42%
 
46%
Net debt to undepreciated book capitalization ratio
 
36%
 
35%
 
36%
 
36%
 
35%
 
36%
 
39%
Net debt to market capitalization ratio
 
29%
 
27%
 
29%
 
31%
 
34%
 
31%
 
34%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest coverage ratio
 
5.67x
 
4.60x
 
3.63x
 
2.35x
 
6.67x
 
4.34x
 
3.38x
Fixed charge coverage ratio
 
4.53x
 
3.72x
 
2.97x
 
1.93x
 
5.49x
 
3.58x
 
2.85x
 
      Concentration Risk. We evaluate our concentration risk in terms of NOI by property mix, relationship mix and geographic mix. Concentration risk is a valuable measure in understanding what portion of our NOI could be at risk if certain sectors were to experience downturns.  Property mix measures the portion of our NOI that relates to our various property types. Relationship mix measures the portion of our NOI that relates to our top five relationships. Geographic mix measures the portion of our NOI that relates to our top five states (or international equivalents). The following table reflects our recent historical trends of concentration risk by NOI for the periods indicated below: 
 
 
Three Months Ended
 
 
March 31,
 
June 30,
 
September 30,
 
December 31,
 
March 31,
 
June 30,
 
September 30,
 
 
2017
 
2017
 
2017
 
2017
 
2018
 
2018
 
2018
Property mix:(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Triple-net
 
45%
 
44%
 
43%
 
42%
 
41%
 
40%
 
38%
Seniors housing operating
 
38%
 
39%
 
40%
 
41%
 
42%
 
43%
 
46%
Outpatient medical
 
17%
 
17%
 
17%
 
17%
 
17%
 
17%
 
16%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Relationship mix:(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sunrise Senior Living(2)
 
14%
 
14%
 
14%
 
14%
 
15%
 
15%
 
15%
ProMedica Health System
 
—%
 
—%
 
—%
 
—%
 
—%
 
—%
 
7%
Revera(2)
 
7%
 
7%
 
7%
 
7%
 
7%
 
7%
 
7%
Genesis HealthCare
 
9%
 
9%
 
9%
 
7%
 
6%
 
6%
 
6%
Brookdale Senior Living
 
7%
 
7%
 
7%
 
7%
 
7%
 
8%
 
6%
Remaining relationships
 
63%
 
63%
 
63%
 
65%
 
65%
 
64%
 
59%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Geographic mix:(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
California
 
13%
 
14%
 
13%
 
13%
 
14%
 
14%
 
13%
United Kingdom
 
9%
 
9%
 
9%
 
9%
 
10%
 
9%
 
9%
Canada
 
8%
 
8%
 
8%
 
8%
 
9%
 
8%
 
8%
New Jersey
 
7%
 
8%
 
8%
 
8%
 
8%
 
7%
 
7%
Texas
 
7%
 
7%
 
7%
 
8%
 
8%
 
8%
 
7%
Remaining geographic areas
 
56%
 
54%
 
55%
 
54%
 
51%
 
54%
 
56%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Excludes our share of investments in unconsolidated entities and non-segment/corporate NOI.  Entities in which we have 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.
 

31

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

Lease Expirations. The following table sets forth information regarding lease expirations for certain portions of our portfolio as of September 30, 2018 (dollars in thousands): 
 
 
Expiration Year(1)
 
 
2018
 
2019
 
2020
 
2021
 
2022
 
2023
 
2024
 
2025
 
2026
 
2027
 
Thereafter
Triple-net:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Properties
 
111

 

 

 
8

 
12

 
7

 
4

 
55

 
55

 
19

 
462

Base rent(2)
 
$
49,563

 
$

 
$

 
$
13,400

 
$
7,843

 
$

 
$
10,842

 
$
66,697

 
$
94,556

 
$
33,955

 
$
523,166

% of base rent
 
6.2
%
 
%
 
%
 
1.7
%
 
1.0
%
 
%
 
1.4
%
 
8.3
%
 
11.8
%
 
4.2
%
 
65.4
%
Units/beds
 
10,754

 

 

 
1,416

 
1,245

 
1,115

 
692

 
4,140

 
5,869

 
2,401

 
48,799

% of Units/beds
 
14.1
%
 
%
 
%
 
1.9
%
 
1.6
%
 
1.5
%
 
0.9
%
 
5.4
%
 
7.7
%
 
3.1
%
 
63.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Outpatient medical:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Square feet
 
337,189

 
1,121,808

 
1,372,820

 
1,559,664

 
1,706,549

 
1,271,602

 
1,290,443

 
765,244

 
1,195,467

 
403,107

 
4,868,618

Base rent(2)
 
$
9,626

 
$
32,658

 
$
38,720

 
$
43,962

 
$
46,037

 
$
34,306

 
$
37,615

 
$
20,607

 
$
29,059

 
$
10,652

 
$
102,387

% of base rent
 
2.4
%
 
8.1
%
 
9.5
%
 
10.8
%
 
11.3
%
 
8.5
%
 
9.3
%
 
5.1
%
 
7.2
%
 
2.6
%
 
25.2
%
Leases
 
112

 
304

 
329

 
310

 
304

 
283

 
149

 
130

 
138

 
79

 
211

% of Leases
 
4.8
%
 
12.9
%
 
14.0
%
 
13.2
%
 
12.9
%
 
12.0
%
 
6.3
%
 
5.5
%
 
5.9
%
 
3.4
%
 
9.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Excludes investments in unconsolidated entities. Investments classified as held for sale are included in the current year.
(2) The most recent monthly cash base rent annualized.  Base rent does not include tenant recoveries or amortization of above and below market lease intangibles or other non cash income.
 
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, 2017, 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
As of December 31, 2017, we adopted Accounting Standards Update (“ASU”) No. 2016-18, “Restricted Cash,” and ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments.”  See Note 2 to the unaudited consolidated financial statements for further information.
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):

32

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

 
 
Nine Months Ended
 
Change
 
 
September 30,
 
September 30,
 
$
 
%
 
 
2018
 
2017
 
 
 
 
Cash, cash equivalents and restricted cash at beginning of period
 
$
309,303

 
$
607,220

 
$
(297,917
)
 
-49
 %
Cash provided from (used in) operating activities
 
1,211,148

 
1,162,464

 
48,684

 
4
 %
Cash provided from (used in) investing activities
 
(2,133,293
)
 
400,418

 
(2,533,711
)
 
n/a

Cash provided from (used in) financing activities
 
899,559

 
(1,899,107
)
 
2,798,666

 
n/a

Effect of foreign currency translation
 
(5,432
)
 
24,316

 
(29,748
)
 
n/a

Cash, cash equivalents and restricted cash at end of period
 
$
281,285

 
$
295,311

 
$
(14,026
)
 
-5
 %
 
     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 nine months ended September 30, 2018 and 2017, cash flow provided from operations exceeded cash distributions to stockholders. 
     Investing Activities.  The changes in net cash provided from/used in investing activities are primarily attributable to changes in acquisition and dispositions, which are summarized above in “Key Transactions” and Notes 3 and 5 of our unaudited consolidated financial statements. The following is a summary of cash used in non-acquisition capital improvement activities (dollars in thousands):  
 
 
Nine Months Ended
 
Change
 
 
September 30,
 
September 30,
 
 
 
 
 
 
2018
 
2017
 
$
 
%
New development
 
$
88,146

 
$
198,068

 
$
(109,922
)
 
-55
 %
Recurring capital expenditures, tenant improvements and lease commissions
 
57,384

 
45,777

 
11,607

 
25
 %
Renovations, redevelopments and other capital improvements
 
116,251

 
113,365

 
2,886

 
3
 %
Total
 
$
261,781

 
$
357,210

 
$
(95,429
)
 
-27
 %
 
The change in new development is primarily due to the number and size of construction projects on-going during the relevant periods.  Renovations, redevelopments and other capital improvements include expenditures to maximize property value, increase net operating income, maintain a market-competitive position and/or achieve property stabilization.  Generally, these expenditures have increased as a result of acquisitions, primarily in our seniors housing operating segment. 
Financing Activities.  The changes in net cash provided from/used in 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 September 30, 2018, we had investments in unconsolidated entities with our ownership interests ranging from 10% to 50%. Please see Note 7 to our unaudited consolidated financial statements for additional information.  We use financial derivative instruments to hedge interest rate and foreign currency exchange rate exposure. Please see Note 11 to our unaudited consolidated financial statements for additional information.  At September 30, 2018, we had 13 outstanding letter of credit obligations. Please see Note 12 to our unaudited consolidated financial statements for additional information.

