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WELLTOWER INC. - Quarter Report: 2019 March (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
 
 
 
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
or
 
 
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                      
Commission file number: 1-8923
WELLTOWER INC.
 
(Exact name of registrant as specified in its charter
Delaware
 
34-1096634
(State or other jurisdiction
of Incorporation)
 
(IRS Employer
Identification No.)
 
 
 
4500 Dorr Street, Toledo, Ohio
 
43615
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(419) 247-2800
(Registrant’s telephone number, including area code)  
 
 
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  þ  No  ¨
Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ  No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 Large accelerated filer
 þ
 Accelerated filer
¨
 Non-accelerated filer
¨
 Smaller reporting company
¨
Emerging growth company
¨
 
 
 
 
(Do not check if a smaller reporting company)
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No  þ
As of April 19, 2019, the registrant had 404,940,650 shares of common stock outstanding. 



TABLE OF CONTENTS
 
 
Page
PART I. FINANCIAL INFORMATION
 
 
 
Item 1. Financial Statements (Unaudited)
 
 
 
Consolidated Balance Sheets — March 31, 2019 and December 31, 2018
 
 
Consolidated Statements of Comprehensive Income — Three months ended March 31, 2019 and 2018
 
 
Consolidated Statements of Equity — Three months ended March 31, 2019 and 2018
 
 
Consolidated Statements of Cash Flows — Three months ended March 31, 2019 and 2018
 
 
Notes to Unaudited Consolidated Financial Statements
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
 
Item 4. Controls and Procedures
 
 
PART II. OTHER INFORMATION
 
 
 
Item 1. Legal Proceedings
 
 
Item 1A. Risk Factors
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
 
Item 5. Other Information
 
 
Item 6. Exhibits
 
 
Signatures



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 
CONSOLIDATED BALANCE SHEETS
WELLTOWER INC. AND SUBSIDIARIES
(In thousands) 
 
 
March 31, 2019 (Unaudited)
 
December 31, 2018 (Note)
Assets:  
 
 
 
 
Real estate investments:  
 
 
 
 
Real property owned:  
 
 
 
 
Land and land improvements  
 
$
3,238,679

 
$
3,205,091

Buildings and improvements  
 
28,047,658

 
28,019,502

Acquired lease intangibles  
 
1,539,363

 
1,581,159

Real property held for sale, net of accumulated depreciation  
 
330,327

 
590,271

Construction in progress  
 
253,478

 
194,365

Less accumulated depreciation and amortization  
 
(5,670,111
)
 
(5,499,958
)
Net real property owned  
 
27,739,394

 
28,090,430

Right of use assets, net
 
502,429

 

Real estate loans receivable, net of allowance  
 
351,085

 
330,339

Net real estate investments  
 
28,592,908

 
28,420,769

Other assets:  
 
 
 
 
Investments in unconsolidated entities  
 
484,265

 
482,914

Goodwill  
 
68,321

 
68,321

Cash and cash equivalents  
 
249,127

 
215,376

Restricted cash  
 
158,312

 
100,753

Straight-line rent receivable
 
395,621

 
367,093

Receivables and other assets  
 
688,782

 
686,846

Total other assets  
 
2,044,428

 
1,921,303

Total assets  
 
$
30,637,336

 
$
30,342,072

 
 
 
 
 
Liabilities and equity  
 
 
 
 
Liabilities:  
 
 
 
 
Unsecured credit facility and commercial paper
 
$
419,293

 
$
1,147,000

Senior unsecured notes  
 
9,632,013

 
9,603,299

Secured debt  
 
2,660,190

 
2,476,177

Lease liabilities
 
426,639

 
70,668

Accrued expenses and other liabilities  
 
1,000,825

 
1,034,283

Total liabilities  
 
14,138,960

 
14,331,427

Redeemable noncontrolling interests  
 
450,545

 
424,046

Equity:  
 
 
 
 
Preferred stock  
 

 
718,498

Common stock  
 
404,509

 
384,465

Capital in excess of par value  
 
19,654,137

 
18,424,368

Treasury stock  
 
(74,492
)
 
(68,499
)
Cumulative net income  
 
6,402,004

 
6,121,534

Cumulative dividends  
 
(11,163,317
)
 
(10,818,557
)
Accumulated other comprehensive income (loss)  
 
(144,618
)
 
(129,769
)
Other equity  
 
268

 
294

Total Welltower Inc. stockholders’ equity  
 
15,078,491

 
14,632,334

Noncontrolling interests  
 
969,340

 
954,265

Total equity  
 
16,047,831

 
15,586,599

Total liabilities and equity  
 
$
30,637,336

 
$
30,342,072

 
NOTE: The consolidated balance sheet at December 31, 2018 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.


