Annual Statements Open main menu

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

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

 

 

 

 

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

For the quarterly period ended March 31, 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 or organization)

 

(I.R.S. Employer

 Identification No.)

 

 

 

4500 Dorr Street, Toledo, Ohio

 

43615

 

 

 

(Address of principal executive offices)

 

(Zip Code)

(419) 247-2800

(Registrant’s telephone number, including area code)  

Not Applicable

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

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

  

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

  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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         Accelerated filer         Non-accelerated filer         Smaller reporting company         Emerging growth company

                                                                                        (Do not check if a smaller reporting company)

 

 

 

 

 

 

 

AAAAAADFASDF

 

 

 

 

 

 

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 o No  ☑

As of April 27, 2018, the registrant had 371,981,518 shares of common stock outstanding.  

 

 

 


TABLE OF CONTENTS

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements (Unaudited)

 

 

 

Consolidated Balance Sheets — March 31, 2018 and December 31, 2017

3

 

 

Consolidated Statements of Comprehensive Income — Three months ended March 31, 2018 and 2017

4

 

 

Consolidated Statements of Equity — Three months ended March 31, 2018 and 2017

6

 

 

Consolidated Statements of Cash Flows — Three months ended March 31, 2018 and 2017

7

 

 

Notes to Unaudited Consolidated Financial Statements

8

 

 

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

27

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

49

 

 

Item 4. Controls and Procedures

50

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

 

Item 1A. Risk Factors

50

 

50

 

 

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

50

 

 

Item 5. Other Information

50

 

 

Item 6. Exhibits

53

 

 

Signatures

54

 

  

 


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

CONSOLIDATED BALANCE SHEETS

WELLTOWER INC. AND SUBSIDIARIES

(In thousands)

 

 

 

 

 

 

March 31, 2018

 

December 31, 2017

 

 

 

 

  

(Unaudited)

 

(Note)

Assets:  

 

 

 

 

 

Real estate investments:  

 

 

 

 

 

 

Real property owned:  

 

 

 

 

 

 

 

Land and land improvements  

$

2,793,671

 

$

2,734,467

 

 

Buildings and improvements  

 

25,672,558

 

 

25,373,117

 

 

Acquired lease intangibles  

 

1,548,621

 

 

1,502,471

 

 

Real property held for sale, net of accumulated depreciation  

 

368,249

 

 

734,147

 

 

Construction in progress  

 

180,984

 

 

237,746

 

 

 

Gross real property owned  

 

30,564,083

 

 

30,581,948

 

 

Less accumulated depreciation and amortization  

 

(4,990,780)

 

 

(4,838,370)

 

 

 

Net real property owned  

 

25,573,303

 

 

25,743,578

 

Real estate loans receivable  

 

436,194

 

 

495,871

 

 

Less allowance for losses on loans receivable  

 

(68,372)

 

 

(68,372)

 

 

 

Net real estate loans receivable  

 

367,822

 

 

427,499

 

Net real estate investments  

 

25,941,125

 

 

26,171,077

Other assets:  

 

 

 

 

 

 

 

Investments in unconsolidated entities  

 

440,424

 

 

445,585

 

 

Goodwill  

 

68,321

 

 

68,321

 

 

Cash and cash equivalents  

 

202,824

 

 

243,777

 

 

Restricted cash  

 

61,295

 

 

65,526

 

 

Straight-line rent receivable

 

406,260

 

 

389,168

 

 

Receivables and other assets  

 

626,410

 

 

560,991

 

 

 

Total other assets  

 

1,805,534

 

 

1,773,368

Total assets  

$

27,746,659

 

$

27,944,445

 

 

 

 

  

 

 

 

 

 

Liabilities and equity  

 

 

 

 

 

Liabilities:  

 

 

 

 

 

 

 

Borrowings under primary unsecured credit facility  

$

865,000

 

$

719,000

 

 

Senior unsecured notes  

 

7,924,340

 

 

8,331,722

 

 

Secured debt  

 

2,488,652

 

 

2,608,976

 

 

Capital lease obligations  

 

71,848

 

 

72,238

 

 

Accrued expenses and other liabilities  

 

948,618

 

 

911,863

Total liabilities  

 

12,298,458

 

 

12,643,799

Redeemable noncontrolling interests  

 

388,875

  

  

375,194

Equity:  

 

 

 

 

 

 

 

Preferred stock  

 

718,498

 

 

718,503

 

 

Common stock  

 

372,729

 

 

372,449

 

 

Capital in excess of par value  

 

17,667,674

 

 

17,662,681

 

 

Treasury stock  

 

(68,696)

 

 

(64,559)

 

 

Cumulative net income  

 

5,765,927

 

 

5,316,580

 

 

Cumulative dividends  

 

(9,807,114)

 

 

(9,471,712)

 

 

Accumulated other comprehensive income (loss)  

 

(91,253)

 

 

(111,465)

 

 

Other equity  

 

670

 

 

670

 

 

 

Total Welltower Inc. stockholders’ equity  

 

14,558,435

 

 

14,423,147

 

 

Noncontrolling interests  

 

500,891

 

 

502,305

Total equity  

 

15,059,326

 

 

14,925,452

Total liabilities and equity  

$

27,746,659

 

$

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.

 

See notes to unaudited consolidated financial statements

 

3


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

WELLTOWER INC. AND SUBSIDIARIES

(In thousands, except per share data)

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

2017

Revenues:

 

 

 

 

 

 

Rental income  

$

343,369

 

$

367,141

 

Resident fees and services

 

735,934

 

 

670,337

 

Interest income

 

14,648

 

 

20,748

 

Other income

 

3,014

 

 

4,072

 

 

Total revenues

 

1,096,965

 

 

1,062,298

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

Interest expense

 

122,775

 

 

118,597

 

Property operating expenses

 

556,465

 

 

510,169

 

Depreciation and amortization

 

228,201

 

 

228,276

 

General and administrative

 

33,705

 

 

31,101

 

Loss (gain) on derivatives and financial instruments, net

 

(7,173)

 

 

1,224

 

Loss (gain) on extinguishment of debt, net

 

11,707

 

 

31,356

 

Impairment of assets

 

28,185

 

 

11,031

 

Other expenses

 

3,712

 

 

11,675

 

 

Total expenses

 

977,577

 

 

943,429

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

 

 

 

 

 

and income from unconsolidated entities

 

119,388

 

 

118,869

Income tax (expense) benefit

 

(1,588)

 

 

(2,245)

Income (loss) from unconsolidated entities

 

(2,429)

 

 

(23,106)

Income (loss) from continuing operations

 

115,371

 

 

93,518

Gain (loss) on real estate dispositions, net

 

338,184

 

 

244,092

Net income

 

453,555

 

 

337,610

Less:

Preferred stock dividends

 

11,676

 

 

14,379

Less:

Preferred stock redemption charge

 

-

 

 

9,769

Less:

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

 

4,208

 

 

823

Net income (loss) attributable to common stockholders

$

437,671

 

$

312,639

 

 

 

 

 

 

 

 

Average number of common shares outstanding:

 

 

 

 

 

 

Basic

 

371,426

 

 

362,534

 

Diluted

 

373,257

 

 

364,652

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

Income (loss) from continuing operations

$

0.31

 

$

0.26

 

Net income (loss) attributable to common stockholders

$

1.18

 

$

0.86

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

Income (loss) from continuing operations

$

0.31

 

$

0.26

 

Net income (loss) attributable to common stockholders

$

1.17

 

$

0.86

 

 

 

 

 

 

 

 

Dividends declared and paid per common share

$

0.87

 

$

0.87

 

 (1) Includes amounts attributable to redeemable noncontrolling interests.

 

See notes to unaudited consolidated financial statements

 

4


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

WELLTOWER INC. AND SUBSIDIARIES

(In thousands)

 

 

 

 

Three Months Ended March 31,

 

 

 

 

2018

 

2017

 

Net income

$

453,555

 

$

337,610

 

 

 

 

 

 

 

 

 

  

Other comprehensive income (loss):

 

 

 

 

 

 

 

Unrecognized gain (loss) on available for sale securities

 

-

 

 

(10,569)

 

 

Foreign currency translation gain (loss)

 

16,326

 

 

5,713

 

Total other comprehensive income (loss)

 

16,326

 

 

(4,856)

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

469,881

 

 

332,754

 

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

 

322

 

 

3,636

 

Total comprehensive income (loss) attributable to common stockholders

$

469,559

 

$

329,118

 

 

 

 

 

 

 

 

 

 

(1) Includes amounts attributable to redeemable noncontrolling interests.

 

 

See notes to unaudited consolidated financial statements

 

5


CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

WELLTOWER INC. AND SUBSIDIARIES

(In thousands)

 

 

Three Months Ended March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

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)

 

 

 

 

 

 

 

 

 

449,347

 

 

 

 

 

 

 

5,191

 

454,538

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

20,212

 

 

 

(3,886)

 

16,326

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

470,864

Net change in noncontrolling interests

 

 

 

  

 

(13,157)

 

 

 

 

 

 

 

 

 

 

 

(2,719)

 

(15,876)

Amounts related to stock incentive plans, net of forfeitures

 

 

 

150

 

11,085

 

(4,137)

 

 

 

 

 

 

 

 

 

 

 

7,098

Proceeds from issuance of common stock

 

 

 

130

 

7,060

 

 

 

 

 

 

 

 

 

 

 

 

 

7,190

 Conversion of preferred stock

 

(5)

 

 

 

5

 

 

 

  

 

 

 

 

 

 

 

 

 

-

Dividends paid:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock dividends

 

 

 

 

 

 

 

 

 

 

 

(323,726)

 

 

 

 

 

 

 

(323,726)

 

Preferred stock dividends

 

 

 

 

 

 

 

 

 

 

 

(11,676)

 

 

 

 

 

 

 

(11,676)

Balances at end of period

$

718,498

$

372,729

$

17,667,674

$

(68,696)

$

5,765,927

$

(9,807,114)

$

(91,253)

$

670

$

500,891

$

15,059,326

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Preferred

Common

Excess of

Treasury

Cumulative

Cumulative

Comprehensive

Other

Noncontrolling

 

 

 

 

 

Stock

Stock

Par Value

Stock

Net Income

Dividends

Income (Loss)

Equity

Interests

Total

Balances at beginning of period

$

1,006,250

$

363,071

$

16,999,691

$

(54,741)

$

4,803,575

$

(8,144,981)

$

(169,531)

$

3,059

$

475,079

$

15,281,472

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

 

 

 

336,787

 

 

 

 

 

 

 

1,780

 

338,567

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,669)

 

 

 

2,813

 

(4,856)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

333,711

Net change in noncontrolling interests

 

 

 

  

 

932

 

 

 

 

 

 

 

 

 

 

 

(5,612)

 

(4,680)

Amounts related to stock incentive plans, net of forfeitures

 

 

 

336

 

6,903

 

(7,565)

 

 

 

 

 

 

 

(1,605)

 

 

 

(1,931)

Proceeds from issuance of common stock

 

 

 

1,780

 

117,204

 

 

 

 

 

 

 

 

 

 

 

 

 

118,984

Redemption of preferred stock

 

(287,500)

 

 

 

9,760

 

 

 

(9,769)

 

 

 

 

 

 

 

 

 

(287,509)

Option compensation expense

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

10

 

 

 

10

Dividends paid:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock dividends

 

 

 

 

 

 

 

 

 

 

 

(315,415)

 

 

 

 

 

 

 

(315,415)

 

Preferred stock dividends

 

 

 

 

 

 

 

 

 

 

 

(14,379)

 

 

 

 

 

 

 

(14,379)

Balances at end of period

$

718,750

$

365,187

$

17,134,490

$

(62,306)

$

5,130,593

$

(8,474,775)

$

(177,200)

$

1,464

$

474,060

$

15,110,263

 

See notes to unaudited consolidated financial statements

 

6


CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

WELLTOWER INC. AND SUBSIDIARIES

(In thousands)

 

 

 

 

 

Three Months Ended

 

 

 

  

March 31,

 

 

 

  

2018

 

2017

Operating activities:  

 

 

 

 

 

Net income  

$

453,555

 

$

337,610

Adjustments to reconcile net income to  

 

 

 

 

 

 

net cash provided from (used in) operating activities:  

 

 

 

 

 

 

 

Depreciation and amortization  

 

228,201

 

 

228,276

 

 

Other amortization expenses  

 

4,171

 

 

3,361

 

 

Impairment of assets  

 

28,185

 

 

11,031

 

 

Stock-based compensation expense  

 

11,557

 

 

4,906

 

 

Loss (gain) on derivatives and financial instruments, net  

 

(7,173)

 

 

1,224

 

 

Loss (gain) on extinguishment of debt, net  

 

11,707

 

 

31,356

 

 

Loss (income) from unconsolidated entities

 

2,429

 

 

23,106

 

 

Rental income less than (in excess of) cash received  

 

(21,406)

 

 

(18,141)

 

 

Amortization related to above (below) market leases, net  

 

718

 

 

8

 

 

Loss (gain) on real estate dispositions, net  

 

(338,184)

 

 

(244,092)

 

 

Distributions by unconsolidated entities

 

-

 

 

474

 

 

Increase (decrease) in accrued expenses and other liabilities  

 

(10,707)

 

 

19,478

 

 

Decrease (increase) in receivables and other assets  

 

5,591

 

 

(13,071)

Net cash provided from (used in) operating activities  

 

368,644

 

 

385,526

 

 

 

  

 

 

 

 

 

Investing activities:  

 

 

 

 

 

 

Cash disbursed for acquisitions  

 

(405,609)

 

 

(102,356)

 

Cash disbursed for capital improvements to existing properties

 

(46,547)

 

 

(42,115)

 

Cash disbursed for construction in progress

 

(22,735)

 

 

(69,334)

 

Capitalized interest  

 

(2,336)

 

 

(4,129)

 

Investment in real estate loans receivable  

 

(27,547)

 

 

(25,375)

 

Principal collected on real estate loans receivable  

 

90,731

 

 

8,792

 

Other investments, net of payments  

 

(49,279)

 

 

48,311

 

Contributions to unconsolidated entities  

 

(14,366)

 

 

(13,073)

 

Distributions by unconsolidated entities  

 

14,880

 

 

24,161

 

Proceeds from (payments on) derivatives  

 

(8,324)

 

 

8,218

 

Proceeds from sales of real property  

 

892,209

 

 

1,087,074

Net cash provided from (used in) investing activities  

 

421,077

 

 

920,174

 

 

 

  

 

 

 

 

 

Financing activities:  

 

 

 

 

 

 

Net increase (decrease) under unsecured credit facilities  

 

146,000

 

 

(123,000)

 

Payments to extinguish senior unsecured notes  

 

(450,000)

 

 

-

 

Net proceeds from the issuance of secured debt  

 

20,326

 

 

12,536

 

Payments on secured debt  

 

(197,655)

 

 

(822,438)

 

Net proceeds from the issuance of common stock  

 

7,214

 

 

119,651

 

Redemption of preferred stock  

 

-

 

 

(287,500)

 

Payments for deferred financing costs and prepayment penalties  

 

(14,341)

 

 

(36,674)

 

Contributions by noncontrolling interests(1)

 

5,734

 

 

2,667

 

Distributions to noncontrolling interests(1)

 

(12,564)

 

 

(20,014)

 

Acquisitions of noncontrolling interests

 

-

 

 

(38)

 

Cash distributions to stockholders  

 

(335,508)

 

 

(329,794)

 

Other financing activities

 

(4,555)

 

 

(8,022)

Net cash provided from (used in) financing activities  

 

(835,349)

 

 

(1,492,626)

Effect of foreign currency translation on cash, cash equivalents and restricted cash

 

444

 

 

2,843

Increase (decrease) in cash, cash equivalents and restricted cash  

 

(45,184)

 

 

(184,083)

Cash, cash equivalents and restricted cash at beginning of period  

 

309,303

 

 

607,220

Cash, cash equivalents and restricted cash at end of period  

$

264,119

 

$

423,137

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

Interest paid

$

104,246

 

$

109,438

 

Income taxes paid (received), net

 

(721)

 

 

3,349

 

 

 

 

 

 

 

 

 

(1) Includes amounts attributable to redeemable noncontrolling interests.