33

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

Contractual Obligations
The following table summarizes our payment requirements under contractual obligations as of September 30, 2018 (in thousands):
 
 
Payments Due by Period
Contractual Obligations
 
Total
 
2018
 
2019-2020
 
2021-2022
 
Thereafter
Unsecured revolving credit facility(1)
 
$
1,312,000

 
$

 
$

 
$

 
$
1,312,000

Senior unsecured notes and term credit facilities:(2)
 

 
 
 
 
 
 
 
 
U.S. Dollar senior unsecured notes
 
7,450,000

 

 
1,050,000

 
1,050,000

 
5,350,000

     Canadian Dollar senior unsecured notes(3)
 
232,162

 

 
232,162

 

 

     Pounds Sterling senior unsecured notes(3)
 
1,370,565

 

 

 

 
1,370,565

U.S. Dollar term credit facility
 
507,500

 

 
7,500

 

 
500,000

     Canadian Dollar term credit facility(3)
 
193,469

 

 

 

 
193,469

Secured debt:(2,3)
 

 
 
 
 
 
 
 
 
Consolidated
 
2,479,755

 
170,742

 
628,104

 
573,112

 
1,107,797

     Unconsolidated  
 
790,673

 
17,836

 
109,404

 
40,844

 
622,589

Contractual interest obligations:(4)
 

 
 
 
 
 
 
 
 
Unsecured revolving credit facility
 
193,720

 
10,196

 
81,566

 
81,566

 
20,392

     Senior unsecured notes and term loans(3)
 
4,120,498

 
152,769

 
830,571

 
710,660

 
2,426,498

     Consolidated secured debt(3)
 
476,489

 
23,252

 
155,504

 
111,191

 
186,542

     Unconsolidated secured debt(3)
 
214,808

 
7,612

 
56,738

 
48,299

 
102,159

Capital lease obligations(5)
 
85,308

 
1,043

 
8,346

 
8,346

 
67,573

Operating lease obligations(5)
 
1,107,336

 
4,507

 
35,588

 
34,105

 
1,033,136

Purchase obligations(5)
 
343,079

 
76,741

 
266,338

 

 

Other long-term liabilities(6)
 
1,598

 
369

 
1,229

 

 

Total contractual obligations
 
$
20,878,960

 
$
465,067

 
$
3,463,050

 
$
2,658,123

 
$
14,292,720

 
 
 
 
 
 
 
 
 
 
 
(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 a supplemental executive retirement plan for one former executive officer.
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 September 30, 2018, 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 17, 2018, 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 October 25, 2018, 13,309,086 shares of common stock remained available for issuance under the DRIP registration statement. On August 3, 2018 we entered into separate amended and restated equity distribution agreements with each of Morgan Stanley & Co. LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman Sachs & Co. LLC, UBS Securities LLC and Wells Fargo Securities, LLC relating to the offer and sale from time to time of up to $784,083,001 aggregate amount of our common stock (“Equity Shelf Program”).  The Equity Shelf Program also allows us to enter into forward sale agreements.  We expect that, if entered into, we will physically settle each forward sale agreement on one or more dates on or prior to the maturity date of that particular forward sale agreement, in which case we

34

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

will expect to receive per share cash proceeds at settlement equal to the forward sale price under the relevant forward sale agreement.  However, we may also elect to cash settle or net share settle a forward sale agreement.  As of October 25, 2018, we had $654,339,000 of remaining capacity under the Equity Shelf Program and there were no outstanding forward sales agreements. 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, resident fees and services and interest income. Our primary expenses include interest expense, depreciation and amortization, property operating expenses, general and administrative expenses and other expenses. We evaluate our business and make resource allocations on our three business segments: triple-net, seniors housing operating and outpatient medical. The primary performance measures for our properties are NOI and SSNOI, which are discussed below.  Please see Non-GAAP Financial Measures for additional information and reconciliations. The following is a summary of our results of operations (dollars in thousands, except per share amounts):  
 
 
Three Months Ended
 
Change
 
Nine Months Ended
 
Change
 
 
September 30,

September 30,
 
 
 
 
 
September 30,
 
September 30,
 
 
 
 
 
 
2018

2017
 
Amount
 
%
 
2018
 
2017
 
Amount
 
%
Net income
 
$
84,226

 
$
89,299

 
$
(5,073
)
 
-6
 %
 
$
705,054

 
$
630,356

 
$
74,698

 
12
%
NICS
 
64,384

 
74,043

 
(9,659
)
 
-13
 %
 
656,487

 
575,118

 
81,369

 
14
%
FFO
 
285,272

 
295,722

 
(10,450
)
 
-4
 %
 
1,017,217

 
986,352

 
30,865

 
3
%
EBITDA
 
467,148

 
442,684

 
24,464

 
6
 %
 
1,802,072

 
1,665,488

 
136,584

 
8
%
NOI
 
579,222

 
567,486

 
11,736

 
2
 %
 
1,676,883

 
1,676,362

 
521

 
%
SSNOI
 
433,523

 
439,807

 
(6,284
)
 
-1
 %
 
1,303,626

 
1,293,712

 
9,914

 
1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Per share data (fully diluted):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NICS
 
$
0.17

 
$
0.20

 
$
(0.03
)
 
-15
 %
 
$
1.76

 
$
1.56

 
$
0.20

 
13
%
FFO
 
$
0.76

 
$
0.80

 
$
(0.04
)
 
-5
 %
 
$
2.72

 
$
2.68

 
$
0.04

 
1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest coverage ratio
 
3.38
x
 
3.63
x
 
(0.25
)x
 
-7
 %
 
4.73
x
 
4.63
x
 
0.10
x
 
2
%
Fixed charge coverage ratio
 
2.85
x
 
2.97
x
 
(0.12
)x
 
-4
 %
 
3.93
x
 
3.74
x
 
0.19
x
 
5
%
Triple-net
     The following is a summary of our NOI and SSNOI for the triple-net segment (dollars in thousands):
 
 
Three Months Ended
 
Change
 
Nine Months Ended
 
Change
 
 
September 30,
 
September 30,
 
 
 
 
 
September 30,
 
September 30,
 
 
 
 
 
 
2018
 
2017
 
$
 
%
 
2018
 
2017
 
$
 
%
NOI
 
$
218,684

 
$
244,916

 
$
(26,232
)
 
-11
 %
 
$
665,706

 
$
735,998

 
$
(70,292
)
 
-10
 %
Non SSNOI attributable to same store properties
 
(3,734
)
 
(7,232
)
 
3,498

 
-48
 %
 
(14,075
)
 
(22,689
)
 
8,614

 
-38
 %
NOI attributable to non same store properties(1)
 
(76,077
)
 
(95,278
)
 
19,201

 
-20
 %
 
(232,926
)
 
(292,948
)
 
60,022

 
-20
 %
SSNOI(2)
 
$
138,873

 
$
142,406

 
$
(3,533
)
 
-2
 %
 
$
418,705

 
$
420,361

 
$
(1,656
)
 
 %
 
(1) Change is primarily due to the acquisition of 290 properties, the transitioning/restructuring of 27 properties, and the conversion of 13 construction projects into revenue-generating properties subsequent to January 1, 2017 and 20 held for sale properties at September 30, 2018.
(2) Relates to 410 same store properties.
The following is a summary of our results of operations for the triple-net segment (dollars in thousands):

35

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

 
 
Three Months Ended
 
Change
 
Nine Months Ended
 
Change
 
 
September 30,
 
September 30,
 
 
 
 
 
September 30,
 
September 30,
 
 
 
 
 
 
2018
 
2017
 
$
 
%
 
2018
 
2017
 
$
 
%
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental income
 
$
203,039

 
$
221,555

 
$
(18,516
)
 
-8
 %
 
$
607,831

 
$
666,735

 
$
(58,904
)
 
-9
 %
Interest income
 
14,378

 
20,187

 
(5,809
)
 
-29
 %
 
42,176

 
61,767

 
(19,591
)
 
-32
 %
Other income
 
1,693

 
3,174

 
(1,481
)
 
-47
 %
 
16,282

 
7,496

 
8,786

 
117
 %
Total revenues
 
219,110

 
244,916

 
(25,806
)
 
-11
 %
 
666,289

 
735,998

 
(69,709
)
 
-9
 %
Property operating expenses
 
426

 

 
426

 
n/a

 
583

 

 
583

 
n/a

NOI(1)
 
218,684

 
244,916

 
(26,232
)
 
-11
 %
 
665,706

 
735,998

 
(70,292
)
 
-10
 %
Other expenses:
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 

Interest expense
 
3,500

 
3,622

 
(122
)
 
-3
 %
 
10,742

 
11,647

 
(905
)
 
-8
 %
Loss (gain) on derivatives and financial instruments, net
 
8,991

 
324

 
8,667

 
2,675
 %
 
(5,642
)
 
2,284

 
(7,926
)
 
n/a

Depreciation and amortization
 
60,383

 
62,891

 
(2,508
)
 
-4
 %
 
171,724

 
182,672

 
(10,948
)
 
-6
 %
Loss (gain) on extinguishment of debt, net
 

 

 

 
n/a

 
(32
)
 
29,083

 
(29,115
)
 
n/a

Impairment of assets
 
6,178

 

 
6,178

 
n/a

 
34,482

 
4,846

 
29,636

 
612
 %
Other expenses
 
87,076

 
89,236

 
(2,160
)
 
-2
 %
 
89,153

 
96,425

 
(7,272
)
 
-8
 %
Total other expenses
 
166,128

 
156,073

 
10,055

 
6
 %
 
300,427

 
326,957

 
(26,530
)
 
-8
 %
Income from continuing operations before income taxes and income (loss) from unconsolidated entities
 
52,556

 
88,843

 
(36,287
)
 
-41
 %
 
365,279

 
409,041

 
(43,762
)
 
-11
 %
Income tax (expense) benefit
 
1,116

 
(816
)
 
1,932

 
n/a

 
(708
)
 
(2,070
)
 
1,362

 
-66
 %
Income (loss) from unconsolidated entities
 
5,377

 
5,478

 
(101
)
 
-2
 %
 
16,260

 
14,983

 
1,277

 
9
 %
Income from continuing operations
 
59,049

 
93,505

 
(34,456
)
 
-37
 %
 
380,831

 
421,954

 
(41,123
)
 
-10
 %
Gain (loss) on real estate dispositions, net
 
24,782

 
(185
)
 
24,967

 
n/a

 
158,938

 
273,051

 
(114,113
)
 
-42
 %
Net income
 
83,831

 
93,320

 
(9,489
)
 
-10
 %
 
539,769

 
695,005

 
(155,236
)
 
-22
 %
Less: Net income (loss) attributable to noncontrolling interests
 
6,913

 
1,539

 
5,374

 
349
 %
 
10,129

 
3,112

 
7,017

 
225
 %
Net income attributable to
common stockholders
 
$
76,918

 
$
91,781

 
$
(14,863
)
 
-16
 %
 
$
529,640

 
$
691,893

 
$
(162,253
)
 
-23
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) See Non-GAAP Financial Measures.
 
 
 
 
 
 
 
 
 
The decrease in rental income is primarily attributable to the disposition of properties exceeding new acquisitions as well as the reduction in the Genesis annual cash rent obligation due to the restructuring of the master lease as of January 1, 2018.  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 September 30, 2018, we had 20 leases with rental rate increasers ranging from 0.12% to 0.79% in our triple-net portfolio. The decrease in interest income is primarily related to the volume of loan payoffs during 2017 and 2018. The increase in other income is primarily due to $10,805,000 of net lease termination fees recognized during the three months ended June 30, 2018.
Depreciation and amortization decreased primarily as a result of the disposition of triple-net properties exceeding new acquisitions. 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 nine months ended September 30, 2018 and 2017, we recorded impairment charges on certain held for sale triple-net properties as the carrying values exceeded the estimated fair value less costs to sell. Changes in the gain on sales of properties are related to the volume of property sales and the sales prices. Transaction costs related to asset acquisitions are capitalized as a component of purchase price. The decrease in other expenses is primarily due to fewer noncapitalizable transaction costs from acquisitions.
During the nine months ended September 30, 2018, we completed two triple-net construction project totaling $90,055,000 or $381,589 per bed/unit.  The following is a summary of triple-net construction projects, excluding expansions, pending as of September 30, 2018 (dollars in thousands): 

36

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

Location
 
Units/Beds
 
Commitment
 
Balance
 
Est. Completion
Westerville, OH
 
90

 
$
22,800

 
$
6,759

 
3Q19
Union, KY
 
162

 
34,600

 
7,150

 
1Q20
Droitwich , UK
 
70

 
16,532

 
4,035

 
4Q20
 
 
322

 
$
73,932

 
$
17,944

 
 
 
Interest expense for the nine months ended September 30, 2018 and 2017 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 loss (gain) on derivatives and financial instruments is primarily attributable to the mark-to-market adjustment recorded on the Genesis HealthCare available-for-sale investment in accordance with the adoption of ASU No. 2016-01 described in Note 2 to our unaudited consolidated financial statements.  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
 
Nine Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
 
 
 
Wtd. Avg.
 
 
 
Wtd. Avg.
 
 
 
Wtd. Avg.
 
 
 
Wtd. Avg.
 
 
Amount
 
Interest Rate
 
Amount
 
Interest Rate
 
Amount
 
Interest Rate
 
Amount
 
Interest Rate
Beginning balance
 
$
334,033

 
3.53
%
 
$
345,866

 
3.53
%
 
$
347,474

 
3.55
%
 
$
594,199

 
4.58
%
Debt issued
 

 
0.00
%
 
13,000

 
4.57
%
 

 
0.00
%
 
13,000

 
4.57
%
Debt extinguished
 

 
0.00
%
 

 
0.00
%
 
(4,107
)
 
4.94
%
 
(255,553
)
 
5.92
%
Debt transferred
 
(35,830
)
 
3.80
%
 

 
0.00
%
 
(35,830
)
 
3.84
%
 

 
0.00
%
Principal payments
 
(962
)
 
5.26
%
 
(1,126
)
 
5.56
%
 
(3,033
)
 
5.42
%
 
(4,724
)
 
5.68
%
Foreign currency
 
(979
)
 
3.51
%
 
7,707

 
3.13
%
 
(8,242
)
 
3.29
%
 
18,525

 
2.95
%
Ending balance
 
$
296,262

 
3.63
%
 
$
365,447

 
5.55
%
 
$
296,262

 
3.63
%
 
$
365,447

 
3.55
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Monthly averages
 
$
309,920

 
3.53
%
 
$
358,425

 
3.56
%
 
$
331,239

 
3.48
%
 
$
424,583

 
4.00
%
 
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 related to unconsolidated investments.  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 NOI and SSNOI for the seniors housing operating segment (dollars in thousands):  
 
 
Three Months Ended
 
Change
 
Nine Months Ended
 
Change
 
 
September 30,
 
September 30,
 
 
 
 
 
September 30,
 
September 30,
 
 
 
 
 
 
2018
 
2017
 
$
 
%
 
2018
 
2017
 
$
 
%
NOI
 
$
265,846

 
$
225,100

 
$
40,746

 
18
 %
 
$
730,577

 
$
653,518

 
$
77,059

 
12
 %
Non SSNOI attributable to same store properties
 
304

 
288

 
16

 
6
 %
 
927

 
1,162

 
(235
)
 
-20
 %
NOI attributable to non same store properties(1)
 
(57,534
)
 
(9,311
)
 
(48,223
)
 
518
 %
 
(104,407
)
 
(24,102
)
 
(80,305
)
 
333
 %
SSNOI(2)
 
$
208,616

 
$
216,077

 
$
(7,461
)
 
-3
 %
 
$
627,097

 
$
630,578

 
$
(3,481
)
 
-1
 %
 
(1) Change is primarily due to the acquisition of 26 properties subsequent to January 1, 2017 and the transition of 78 properties from triple-net to seniors housing operating.
(2) Relates to 399 same store properties.
The following is a summary of our seniors housing operating results of operations (dollars in thousands):

37

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

 
 
Three Months Ended
 
Change
 
Nine Months Ended
 
Change
 
 
September 30,
 
September 30,
 
 
 
 
 
September 30,
 
September 30,
 
 
 
 
 
 
2018
 
2017
 
$
 
%
 
2018
 
2017
 
$
 
%
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Resident fees and services
 
$
875,171

 
$
702,380

 
$
172,791

 
25
 %
 
$
2,374,450

 
$
2,049,757

 
$
324,693

 
16
 %
Interest income
 
159

 

 
159

 
n/a

 
416

 
69

 
347

 
503
 %
Other income
 
1,175

 
1,497

 
(322
)
 
-22
 %
 
3,973

 
4,005

 
(32
)
 
-1
 %
Total revenues
 
876,505

 
703,877

 
172,628

 
25
 %
 
2,378,839

 
2,053,831

 
325,008

 
16
 %
Property operating expenses
 
610,659

 
478,777

 
131,882

 
28
 %
 
1,648,262

 
1,400,313

 
247,949

 
18
 %
NOI(1)
 
265,846

 
225,100

 
40,746

 
18
 %
 
730,577

 
653,518

 
77,059

 
12
 %
Other expenses:
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 

Interest expense
 
17,319

 
16,369

 
950

 
6
 %
 
51,225

 
47,587

 
3,638

 
8
 %
Depreciation and amortization
 
136,532

 
119,089

 
17,443

 
15
 %
 
397,080

 
356,023

 
41,057

 
12
 %
Loss (gain) on extinguishment of debt, net
 

 

 

 
n/a

 
110

 
3,414

 
(3,304
)
 
-97
 %
Impairment of assets
 
562

 

 
562

 
n/a

 
5,075

 
14,191

 
(9,116
)
 
-64
 %
Other expenses
 
(811
)
 
5,157

 
(5,968
)
 
n/a

 
5,168

 
8,100

 
(2,932
)
 
-36
 %
Total other expenses
 
153,602

 
140,615

 
12,987

 
9
 %
 
458,658

 
429,315

 
29,343

 
7
 %
Income (loss) from continuing operations
before income taxes and income (loss) from unconsolidated entities
 
112,244

 
84,485

 
27,759

 
33
 %
 
271,919

 
224,203

 
47,716

 
21
 %
Income tax benefit (expense)
 
211

 
(1,519
)
 
1,730

 
n/a

 
(2,244
)
 
9,133

 
(11,377
)
 
n/a

Income (loss) from unconsolidated entities
 
(6,705
)
 
(2,886
)
 
(3,819
)
 
132
 %
 
(21,389
)
 
(40,527
)
 
19,138

 
-47
 %
Income from continuing operations
 
105,750

 
80,080

 
25,670

 
32
 %
 
248,286

 
192,809

 
55,477

 
29
 %
Gain (loss) on real estate dispositions, net
 
(1
)
 
(197
)
 
196

 
-99
 %
 
3

 
12,814

 
(12,811
)
 
-100
 %
Net income (loss)
 
105,749

 
79,883

 
25,866

 
32
 %
 
248,289

 
205,623

 
42,666

 
21
 %
Less: Net income (loss) attributable to
noncontrolling interests
 
405

 
1,008

 
(603
)
 
-60
 %
 
(1,259
)
 
1,199

 
(2,458
)
 
n/a

Net income (loss) attributable to
common stockholders
 
$
105,344

 
$
78,875

 
$
26,469

 
34
 %
 
$
249,548

 
$
204,424

 
$
45,124

 
22
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) See Non-GAAP Financial Measures.
 