 

See notes to unaudited consolidated financial statements

 

7


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

1. Business

 

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

  

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 three months ended March 31, 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.

·         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 three months ended March 31, 2018, we recognized a gain of $7,173,000 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

 

 

·          During the three months ended 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 three months ended March 31, 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As Previously

 

 

 

As Reported

 

 

Reported

 

Cash disbursed for acquisitions

 

$

(102,356)

 

$

(102,356)

 

Decrease (increase) in restricted cash

 

 

-

 

 

145,065

 

Net cash provided from (used in) investing activities

 

 

920,174

 

 

1,065,239

 

Increase (decrease) in balance(1)

 

 

(184,083)

 

 

(39,018)

 

Balance at beginning of period(1)

 

 

607,220

 

 

419,378

 

Balance at end of period(1)

 

 

423,137

 

 

380,360

 

 

 

 

 

 

 

 

 

(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.

 

 

 

 

 

 

 

 

      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 an Exposure Draft in January 2018 proposing to amend ASU 2016-02, which would provide 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 and the Exposure Draft are 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.  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 amortizations.  We expect to utilize the practical expedients proposed in the Exposure Draft 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.

 

·         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 standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. We expect to adopt this guidance during the three months ended June 30, 2018 and are currently evaluating the impact the effects this 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

9


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

for these acquisitions have been included in our consolidated results of operations since the date of acquisition and are a component of the appropriate segments.  Transaction costs primarily represent costs incurred with acquisitions, including due diligence costs, fees for legal and valuation services and termination of pre-existing relationships computed based on the fair value of the assets acquired, lease termination fees and other acquisition-related costs.  Transaction costs related to asset acquisitions are capitalized as a component of purchase price and all other non-capitalizable costs are reflected in “Other Expenses” on our Consolidated Statements of Comprehensive Income. Certain of our subsidiaries’ functional currencies are the local currencies of their respective countries. See Note 2 to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017 for information regarding our foreign currency policies.  

   

     Triple-net Activity

 

 

Three Months Ended

 

(In thousands)

March 31, 2018

March 31, 2017

 

Land and land improvements

 

$

1,691

 

$

4,017

 

Buildings and improvements

 

 

235

 

 

37,241

 

 

Total assets acquired

 

 

1,926

 

 

41,258

 

Accrued expenses and other liabilities  

 

 

(6)

 

 

-

 

 

Total liabilities assumed

 

 

(6)

 

 

-

 

 

Cash disbursed for acquisitions(1)

 

 

1,920

 

 

41,258

 

Construction in progress additions

 

 

15,850

 

 

46,754

 

Less:

Capitalized interest

 

 

(847)

 

 

(2,028)

 

 

Foreign currency translation

 

 

-

 

 

(164)

 

Cash disbursed for construction in progress

 

 

15,003

 

  

44,562

 

Capital improvements to existing properties

 

 

2,351

 

 

10,495

 

 

Total cash invested in real property, net of cash acquired

 

$

19,274

 

$

96,315

 

 

 

 

 

 

 

 

 

 

(1) Primarily reprsents land acquired on an existing property during the three months ended March 31, 2018.

   

     Seniors Housing Operating Activity

 

 

Three Months Ended

 

(In thousands)

March 31, 2018

March 31, 2017

 

Land and land improvements

 

$

35,193

 

$

4,304

 

Building and improvements

 

 

372,562

 

 

44,075

 

Acquired lease intangibles

 

 

48,805

 

 

1,741

 

Receivables and other assets

 

 

265

 

 

74

 

  

Total assets acquired(1)

 

 

456,825

 

 

50,194

 

Secured debt

 

 

(89,973)

 

 

-

 

Accrued expenses and other liabilities  

 

 

(12,808)

 

 

(2,755)

 

 

Total liabilities assumed

 

 

(102,781)

 

 

(2,755)

 

Noncontrolling interests

 

 

(5,618)

 

 

(647)

 

Non-cash acquisition related activity(2)

 

 

-

 

 

(14,148)

 

 

Cash disbursed for acquisitions

 

 

348,426

 

 

32,644

 

Construction in progress additions

 

 

10,562

 

 

8,062

 

Less:

Capitalized interest

 

 

(891)

 

 

(1,707)

 

 

Foreign currency translation

 

 

(5,032)

 

 

691

 

Cash disbursed for construction in progress

 

 

4,639

 

  

7,046

 

Capital improvements to existing properties

 

 

31,325

 

 

24,254

 

 

Total cash invested in real property, net of cash acquired

 

$

384,390

 

$

63,944

 

 

 

 

 

 

 

 

 

 

(1) Excludes $2,155,000 and $400,000 of unrestricted and restricted cash acquired during the three months ended March 31, 2018 and 2017, respectively.

(2) Includes $6,349,000 related to the acquisition of assets previously financed as real estate loans receivable and $7,799,000 previously financed as an investment in an unconsolidated entity during the three months ended March 31, 2017.

10


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

     Outpatient Medical Activity

 

 

Three Months Ended

 

(In thousands)

March 31, 2018

 

March 31, 2017

 

Land and land improvements

 

$

7,369

 

$

2,895

 

Buildings and improvements

 

 

42,673

 

 

23,310

 

Acquired lease intangibles

 

 

5,852

 

 

3,496

 

Receivables and other assets

 

 

1

 

 

3

 

  

Total assets acquired(1)

 

 

55,895

 

  

29,704

 

Accrued expenses and other liabilities

 

 

(632)

 

 

(1,250)

 

 

Total liabilities assumed  

 

 

 (632)  

 

 

 (1,250)  

 

 

Cash disbursed for acquisitions

 

 

55,263

 

 

28,454

 

Construction in progress additions

 

 

2,803

 

 

14,921

 

Less:

Capitalized interest

 

 

(598)

 

 

(717)

 

 

Accruals(2)

 

 

888

 

 

3,522

 

Cash disbursed for construction in progress

 

 

3,093

 

  

17,726

 

Capital improvements to existing properties

 

 

12,871

 

 

7,366

 

 

Total cash invested in real property

 

$

71,227

 

$

53,546

 

 

 

 

 

 

 

 

 

 

(1) Excludes $1,950,000 of unrestricted and restricted cash acquired during the three months ended March 31, 2018.

(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):

 

 

 

 

Three Months Ended

 

 

 

 

March 31, 2018

 

March 31, 2017

 

Development projects:

 

 

 

 

 

 

 

 

 

 

Triple-net

  

 

$

49,759

 

 

$

157,460

 

 

Seniors housing operating

 

 

 

36,218

 

 

 

3,634

 

 

Outpatient medical

 

 

 

-

 

 

 

25,910

 

Total development projects

 

 

 

85,977

 

 

 

187,004

Total construction in progress conversions

  

 

$

85,977

 

 

$

187,004

 

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):

11


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

March 31, 2018

 

December 31, 2017

Assets:

  

 

 

 

 

 

 

In place lease intangibles

  

$

1,395,920

 

$

1,352,139

 

Above market tenant leases

  

 

58,402

 

 

58,443

 

Below market ground leases

  

 

59,030

 

 

58,784

 

Lease commissions

  

 

35,269

 

 

33,105

 

Gross historical cost

  

 

1,548,621

 

 

1,502,471

 

Accumulated amortization

  

 

(1,149,223)

 

 

(1,125,437)

 

Net book value

  

$

399,398

 

$

377,034

 

 

  

 

 

 

 

 

 

Weighted-average amortization period in years

  

 

14.4

 

 

15.1

 

 

  

 

 

 

 

 

Liabilities:

  

 

 

 

 

 

 

Below market tenant leases

  

$

71,706

 

$

60,430

 

Above market ground leases

  

 

8,540

 

 

8,540

 

Gross historical cost

  

 

80,246

 

 

68,970

 

Accumulated amortization

  

 

(40,400)

 

 

(39,629)

 

Net book value

  

$

39,846

 

$

29,341

 

 

  

 

 

 

 

 

 

Weighted-average amortization period in years

  

 

16.0

 

 

20.1

 

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

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

  

 

2018

 

2017

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

 

$

(351)

 

$

304

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

 

 

367

 

 

(312)

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

 

 

(32,261)

 

 

(39,302)

 

 

 

 

 

 

 

 

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

 

 

 

Assets

 

 

Liabilities

2018

 

$

94,521

 

$

4,470

2019

 

 

74,771

 

 

5,582

2020

 

 

47,871

 

 

5,085

2021

 

 

20,985

 

 

4,597

2022

 

 

17,770

 

 

4,132

Thereafter

 

 

143,480

 

 

15,980

Total

 

$

399,398

 

$

39,846

 

5. Dispositions, Assets Held for Sale and Discontinued Operations

We periodically sell properties for various reasons, including favorable market conditions, the exercise of tenant purchase options or reduction of concentrations (e.g., property type, relationship or geography). At March 31, 2018, 36 triple-net, seven seniors housing operating and two outpatient medical properties with an aggregate real estate balance of $368,249,000 were classified as held for sale. During the three months ended March 31, 2018, we recorded impairment charges of $28,185,000 on certain held for sale seniors

12


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

housing operating, triple-net and outpatient medical 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):

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 2018

March 31, 2017

Real estate dispositions:

 

 

 

 

 

 

 

Triple-net

 

$

323,667

 

$

808,204

 

Seniors housing operating

 

 

2,200

 

 

13,845

 

Outpatient medical

 

 

223,069

 

 

-

 

Total dispositions

 

 

548,936

 

 

822,049

Gain (loss) on real estate dispositions, net

 

 

338,184

 

 

244,092

 

Net other assets/liabilities disposed

 

 

5,089

 

 

20,933

Proceeds from real estate dispositions

 

$

892,209

 

$

1,087,074

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Dispositions and Assets Held for Sale

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

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

 

2018

 

2017

Revenues:

 

 

 

 

 

 

 

Rental income

 

$

13,886

 

$

43,787

Expenses:

 

  

 

 

 

 

 

Interest expense

 

  

127

 

 

2,707

 

Property operating expenses

 

  

7,256

 

 

8,521

 

Provision for depreciation

 

  

1,741

 

 

9,813

 

Total expenses

 

 

9,124

 

 

21,041

Income (loss) from real estate dispositions, net

 

$

4,762

 

$

22,746

 

 

 

 

 

 

 

 

 

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):

  

13


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

Three Months Ended

 

 

March 31, 2018

 

March 31, 2017

 

 

 

 

 

Senior

 

 

 

 

 

 

 

 

 

 

Senior

 

 

 

 

 

 

 

 

 

 

Housing

 

Outpatient

 

 

 

 

 

 

Housing

 

Outpatient

 

 

 

 

 

Triple-net

 

Operating

 

Medical

 

Totals

 

Triple-net

 

Operating

 

Medical

 

Totals

Advances on real estate loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in new loans

$

1,172

 

$

11,806

 

$

2,458

 

$

15,436

 

$

7,828

 

$

-

 

$

-

 

$

7,828

 

Draws on existing loans

 

12,111

 

 

-

 

 

-

 

 

12,111

 

 

17,547

 

 

-

 

 

-

 

 

17,547

 

Net cash advances on real estate loans

 

13,283

 

 

11,806

 

 

2,458

 

 

27,547

 

 

25,375

 

 

-

 

 

-

 

 

25,375

Receipts on real estate loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan payoffs

 

58,557

 

 

-

 

 

-

 

 

58,557

 

 

14,474

 

 

-

 

 

60,500

 

 

74,974

 

Principal payments on loans

 

32,174

 

 

-

 

 

-

 

 

32,174

 

 

667

 

 

-

 

 

-

 

 

667

 

   Sub-total

 

90,731

 

 

-

 

 

-

 

 

90,731

 

 

15,141

 

 

-

 

 

60,500

 

 

75,641

 

Less: Non-cash activity(1)

 

-

 

 

-

 

 

-

 

 

-

 

 

(6,349)

 

 

-

 

 

(60,500)

 

 

(66,849)

 

Net cash receipts on real estate loans

 

90,731

 

 

-

 

 

-

 

 

90,731

 

 

8,792

 

 

-

 

 

-

 

 

8,792

Net cash advances (receipts) on real estate loans

$

(77,448)

 

$

11,806

 

$

2,458

 

$

(63,184)

 

$

16,583

 

$

-

 

$

-

 

$

16,583

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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.

 

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 March 31, 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 March 31, 2018, we had no real estate loans with outstanding balances on non-accrual status and recorded no provision for loan losses during the three months ended March 31, 2018.

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 2018

 

March 31, 2017

Balance of impaired loans at end of period

 

$

214,896

 

$

317,049

Allowance for loan losses

 

 

68,372

 

 

6,196

Balance of impaired loans not reserved

 

$

146,524

 

$

310,853

Average impaired loans for the period

 

$

265,973

 

$

340,920

Interest recognized on impaired loans(1)

 

 

5,327

 

 

8,243

 

 

 

 

 

 

 

 

(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):

14


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Percentage Ownership(1)

 

March 31, 2018

 

December 31, 2017

 

Triple-net

10% to 49%

 

$

22,440

 

$

22,856

 

Seniors housing operating

10% to 50%

 

 

338,154

 

 

352,430

 

Outpatient medical

43%

 

 

79,830

 

 

70,299

 

Total

 

 

$

440,424

 

$

445,585

 

 

 

 

 

 

 

 

 

 

(1) Excludes in-substance real estate investments.

 

 

     At March 31, 2018, the aggregate unamortized basis difference of our joint venture investments of $108,549,000 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 three months ended March 31, 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)

 

160

 

$

79,838

 

15%

 

Revera(3)

 

98

 

 

39,525

 

7%

 

Brookdale Senior Living

 

137

 

 

36,865

 

7%

 

Genesis HealthCare

 

86

 

 

34,773

 

6%

 

Benchmark Senior Living  

 

48

 

 

23,948

 

4%

 

Remaining portfolio  

 

728

 

 

325,551

 

61%

 

Totals  

 

1,257

 

$

540,500

 

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.

 

9. Borrowings Under Credit Facilities and Related Items

 

      At March 31, 2018, we had a primary unsecured credit facility with a consortium of 29 banks that includes a $3,000,000,000 unsecured revolving credit facility, a $500,000,000 unsecured term credit facility and a $250,000,000 Canadian-denominated unsecured term credit facility.  We have an option, through an accordion feature, to upsize the unsecured revolving credit facility and the $500,000,000 unsecured term credit facility by up to an additional $1,000,000,000, in the aggregate, and the $250,000,000 Canadian-denominated unsecured term credit facility by up to an additional $250,000,000.  The primary unsecured credit facility also allows us to borrow up to $1,000,000,000 in alternate currencies (none outstanding at March 31, 2018).  Borrowings under the unsecured revolving credit facility are subject to interest payable at the applicable margin over LIBOR interest rate (2.78% at March 31, 2018). The applicable margin is based on our debt ratings and was 0.90% at March 31, 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 March 31, 2018.  The term credit facilities mature on May 13, 2021. The revolving credit facility is scheduled to mature on May 13, 2020 and can be extended for two successive terms of six months each at our option.

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

  

15


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

Three Months Ended March 31,

 

 

 

 

 

2018

 

2017

 

 

 

 

Balance outstanding at quarter end(1)

 

$

865,000

 

$

522,000

 

 

 

 

 

Maximum amount outstanding at any month end

 

$

865,000

 

$

1,010,000

 

 

 

 

 

Average amount outstanding (total of daily

 

  

 

 

  

 

 

 

 

 

 

 

principal balances divided by days in period)

 

$

364,111

 

$

796,356

 

 

 

 

 

Weighted average interest rate (actual interest

 

  

 

 

 

 

 

 

 

 

 

 

expense divided by average borrowings outstanding)

 

  

2.72%

 

 

1.81%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) As of March 31, 2018, letters of credit in the aggregate amount of $22,365,000 have been issued, which reduces the borrowing capacity on the unsecured revolving credit facility.

 

10. Senior Unsecured Notes and Secured Debt

 

     We may repurchase, redeem or refinance senior unsecured notes from time to time, taking advantage of favorable market conditions when available. We may purchase senior notes for cash through open market purchases, privately negotiated transactions, a tender offer or, in some cases, through the early redemption of such securities pursuant to their terms.   The senior unsecured notes are redeemable at our option, at any time in whole or from time to time in part, at a redemption price equal to the sum of (1) the principal amount of the notes (or portion of such notes) being redeemed plus accrued and unpaid interest thereon up to the redemption date and (2) any “make-whole” amount due under the terms of the notes in connection with early redemptions.   Redemptions and repurchases of debt, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.   At March 31, 2018, the annual principal payments due on these debt obligations were as follows (in thousands):

 

Senior

 

Secured

 

 

 

 

Unsecured Notes(1,2)

 

Debt (1,3)

 

Totals

2018

$

 -     

 

$

350,257

 

$

350,257

2019

 

600,000

 

 

483,773

 

 

1,083,773

2020(4)

 

690,220

 

 

138,069

 

 

828,289

2021(5,6)

 

1,143,934

 

 

228,870

 

 

1,372,804

2022

 

600,000

 

 

224,905

 

 

824,905

Thereafter(7,8)

 

4,972,835

 

 

1,072,521

 

 

6,045,356

Totals

$

8,006,989

 

$

2,498,395

 

$

10,505,384

 

 

 

 

 

 

 

 

 

(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 2.4% to 6.5%.

(3) Annual interest rates range from 1.69% to 7.93%.  Carrying value of the properties securing the debt totaled $5,272,358,000 at March 31, 2018.

(4) In November 2015, one of our wholly-owned subsidiaries issued and we guaranteed $300,000,000 of Canadian-denominated 3.35% senior unsecured notes due 2020 (approximately $232,720,000 based on the Canadian/U.S. Dollar exchange rate on March 31, 2018).

(5) On May 13, 2016, we refinanced the funding on a $250,000,000 Canadian-denominated unsecured term credit facility (approximately $193,934,000 based on the Canadian/U.S. Dollar exchange rate on March 31, 2018).  The loan matures on May 13, 2021 and bears interest at the Canadian Dealer Offered Rate plus 95 basis points (2.55% at March 31, 2018).

(6) On May 13, 2016, we refinanced the funding on a $500,000,000 unsecured term credit facility.  The loan matures on May 13, 2021 and bears interest at LIBOR plus 95 basis points (2.7% at March 31, 2018).

(7) On November 20, 2013, we completed the sale of £550,000,000 (approximately $771,485,000 based on the Sterling/U.S. Dollar exchange rate in effect on March 31, 2018) of 4.8% senior unsecured notes due 2028.

(8) On November 25, 2014, we completed the sale of £500,000,000 (approximately $701,350,000 based on the Sterling/U.S. Dollar exchange rate in effect on March 31, 2018) of 4.5% senior unsecured notes due 2034.

 

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

 

16


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Three Months Ended

 

March 31, 2018

 

March 31, 2017

 

 

 

 

Weighted Avg.

 

 

 

 

Weighted Avg.

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

Beginning balance

 $ 

8,417,447

 

4.306%

 

 $ 

8,260,038

 

4.245%

Debt extinguished

  

(450,000)

 

2.250%

 

  

-

 

0.000%

Foreign currency

 

39,542

 

5.216%

 

 

24,229

 

4.391%

Ending balance

 $ 

8,006,989

 

4.451%

 

 $ 

8,284,267

 

4.262%

 

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

 

 

  

Three Months Ended

 

 

  

March 31, 2018

 

March 31, 2017

 

 

 

 

 

Weighted Avg.

 

 

 

 

Weighted Avg.

 

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

Beginning balance

 

$

2,618,408

 

3.761%

 

$

3,465,066

 

4.094%

Debt issued

 

 

20,326

 

3.774%

 

 

12,536

 

2.340%

Debt assumed

 

 

85,192

 

4.395%

 

 

-

 

0.000%

Debt extinguished

  

 

(183,408)

 

5.809%

 

 

(806,189)

 

5.580%

Foreign currency

  

 

(27,876)

 

3.326%

 

 

10,313

 

3.262%

Principal payments

 

 

(14,247)

 

3.865%

 

 

(16,249)

 

4.469%

Ending balance

 

$

2,498,395

 

3.696%

 

$

2,665,477

 

3.744%

 

     Our debt agreements contain various covenants, restrictions and events of default. Certain agreements require us to maintain certain financial ratios and minimum net worth and impose certain limits on our ability to incur indebtedness, create liens and make investments or acquisitions. As of March 31, 2018, we were in compliance with all of the covenants under our debt agreements.

 

11. Derivative Instruments

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

      Interest Rate Swap Contracts and Foreign Currency Forward Contracts Designated as Cash Flow Hedges

     For instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (“OCI”), and reclassified into earnings in the same period or periods, during which the hedged transaction affects earnings.  Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in earnings. 

     Foreign Currency Hedges

     For instruments that are designated and qualify as net investment hedges, the variability in the foreign currency to U.S. Dollar of the instrument is recorded as a cumulative translation adjustment component of OCI.  During the three months ended March 31, 2018 and 2017, we settled certain net investment hedges necessitating cash payments of $8,055,000 and generating cash proceeds of $8,218,000, respectively.  The balance of the cumulative translation adjustment will be reclassified to earnings when the hedged investment is sold or substantially liquidated. 

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

17


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

  

 

 

 

March 31, 2018

 

December 31, 2017

Derivatives designated as net investment hedges:

 

 

 

 

Denominated in Canadian Dollars

$

575,000

$

575,000

Denominated in Pounds Sterling

£

550,000

£

550,000

 

 

 

 

 

Financial instruments designated as net investment hedges:

 

 

 

 

Denominated in Canadian Dollars

$

250,000

$

250,000

Denominated in Pounds Sterling

£

1,050,000

£

1,050,000

 

 

 

 

 

Derivatives designated as cash flow hedges:

 

 

 

 

Denominated in Canadian Dollars

$

18,000

$

36,000

 

 

 

 

 

Derivative instruments not designated:

 

 

 

 

Denominated in Canadian Dollars

$

408,007

$

408,007

Denominated in Pounds Sterling

£

-

£

80,000

 

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

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 31,

 

 

 

Location

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) on forward exchange contracts recognized in income

 

Interest expense

 

$

1,195

 

$

2,457

 

 

 

 

 

 

 

 

 

 

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

 

OCI

 

$

(62,698)

 

$

(44,341)

 

12. Commitments and Contingencies

     At March 31, 2018, we had 14 outstanding letter of credit obligations totaling $158,969,000 and expiring between 2018 and 2024.  At March 31, 2018, we had outstanding construction in progress of $180,984,000 and were committed to providing additional funds of approximately $392,710,000 to complete construction.  At March 31, 2018, we had contingent purchase obligations totaling $10,350,000.  These contingent purchase obligations relate to unfunded capital improvement obligations and contingent obligations on acquisitions. Rents due from the tenant are increased to reflect the additional investment in the property.

     We evaluate our leases for operating versus capital lease treatment in accordance with ASC Topic 840 “Leases.”  A lease is classified as a capital lease if it provides for transfer of ownership of the leased asset at the end of the lease term, contains a bargain purchase option, has a lease term greater than 75% of the economic life of the leased asset, or if the net present value of the future minimum lease payments are in excess of 90% of the fair value of the leased asset. Certain leases contain bargain purchase options and have been classified as capital leases.  At March 31, 2018, we had operating lease obligations of $1,121,736,000 relating to certain ground leases and company office space and capital lease obligations of $87,922,000 relating primarily to certain investment properties. Regarding ground leases, we have sublease agreements with certain of our operators that require the operators to reimburse us for our monthly operating lease obligations.  At March 31, 2018, aggregate future minimum rentals to be received under these noncancelable subleases totaled $76,388,000.

18


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

13. Stockholders’ Equity

 

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

 

 

 

March 31, 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

 

373,161,327

 

372,852,311

   Outstanding shares

 

371,970,655

 

371,731,551

 

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

 

 

 

Three Months Ended

 

 

 

March 31, 2018

 

March 31, 2017

 

 

 

 

 

Weighted Avg.

 

 

 

Weighted Avg.

 

 

 

Shares

 

Dividend Rate

 

Shares

 

Dividend Rate

 

Beginning balance

 

14,370,060

 

6.500%

 

25,875,000

 

6.500%

 

Shares redeemed

 

-

 

0.000%

 

(11,500,000)

 

6.500%

 

Shares converted

 

(95)

 

6.500%

 

-

 

0.000%

 

Ending balance

 

14,369,965

 

6.500%

 

14,375,000

 

6.500%

 

 

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

 

     Common Stock. The following is a summary of our common stock issuances during the three months ended March 31, 2018 and 2017 (dollars in thousands, except average price amounts):

 

 

 

Shares Issued

 

 

Average Price

 

 

Gross Proceeds

 

 

Net Proceeds

2017 Dividend reinvestment plan issuances

 

1,284,719

 

$

 68.33  

 

$

87,985

 

 $  

87,784

2017 Option exercises

 

156,675

 

 

 52.71  

 

 

8,258

 

 

8,258

2017 Equity shelf program issuances

 

338,486

 

 

 69.75  

 

 

23,776

 

 

23,609

2017 Stock incentive plans, net of forfeitures

 

181,600

 

 

 

 

 

-

 

 

                    - 

2017 Totals

 

1,961,480

 

 

 

 

$

120,019

 

$

119,651

 

 

 

 

 

 

 

 

 

 

 

 

2018 Dividend reinvestment plan issuances

 

129,975

 

$

 55.51  

 

$

7,214

 

$

7,214

2018 Preferred stock conversions

 

83

 

 

 

 

 

-

 

 

-

2018 Stock incentive plans, net of forfeitures

 

109,046

 

 

 

 

 

-

 

 

-

2018 Totals

 

239,104

 

 

 

 

$

7,214

 

$

7,214

 

     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):

 

19


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

Three Months Ended

 

 

March 31, 2018

 

March 31, 2017

  

 

Per Share

 

Amount

 

Per Share

 

Amount

Common Stock

 

$

0.8700

 

$

323,726

 

$

0.8700

 

$

315,415

Series I Preferred Stock

 

 

0.8125

 

 

11,676

 

 

0.8125

 

 

11,680

Series J Preferred Stock

 

 

-

 

 

-

 

 

0.2347

 

 

2,699

Totals

 

 

 

 

$

335,402

 

 

 

 

$

329,794

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrecognized gains (losses) related to:

 

 

 

 

 

 

 Foreign Currency Translation

 

 

Available for Sale Securities

 

 

Actuarial Losses

 

 

Cash Flow Hedges

 

 

Total

Balance at December 31, 2017

 

$

(110,581)

 

$

-

 

$

(884)

 

$

-

 

$

(111,465)

Other comprehensive income before reclassification adjustments

 

  

20,212

 

 

-

 

 

-

 

 

-

 

 

20,212

Net current-period other comprehensive income

 

  

20,212

 

 

-

 

 

-

 

 

-

 

 

20,212

Balance at March 31, 2018

 

$

(90,369)

 

$

-

 

$

(884)

 

$

-

 

$

(91,253)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

 

$

(173,496)

 

$

5,120

 

$

(1,153)

 

$

(2)

 

$

(169,531)

Other comprehensive income before reclassification adjustments

 

  

2,900

 

 

(10,569)

 

 

-

 

 

-

 

  

(7,669)

Net current-period other comprehensive income

 

  

2,900

 

 

(10,569)

 

 

-

 

 

-

 

  

(7,669)

Balance at March 31, 2017

 

$

(170,596)

 

$

(5,449)

 

$

(1,153)

 

$

(2)

 

$

(177,200)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14. Stock Incentive Plans

     Our 2016 Long-Term Incentive Plan (“2016 Plan”) authorizes up to 10,000,000 shares of common stock to be issued at the discretion of the Compensation Committee of the Board of Directors. Our non-employee directors, officers and key employees are eligible to participate in the 2016 Plan. The 2016 Plan allows for the issuance of, among other things, stock options, stock appreciation rights, restricted stock, deferred stock units and dividend equivalent rights. Vesting periods for options, deferred stock units and restricted shares generally range from three to five years. Options expire ten years from the date of grant.  Stock-based compensation expense totaled $11,557,000 and $4,906,000 for the three months ended March 31, 2018 and 2017, respectively.