 
 
 
 
 
 
 
 
Fluctuations in revenues and property operating expenses are primarily a result of acquisitions, segment transitions and the movement of U.S. and foreign currency exchange rates. The fluctuations in depreciation and amortization are due to acquisitions and variations in amortization of short-lived intangible assets. To the extent that we acquire or dispose of additional properties in the future, these amounts will change accordingly. 
During the nine months ended September 30, 2018 and 2017, we recorded impairment charges on certain held for sale properties as the carrying value exceeded the estimated fair value less costs to sell.  Changes in the gain/loss on sale of properties are related to the volume of property sales and sales prices. Transaction costs related to asset acquisitions are capitalized as a component of purchase price. The decrease in other expenses is primarily due to noncapitalizable transactions costs from acquisitions. 
During the nine months ended September 30, 2018, we completed two seniors housing operating construction project representing $86,931,000 or $459,952 per unit. The following is a summary of our seniors housing operating construction projects, excluding expansions, pending as of September 30, 2018 (dollars in thousands):
Location
 
Units
 
Commitment
 
Balance
 
Est. Completion
Wandsworth, UK
 
98

 
$
76,947

 
$
38,759

 
1Q20
 
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):

38

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

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
 
 
 
Wtd. Avg.
 
 
 
Wtd. Avg.
 
 
 
Wtd. Avg.
 
 
 
Wtd. Avg.
 
 
Amount
 
Interest Rate
 
Amount
 
Interest Rate
 
Amount
 
Interest Rate
 
Amount
 
Interest Rate
Beginning balance
 
$
1,909,415

 
3.73
%
 
$
2,040,985

 
3.56
%
 
$
1,988,700

 
3.66
%
 
$
2,463,249

 
3.94
%
Debt transferred
 
35,830

 
3.84
%
 

 
0.00
%
 
35,830

 
3.84
%
 

 
0.00
%
Debt issued
 

 
0.00
%
 
15,659

 
3.46
%
 
44,606

 
3.38
%
 
177,459

 
2.60
%
Debt assumed
 

 
0.00
%
 

 
0.00
%
 
85,192

 
4.38
%
 

 
0.00
%
Debt extinguished
 

 
0.00
%
 
(15,449
)
 
2.88
%
 
(131,175
)
 
4.85
%
 
(610,403
)
 
4.92
%
Principal payments
 
(11,908
)
 
3.64
%
 
(11,857
)
 
3.57
%
 
(35,910
)
 
3.58
%
 
(35,008
)
 
3.63
%
Foreign currency
 
18,204

 
3.33
%
 
39,696

 
3.18
%
 
(35,702
)
 
3.54
%
 
73,737

 
3.26
%
Ending balance
 
$
1,951,541

 
3.76
%
 
$
2,069,034

 
3.63
%
 
$
1,951,541

 
3.76
%
 
$
2,069,034

 
3.63
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Monthly averages
 
$
1,934,652

 
3.74
%
 
$
2,065,572

 
3.61
%
 
$
1,935,752

 
3.70
%
 
$
2,082,662

 
3.66
%
 
     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 income tax expense adjustments during the nine month period ended September 30, 2017. During the nine months ended September 30, 2017, we recognized a $7,916,000 deferred tax benefit arising from the basis difference generated by the aforementioned unconsolidated entities' adjustments.
Outpatient Medical
The following is a summary of our NOI and SSNOI for the outpatient medical segment (dollars in thousands):
 
 
Three Months Ended
 
Change
 
Nine Months Ended
 
Change
 
 
September 30,
 
September 30,
 
 
 
 
 
September 30,
 
September 30,
 
 
 
 
 
 
2018
 
2017
 
$
 
%
 
2018
 
2017
 
$
 
%
NOI
 
$
93,997

 
$
96,772

 
$
(2,775
)
 
-3
 %
 
$
279,039

 
$
285,675

 
$
(6,636
)
 
-2
 %
Non SSNOI on same store properties
 
(1,061
)
 
(1,451
)
 
390

 
-27
 %
 
(2,841
)
 
(5,594
)
 
2,753

 
-49
 %
NOI attributable to non same store properties(1)
 
(6,902
)
 
(13,997
)
 
7,095

 
-51
 %
 
(18,374
)
 
(37,308
)
 
18,934

 
-51
 %
SSNOI(2)
 
$
86,034

 
$
81,324

 
$
4,710

 
6
 %
 
$
257,824

 
$
242,773

 
$
15,051

 
6
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Change is primarily due to acquisitions of 19 properties and the conversion of 11 construction projects into revenue-generating properties subsequent to January 1, 2017.
(2) Relates to 219 same store properties.
The following is a summary of our results of operations for the outpatient medical segment (dollars in thousands):

39

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

 
 
Three Months Ended
 
Change
 
Nine Months Ended
 
Change
 
 
September 30,
 
September 30,
 
 
 
 
 
September 30,
 
September 30,
 
 
 
 
 
 
2018
 
2017
 
$
 
%
 
2018
 
2017
 
$
 
%
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental income
 
$
139,848

 
$
141,325

 
$
(1,477
)
 
-1
 %
 
$
412,026

 
$
418,886

 
$
(6,860
)
 
-2
 %
Interest income
 
85

 

 
85

 
n/a

 
140

 

 
140

 
n/a

Other income
 
136

 
667

 
(531
)
 
-80
 %
 
401

 
2,497

 
(2,096
)
 
-84
 %
Total revenues
 
140,069

 
141,992

 
(1,923
)
 
-1
 %
 
412,567

 
421,383

 
(8,816
)
 
-2
 %
Property operating expenses
 
46,072

 
45,220

 
852

 
2
 %
 
133,528

 
135,708

 
(2,180
)
 
-2
 %
NOI(1)
 
93,997

 
96,772

 
(2,775
)
 
-3
 %
 
279,039

 
285,675

 
(6,636
)
 
-2
 %
Other expenses:
 
 
 
 
 
 

 
 

 
 
 
 
 
 
 
 

Interest expense
 
1,643

 
2,929

 
(1,286
)
 
-44
 %
 
4,975

 
7,342

 
(2,367
)
 
-32
 %
Depreciation and amortization
 
46,234

 
48,158

 
(1,924
)
 
-4
 %
 
138,821

 
144,567

 
(5,746
)
 
-4
 %
Impairment of assets
 

 

 

 
n/a

 

 
5,625

 
(5,625
)
 
-100
 %
Loss (gain) on extinguishment of debt, net
 

 

 

 
n/a

 
11,928

 
4,373

 
7,555

 
173
 %
Other expenses
 
1,055

 
530

 
525

 
99
 %
 
3,748

 
2,201

 
1,547

 
70
 %
Total other expenses
 
48,932

 
51,617

 
(2,685
)
 
-5
 %
 
159,472

 
164,108

 
(4,636
)
 
-3
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
before income taxes and income (loss) from unconsolidated entities

 
45,065

 
45,155

 
(90
)
 
 %
 
119,567

 
121,567

 
(2,000
)
 
-2
 %
Income tax (expense) benefit
 
239

 
(366
)
 
605

 
n/a

 
(567
)
 
(655
)
 
88

 
-13
 %
Income from unconsolidated entities
 
1,672

 
816

 
856

 
105
 %
 
4,293

 
1,868

 
2,425

 
130
 %
Income from continuing operations
 
46,976

 
45,605

 
1,371

 
3
 %
 
123,293

 
122,780

 
513

 
 %
Gain (loss) on real estate dispositions, net
 
(58
)
 
2,004

 
(2,062
)
 
n/a

 
214,721

 
2,004

 
212,717

 
10,615
 %
Net income (loss)
 
46,918

 
47,609

 
(691
)
 
-1
 %
 
338,014

 
124,784

 
213,230

 
171
 %
Less: Net income (loss) attributable to
noncontrolling interests
 
848

 
1,032

 
(184
)
 
-18
 %
 
4,669

 
3,424

 
1,245

 
36
 %
Net income (loss) attributable to
common stockholders
 
$
46,070

 
$
46,577

 
$
(507
)
 
-1
 %
 
$
333,345

 
$
121,360

 
$
211,985

 
175
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) See Non-GAAP Financial Measures.
 
 
 
 
 
 
 
 
 
The decrease in rental income is primarily attributable to dispositions partially offset by 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 rental rates, resulting in an increase or decrease in rental income.  For the three months ended September 30, 2018, our consolidated outpatient medical portfolio signed 105,716 square feet of new leases and 190,465 square feet of renewals.  The weighted-average term of these leases was six years, with a rate of $36.76 per square foot and tenant improvement and lease commission costs of $28.38 per square foot. Substantially all of these leases contain an annual fixed or contingent escalation rent structure ranging from 1.9% to 4.0%.  
The fluctuation in property operating expenses is primarily attributable to dispositions partially offset by acquisitions and construction conversions of new outpatient medical facilities for which we incur certain property operating expenses.  The fluctuations in depreciation and amortization are primarily due to dispositions and variations in amortization of short-lived intangible assets. To the extent that we acquire or dispose of additional properties in the future, these amounts will change accordingly. During the nine months ended September 30, 2017, we recorded impairment charges related to certain held for sale properties as the carrying values exceeded the estimated fair values less costs to sell. Changes in the gain/loss on sale of properties are related to the volume of property sales and sales prices.  
During the nine months ended September 30, 2018, we completed one outpatient medical construction project representing $11,358,000 or $296 per square foot. The following is a summary of the outpatient medical construction projects, excluding expansions, pending as of September 30, 2018 (dollars in thousands):

40

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

Location
 
Square Feet
 
Commitment
 
Balance
 
Est. Completion
Brooklyn, NY
 
140,955

 
$
105,177

 
$
54,454

 
3Q19
Houston, TX
 
73,500

 
23,455

 
3,399

 
4Q19
Total
 
214,455

 
$
128,632

 
$
57,853

 
 