 

15. Earnings Per Share

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

20


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

  

2018

 

2017

Numerator for basic and diluted earnings

 

 

 

 

 

 

 

per share - net income (loss) attributable

  

 

 

 

 

 

 

to common stockholders

  

$

437,671

 

$

312,639

 

 

  

 

 

 

 

 

Denominator for basic earnings per

  

 

 

 

 

 

 

share - weighted average shares

  

 

371,426

 

 

362,534

Effect of dilutive securities:

  

 

 

 

 

 

 

Employee stock options

  

 

15

 

 

70

 

Non-vested restricted shares

  

 

720

 

 

397

 

Redeemable shares

 

 

1,096

 

 

1,651

Dilutive potential common shares

  

 

1,831

 

 

2,118

Denominator for diluted earnings per

  

 

 

 

 

 

 

share - adjusted weighted average shares

  

 

373,257

 

 

364,652

 

 

  

 

 

 

 

 

Basic earnings per share

  

$

1.18

 

$

0.86

Diluted earnings per share

  

$

1.17

 

$

0.86

 

 

 

 

 

 

 

 

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

 

16. Disclosure about Fair Value of Financial Instruments

 

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

 

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.

 

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

 

21


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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

 

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

 

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

 

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

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

December 31, 2017

 

 

 

Carrying Amount

 

Fair Value

 

Carrying Amount

 

Fair Value

Financial assets:

 

  

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans receivable

 

$

264,948

 

$

271,887

 

$

306,120

 

$

332,508

 

Other real estate loans receivable

 

  

102,874

 

 

108,850

 

 

121,379

 

 

125,480

 

Available-for-sale equity investments

 

  

14,443

 

 

14,443

 

 

7,269

 

 

7,269

 

Cash and cash equivalents

 

  

202,824

 

 

202,824

 

 

243,777

 

 

243,777

 

Restricted cash

 

  

61,295

 

 

61,295

 

 

65,526

 

 

65,526

 

Foreign currency forward contracts

 

  

28,713

 

 

28,713

 

 

15,604

 

 

15,604

 

 

 

  

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

  

 

 

 

 

 

 

 

 

 

 

 

Borrowings under unsecured credit facilities

 

$

865,000

 

$

865,000

 

$

719,000

 

$

719,000

 

Senior unsecured notes

 

  

7,924,340

 

 

8,582,136

 

 

8,331,722

 

 

9,168,432

 

Secured debt

 

  

2,488,652

 

 

2,465,270

 

 

2,608,976

 

 

2,641,997

 

Foreign currency forward contracts

 

 

58,190

 

 

58,190

 

 

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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements as of March 31, 2018

 

 

Total

 

Level 1

 

Level 2

 

Level 3

Available-for-sale equity investments

 

$

14,443

 

$

14,443

 

$

-

 

$

-

Foreign currency forward contracts, net asset (liability)(1)

 

 

(29,477)

 

 

-

 

 

(29,477)

 

 

-

Redeemable OP unitholder interests

 

 

97,476

 

 

-

 

 

97,476

 

 

-

 Totals 

 

$

82,442

 

$

14,443

 

$

67,999

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Please see Note 11 for additional information.

 

 

 

 

 

 

 

 

 

 

 

 

 

22


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Items Measured at Fair Value on a Nonrecurring Basis

 

In addition to items that are measured at fair value on a recurring basis, we also have assets and liabilities in our balance sheet that are measured at fair value on a nonrecurring basis.  As these assets and liabilities are not measured at fair value on a recurring basis, they are not included in the tables above. Assets, liabilities and noncontrolling interests that are measured at fair value on a nonrecurring basis include those acquired/assumed. 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 support living facilities (Canada), care homes with nursing (United Kingdom) and combinations thereof. Under the triple-net segment, we invest in seniors housing and health care real estate through acquisition and financing of primarily single tenant properties. Properties acquired are primarily leased under triple-net leases and we are not involved in the management of the property. Our seniors housing operating properties include the seniors housing communities referenced above that are owned and/or operated through RIDEA structures (see 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):

23


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Three Months Ended March 31, 2018:

 

 

Triple-net

 

 

Seniors Housing Operating

 

 

Outpatient Medical

 

 

Non-segment / Corporate

 

 

Total

Rental income

 

$

206,831

 

$

-

 

$

136,538

 

$

-

 

$

343,369

Resident fees and services

 

 

-

 

 

735,934

 

 

-

 

 

-

 

 

735,934

Interest income

 

 

14,551

 

 

85

 

 

12

 

 

-

 

 

14,648

Other income

 

 

1,377

 

 

1,148

 

 

121

 

 

368

 

 

3,014

Total revenues

 

 

222,759

 

 

737,167

 

 

136,671

 

 

368

 

 

1,096,965

Property operating expenses

 

 

21

 

 

511,941

 

 

44,503

 

 

-

 

 

556,465

Consolidated net operating income

 

 

222,738

 

 

225,226

 

 

92,168

 

 

368

 

 

540,500

Interest expense

 

 

3,442

 

 

16,935

 

 

1,676

 

 

100,722

 

 

122,775

Loss (gain) on derivatives and financial instruments, net

 

 

(7,173)

 

 

-

 

 

-

 

 

-

 

 

(7,173)

Depreciation and amortization

 

 

56,032

 

 

125,769

 

 

46,400

 

 

-

 

 

228,201

General and administrative

 

 

-

 

 

-

 

 

-

 

 

33,705

 

 

33,705

Loss (gain) on extinguishment of debt, net

 

 

(32)

 

 

(189)

 

 

11,928

 

 

-

 

 

11,707

Impairment of assets

 

 

25,884

 

 

2,301

 

 

-

 

 

-

 

 

28,185

Other expenses

 

 

1,120

 

 

(188)

 

 

598

 

 

2,182

 

 

3,712

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

 

 

143,465

 

 

80,598

 

 

31,566

 

 

(136,241)

 

 

119,388

Income tax (expense) benefit

 

 

(1,136)

 

 

162

 

 

(428)

 

 

(186)

 

 

(1,588)

Income (loss) from unconsolidated entities

 

 

5,821

 

 

(9,480)

 

 

1,230

 

 

-

 

 

(2,429)

Income (loss) from continuing operations

 

 

148,150

 

 

71,280

 

 

32,368

 

 

(136,427)

 

 

115,371

Gain (loss) on real estate dispositions, net

 

 

123,397

 

 

5

 

 

214,782

 

 

-

 

 

338,184

Net income (loss)

 

$

271,547

 

$

71,285

 

$

247,150

 

$

(136,427)

 

$

453,555

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

8,937,964

 

$

13,769,265

 

$

4,911,566

 

$

127,864

 

$

27,746,659

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2017:

 

 

Triple-net

 

 

Seniors Housing Operating

 

Outpatient Medical

 

 

Non-segment / Corporate

 

 

Total

Rental income

 

$

227,290

 

$

-

$

139,851

 

$

-

 

$

367,141

Resident fees and services

 

 

-

 

 

670,337

 

-

 

 

-

 

 

670,337

Interest income

 

 

20,679

 

 

69

 

-

 

 

-

 

 

20,748

Other income

 

 

1,766

 

 

1,461

 

612

 

 

233

 

 

4,072

Total revenues

 

 

249,735

 

 

671,867

 

140,463

 

 

233

 

 

1,062,298

Property operating expenses

 

 

-

 

 

462,425

 

47,744

 

 

-

 

 

510,169

Consolidated net operating income

 

 

249,735

 

 

209,442

 

92,719

 

 

233

 

 

552,129

Interest expense

 

 

5,511

 

 

15,816

 

2,291

 

 

94,979

 

 

118,597

Loss (gain) on derivatives and financial instruments, net

 

 

1,224

 

 

-

 

-

 

 

-

 

 

1,224

Depreciation and amortization

 

 

59,608

 

 

119,737

 

48,931

 

 

-

 

 

228,276

General and administrative

 

 

-

 

 

-

 

-

 

 

31,101

 

 

31,101

Loss (gain) on extinguishment of debt, net

 

 

29,084

 

 

890

 

1,382

 

 

-

 

 

31,356

Impairment of assets

 

 

-

 

 

5,406

 

5,625

 

 

-

 

 

11,031

Other expenses

 

 

5,010

 

 

1,778

 

360

 

 

4,527

 

 

11,675

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

 

 

149,298

 

 

65,815

 

34,130

 

 

(130,374)

 

 

118,869

Income tax (expense) benefit

 

 

(800)

 

 

(1,087)

 

(335)

 

 

(23)

 

 

(2,245)

Income (loss) from unconsolidated entities

 

 

5,638

 

 

(29,191)(1)

 

447

 

 

-

 

 

(23,106)

Income (loss) from continuing operations

 

 

154,136

 

 

35,537

 

34,242

 

 

(130,397)

 

 

93,518

Gain (loss) on real estate dispositions, net

 

 

231,081

 

 

13,011

 

-

 

 

-

 

 

244,092

Net income (loss)

 

$

385,217

 

$

48,548

$

34,242

 

$

(130,397)

 

$

337,610

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     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):

24


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31, 2018

 

 

March 31, 2017

 

Revenues:

 

 

Amount

%

 

 

Amount

%

 

United States

 

$

863,789

78.8%

 

$

858,668

80.9%

 

United Kingdom

 

 

116,525

10.6%

 

 

93,843

8.8%

 

Canada

 

 

116,651

10.6%

 

 

109,787

10.3%

 

Total

 

$

1,096,965

100.0%

 

$

1,062,298

100.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

 

March 31, 2018

 

 

December 31, 2017

 

Assets:

 

 

Amount

%

 

 

Amount

%

 

United States

 

$

21,847,420

78.7%

 

$

22,274,443

79.7%

 

United Kingdom

 

 

3,397,904

12.3%

 

 

3,239,039

11.6%

 

Canada

 

 

2,501,335

9.0%

 

 

2,430,963

8.7%

 

Total

 

$

27,746,659

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 and state and local income taxes as well as non-U.S. income based or withholding taxes on certain investments located in jurisdictions outside the U.S.  The provision for income taxes for the three months ended March 31, 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):

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

 

December 31, 2017

Assets

 

 

 

 

 

 

 

 

Net real property owned

 

$

993,156

 

 

$

1,002,137

 

Cash and cash equivalents

 

 

16,871

 

 

 

12,308

 

Receivables and other assets

 

 

17,198

 

 

 

16,330

 

Total assets(1)

 

$

1,027,225

 

 

$

1,030,775

 

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

 

 

Secured debt

 

$

469,757

 

 

$

471,103

 

Accrued expenses and other liabilities

 

 

16,501

 

 

 

14,832

 

Redeemable noncontrolling interests

 

 

171,035

 

 

 

171,898

 

Total equity

 

 

369,932

 

 

 

372,942

 

Total liabilities and equity

 

$

1,027,225

 

 

$

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.

 

 

 

 

 

 

 

 

 

20. Subsequent Events

 

     Senior Notes Subsequent to March 31, 2018, we completed the issuance of $550,000,000 of 4.25% senior unsecured notes due 2028 for net proceeds of approximately $545,199,000.

 

     Strategic Joint Venture Commitment Subsequent to March 31, 2018, we entered into a definitive agreement (the “Merger Agreement”) to acquire all of the outstanding shares of Quality Care Properties, Inc. (“QCP”) in an all cash deal for $20.75 per share (the “QCP Acquisition”). Concurrent with this agreement, we formed an 80/20 joint venture with ProMedica to own the real estate of QCP’s principal tenants, HCR ManorCare and Arden Courts, the operations of which will be acquired by ProMedica. Our joint venture investment is estimated to be $2.2 billion and upon completion of the transactions, ProMedica will enter into a new lease agreement with the following key terms: (i) 15-year absolute triple-net master lease with three five-year renewal options; (ii) 8% initial cash rental yield with a year one escalator of 1.375% and 2.75% annual escalator thereafter; and (iii) full corporate guarantee of ProMedica. In connection with the QCP Acquisition, we have entered into a debt commitment letter with Barclays Bank PLC (“Barclays”), pursuant to which Barclays has committed to provide a $1.0 billion senior unsecured bridge credit facility.  The bridge facility may be used to pay a portion of the QCP Acquisition cash consideration and other related expenses.  The Merger Agreement contemplates that we may issue notes or term loans in lieu of a portion or all of the drawings under this bridge facility.

  

 

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

28

28

29

30

32

 

 

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

 

 

 

     Sources and Uses of Cash

     Off-Balance Sheet Arrangements

     Contractual Obligations

     Capital Structure

32

33

34

34

 

 

 

 

RESULTS OF OPERATIONS

 

 

 

 

     Summary

     Triple-net

     Seniors Housing Operating

     Outpatient Medical

     Non-Segment/Corporate

35

35

37

39

41

 

 

 

 

OTHER

 

 

 

 

     Non-GAAP Financial Measures

43

 

     Critical Accounting Policies

47

 

     Cautionary Statement Regarding Forward-Looking Statements

48

 

 

 

 

 

 

 

 

 

 

 

 

 

  

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 March 31, 2018 (dollars in thousands):

  

 

 

 

 

Percentage of

 

Number of

 

Type of Property

NOI(1)

 

NOI

 

Properties

 

Triple-net

$

222,738

 

41.2%

 

550

 

Seniors housing operating

 

225,226

 

41.7%

 

452

 

Outpatient medical

 

92,168

 

17.1%

 

255

 

Totals

$

540,132

 

100.0%

 

1,257

 

 

 

 

 

 

 

 

 

(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

28


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

 

 

typically structured as master leases and loans are generally cross-defaulted and cross-collateralized with other real estate loans, operating leases or agreements between us and the obligor and its affiliates.

     For the three months ended March 31, 2018, rental income and resident fees and services represented 31% and 67%, 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 March 31, 2018, we had $202,824,000 of cash and cash equivalents, $61,295,000 of restricted cash and $2,112,635,000 of available borrowing capacity under our primary unsecured credit facility.

  

Key Transactions

     Capital.   During the three months ended March 31, 2018, we extinguished $183,408,000 of secured debt at a blended average interest rate of 5.8% and repaid our 2.25% $450,000,000 of senior unsecured notes at par on maturity on March 15, 2018.  In addition, we raised $7,214,000 through our dividend reinvestment program. Subsequent to March 31, 2018, we completed the issuance of $550,000,000 of 4.25% senior unsecured notes for net proceeds of approximately $545,199,000.

     Investments.  The following summarizes our property acquisitions and joint venture investments completed during the three months ended March 31, 2018 (dollars in thousands):

 

 

Properties

 

Investment Amount(1)

 

Capitalization Rates(2)

 

 

Book Amount(3)

 

Seniors housing operating

9

$

428,047

 

6.7%

 

$

456,825

 

Outpatient medical

3

 

47,739

 

6.0%

 

 

55,895

 

Totals

12

$

475,786

 

6.7%

 

$

512,720

 

 

 

 

 

 

 

 

 

 

 

(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.

 

 

 

 

 

 

 

 

 

 

     In April 2018, we signed an agreement to acquire all outstanding shares of Quality Care Properties, Inc. (the “QCP Acquisition”) and entered into a related joint venture with ProMedica.  For more information, please see Note 20 to the unaudited consolidated financial statements.

 

     Dispositions.  The following summarizes property dispositions made during the three months ended March 31, 2018 (dollars in thousands):

29


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

 

 

 

Properties

 

Proceeds(1)

 

Capitalization Rates(2)

 

 

Book Amount(3)

 

Triple-net

27

$

459,789

 

7.4%

 

$

323,667

 

Seniors housing operating

2

 

6,908

 

6.5%

 

 

2,200

 

Outpatient medical

18

 

428,727

 

6.0%

 

 

223,069

 

Totals

47

$

895,424

 

6.7%

 

$

548,936

 

 

 

 

 

 

 

 

 

 

 

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

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

(3) Represents carrying value of assets at time of disposition. See Note 5 to our unaudited consolidated financial statements for additional information.

      

     Dividends. Our Board of Directors 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 March 31, 2018 represents the 188th 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 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,

 

 

 

2017

 

2017

 

2017

 

2017

 

 

2018

Net income (loss)

$

337,610

 

$

203,441

 

$

89,299

 

$

(89,743)

 

$

453,555

NICS

 

312,639

 

 

188,429

 

 

74,043

 

 

(111,523)

 

 

437,671

FFO

 

306,231

 

 

384,390

 

 

295,722

 

 

179,224

 

 

353,220

NOI

 

552,129

 

 

556,747

 

 

567,486

 

 

556,353

 

 

540,500

SSNOI

 

451,925

 

 

464,187

 

 

470,759

 

 

465,898

 

 

463,459

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share data (fully diluted):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NICS

$

0.86

 

$

0.51

 

$

0.20

 

$

(0.30)

 

$

1.17

 

FFO

 

0.84

 

 

1.04

 

 

0.80

 

 

0.48

 

 

0.95

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     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:

  

30


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,

 

 

 

 

2017

 

2017

 

2017

 

2017

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Net debt to book capitalization ratio

 

42%

 

41%

 

42%

 

43%

 

42%

Net debt to undepreciated book

 

 

 

 

 

 

 

 

 

 

 

capitalization ratio

 

36%

 

35%

 

36%

 

36%

 

35%

Net debt to market capitalization ratio

 

29%

 

27%

 

29%

 

31%

 

34%

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest coverage ratio

 

5.67x

 

4.60x

 

3.63x

 

2.35x

 

6.67x

Fixed charge coverage ratio

 

4.53x

 

3.72x

 

2.97x

 

1.93x

 

5.49x

   

      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,

 

 

 

 

2017

 

2017

 

2017

 

2017

 

2018

Property mix:(1)

 

 

 

 

 

 

 

 

 

 

 

Triple-net

 

45%

 

44%

 

43%

 

42%

 

41%

 

Seniors housing operating

 

38%

 

39%

 

40%

 

41%

 

42%

 

Outpatient medical

 

17%

 

17%

 

17%

 

18%

 

17%

 

 

 

 

 

 

 

 

 

 

 

 

 

Relationship mix:(1)

 

 

 

 

 

 

 

 

 

 

 

Sunrise Senior Living(2)

 

14%

 

14%

 

14%

 

14%

 

15%

 

Genesis HealthCare

 

9%

 

9%

 

9%

 

7%

 

6%

 

Revera(2)

 

7%

 

7%

 

7%

 

7%

 

7%

 

Brookdale Senior Living

 

7%

 

7%

 

7%

 

7%

 

7%

 

Benchmark Senior Living

 

4%

 

5%

 

5%

 

4%

 

4%

 

Remaining relationships

 

59%

 

58%

 

58%

 

61%

 

61%

 

 

 

 

 

 

 

 

 

 

 

 

 

Geographic mix:(1)

 

 

 

 

 

 

 

 

 

 

 

California

 

13%

 

14%

 

13%

 

13%

 

14%

 

United Kingdom

 

9%

 

9%

 

9%

 

9%

 

10%

 

Canada

 

8%

 

8%

 

8%

 

8%

 

9%

 

Texas

 

7%

 

7%

 

7%

 

8%

 

8%

 

New Jersey

 

7%

 

8%

 

8%

 

8%

 

8%

 

Remaining geographic areas

 

56%

 

54%

 

55%

 

54%

 

51%

 

 

 

 

 

 

 

 

 

 

 

 

 

(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.

 

     Lease Expirations. The following table sets forth information regarding lease expirations for certain portions of our portfolio as of March 31, 2018 (dollars in thousands):

  

31


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

 

 

 

 

 

 

 

Expiration Year (1)

 

 

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

2023

 

 

2024

 

 

2025

 

 

2026

 

 

2027

 

 

Thereafter

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triple-net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Properties

 

 

84

 

 

-

 

 

14

 

 

10

 

 

13

 

 

11

 

 

4

 

 

53

 

 

34

 

 

43

 

 

275

 

 

  

Base rent(2)

 

$

64,546

 

$

-

 

$

17,740

 

$

16,049

 

$

11,062

 

$

4,175

 

$

10,842

 

$

69,232

 

$

70,931

 

$

85,446

 

$

468,624

 

 

 

% of base rent

 

 

7.9%

 

 

0.0%

 

 

2.2%

 

 

2.0%

 

 

1.4%

 

 

0.5%

 

 

1.3%

 

 

8.5%

 

 

8.7%

 

 

10.4%

 

 

57.2%

 

 

 

Units/beds

 

 

6,631

 

 

-

 

 

1,225

 

 

1,626

 

 

1,220

 

 

1,432

 

 

692

 

 

4,152

 

 

4,081

 

 

4,482

 

 

26,399

 

 

 

% of Units/beds

 

 

12.8%

 

 

0.0%

 

 

2.4%

 

 

3.1%

 

 

2.3%

 

 

2.8%

 

 

1.3%

 

 

8.0%

 

 

7.9%

 

 

8.6%

 

 

50.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outpatient medical:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Square feet

 

 

667,704

 

 

1,185,656

 

 

1,322,323

 

 

1,557,516

 

 

1,721,068

 

 

1,125,631

 

 

1,145,811

 

 

722,199

 

 

1,150,493

 

 

399,572

 

 

4,606,299

 

 

  

Base rent(2)

 

$

18,172

 

$

32,493

 

$

36,082

 

$

41,863

 

$

45,401

 

$

29,692

 

$

33,188

 

$

19,856

 

$

29,000

 

$

11,458

 

$

109,976

 

 

 

% of base rent

 

 

4.5%

 

 

8.0%

 

 

8.9%

 

 

10.3%

 

 

11.2%

 

 

7.3%

 

 

8.2%

 

 

4.9%

 

 

7.1%

 

 

2.8%

 

 

27.0%

 

 

 

Leases

 

 

237

 

 

314

 

 

313

 

 

280

 

 

304

 

 

234

 

 

127

 

 

120

 

 

130

 

 

77

 

 

178

 

 

 

% of Leases

 

 

10.2%

 

 

13.6%

 

 

13.5%

 

 

12.1%

 

 

13.1%

 

 

10.1%

 

 

5.5%

 

 

5.2%

 

 

5.6%

 

 

3.3%

 

 

7.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Excludes investments in unconsolidated entities. Investments classified as held for sale are included in the current year.

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

 

     We evaluate our key performance indicators in conjunction with current expectations to determine if historical trends are indicative of future results. Our expected results may not be achieved and actual results may differ materially from our expectations. Factors that may cause actual results to differ from expected results are described in more detail in “Cautionary Statement Regarding Forward-Looking Statements” and other sections of this Quarterly Report on Form 10-Q. Management regularly monitors economic and other factors to develop strategic and tactical plans designed to improve performance and maximize our competitive position. Our ability to achieve our financial objectives is dependent upon our ability to effectively execute these plans and to appropriately respond to emerging economic and company-specific trends. Please refer to our Annual Report on Form 10-K for the year ended December 31, 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

     During the three months ended 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

 

 

 

 

 

Three Months Ended

 

 

Change

 

 

 

March 31, 2018

 

March 31, 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

 

 

368,644

 

 

385,526

 

 

 

(16,882)

 

-4%

   Cash provided from (used in) investing activities

 

 

421,077

 

 

920,174

 

 

 

(499,097)

 

-54%

   Cash provided from (used in) financing activities

 

 

(835,349)

 

 

(1,492,626)

 

 

 

657,277

 

-44%

Effect of foreign currency translation

 

 

444

 

 

2,843

 

 

 

(2,399)

 

-84%

Cash, cash equivalents and restricted cash at end of period

 

$

264,119

 

$

423,137

 

 

$

(159,018)

 

-38%

 

     Operating Activities. The change in net cash provided from operating activities was immaterial.  Please see “Results of Operations” for discussion of net income fluctuations. For the three months ended March 31, 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):

  

 

 

Three Months Ended

 

Change

 

 

March 31,

 

March 31,

 

 

 

 

 

 

 

2018

 

2017

 

$

 

%

New development

 

$

22,735

 

$

69,334

 

$

(46,599)

 

-67%

Recurring capital expenditures, tenant improvements and lease commissions

 

 

18,564

 

 

13,834

 

 

4,730

 

34%

Renovations, redevelopments and other capital improvements

 

 

27,983

 

 

28,281

 

 

(298)

 

-1%

Total

 

$

69,282

 

$

111,449

 

$

(42,167)

 

-38%

 

    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 March 31, 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 March 31, 2018, we had 14 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 March 31, 2018 (in thousands):

  

 

 

Payments Due by Period

Contractual Obligations

 

Total

 

2018

 

2019-2020

 

2021-2022

 

Thereafter

Unsecured revolving credit facility(1)

 

$

865,000

 

$

-

 

$

-

 

$

865,000

 

$

-

Senior unsecured notes and term credit facilities:(2,7)

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     U.S. Dollar senior unsecured notes

 

 

5,600,000

 

 

-

 

 

1,050,000

 

 

1,050,000

 

 

3,500,000

     Canadian Dollar senior unsecured notes(3)

 

 

232,720

 

 

-

 

 

232,720

 

 

-

 

 

-

     Pounds Sterling senior unsecured notes(3)

 

 

1,472,835

 

 

-

 

 

-

 

 

-

 

 

1,472,835

     U.S. Dollar term credit facility

 

 

507,500

 

 

-

 

 

7,500

 

 

500,000

 

 

-

     Canadian Dollar term credit facility(3)

 

 

193,934

 

 

-

 

 

-

 

 

193,934

 

 

-

Secured debt:(2,3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Consolidated

 

 

2,498,395

 

 

350,257

 

 

621,842

 

 

453,775

 

 

1,072,521

     Unconsolidated  

 

 

754,675

 

 

25,529

 

 

124,290

 

 

37,638

 

 

567,218

Contractual interest obligations:(4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Unsecured revolving credit facility

 

 

110,917

 

 

22,183

 

 

59,156

 

 

29,578

 

 

-

     Senior unsecured notes and term loans(3)

 

 

3,089,204

 

 

288,753

 

 

673,721

 

 

516,518

 

 

1,610,212

     Consolidated secured debt(3)

 

 

491,573

 

 

68,110

 

 

141,197

 

 

103,923

 

 

178,343

     Unconsolidated secured debt(3)

 

 

198,512

 

 

21,785

 

 

52,100

 

 

42,943

 

 

81,684

Capital lease obligations(5)

 

 

87,922

 

 

3,496

 

 

8,507

 

 

8,346

 

 

67,573

Operating lease obligations(5)

 

 

1,121,736

 

 

13,442

 

 

35,701

 

 

34,211

 

 

1,038,382

Purchase obligations(5,7)

 

 

403,060

 

 

232,697

 

 

170,363

 

 

-

 

 

-

Other long-term liabilities(6)

 

 

2,335

 

 

1,106

 

 

1,229

 

 

-

 

 

-

Total contractual obligations

 

$

17,630,318

 

$

1,027,358

 

$

3,178,326

 

$

3,835,866

 

$

9,588,768

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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.