 
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 primarily attributable to the prepayment penalties paid on certain extinguishments in the first quarter of 2018.  The following is a summary of our outpatient medical secured debt principal activity (dollars in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
 
 
 
Wtd. Ave
 
 
 
Wtd. Ave
 
 
 
Wtd. Ave
 
 
 
Wtd. Ave
 
 
Amount
 
Interest Rate
 
Amount
 
Interest Rate
 
Amount
 
Interest Rate
 
Amount
 
Interest Rate
Beginning balance
 
$
217,007

 
4.35
%
 
$
284,918

 
4.62
%
 
$
279,951

 
4.72
%
 
$
404,079

 
4.85
%
Debt assumed
 
14,360

 
3.80
%
 

 
0.00
%
 
14,360

 
3.80
%
 
23,094

 
6.67
%
Debt extinguished
 

 
0.00
%
 

 
0.00
%
 
(61,291
)
 
7.43
%
 
(137,416
)
 
5.99
%
Principal payments
 
(702
)
 
5.90
%
 
(2,000
)
 
6.63
%
 
(2,355
)
 
6.02
%
 
(6,839
)
 
6.76
%
Ending balance
 
$
230,665

 
4.19
%
 
$
282,918

 
4.69
%
 
$
230,665

 
4.19
%
 
$
282,918

 
4.69
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Monthly averages
 
$
220,246

 
4.22
%
 
$
283,885

 
4.68
%
 
$
224,943

 
4.26
%
 
$
298,933

 
4.61
%
 
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.
Non-Segment/Corporate
The following is a summary of our results of operations for the non-segment/corporate activities (dollars in thousands):  
 
 
Three Months Ended
 
Change
 
Nine Months Ended
 
Change
 
 
September 30,
 
September 30,
 
 
 
 
 
September 30,
 
September 30,
 
 
 
 
 
 
2018
 
2017
 
$
 
%
 
2018
 
2017
 
$
 
%
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other income
 
$
695

 
$
698

 
$
(3
)
 
 %
 
$
1,561

 
$
1,171

 
$
390

 
33
 %
Expenses:
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 

Interest expense
 
115,570

 
99,658

 
15,912

 
16
 %
 
315,281

 
290,829

 
24,452

 
8
 %
General and administrative
 
28,746

 
29,913

 
(1,167
)
 
-4
 %
 
95,282

 
93,643

 
1,639

 
2
 %
Loss (gain) on extinguishment of debt, net
 
4,038

 

 
4,038

 
n/a

 
4,038

 

 
4,038

 
n/a

Other expenses
 
1,306

 
4,672

 
(3,366
)
 
-72
 %
 
4,327

 
10,882

 
(6,555
)
 
-60
 %
Total expenses
 
149,660

 
134,243

 
15,417

 
11
 %
 
418,928

 
395,354

 
23,574

 
6
 %
Loss from continuing operations before
 income taxes
 
(148,965
)
 
(133,545
)
 
(15,420
)
 
12
 %
 
(417,367
)
 
(394,183
)
 
(23,184
)
 
6
 %
Income tax (expense) benefit
 
(3,307
)
 
2,032

 
(5,339
)
 
n/a

 
(3,651
)
 
(873
)
 
(2,778
)
 
318
 %
Loss from continuing operations
 
(152,272
)
 
(131,513
)
 
(20,759
)
 
16
 %
 
(421,018
)
 
(395,056
)
 
(25,962
)
 
7
 %
Less: Preferred stock dividends
 
11,676

 
11,676

 

 
 %
 
35,028

 
37,734

 
(2,706
)
 
-7
 %
Less: Preferred stock redemption charge
 

 

 

 
n/a

 

 
9,769

 
(9,769
)
 
-100
 %
Net loss attributable to common stockholders
 
$
(163,948
)
 
$
(143,189
)
 
$
(20,759
)
 
14
 %
 
$
(456,046
)
 
$
(442,559
)
 
$
(13,487
)
 
3
 %
 
The following is a summary of our non-segment/corporate interest expense (dollars in thousands):

41

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

 
 
Three Months Ended
 
Change
 
Nine Months Ended
 
Change
 
 
September 30,
 
September 30,
 
 
 
 
 
September 30,
 
September 30,
 
 
 
 
 
 
2018
 
2017
 
$
 
%
 
2018
 
2017
 
$
 
%
Senior unsecured notes
 
$
99,445

 
$
92,296

 
$
7,149

 
8
 %
 
$
282,847

 
$
267,444

 
$
15,403

 
6
 %
Secured debt
 
26

 
49

 
(23
)
 
-47
 %
 
96

 
164

 
(68
)
 
-41
 %
Primary unsecured credit facility
 
12,662

 
3,906

 
8,756

 
224
 %
 
22,442

 
13,179

 
9,263

 
70
 %
Loan expense
 
3,437

 
3,407

 
30

 
1
 %
 
9,896

 
10,042

 
(146
)
 
-1
 %
Totals
 
$
115,570

 
$
99,658

 
$
15,912

 
16
 %
 
$
315,281

 
$
290,829

 
$
24,452

 
8
 %
 
The change in interest expense on senior unsecured notes is primarily due to the net effect of issuances and extinguishments, as well as the movement of foreign exchange rates and related hedge activity. Loan expense represents the amortization of deferred loan costs incurred in connection with the issuance and amendments of debt. Loan expense changes are due to amortization of charges for costs incurred in connection with senior unsecured note issuances.  The change in interest expense on the primary unsecured credit facility is due primarily to the net effect and timing of draws, paydowns and variable interest rate changes.  Please refer to Note 9 of our unaudited consolidated financial statements for additional information regarding our primary unsecured credit facility. 
General and administrative expenses as a percentage of consolidated revenues for the three months ended September 30, 2018 and 2017 were 2.33% and 2.74%, respectively. Other expenses primarily represent severance-related costs associated with the departure of certain executive officers and key employees.
The decrease in preferred dividends and the preferred stock redemption charge are due to the redemption of our 6.5% Series J preferred stock during 2017.
Other
Non-GAAP Financial Measures
We believe that 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, NOI, SSNOI, EBITDA and Adjusted EBITDA to be useful supplemental measures of our operating performance. Historical cost accounting for real estate assets in accordance with U.S. GAAP implicitly assumes that the value of real estate assets diminishes predictably over time as evidenced by the provision for depreciation. However, since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient. In response, the National Association of Real Estate Investment Trusts (“NAREIT”) created funds from operations attributable to common stockholders (“FFO”) as a supplemental measure of operating performance for REITs that excludes historical cost depreciation from net income. FFO, as defined by NAREIT, means 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.
Consolidated net operating income (“NOI”) is used to evaluate the operating performance of our properties. We define NOI as total revenues, including tenant reimbursements, less property operating expenses. Property operating expenses represent costs associated with managing, maintaining and servicing tenants for our seniors housing operating and medical facility properties.  These expenses include, but are not limited to, property-related payroll and benefits, property management fees paid to operators, marketing, housekeeping, food service, maintenance, utilities, property taxes and insurance.  General and administrative expenses represent costs unrelated to property operations.  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, 2017.  Land parcels, loans, and sub-leases as well as any properties acquired, developed/redeveloped, transitioned, sold or classified as held for sale during that period are excluded from the same store amounts.  We believe NOI and SSNOI provide investors relevant and useful information because they measure the operating performance of our properties at the property level on an unleveraged basis. We use NOI and SSNOI to make decisions about resource allocations and to assess the property level performance of our properties.
EBITDA stands for earnings (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.

42

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

Covenants in our senior unsecured notes contain 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. 
The following tables reflect the reconciliations of NOI and SSNOI 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,
 
June 30,
 
September 30,
NOI Reconciliations:
 
2017
 
2017
 
2017
 
2017
 
2018
 
2018
 
2018
Net income (loss)
 
$
337,610

 
$
203,441

 
$
89,299

 
$
(89,743
)
 
$
453,555

 
$
167,273

 
$
84,226

Loss (gain) on real estate dispositions, net
 
(244,092
)
 
(42,155
)
 
(1,622
)
 
(56,381
)
 
(338,184
)
 
(10,755
)
 
(24,723
)
Loss (income) from unconsolidated entities
 
23,106

 
3,978

 
(3,408
)
 
59,449

 
2,429

 
(1,249
)
 
(344
)
Income tax expense (benefit)
 
2,245

 
(8,448
)
 
669

 
25,663

 
1,588

 
3,841

 
1,741

Other expenses
 
11,675

 
6,339

 
99,595

 
60,167

 
3,712

 
10,058

 
88,626

Impairment of assets
 
11,031

 
13,631

 

 
99,821

 
28,185

 
4,632

 
6,740

Provision for loan losses
 

 

 

 
62,966

 

 

 

Loss (gain) on extinguishment of debt, net
 
31,356

 
5,515

 

 
371

 
11,707

 
299

 
4,038

Loss (gain) on derivatives and financial instruments, net
 
1,224

 
736

 
324

 

 
(7,173
)
 
(7,460
)
 
8,991

General and administrative expenses
 
31,101

 
32,632

 
29,913

 
28,365

 
33,705

 
32,831

 
28,746

Depreciation and amortization
 
228,276

 
224,847

 
230,138

 
238,458

 
228,201

 
236,275

 
243,149

Interest expense
 
118,597

 
116,231

 
122,578

 
127,217

 
122,775

 
121,416

 
138,032

Consolidated net operating income (NOI)
 
$
552,129

 
$
556,747

 
$
567,486

 
$
556,353

 
$
540,500

 
$
557,161

 
$
579,222

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NOI by segment:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
Triple-net
 