(7) Excludes commitments entered into subsequent to March 31, 2018 as discussed in Note 20 to our unaudited consolidated financial statements.

   

Capital Structure

     Please refer to “Credit Strength” above for a discussion of our leverage and coverage ratio trends.  Our debt agreements contain various covenants, restrictions and events of default. Certain agreements require us to maintain financial ratios and minimum net worth and impose certain limits on our ability to incur indebtedness, create liens and make investments or acquisitions. As of March 31, 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 1, 2015, we filed with the Securities and Exchange Commission (1) an open-ended automatic or “universal” shelf registration statement covering an indeterminate amount of future offerings of debt securities, common stock, preferred stock, depositary shares, warrants and units and (2) a registration statement in connection with our enhanced dividend reinvestment plan (“DRIP”) under which we may issue up to 15,000,000 shares of common stock.  As of April 27, 2018, 1,977,512 shares of common stock remained available for issuance under the DRIP registration statement. These registration statements expired on May 1, 2018 and we expect to file  replacement registration statements. We have entered into separate 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 $1,000,000,000 aggregate amount of our

34


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

 

 

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 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 April 27, 2018, we had $784,083,000 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. This registration statement also expired on May 1, 2018 and we expect to file a replacement registration statement.

   

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

 

 

 

March 31,

 

March 31,

 

 

 

 

 

 

 

2018

 

2017

 

Amount

 

%

Net income

 

$

453,555

 

$

337,610

 

$

115,945

 

34%

NICS

 

 

437,671

 

 

312,639

 

 

125,032

 

40%

FFO

 

  

353,220

 

 

306,231

 

 

46,989

 

15%

EBITDA

 

  

806,119

 

 

686,728

 

 

119,391

 

17%

NOI

 

  

540,500

 

 

552,129

 

 

(11,629)

 

-2%

SSNOI

 

 

463,459

 

 

451,925

 

 

11,534

 

3%

 

 

 

  

 

 

 

 

 

 

 

 

 

Per share data (fully diluted):

 

  

 

 

 

 

 

 

 

 

 

NICS

 

$

1.17

 

$

0.86

 

$

0.31

 

36%

FFO

 

$

0.95

 

$

0.84

 

$

0.11

 

13%

 

 

 

  

 

 

 

 

 

 

 

 

 

Interest coverage ratio

 

  

6.67x

 

 

5.67x

 

 

1.00x

 

18%

Fixed charge coverage ratio

 

  

5.49x

 

 

4.53x

 

 

0.96x

 

21%

 

Triple-net

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

 

 

 

Three Months Ended

 

Change

 

 

 

 

March 31,

 

March 31,

 

 

 

 

 

 

 

 

 

2018

 

2017

 

$

 

%

NOI

 

 $ 

222,738

 

 $ 

249,735

 

 $ 

(26,997)

 

-11%

Non SSNOI attributable to same store properties

 

 

(8,729)

 

 

(9,239)

 

 

510

 

-6%

NOI attributable to non same store properties(1)

 

 

(48,530)

 

 

(75,156)

 

 

26,626

 

-35%

SSNOI(2)

 

 $ 

165,479

 

 $ 

165,340

 

 $ 

139

 

0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Change is primarily due to the acquisition of 22 properties, the transitioning/restructuring of 15 properties, and the conversion of 15 construction projects into revenue-generating properties subsequent to January 1, 2017 and 36 held for sale properties at March 31, 2018.

(2) Relates to 461 same store properties.

35


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

 

 

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

 

 

 

 

Three Months Ended

 

Change

 

 

 

 

March 31,

 

March 31,

 

 

 

 

 

 

 

 

2018

 

2017

 

$

 

%

Revenues:

 

  

 

 

 

 

 

 

 

 

 

 

Rental income

 

 $ 

206,831

 

 $ 

227,290

 

 $ 

(20,459)

 

-9%

 

Interest income

 

  

14,551

 

 

20,679

 

 

(6,128)

 

-30%

 

Other income

 

  

1,377

 

 

1,766

 

 

(389)

 

-22%

 

 

Total revenues

 

  

222,759

 

 

249,735

 

 

(26,976)

 

-11%

Property operating expenses

 

 

21

 

 

-

 

 

21

 

n/a

 

 

NOI(1)

 

 

222,738

 

 

249,735

 

 

(26,997)

 

-11%

Other expenses:

 

  

 

 

 

 

 

 

 

 

 

 

Interest expense

 

  

3,442

 

 

5,511

 

 

(2,069)

 

-38%

 

Loss (gain) on derivatives and financial instruments, net

 

 

(7,173)

 

 

1,224

 

 

(8,397)

 

n/a

 

Depreciation and amortization

 

  

56,032

 

 

59,608

 

 

(3,576)

 

-6%

 

Loss (gain) on extinguishment of debt, net

 

  

(32)

 

 

29,084

 

 

(29,116)

 

n/a

 

Impairment of assets

 

 

25,884

 

 

-

 

 

25,884

 

n/a

 

Other expenses

 

 

1,120

 

 

5,010

 

 

(3,890)

 

-78%

 

 

Total other expenses

 

  

79,273

 

 

100,437

 

 

(21,164)

 

-21%

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

 

  

143,465

 

 

149,298

 

 

(5,833)

 

-4%

Income tax (expense) benefit

 

  

(1,136)

 

 

(800)

 

 

(336)

 

42%

Income (loss) from unconsolidated entities

 

 

5,821

 

 

5,638

 

 

183

 

3%

Income from continuing operations

 

  

148,150

 

 

154,136

 

 

(5,986)

 

-4%

Gain (loss) on real estate dispositions, net

 

 

123,397

 

 

231,081

 

 

(107,684)

 

-47%

Net income

 

 

271,547

 

 

385,217

 

 

(113,670)

 

-30%

Less: Net income (loss) attributable to noncontrolling interests

 

  

1,963

 

 

603

 

 

1,360

 

226%

Net income attributable to common stockholders

 

$

269,584

 

$

384,614

 

$

(115,030)

 

-30%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) See Non-GAAP Financial Measures.

 

     The decrease in rental income is primarily attributable to the disposition of properties exceeding new acquisitions.  Certain of our leases contain annual rental escalators that are contingent upon changes in the Consumer Price Index and/or changes in the gross operating revenues of the tenant’s properties.  These escalators are not fixed, so no straight-line rent is recorded; however, rental income is recorded based on the contractual cash rental payments due for the period.  If gross operating revenues at our facilities and/or the Consumer Price Index do not increase, a portion of our revenues may not continue to increase. For the three months ended March 31, 2018, we had 20 leases with rental rate increasers ranging from 0.14% to 0.82% in our triple-net portfolio. The decrease in interest income is primarily related to the volume of loan payoffs during 2017 and 2018.

 

     Depreciation and amortization primarily decreased as a result of the disposition of triple-net properties. To the extent that we acquire or dispose of additional properties in the future, our provision for depreciation and amortization will change accordingly.

 

During the three months ended March 31, 2018, 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. Noncapitalizable transaction costs are recognized through other expenses. The decrease in other expenses is primarily due to fewer non-capitalizable transaction costs from acquisitions.

    During the three months ended March 31, 2018, we completed one triple-net construction project totaling $49,759,000 or $428,957 per bed/unit.  The following is a summary of triple-net construction projects pending as of March 31, 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

Exton, PA

 

120

 

 

34,175

 

 

23,305

 

2Q18

Westerville, OH

 

90

 

 

22,800

 

 

3,635

 

4Q18

 

 

210

 

$

56,975

 

 

26,940

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Interest expense for the three months ended March 31, 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

 

 

March 31, 2018

 

March 31, 2017

 

 

 

 

 

Wtd. Avg.

 

 

 

 

Wtd. Avg.

 

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

Beginning balance

 

$

347,474

 

3.546%

 

$

594,199

 

4.580%

Debt extinguished

 

  

(4,107)

 

4.940%

 

 

(255,553)

 

5.923%

Foreign currency

 

 

4,991

 

3.054%

 

 

3,155

 

2.751%

Principal payments

 

  

(1,016)

 

5.404%

 

 

(2,531)

 

5.790%

Ending balance

 

$

347,342

 

3.500%

 

$

339,270

 

3.549%

 

 

  

 

 

 

 

 

 

 

 

Monthly averages

 

$

348,190

 

3.515%

 

$

531,647

 

4.441%

 

 

 

 

 

 

 

 

 

 

 

   

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

 

 

 

 

March 31,

 

March 31,

 

 

 

 

 

 

 

 

 

2018

 

2017

 

$

 

%

NOI

 

 $ 

225,226

 

 $ 

209,442

 

 $ 

15,784

 

8%

Non SSNOI attributable to same store properties

 

 

312

 

 

316

 

 

(4)

 

-1%

NOI attributable to non same store properties(1)

 

 

(13,960)

 

 

(3,980)

 

 

(9,980)

 

251%

SSNOI(2)

 

 $ 

211,578

 

 $ 

205,778

 

 $ 

5,800

 

3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Change is primarily due to the acquisition of 23 properties subsequent to January 1, 2017 and the transition of 13 properties from triple-net to seniors housing operating.

(2) Relates to 406 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

 

 

 

 

March 31,

 

March 31,

 

 

 

 

 

 

 

 

2018

 

2017

 

$

 

%

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Resident fees and services

 

 $ 

735,934

 

$

670,337

 

$

65,597

 

10%

 

Interest income

 

 

85

 

 

69

 

 

16

 

23%

 

Other income

 

 

1,148

 

 

1,461

 

 

(313)

 

-21%

 

 

Total revenues

 

 

737,167

 

 

671,867

 

 

65,300

 

10%

Property operating expenses

 

 

511,941

 

 

462,425

 

 

49,516

 

11%

 

NOI(1)

 

 

225,226

 

 

209,442

 

 

15,784

 

8%

Other expenses:

 

  

 

 

 

 

 

 

 

 

 

 

Interest expense

 

  

16,935

 

 

15,816

 

 

1,119

 

7%

 

Depreciation and amortization

 

  

125,769

 

 

119,737

 

 

6,032

 

5%

 

Loss (gain) on extinguishment of debt, net

 

 

(189)

 

 

890

 

 

(1,079)

 

n/a

 

Impairment of assets

 

 

2,301

 

 

5,406

 

 

(3,105)

 

-57%

 

Other expenses

 

 

(188)

 

 

1,778

 

 

(1,966)

 

n/a

 

 

Total other expenses

 

  

144,628

 

 

143,627

 

 

1,001

 

1%

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

 

  

80,598

 

 

65,815

 

 

14,783

 

22%

Income tax benefit (expense)

 

 

162

 

 

(1,087)

 

 

1,249

 

n/a

Income (loss) from unconsolidated entities

 

  

(9,480)

 

 

(29,191)

 

 

19,711

 

-68%

Income from continuing operations

 

 

71,280

 

 

35,537

 

 

35,743

 

101%

Gain (loss) on real estate dispositions, net

 

 

5

 

 

13,011

 

 

(13,006)

 

-100%

Net income (loss)

 

 

71,285

 

 

48,548

 

 

22,737

 

47%

Less: Net income (loss) attributable to noncontrolling interests

 

  

(898)

 

 

(590)

 

 

(308)

 

52%

Net income (loss) attributable to common stockholders

 

$

72,183

 

$

49,138

 

$

23,045

 

47%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) See Non-GAAP Financial Measures.

 

     Fluctuations in revenues and property operating expenses are primarily a result of acquisitions and the movement of U.S. and foreign currency exchange rates. The fluctuations in depreciation and amortization are due to acquisitions and variations in amortization of short-lived intangible assets. To the extent that we acquire or dispose of additional properties in the future, these amounts will change accordingly. 

 

     During the three month periods ended March 31, 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 on sale of properties are related to the volume of property sales and sales prices.

 

     During the three month period ended March 31, 2018, we completed one seniors housing operating construction project representing $36,218,000 or $385,295 per unit.  The following is a summary of our seniors housing operating construction projects, excluding expansions, pending as of March 31, 2018 (dollars in thousands):

  

Location

 

Units

 

 

Commitment

 

 

Balance

 

Est. Completion

Bushey, UK

 

95

 

$

57,160

 

$

44,251

 

3Q18

Wandsworth, UK

 

98

 

 

81,637

 

 

32,193

 

1Q20

 

 

193

 

$

138,797

 

 

76,444

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense represents secured debt interest expense.  The change in secured debt interest expense is primarily due to the net

38


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

 

 

effect and timing of assumptions, extinguishments and principal amortizations.  The following is a summary of our seniors housing operating property secured debt principal activity (dollars in thousands):

  

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 2018

 

March 31, 2017

 

 

 

 

 

Weighted Avg.

 

 

 

 

Weighted Avg.

 

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

Beginning balance

 

$

1,988,700

 

3.661%

 

$

2,463,249

 

3.936%

Debt issued

 

 

20,326

 

3.774%

 

 

12,536

 

2.340%

Debt assumed

 

 

85,192

 

4.395%

 

 

-

 

0.000%

Debt extinguished

 

 

(118,010)

 

4.997%

 

 

(438,532)

 

5.301%

Foreign currency

 

 

(32,867)

 

3.285%

 

 

7,158

 

3.488%

Principal payments

 

 

(11,940)

 

3.477%

 

 

(11,259)

 

3.733%

Ending balance

 

$

1,931,401

 

3.679%

 

$

2,033,152

 

3.663%

 

 

 

 

 

 

 

 

 

 

 

Monthly averages

 

$

1,942,292

 

3.642%

 

$

2,162,185

 

3.729%

 

     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 three month period ended March 31, 2017.

  

Outpatient Medical

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

 

 

 

Three Months Ended

 

Change

 

 

 

 

March 31,

 

March 31,

 

 

 

 

 

 

 

 

 

2018

 

2017

 

$

 

%

NOI

 

 $ 

92,168

 

 $ 

92,719

 

 $ 

(551)

 

-1%

Non SSNOI on same store properties

 

 

(876)

 

 

(1,821)

 

 

945

 

-52%

NOI attributable to non same store properties(1)

 

 

(4,890)

 

 

(10,091)

 

 

5,201

 

-52%

SSNOI(2)

 

 $ 

86,402

 

 $ 

80,807

 

 $ 

5,595

 

7%

 

 

 

 

 

 

 

 

 

 

 

 

(1) Change is primarily due to acquisitions of 13 properties and the conversion of 12 construction projects into revenue-generating properties subsequent to January 1, 2017.