$
249,735

 
$
241,347

 
$
244,916

 
$
231,083

 
$
222,738

 
$
224,284

 
$
218,684

Seniors housing operating
 
209,442

 
218,978

 
225,100

 
226,509

 
225,226

 
239,505

 
265,846

Outpatient medical
 
92,719

 
96,183

 
96,772

 
98,393

 
92,168

 
92,874

 
93,997

Non-segment/corporate
 
233

 
239

 
698

 
368

 
368

 
498

 
695

Total NOI
 
$
552,129

 
$
556,747

 
$
567,486

 
$
556,353

 
$
540,500

 
$
557,161

 
$
579,222

 
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2017
 
2018
NOI Reconciliations:
 

 
 
Net income (loss)
 
$
630,356

 
$
705,054

Loss (gain) on real estate dispositions, net
 
(287,869
)
 
(373,662
)
Loss (income) from unconsolidated entities
 
23,676

 
836

Income tax expense (benefit)
 
(5,535
)
 
7,170

Other expenses
 
117,608

 
102,396

Impairment of assets
 
24,662

 
39,557

Loss (gain) on extinguishment of debt, net
 
36,870

 
16,044

Loss (gain) on derivatives and financial instruments, net
 
2,284

 
(5,642
)
General and administrative expenses
 
93,643

 
95,282

Depreciation and amortization
 
683,262

 
707,625

Interest expense
 
357,405

 
382,223

Consolidated net operating income (NOI)
 
$
1,676,362

 
$
1,676,883

 
 
 
 
 
NOI by segment:
 
 
 
 
Triple-net
 
$
735,998

 
$
665,706

Seniors housing operating
 
653,518

 
730,577

Outpatient medical
 
285,675

 
279,039

Non-segment/corporate
 
1,171

 
1,561

Total NOI
 
$
1,676,362

 
$
1,676,883


43

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

 
 
 
 
Three Months Ended
 
 
 
 
March 31,
 
June 30,
 
September 30,
 
December 31,
 
March 31,
 
June 30,
 
September 30,
SSNOI Reconciliations:
 
 
 
2017
 
2017
 
2017
 
2017
 
2018
 
2018
 
2018
NOI:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Triple-net
 
 
 
$
249,735

 
$
241,347

 
$
244,916

 
$
231,083

 
$
222,738

 
$
224,284

 
$
218,684

Seniors housing operating
 
 
 
209,442

 
218,978

 
225,100

 
226,509

 
225,226

 
239,505

 
265,846

Outpatient medical
 
 
 
92,719

 
96,183

 
96,772

 
98,393

 
92,168

 
92,874

 
93,997

Total
 
 
 
551,896

 
556,508

 
566,788

 
555,985

 
540,132

 
556,663

 
578,527

Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Triple-net:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non SSNOI on same store properties
 
(8,152
)
 
(7,305
)
 
(7,232
)
 
(6,821
)
 
(7,959
)
 
(2,382
)
 
(3,734
)
NOI attributable to non same store properties
 
(103,340
)
 
(94,330
)
 
(95,278
)
 
(83,614
)
 
(77,078
)
 
(79,771
)
 
(76,077
)
Subtotal
 
 
 
(111,492
)
 
(101,635
)
 
(102,510
)
 
(90,435
)
 
(85,037
)
 
(82,153
)
 
(79,811
)
Seniors housing operating:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non SSNOI on same store properties
 
316

 
558

 
288

 
424

 
312

 
311

 
304

NOI attributable to non same store properties
 
(7,218
)
 
(7,573
)
 
(9,311
)
 
(14,913
)
 
(17,953
)
 
(28,920
)
 
(57,534
)
Subtotal
 
 
 
(6,902
)
 
(7,015
)
 
(9,023
)
 
(14,489
)
 
(17,641
)
 
(28,609
)
 
(57,230
)
Outpatient medical:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non SSNOI on same store properties
 
(1,828
)
 
(2,315
)
 
(1,451
)
 
(1,743
)
 
(886
)
 
(894
)
 
(1,061
)
NOI attributable to non same store properties
 
(10,346
)
 
(12,965
)
 
(13,997
)
 
(14,564
)
 
(5,168
)
 
(6,304
)
 
(6,902
)
Subtotal
 
 
 
(12,174
)
 
(15,280
)
 
(15,448
)
 
(16,307
)
 
(6,054
)
 
(7,198
)
 
(7,963
)
SSNOI:
 
Properties
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Triple-net
 
410

 
138,243

 
139,712

 
142,406

 
140,648

 
137,701

 
142,131

 
138,873

Seniors housing operating
 
399

 
202,540

 
211,963

 
216,077

 
212,020

 
207,585

 
210,896

 
208,616

Outpatient medical
 
219

 
80,545

 
80,903

 
81,324

 
82,086

 
86,114

 
85,676

 
86,034

Total
 
1,028

 
$
421,328


$
432,578


$
439,807


$
434,754


$
431,400


$
438,703

 
$
433,523

SSNOI Property Reconciliation:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total properties
 
1,529

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisitions
 
(335
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Developments
 
(26
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Held for sale
 
(39
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Transitions/restructurings
 
(93
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other(1)
 
(8
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Same store properties
 
1,028

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Includes seven land parcels and one loan.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
 
 
 
September 30,
 
September 30,
SSNOI Reconciliations:
 
 
 
2017
 
2018
NOI:
 
 
 
 
 
 
Triple-net
 
 
 
$
735,998

 
$
665,706

Seniors housing operating
 
 
 
653,518

 
730,577

Outpatient medical
 
 
 
285,675

 
279,039

Total
 
 
 
1,675,191

 
1,675,322

Adjustments:
 
 
 
 
 
 
Triple-net:
 
 
 
 
 
 
Non SSNOI on same store properties
 
(22,689
)
 
(14,075
)
NOI attributable to non same store properties
 
(292,948
)
 
(232,926
)
Subtotal
 
 
 
(315,637
)
 
(247,001
)
Seniors housing operating:
 
 
 
 
 
 
Non SSNOI on same store properties
 
1,162

 
927

NOI attributable to non same store properties
 
(24,102
)
 
(104,407
)
Subtotal
 
 
 
(22,940
)
 
(103,480
)
Outpatient medical:
 
 
 
 
 
 
Non SSNOI on same store properties
 
(5,594
)
 
(2,841
)
NOI attributable to non same store properties
 
(37,308
)
 
(18,374
)
Subtotal
 
 
 
(42,902
)
 
(21,215
)
SSNOI:
 
Properties
 
 
 
 
Triple-net
 
410

 
420,361

 
418,705

Seniors housing operating
 
399

 
630,578

 
627,097

Outpatient medical
 
219

 
242,773

 
257,824

Total
 
1,028

 
$
1,293,712

 
$
1,303,626


44

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,
 
June 30,
 
September 30,
FFO Reconciliations:
 
2017
 
2017
 
2017
 
2017
 
2018
 
2018
 
2018
NICS
 
$
312,639

 
$
188,429

 
$
74,043

 
$
(111,523
)
 
$
437,671

 
$
154,432

 
$
64,384

Depreciation and amortization
 
228,276

 
224,847

 
230,138

 
238,458

 
228,201

 
236,275

 
243,149

Impairment of assets
 
11,031

 
13,631

 

 
99,821

 
28,185

 
4,632

 
6,740

Loss (gain) on real estate dispositions, net
 
(244,092
)
 
(42,155
)
 
(1,622
)
 
(56,381
)
 
(338,184
)
 
(10,755
)
 
(24,723
)
Noncontrolling interests
 
(18,107
)
 
(16,955
)
 
(16,826
)
 
(8,131
)
 
(16,353
)
 
(17,692
)
 
(17,498
)
Unconsolidated entities
 
16,484

 
16,593

 
9,989

 
16,980

 
13,700

 
11,833

 
13,220

FFO
 
$
306,231

 
$
384,390

 
$
295,722

 
$
179,224

 
$
353,220

 
$
378,725

 
$
285,272

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average common shares outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
362,534

 
366,524

 
369,089

 
370,485

 
371,426

 
371,640

 
373,023

Diluted for NICS purposes
 
364,652

 
368,149

 
370,740

 
370,485

 
373,257

 
373,075

 
374,487

Diluted for FFO purposes
 
364,652

 
368,149

 
370,740

 
372,145

 
373,257

 
373,075

 
374,487

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Per share data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NICS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.86

 
$
0.51

 
$
0.20

 
$
(0.30
)
 
$
1.18

 
$
0.42

 
$
0.17

Diluted
 
0.86

 
0.51

 
0.20

 
(0.30
)
 
1.17

 
0.41

 
0.17

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FFO
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.84

 
$
1.05

 
$
0.80

 
$
0.48

 
$
0.95

 
$
1.02

 
$
0.76

Diluted
 
0.84

 
1.04

 
0.80

 
0.48

 
0.95

 
1.02

 
0.76

 
 
Nine Months Ended
 
 
September 30,
 
September 30,
FFO Reconciliations:
 
2017
 
2018
NICS
 
$
575,118

 
$
656,487

Depreciation and amortization
 
683,262

 
707,625

Impairment of assets
 
24,662

 
39,557

Loss (gain) on real estate dispositions, net
 
(287,869
)
 
(373,662
)
Noncontrolling interests
 
(51,887
)
 
(51,543
)
Unconsolidated entities
 
43,066

 
38,753

FFO
 
$
986,352

 
$
1,017,217

 
 
 
 
 
Average common shares outstanding:
 
 
 
 
Basic
 
366,096

 
372,052

Diluted
 
367,894

 
373,638

 
 
 
 
 
Per share data:
 
 
 
 
NICS
 
 
 
 
Basic
 
$
1.57

 
$
1.76

Diluted
 
1.56

 
1.76

 
 
 
 
 
FFO
 
 
 
 
Basic
 
$
2.69

 
$
2.73

Diluted
 
2.68

 
2.72




45

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

The table below reflects the reconciliation of EBITDA to net income, the most directly comparable U.S. GAAP measure, for the periods presented. Dollars are in thousands.
 