(2) Relates to 220 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

 

 

 

 

March 31,

 

March 31,

 

 

 

 

 

 

 

 

2018

 

2017

 

$

 

%

Revenues:

 

  

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

136,538

 

$

139,851

 

$

(3,313)

 

-2%

 

Interest income

 

  

12

 

 

-

 

 

12

 

n/a

 

Other income

 

  

121

 

 

612

 

 

(491)

 

-80%

 

 

Total revenues

 

  

136,671

 

 

140,463

 

 

(3,792)

 

-3%

Property operating expenses

 

  

44,503

 

 

47,744

 

 

(3,241)

 

-7%

 

NOI(1)

 

  

92,168

 

 

92,719

 

 

(551)

 

-1%

Other expenses:

 

  

 

 

 

 

 

 

 

 

 

 

Interest expense

 

  

1,676

 

 

2,291

 

 

(615)

 

-27%

 

Depreciation and amortization

 

  

46,400

 

 

48,931

 

 

(2,531)

 

-5%

 

Impairment of assets

 

 

-

 

 

5,625

 

 

(5,625)

 

-100%

 

Loss (gain) on extinguishment of debt, net

 

  

11,928

 

 

1,382

 

 

10,546

 

763%

 

Other expenses

 

 

598

 

 

360

 

 

238

 

66%

 

 

Total other expenses

 

  

60,602

 

 

58,589

 

 

2,013

 

3%

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

 

  

31,566

 

 

34,130

 

 

(2,564)

 

-8%

Income tax (expense) benefit

 

  

(428)

 

 

(335)

 

 

(93)

 

28%

Income from unconsolidated entities

 

 

1,230

 

 

447

 

 

783

 

175%

Income from continuing operations

 

  

32,368

 

 

34,242

 

 

(1,874)

 

-5%

Gain (loss) on real estate dispositions, net

 

 

214,782

 

 

-

 

 

214,782

 

n/a

Net income (loss)

 

  

247,150

 

 

34,242

 

 

212,908

 

622%

Less: Net income (loss) attributable to noncontrolling interests

 

  

3,143

 

 

810

 

 

2,333

 

288%

Net income (loss) attributable to common stockholders

 

$

244,007

 

$

33,432

 

$

210,575

 

630%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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 rent rates, resulting in an increase or decrease in rental income.  For the three months ended March 31, 2018, our consolidated outpatient medical portfolio signed 129,318 square feet of new leases and 250,794 square feet of renewals.  The weighted-average term of these leases was six years, with a rate of $40.48 per square foot and tenant improvement and lease commission costs of $22.31 per square foot. Substantially all of these leases contain an annual fixed or contingent escalation rent structure ranging from 0% to 4%. 

 

     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 three months ended March 31, 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. 

 

    During the three months ended March 31, 2018, there were no outpatient medical construction projects completed. The following is a summary of the outpatient medical construction projects, excluding expansions, pending as of March 31, 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

Palmer. AK

 

38,676

 

$

12,345

 

$

3,513

 

3Q18

Brooklyn, NY

 

140,955

 

 

105,177

 

 

51,521

 

3Q19

 

 

179,631

 

$

117,522

 

$

55,034

 

 

 

     Total interest expense represents secured debt interest expense. The change in secured debt interest expense is primarily due to the net effect and timing of assumptions, extinguishments and principal amortizations. The fluctuation in losses/gains on debt extinguishment is attributable to the prepayment penalties paid on certain extinguishments in 2018.  The following is a summary of our outpatient medical secured debt principal activity (dollars in thousands):

 

 

 

Three Months Ended

 

 

March 31, 2018

 

March 31, 2017

 

 

 

 

 

Weighted Avg.

 

 

 

 

Weighted Avg.

 

 

Amount

 

Interest Rate

 

Amount

 

Interest Rate

Beginning balance

 

$

279,951

 

4.720%

 

$

404,079

 

4.846%

Debt extinguished

 

  

(61,291)

 

7.431%

 

  

(112,104)

 

5.889%

Principal payments

 

  

(963)

 

6.204%

 

  

(2,151)

 

6.491%

Ending balance

 

$

217,697

 

4.141%

 

$

289,824

 

4.509%

 

 

 

 

 

 

 

 

 

 

 

Monthly averages

 

$

233,394

 

4.288%

 

$

332,085

 

4.664%

 

         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

 

 

 

 

March 31,

 

March 31,

 

 

 

 

 

 

 

 

2018

 

2017

 

$

 

%

Revenues:

 

  

 

 

 

 

 

 

 

 

 

 

 

Other income

 

$

368

 

$

233

 

$

135

 

58%

Expenses:

 

  

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

  

100,722

 

 

94,979

 

 

5,743

 

6%

 

 

General and administrative

 

  

33,705

 

 

31,101

 

 

2,604

 

8%

 

 

Other expenses

 

 

2,182

 

 

4,527

 

 

(2,345)

 

-52%

 

 

Total expenses

 

  

136,609

 

 

130,607

 

 

6,002

 

5%

Loss from continuing operations before income taxes

 

  

(136,241)

 

 

(130,374)

 

 

(5,867)

 

5%

Income tax (expense) benefit

 

  

(186)

 

 

(23)

 

 

(163)

 

709%

Loss from continuing operations

 

  

(136,427)

 

 

(130,397)

 

 

(6,030)

 

5%

Less: Preferred stock dividends

 

  

11,676

 

 

14,379

 

 

(2,703)

 

-19%

Less: Preferred stock redemption charge

 

  

-

 

 

9,769

 

 

(9,769)

 

-100%

Net loss attributable to common stockholders

 

$

(148,103)

 

$

(154,545)

 

$

6,442

 

-4%

 

     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

 

 

March 31,

 

March 31,

 

 

 

 

 

 

2018

 

2017

 

$

 

%

Senior unsecured notes

 

$

93,414

 

$

86,591

 

$

6,823

 

8%

Secured debt

 

  

38

 

  

60

 

  

(22)

 

-37%

Primary unsecured credit facility

 

  

4,013

 

  

5,037

 

  

(1,024)

 

-20%

Loan expense

 

  

3,257

 

  

3,291

 

  

(34)

 

-1%

Totals

 

$

100,722

 

$

94,979

 

$

5,743

 

6%

 

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 March 31, 2018 and 2017 were 3.07% and 2.93%, respectively. Other expenses primarily represent severance-related costs associated with the departure of certain executive officers and key employees.

  

42


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

 

 

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. Covenants in our senior unsecured notes contain a financial ratios based on a definition of EBITDA that is specific to those agreements. Failure to satisfy these covenants could result in an event of default that could have a material adverse impact on our cost and availability of capital, which could in turn have a material adverse impact on our consolidated results of operations, liquidity and/or financial condition. Due to the materiality of these debt agreements and the financial covenants, we have disclosed Adjusted EBITDA, which represents EBITDA as defined above excluding unconsolidated entities and adjusted for items per our covenant. We use Adjusted EBITDA to measure our adjusted fixed charge coverage ratio, which represents Adjusted EBITDA divided by fixed charges on a trailing twelve months basis. Fixed charges include total interest (excluding capitalized interest and non-cash interest expenses), secured debt principal amortization and preferred dividends. Our covenant requires an adjusted fixed charge coverage ratio of at least 1.50 times.

     Our supplemental reporting measures and similarly entitled financial measures are widely used by investors, equity and debt analysts and rating agencies in the valuation, comparison, rating and investment recommendations of companies. Management uses these financial measures to facilitate internal and external comparisons to our historical operating results and in making operating decisions. Additionally, these measures are utilized by the Board of Directors to evaluate management. None of our supplemental measures represent net income or cash flow provided from operating activities as determined in accordance with U.S. GAAP and should not be considered as alternative measures of profitability or liquidity. Finally, the supplemental measures, as defined by us, may not be comparable to similarly entitled items reported by other real estate investment trusts or other companies.

43


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

 

 

     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,

NOI Reconciliations:

 

2017

 

2017

 

2017

 

2017

 

2018

Net income (loss)

 

$

337,610

 

$

203,441

 

$

89,299

 

$

(89,743)

 

$

453,555

Loss (gain) on real estate dispositions, net

 

 

(244,092)

 

 

(42,155)

 

 

(1,622)

 

 

(56,381)

 

 

(338,184)

Loss (income) from unconsolidated entities

 

 

23,106

 

 

3,978

 

 

(3,408)

 

 

59,449

 

 

2,429

Income tax expense (benefit)

 

 

2,245

 

 

(8,448)

 

 

669

 

 

25,663

 

 

1,588

Other expenses

 

 

11,675

 

 

6,339

 

 

99,595

 

 

60,167

 

 

3,712

Impairment of assets

 

 

11,031

 

 

13,631

 

 

-

 

 

99,821

 

 

28,185

Provision for loan losses

 

 

-

 

 

-

 

 

-

 

 

62,966

 

 

-

Loss (gain) on extinguishment of debt, net

 

 

31,356

 

 

5,515

 

 

-

 

 

371

 

 

11,707

Loss (gain) on derivatives and financial instruments, net

 

 

1,224

 

 

736

 

 

324

 

 

-

 

 

(7,173)

General and administrative expenses

 

 

31,101

 

 

32,632

 

 

29,913

 

 

28,365

 

 

33,705

Depreciation and amortization

 

 

228,276

 

 

224,847

 

 

230,138

 

 

238,458

 

 

228,201

Interest expense

 

 

118,597

 

 

116,231

 

 

122,578

 

 

127,217

 

 

122,775

Consolidated net operating income (NOI)

 

$

552,129

 

$

556,747

 

$

567,486

 

$

556,353

 

$

540,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOI by segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triple-net

 

$

249,735

 

$

241,347

 

$

244,916

 

$

231,083

 

$

222,738

 

Seniors housing operating

 

 

209,442

 

 

218,978

 

 

225,100

 

 

226,509

 

 

225,226

 

Outpatient medical

 

 

92,719

 

 

96,183

 

 

96,772

 

 

98,393

 

 

92,168

 

Non-segment/corporate

 

 

233

 

 

239

 

 

698

 

 

368

 

 

368

 

 

Total NOI

 

$

552,129

 

$

556,747

 

$

567,486

 

$

556,353

 

$

540,500

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

March 31,

 

June 30,

 

September 30,

 

December 31,

 

March 31,

SSNOI Reconciliations:

 

2017

 

2017

 

2017

 

2017

 

2018

NOI:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triple-net

 

 

 

$

249,735

 

$

241,347

 

$

244,916

 

$

231,083

 

$

222,738

 

Seniors housing operating

 

 

 

 

209,442

 

 

218,978

 

 

225,100

 

 

226,509

 

 

225,226

 

Outpatient medical

 

 

 

 

92,719

 

 

96,183

 

 

96,772

 

 

98,393

 

 

92,168

 

 

 

Total

 

 

 

 

551,896

 

 

556,508

 

 

566,788

 

 

555,985

 

 

540,132

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triple-net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non SSNOI on same store properties

 

 

(9,239)

 

 

(8,391)

 

 

(8,196)

 

 

(7,597)

 

 

(8,729)

 

 

NOI attributable to non same store properties

 

 

(75,156)

 

 

(65,842)

 

 

(67,439)

 

 

(55,451)

 

 

(48,530)

 

 

 

Subtotal

 

 

 

 

(84,395)

 

 

(74,233)

 

 

(75,635)

 

 

(63,048)

 

 

(57,259)

 

Seniors housing operating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non SSNOI on same store properties

 

 

316

 

 

558

 

 

288

 

 

424

 

 

312

 

 

NOI attributable to non same store properties

 

 

(3,980)

 

 

(3,632)

 

 

(5,497)

 

 

(11,426)

 

 

(13,960)

 

 

 

Subtotal

 

 

 

 

(3,664)

 

 

(3,074)

 

 

(5,209)

 

 

(11,002)

 

 

(13,648)

 

Outpatient medical:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non SSNOI on same store properties

 

 

(1,821)

 

 

(2,306)

 

 

(1,441)

 

 

(1,734)

 

 

(876)

 

 

NOI attributable to non same store properties

 

 

(10,091)

 

 

(12,708)

 

 

(13,744)

 

 

(14,303)

 

 

(4,890)

 

 

 

Subtotal

 

 

 

 

(11,912)

 

 

(15,014)

 

 

(15,185)

 

 

(16,037)

 

 

(5,766)

SSNOI:

 

Properties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Triple-net

 

461

 

 

165,340

 

 

167,114

 

 

169,281

 

 

168,035

 

 

165,479

 

Seniors housing operating

 

406

 

 

205,778

 

 

215,904

 

 

219,891

 

 

215,507

 

 

211,578

 

Outpatient medical

 

220

 

 

80,807

 

 

81,169

 

 

81,587

 

 

82,356

 

 

86,402

 

 

 

Total

 

1,087

 

$

451,925

 

$

464,187

 

$

470,759

 

$

465,898

 

$

463,459

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SSNOI Property Reconciliation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total properties

 

1,257

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions

 

(58)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Developments

 

(30)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held for sale

 

(45)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transitions/restructurings

 

(28)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other(1)

 

(9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same store properties

 

1,087

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Includes eight land parcels and one loan.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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,

FFO Reconciliations:

  

2017

 

2017

 

2017

 

2017

 

2018

NICS

  

$

312,639

 

$

188,429

 

$

74,043

 

$

(111,523)

 

$

437,671

Depreciation and amortization

  

 

228,276

 

 

224,847

 

 

230,138

 

 

238,458

 

 

228,201

Impairment of assets

 

 

11,031

 

 

13,631

 

 

-

 

 

99,821

 

 

28,185

Loss (gain) on real estate dispositions, net

  

 

(244,092)

 

 

(42,155)

 

 

(1,622)

 

 

(56,381)

 

 

(338,184)

Noncontrolling interests

 

 

(18,107)

 

 

(16,955)

 

 

(16,826)

 

 

(8,131)

 

 

(16,353)

Unconsolidated entities

  

 

16,484

 

 

16,593

 

 

9,989

 

 

16,980

 

 

13,700

FFO

  

$

306,231

 

$

384,390

 

$

295,722

 

$

179,224

 

$

353,220

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

  

 