 
Three Months Ended
 
 
March 31,
 
June 30,
 
September 30,
 
December 31,
 
March 31,
 
June 30,
 
September 30,
EBITDA Reconciliations:
 
2017
 
2017
 
2017
 
2017
 
2018
 
2018
 
2018
Net income (loss)
 
$
337,610

 
$
203,441

 
$
89,299

 
$
(89,743
)
 
$
453,555

 
$
167,273

 
$
84,226

Interest expense
 
118,597

 
116,231

 
122,578

 
127,217

 
122,775

 
121,416

 
138,032

Income tax expense (benefit)
 
2,245

 
(8,448
)
 
669

 
25,663

 
1,588

 
3,841

 
1,741

Depreciation and amortization
 
228,276

 
224,847

 
230,138

 
238,458

 
228,201

 
236,275

 
243,149

EBITDA
 
$
686,728

 
$
536,071

 
$
442,684

 
$
301,595

 
$
806,119

 
$
528,805

 
$
467,148

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Coverage Ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
$
118,597

 
$
116,231

 
$
122,578

 
$
127,217

 
$
122,775

 
$
121,416

 
$
138,032

Non-cash interest expense
 
(1,679
)
 
(2,946
)
 
(3,199
)
 
(2,534
)
 
(4,179
)
 
(1,716
)
 
(1,658
)
Capitalized interest
 
4,129

 
3,358

 
2,545

 
3,456

 
2,336

 
2,100

 
1,921

Total interest
 
121,047

 
116,643

 
121,924

 
128,139

 
120,932

 
121,800

 
138,295

EBITDA
 
$
686,728

 
$
536,071

 
$
442,684

 
$
301,595

 
$
806,119

 
$
528,805

 
$
467,148

Interest coverage ratio
 
5.67
x
 
4.60
x
 
3.63
x
 
2.35
x
 
6.67
x
 
4.34
x
 
3.38
x
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed Charge Coverage Ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total interest
 
$
121,047

 
$
116,643

 
$
121,924

 
$
128,139

 
$
120,932

 
$
121,800

 
$
138,295

Secured debt principal payments
 
16,249

 
15,958

 
15,300

 
16,572

 
14,247

 
14,139

 
13,908

Preferred dividends
 
14,379

 
11,680

 
11,676

 
11,676

 
11,676

 
11,676

 
11,676

Total fixed charges
 
151,675

 
144,281

 
148,900

 
156,387

 
146,855

 
147,615

 
163,879

EBITDA
 
$
686,728

 
$
536,071

 
$
442,684

 
$
301,595

 
$
806,119

 
$
528,805

 
$
467,148

Fixed charge coverage ratio
 
4.53
x
 
3.72
x
 
2.97
x
 
1.93
x
 
5.49
x
 
3.58
x
 
2.85
x
 
 
 
Nine Months Ended
 
 
September 30,
 
September 30,
EBITDA Reconciliations:
 
2017
 
2018
Net income (loss)
 
$
630,356

 
$
705,054

Interest expense
 
357,405

 
382,223

Income tax expense (benefit)
 
(5,535
)
 
7,170

Depreciation and amortization
 
683,262

 
707,625

EBITDA
 
$
1,665,488

 
$
1,802,072

 
 
 
 
 
Interest Coverage Ratio:
 
 
 
 
Interest expense
 
$
357,405

 
$
382,223

Non-cash interest expense
 
(7,825
)
 
(7,553
)
Capitalized interest
 
10,033

 
6,357

Total interest
 
359,613

 
381,027

EBITDA
 
$
1,665,488

 
$
1,802,072

Interest coverage ratio
 
4.63
x
 
4.73
x
 
 
 
 
 
Fixed Charge Coverage Ratio:
 
 
 
 
Total interest
 
$
359,613

 
$
381,027

Secured debt principal payments
 
47,507

 
42,294

Preferred dividends
 
37,734

 
35,028

Total fixed charges
 
444,854

 
458,349

EBITDA
 
$
1,665,488

 
$
1,802,072

Fixed charge coverage ratio
 
3.74
x
 
3.93
x



46

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,
 
June 30,
 
September 30,
Reconciliations:
 
2017
 
2017
 
2017
 
2017
 
2018
 
2018
 
2018
Net income
 
$
1,254,208

 
$
1,246,899

 
$
981,458

 
$
540,613

 
$
656,551

 
$
620,384

 
$
615,311

Interest expense
 
506,982

 
490,886

 
483,765

 
484,622

 
488,800

 
493,986

 
509,440

Income tax expense (benefit)
 
(15,158
)
 
(23,093
)
 
(22,119
)
 
20,128

 
19,471

 
31,761

 
32,833

Depreciation and amortization
 
900,822

 
899,100

 
911,180

 
921,720

 
921,645

 
933,072

 
946,083

EBITDA
 
2,646,854

 
2,613,792

 
2,354,284

 
1,967,083

 
2,086,467

 
2,079,203

 
2,103,667

Loss (income) from unconsolidated entities
 
29,643

 
31,662

 
26,505

 
83,125

 
62,448

 
57,221

 
60,285

Transaction costs
 
34,702

 
29,545

 
9,704

 

 

 

 

Stock-based compensation expense(1)
 
25,588

 
23,321

 
24,710

 
19,102

 
25,753

 
26,158

 
25,443

Loss (gain) on extinguishment of debt, net
 
48,593

 
54,074

 
54,074

 
37,241

 
17,593

 
12,377

 
16,415

Loss (gain) on real estate dispositions, net
 
(608,139
)
 
(648,763
)
 
(488,034
)
 
(344,250
)
 
(438,342
)
 
(406,942
)
 
(430,043
)
Impairment of assets
 
33,923

 
47,554

 
37,849

 
124,483

 
141,637

 
132,638

 
139,378

Provision for loan losses
 
10,215

 
10,215

 
10,215

 
62,966

 
62,966

 
62,966

 
62,966

Loss (gain) on derivatives and financial instruments, net
 
(1,225
)
 
(489
)
 
2,351

 
2,284

 
(6,113
)
 
(14,309
)
 
(5,642
)
Other expenses(1)
 
19,396

 
23,997

 
122,211

 
176,395

 
167,524

 
171,243

 
161,655

Additional other income
 
(16,664
)
 
(4,853
)
 
(4,853
)
 

 

 
(10,805
)
 
(10,805
)
Adjusted EBITDA
 
$
2,222,886

 
$
2,180,055

 
$
2,149,016

 
$
2,128,429

 
$
2,119,933

 
$
2,109,750

 
$
2,123,319

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted Fixed Charge Coverage Ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
$
506,982

 
$
490,886

 
$
483,765

 
$
484,622

 
$
488,800

 
$
493,986

 
$
509,440

Capitalized interest
 
18,035

 
17,087

 
14,866

 
13,489

 
11,696

 
10,437

 
9,813

Non-cash interest expense
 
(3,958
)
 
(5,386
)
 
(8,041
)
 
(10,359
)
 
(12,858
)
 
(11,628
)
 
(10,087
)
Total interest
 
521,059

 
502,587

 
490,590

 
487,752

 
487,638

 
492,795

 
509,166

Adjusted EBITDA
 
$
2,222,886

 
$
2,180,055

 
$
2,149,016

 
$
2,128,429

 
$
2,119,933

 
$
2,109,750

 
$
2,123,319

Adjusted interest coverage ratio
 
4.27
x
 
4.34
x
 
4.38
x
 
4.36
x
 
4.35
x
 
4.28
x
 
4.17
x
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total interest
 
$
521,059

 
$
502,587

 
$
490,590

 
$
487,752

 
$
487,638

 
$
492,795

 
$
509,166

Secured debt principal payments
 
72,073

 
68,935

 
66,084

 
64,078

 
62,077

 
60,258

 
58,866

Preferred dividends
 
63,434

 
58,762

 
54,086

 
49,410

 
46,707

 
46,704

 
46,704

Total fixed charges
 
656,566

 
630,284

 
610,760

 
601,240

 
596,422

 
599,757

 
614,736

Adjusted EBITDA
 
$
2,222,886

 
$
2,180,055

 
$
2,149,016

 
$
2,128,429

 
$
2,119,933

 
$
2,109,750

 
$
2,123,319

Adjusted fixed charge coverage ratio
 
3.39
x
 
3.46
x
 
3.52
x
 
3.54
x
 
3.55
x
 
3.52
x
 
3.45
x
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Certain severance-related costs are included in stock-based compensation and excluded from other expenses.
 
 
 
 
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. Amounts are in thousands, except share price. 