362,534

 

 

366,524

 

 

369,089

 

 

370,485

 

 

371,426

 

Diluted for NICS purposes

 

 

364,652

 

 

368,149

 

 

370,740

 

 

370,485

 

 

373,257

 

Diluted for FFO purposes

  

 

364,652

 

 

368,149

 

 

370,740

 

 

372,145

 

 

373,257

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share data:

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NICS

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

  

$

0.86

 

$

0.51

 

$

0.20

 

$

(0.30)

 

$

1.18

 

Diluted

  

 

0.86

 

 

0.51

 

 

0.20

 

 

(0.30)

 

 

1.17

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FFO

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

  

$

0.84

 

$

1.05

 

$

0.80

 

$

0.48

 

$

0.95

 

Diluted

  

 

0.84

 

 

1.04

 

 

0.80

 

 

0.48

 

 

0.95

  

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

 

  

 

 

 

Three Months Ended

 

 

 

March 31,

 

June 30,

 

September 30,

 

December 31,

 

March 31,

EBITDA Reconciliations:

 

2017

 

2017

 

2017

 

2017

 

2018

Net income (loss)

 

$

337,610

 

$

203,441

 

$

89,299

 

$

(89,743)

 

$

453,555

Interest expense

 

  

118,597

 

  

116,231

 

  

122,578

 

  

127,217

 

  

122,775

Income tax expense (benefit)

 

  

2,245

 

  

(8,448)

 

  

669

 

  

25,663

 

  

1,588

Depreciation and amortization

 

  

228,276

 

  

224,847

 

  

230,138

 

  

238,458

 

  

228,201

EBITDA

 

$

686,728

 

$

536,071

 

$

442,684

 

$

301,595

 

$

806,119

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Interest Coverage Ratio:

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Interest expense

 

$

118,597

 

$

116,231

 

$

122,578

 

$

127,217

 

$

122,775

Non-cash interest expense

 

  

(1,679)

 

  

(2,946)

 

  

(3,199)

 

  

(2,534)

 

  

(4,179)

Capitalized interest

 

  

4,129

 

  

3,358

 

  

2,545

 

  

3,456

 

  

2,336

 

Total interest

 

  

121,047

 

  

116,643

 

  

121,924

 

  

128,139

 

  

120,932

EBITDA

 

$

686,728

 

$

536,071

 

$

442,684

 

$

301,595

 

$

806,119

 

Interest coverage ratio

 

  

5.67x

 

  

4.60x

 

  

3.63x

 

  

2.35x

 

  

6.67x

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Fixed Charge Coverage Ratio:

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Total interest

 

$

121,047

 

$

116,643

 

$

121,924

 

$

128,139

 

$

120,932

Secured debt principal payments

 

  

16,249

 

 

15,958

 

  

15,300

 

  

16,572

 

  

14,247

Preferred dividends

 

  

14,379

 

 

11,680

 

  

11,676

 

  

11,676

 

  

11,676

 

Total fixed charges

 

  

151,675

 

  

144,281

 

  

148,900

 

  

156,387

 

  

146,855

EBITDA

 

$

686,728

 

$

536,071

 

$

442,684

 

$

301,595

 

$

806,119

 

Fixed charge coverage ratio

 

  

4.53x

 

 

3.72x

 

 

2.97x

 

 

1.93x

 

 

5.49x

45


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

 

 

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

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Twelve Months Ended

Adjusted EBITDA

 

March 31,

 

June 30,

 

September 30,

 

December 31,

 

March 31,

Reconciliations:

 

2017

 

2017

 

2017

 

2017

 

2018

Net income

 

$

1,254,208

 

$

1,246,899

 

$

981,458

 

$

540,613

 

$

656,551

Interest expense

 

  

506,982

 

 

490,886

 

 

483,765

 

 

484,622

 

 

488,800

Income tax expense (benefit)

 

  

(15,158)

 

 

(23,093)

 

 

(22,119)

 

 

20,128

 

 

19,471

Depreciation and amortization

 

  

900,822

 

 

899,100

 

 

911,180

 

 

921,720

 

 

921,645

 

EBITDA

 

 

2,646,854

 

 

2,613,792

 

 

2,354,284

 

 

1,967,083

 

 

2,086,467

Loss (income) from unconsolidated entities

 

 

29,643

 

 

31,662

 

 

26,505

 

 

83,125

 

 

62,448

Transaction costs

 

 

34,702

 

 

29,545

 

 

9,704

 

 

-

 

 

-

Stock-based compensation expense(1)

 

 

25,588

 

 

23,321

 

 

24,710

 

 

19,102

 

 

25,753

Loss (gain) on extinguishment of debt, net

 

 

48,593

 

 

54,074

 

 

54,074

 

 

37,241

 

 

17,593

Loss (gain) on real estate dispositions, net

 

  

(608,139)

 

 

(648,763)

 

 

(488,034)

 

 

(344,250)

 

 

(438,342)

Impairment of assets

 

  

33,923

 

 

47,554

 

 

37,849

 

 

124,483

 

 

141,637

Provision for loan losses

 

  

10,215

 

 

10,215

 

 

10,215

 

 

62,966

 

 

62,966

Loss (gain) on derivatives and financial instruments, net

 

 

(1,225)

 

 

(489)

 

 

2,351

 

 

2,284

 

 

(6,113)

Other expenses(1)

 

 

19,396

 

 

23,997

 

 

122,211

 

 

176,395

 

 

167,524

Additional other income

 

  

(16,664)

 

 

(4,853)

 

 

(4,853)

 

 

-

 

 

-

Adjusted EBITDA

 

$

2,222,886

 

$

2,180,055

 

$

2,149,016

 

$

2,128,429

 

$

2,119,933

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Adjusted Fixed Charge Coverage Ratio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

506,982

 

$

490,886

 

$

483,765

 

$

484,622

 

$

488,800

Capitalized interest

 

  

18,035

 

  

17,087

 

  

14,866

 

  

13,489

 

  

11,696

Non-cash interest expense

 

  

(3,958)

 

  

(5,386)

 

  

(8,041)

 

  

(10,359)

 

  

(12,858)

 

Total interest

 

 

521,059

 

 

502,587

 

 

490,590

 

 

487,752

 

 

487,638

Adjusted EBITDA

 

$

2,222,886

 

$

2,180,055

 

$

2,149,016

 

$

2,128,429

 

$

2,119,933

 

Adjusted interest coverage ratio

 

 

4.27x

 

 

4.34x

 

 

4.38x

 

 

4.36x

 

 

4.35x

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest

 

$

521,059

 

$

502,587

 

$

490,590

 

$

487,752

 

$

487,638

Secured debt principal payments

 

  

72,073

 

  

68,935

 

  

66,084

 

  

64,078

 

  

62,077

Preferred dividends

 

  

63,434

 

  

58,762

 

  

54,086

 

  

49,410

 

  

46,707

 

Total fixed charges

 

  

656,566

 

  

630,284

 

  

610,760

 

  

601,240

 

  

596,422

Adjusted EBITDA

 

$

2,222,886

 

$

2,180,055

 

$

2,149,016

 

$

2,128,429

 

$

2,119,933

 

Adjusted fixed charge coverage ratio

 

  

3.39x

 

 

3.46x

 

 

3.52x

 

 

3.54x

 

 

3.55x

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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.

46


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,

 

 

 

 

 

2017

 

 

2017

 

 

2017

 

 

2017

 

 

2018

Book capitalization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings under primary unsecured credit facility

 

$

522,000

 

$

385,000

 

$

420,000

 

$

719,000

 

$

865,000

Long-term debt obligations(1)

 

 

10,932,185

 

 

10,994,946

 

 

11,101,592

 

 

11,012,936

 

 

10,484,840

Cash & cash equivalents(2)

 

 

(380,360)

 

 

(442,284)

 

 

(250,776)

 

 

(249,620)

 

 

(202,824)

Total net debt

 

 

11,073,825

 

 

10,937,662

 

 

11,270,816

 

 

11,482,316

 

 

11,147,016

Total equity and noncontrolling interests(3)

 

 

15,495,681

 

 

15,702,399

 

 

15,631,412

 

 

15,300,646

 

 

15,448,201

Book capitalization

 

$

26,569,506

 

$

26,640,061

 

$

26,902,228

 

$

26,782,962

 

$

26,595,217

 

Net debt to book capitalization ratio

 

 

42%

 

 

41%

 

 

42%

 

 

43%

 

 

42%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Undepreciated book capitalization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net debt

 

$

11,073,825

 

$

10,937,662

 

$

11,270,816

 

$

11,482,316

 

$

11,147,016

Accumulated depreciation and amortization

 

 

4,335,160

 

 

4,568,408

 

 

4,826,418

 

 

4,838,370

 

 

4,990,780

Total equity and noncontrolling interests(3)

 

 

15,495,681

 

 

15,313,523

 

 

15,631,412

 

 

15,300,646

 

 

15,448,201

Undepreciated book capitalization

 

$

30,904,666

 

$

30,819,593

 

$

31,728,646

 

$

31,621,332

 

$

31,585,997

 

Net debt to undepreciated book capitalization ratio

 

 

36%

 

 

35%

 

 

36%

 

 

36%

 

 

35%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Market capitalization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares outstanding

 

 

364,564

 

 

368,878

 

 

370,342

 

 

371,732

 

 

371,971

Period end share price

 

$

70.82

 

$

74.85

 

$

70.28

 

$

63.77

 

$

54.43

Common equity market capitalization

 

$

25,818,422

 

$

27,610,518

 

$

26,027,636

 

$

23,705,350

 

$

20,246,382

Total net debt

 

 

11,073,825

 

 

10,937,662

 

 

11,270,816

 

 

11,482,316

 

 

11,147,016

Noncontrolling interests(3)

 

 

859,478

 

 

873,567

 

 

901,487

 

 

877,499

 

 

889,766

Preferred stock

 

 

718,750

 

 

718,750

 

 

718,503

 

 

718,503

 

 

718,498

Enterprise value

 

$

38,470,475

 

$

40,140,497

 

$

38,918,442

 

$

36,783,668

 

$

33,001,662

 

Net debt to market capitalization ratio

 

 

29%

 

 

27%

 

 

29%

 

 

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.

 

47


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, including the QCP Acquisition and ProMedica joint venture, 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.

  

 

48


  

 

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):

 

 

March 31, 2018

 

December 31, 2017

 

 

Principal

 

Change in

 

Principal

 

Change in

 

 

balance

 

fair value

 

balance

 

fair value

Senior unsecured notes

 

$

7,305,556

 

$

(475,650)

 

$

7,710,219

 

$

(500,951)

Secured debt

 

 

1,626,085

 

 

(56,980)

 

 

1,749,958

 

 

(63,492)

Totals

 

$

8,931,641

 

$

(532,630)

 

$

9,460,177

 

$

(564,443)

     Our variable rate debt, including our primary unsecured credit facility, is reflected at fair value. At March 31, 2018, we had $2,438,743,000 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 $24,387,000.  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 March 31, 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 $6,000,000.  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):

  

 

 

March 31, 2018

 

December 31, 2017

 

 

Carrying

 

Change in

 

Carrying

 

Change in

 

 

Value

 

fair value

 

Value

 

fair value

Foreign currency forward contracts

 

$

29,922

 

$

12,933

 

$

23,238

 

$

12,929

Debt designated as hedges

 

 

1,666,769

 

 

16,668

 

 

1,620,273

 

 

16,203

Totals

 

$

1,696,691

 

$

29,601

 

$

1,643,511

 

$

29,132

 

 

 

 

 

 

 

 

 

 

 

 

 

 

49


  

 

     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

January 1, 2018 through January 31, 2018

 

64,408

 

$

60.26

 

 

 

 

February 1, 2018 through February 28, 2018

 

-

 

 

-

 

 

 

 

March 1, 2018 through March 31, 2018

 

5,504

 

 

52.53

 

 

 

 

Totals

 

69,912

 

$

59.65

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) During the three months ended March 31, 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.

50


  

 

  

Item 6. Exhibits

2.1              Agreement and Plan of Merger, dated as of April 25, 2018, by and among Welltower Inc. (the “Company”), Potomac Acquisition LLC, Quality Care Properties, Inc. and certain subsidiaries of Quality Care Properties, Inc. (filed with the Securities and Exchange Commission as Exhibit 2.1 to the Company’s Form 8-K filed April 26, 2018, and incorporated herein by reference thereto).

4.1              Indenture, dated as of March 15, 2010, between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”) (filed with the Securities and Exchange Commission as Exhibit 4.1 to the Company’s Form 8-K filed March 15, 2010, and incorporated herein by reference thereto).

4.2              Supplemental Indenture No. 13, dated as of April 10, 2018, between the Company and the Trustee (filed with the Securities and Exchange Commission as Exhibit 4.2 to the Company’s Form 8-K filed April 10, 2018, and incorporated herein by reference thereto).

4.3              Form of Global Note due 2028 (included in Exhibit 4.2 hereto).

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

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

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

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

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

101.INS     XBRL Instance Document*

101.SCH   XBRL Taxonomy Extension Schema Document*

101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document*

101.LAB   XBRL Taxonomy Extension Label Linkbase Document*

101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document*

101.DEF    XBRL Taxonomy Extension Definition Linkbase Document*

                           

*

 

 

Attached as Exhibit 101 to this Quarterly Report on Form 10-Q are the following materials, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets at March 31, 2018 and December 31, 2017, (ii) the Consolidated Statements of Comprehensive Income for the three months ended March 31, 2018 and 2017, (iii) the Consolidated Statements of Equity for the three months ended March 31, 2018 and 2017, (iv) the Consolidated Statements of Cash Flows for the three months ended March 31, 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: May 4, 2018 

By:  

/s/ THOMAS J. DEROSA  

 

 

Thomas J. DeRosa, 

 

 

Chief Executive Officer

 (Principal Executive Officer) 

 

 

 

 

 

Date: May 4, 2018 

By:  

/s/ JOHN A. GOODEY  

 

 

John A. Goodey, 

 

 

Executive Vice President & Chief Financial Officer

 (Principal Financial Officer) 

 

 

 

 

 

Date: May 4, 2018 

By:  

/s/ JOSHUA T. FIEWEGER 

 

 

Joshua T. Fieweger, 

 

 

Vice President & Controller

 (Principal Accounting Officer) 

 

 

51