47

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,
 
June 30,
 
September 30,
 
 
2017
 
2017
 
2017
 
2017
 
2018
 
2018
 
2018
Book capitalization:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Borrowings under primary unsecured
credit facility
 
$
522,000

 
$
385,000

 
$
420,000

 
$
719,000

 
$
865,000

 
$
540,000

 
$
1,312,000

Long-term debt obligations(1)
 
10,932,185

 
10,994,946

 
11,101,592

 
11,012,936

 
10,484,840

 
10,895,559

 
12,192,060

Cash & cash equivalents(2)
 
(380,360
)
 
(442,284
)
 
(250,776
)
 
(249,620
)
 
(202,824
)
 
(215,120
)
 
(191,199
)
Total net debt
 
11,073,825

 
10,937,662

 
11,270,816

 
11,482,316

 
11,147,016

 
11,220,439

 
13,312,861

Total equity and noncontrolling interests(3)
 
15,495,681

 
15,702,399

 
15,631,412

 
15,300,646

 
15,448,201

 
15,198,644

 
15,670,065

Book capitalization
 
$
26,569,506

 
$
26,640,061

 
$
26,902,228

 
$
26,782,962

 
$
26,595,217

 
$
26,419,083

 
$
28,982,926

Net debt to book capitalization ratio
 
42
%
 
41
%
 
42
%
 
43
%
 
42
%
 
42
%
 
46
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Undepreciated book capitalization:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total net debt
 
$
11,073,825

 
$
10,937,662

 
$
11,270,816

 
$
11,482,316

 
$
11,147,016

 
$
11,220,439

 
$
13,312,861

Accumulated depreciation and amortization
 
4,335,160

 
4,568,408

 
4,826,418

 
4,838,370

 
4,990,780

 
5,113,928

 
5,394,274

Total equity and noncontrolling interests(3)
 
15,495,681

 
15,702,399

 
15,631,412

 
15,300,646

 
15,448,201

 
15,198,644

 
15,670,065

Undepreciated book capitalization
 
$
30,904,666

 
$
31,208,469

 
$
31,728,646

 
$
31,621,332

 
$
31,585,997

 
$
31,533,011

 
$
34,377,200

Net debt to undepreciated book
capitalization ratio
 
36
%
 
35
%
 
36
%
 
36
%
 
35
%
 
36
%
 
39
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Market capitalization:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common shares outstanding
 
364,564

 
368,878

 
370,342

 
371,732

 
371,971

 
372,030

 
375,577

Period end share price
 
$
70.82

 
$
74.85

 
$
70.28

 
$
63.77

 
$
54.43

 
$
62.69

 
$
64.32

Common equity market capitalization
 
$
25,818,422

 
$
27,610,518

 
$
26,027,636

 
$
23,705,350

 
$
20,246,382

 
$
23,322,561

 
$
24,157,113

Total net debt
 
11,073,825

 
10,937,662

 
11,270,816

 
11,482,316

 
11,147,016

 
11,220,439

 
13,312,861

Noncontrolling interests(3)
 
859,478

 
873,567

 
901,487

 
877,499

 
889,766

 
856,721

 
1,362,380

Preferred stock
 
718,750

 
718,750

 
718,503

 
718,503

 
718,498

 
718,498

 
718,498

Enterprise value
 
$
38,470,475

 
$
40,140,497

 
$
38,918,442

 
$
36,783,668

 
$
33,001,662

 
$
36,118,219


$
39,550,852

Net debt to market capitalization ratio
 
29
%
 
27
%
 
29
%
 
31
%
 
34
%
 
31
%
 
34
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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.
(3) Includes all noncontrolling interests (redeemable and permanent) as reflected on our consolidated balance sheet.
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, 2017 for further information regarding significant accounting policies that impact us.  There have been no material changes to these policies in 2018.

48

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, 2017, 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.

49


Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various market risks, including the potential loss arising from adverse changes in interest rates and foreign currency exchange rates. We seek to mitigate the underlying foreign currency exposures with gains and losses on derivative contracts hedging these exposures.  We seek to mitigate the effects of fluctuations in interest rates by matching the terms of new investments with new long-term fixed rate borrowings to the extent possible. We may or may not elect to use financial derivative instruments to hedge interest rate exposure. These decisions are principally based on our policy to match our variable rate investments with comparable borrowings, but are also based on the general trend in interest rates at the applicable dates and our perception of the future volatility of interest rates. This section is presented to provide a discussion of the risks associated with potential fluctuations in interest rates and foreign currency exchange rates.
We historically borrow on our primary unsecured credit facility to acquire, construct or make loans relating to health care and seniors housing properties. Then, as market conditions dictate, we will issue equity or long-term fixed rate debt to repay the borrowings under our primary unsecured credit facility.  We are subject to risks associated with debt financing, including the risk that existing indebtedness may not be refinanced or that the terms of refinancing may not be as favorable as the terms of current indebtedness. The majority of our borrowings were completed under indentures or contractual agreements that limit the amount of indebtedness we may incur. Accordingly, in the event that we are unable to raise additional equity or borrow money because of these limitations, our ability to acquire additional properties may be limited.
A change in interest rates will not affect the interest expense associated with our fixed rate debt. Interest rate changes, however, will affect the fair value of our fixed rate debt. Changes in the interest rate environment upon maturity of this fixed rate debt could have an effect on our future cash flows and earnings, depending on whether the debt is replaced with other fixed rate debt, variable rate debt or equity or repaid by the sale of assets. To illustrate the impact of changes in the interest rate markets, we performed a sensitivity analysis on our fixed rate debt instruments whereby we modeled the change in net present values arising from a hypothetical 1% increase in interest rates to determine the instruments’ change in fair value. The following table summarizes the analysis performed as of the dates indicated (in thousands):
 
 
September 30, 2018
 
December 31, 2017
 
 
Principal
 
Change in
 
Principal
 
Change in
 
 
balance
 
fair value
 
balance
 
fair value
Senior unsecured notes
 
$
9,052,727

 
$
(570,754
)
 
$
7,710,219

 
$
(500,951
)
Secured debt
 
1,623,202

 
(54,782
)
 
1,749,958

 
(63,492
)
Totals
 
$
10,675,929

 
$
(625,536
)
 
$
9,460,177

 
$
(564,443
)
Our variable rate debt, including our primary unsecured credit facility, is reflected at fair value. At September 30, 2018, we had $2,869,522,000 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 $28,695,000.  At December 31, 2017, we had $2,294,678,000 outstanding under our variable rate debt.  Assuming no changes in outstanding balances, a 1% increase in interest rates would have resulted in increased annual interest expense of $22,947,000. 
     We are subject to currency fluctuations that may, from time to time, affect our financial condition and results of operations. Increases or decreases in the value of the Canadian Dollar or Pounds Sterling relative to the U.S. Dollar impact the amount of net income we earn from our investments in Canada and the United Kingdom. Based solely on our results for the three months ended September 30, 2018, 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 $13,000,000.  We will continue to mitigate these underlying foreign currency exposures with non-U.S. denominated borrowings and gains and losses on derivative contracts.  If we increase our international presence through investments in, or acquisitions or development of, seniors housing and health care properties outside the U.S., we may also decide to transact additional business or borrow funds in currencies other than U.S. Dollars, Canadian Dollars or Pounds Sterling. To illustrate the impact of changes in foreign currency markets, we performed a sensitivity analysis on our derivative portfolio whereby we modeled the change in net present values arising from a hypothetical 1% increase in foreign currency exchange rates to determine the instruments’ change in fair value.  The following table summarizes the results of the analysis performed (dollars in thousands):
 
 
September 30, 2018
 
December 31, 2017
 
 
Carrying
 
Change in
 
Carrying
 
Change in
 
 
Value
 
fair value
 
Value
 
fair value
Foreign currency forward contracts
 
$
43,664

 
$
16,681

 
$
23,238

 
$
12,929

Debt designated as hedges
 
1,602,727

 
16,027

 
1,620,273

 
16,203

Totals
 
$
1,646,391

 
$
32,708

 
$
1,643,511

 
$
29,132


50


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.  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.  Further, 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. 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.
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, 2017.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  
Issuer Purchases of Equity Securities
Period
 
Total Number of Shares Purchased(1)
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2)
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 1, 2018 through July 31, 2018
 

 
$

 
 
 
 
August 1, 2018 through August 31, 2018
 
1,084

 
62.68

 
 
 
 
September 1, 2018 through September 30, 2018
 
160

 
65.49

 
 
 
 
Totals
 
1,244

 
$
63.04

 
 
 
 
 
 
 
 
 
 
 
 
 
(1) During the three months ended September 30, 2018, 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.

51


Item 6. Exhibits
10.1
 
10.2
 
12
 
31.1
 
31.2
 
32.1
 
32.2
 
101.INS
 
XBRL Instance Document**
101.SCH
 
XBRL Taxonomy Extension Schema Document**
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document**
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document**
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document**
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document**
 
 
 
* Management contract or compensatory plan or arrangement
** Attached as Exhibit 101 to this Quarterly Report on Form 10-Q are the following materials, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets at September 30, 2018 and December 31, 2017, (ii) the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017, (iii) the Consolidated Statements of Equity for the nine months ended September 30, 2018 and 2017, (iv) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 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:

October 30, 2018
By:  
/s/ THOMAS J. DEROSA  
 
 
 
Thomas J. DeRosa, 
 
 
 
Chief Executive Officer
 (Principal Executive Officer) 
 
 
 
 
 
 
Date:
October 30, 2018
By:  
/s/ JOHN A. GOODEY  
 
 
 
John A. Goodey, 
 
 
 
Executive Vice President & Chief Financial Officer
 (Principal Financial Officer) 
 
 
 
 
 
 
Date:
October 30, 2018
By:  
/s/ JOSHUA T. FIEWEGER 
 
 
 
Joshua T. Fieweger, 
 
 
 
Vice President & Controller
 (Principal Accounting Officer) 
 

52