3


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
WELLTOWER INC. AND SUBSIDIARIES
(In thousands, except per share data) 
 
 
Three Months Ended
 
 
March 31,
 
 
2019
 
2018
Revenues:
 
 
 
 
Resident fees and services
 
$
868,285

 
$
735,934

Rental income  
 
381,084

 
343,369

Interest income
 
15,119

 
14,648

Other income
 
7,757

 
3,014

Total revenues
 
1,272,245

 
1,096,965

 
 
 
 
 
Expenses:
 
 
 
 
Property operating expenses
 
670,807

 
556,465

Depreciation and amortization
 
243,932

 
228,201

Interest expense
 
145,232

 
122,775

General and administrative expenses
 
35,282

 
33,705

Loss (gain) on derivatives and financial instruments, net
 
(2,487
)
 
(7,173
)
Loss (gain) on extinguishment of debt, net
 
15,719

 
11,707

Provision for loan losses
 
18,690

 

Impairment of assets
 

 
28,185

Other expenses
 
8,756

 
3,712

Total expenses
 
1,135,931

 
977,577

 
 
 
 
 
Income (loss) from continuing operations before income taxes and other items
 
136,314

 
119,388

Income tax (expense) benefit
 
(2,222
)
 
(1,588
)
Income (loss) from unconsolidated entities
 
(9,199
)
 
(2,429
)
Gain (loss) on real estate dispositions, net
 
167,409

 
338,184

Income (loss) from continuing operations
 
292,302

 
453,555

 
 
 
 
 
Net income
 
292,302

 
453,555

Less: Preferred stock dividends
 

 
11,676

Less: Net income (loss) attributable to noncontrolling interests(1)
 
11,832

 
4,208

Net income (loss) attributable to common stockholders
 
$
280,470

 
$
437,671

 
 
 
 
 
Average number of common shares outstanding:
 
 
 
 
Basic
 
391,474

 
371,426

Diluted
 
393,452

 
373,257

 
 
 
 
 
Earnings per share:
 
 
 
 
Basic:
 
 
 
 
Income (loss) from continuing operations
 
$
0.75

 
$
1.22

Net income (loss) attributable to common stockholders
 
$
0.72

 
$
1.18

 
 
 
 
 
Diluted:
 
 
 
 
Income (loss) from continuing operations
 
$
0.74

 
$
1.22

Net income (loss) attributable to common stockholders
 
$
0.71

 
$
1.17

 
 
 
 
 
Dividends declared and paid per common share
 
$
0.87

 
$
0.87

 
(1) Includes amounts attributable to redeemable noncontrolling interests.


4


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
WELLTOWER INC. AND SUBSIDIARIES
(In thousands) 
 
 
Three Months Ended
 
 
March 31,
 
 
2019
 
2018
Net income
 
$
292,302

 
$
453,555

 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
Foreign currency translation gain (loss)
 
78,620

 
79,024

Derivative instruments gain (loss)
 
(87,682
)
 
(62,698
)
Total other comprehensive income (loss)
 
(9,062
)
 
16,326

 
 
 
 
 
Total comprehensive income (loss)
 
283,240

 
469,881

Less: Total comprehensive income (loss) attributable
to noncontrolling interests(1)
 
17,619

 
322

Total comprehensive income (loss) attributable to common stockholders
 
$
265,621

 
$
469,559

 
 
 
 
 
(1) Includes amounts attributable to redeemable noncontrolling interests.
 
 
 
 


5


CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
WELLTOWER INC. AND SUBSIDIARIES
(In thousands) 
 
 
Three Months Ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
Preferred
Stock
 
Common
Stock
 
Capital in
Excess of
Par Value
 
Treasury
Stock
 
Cumulative
Net Income
 
Cumulative
Dividends
 
Other
Comprehensive
Income (Loss)
 
Other
Equity
 
Noncontrolling
Interests
 
Total
Balances at beginning of period
 
$
718,498

 
$
384,465

 
$
18,424,368

 
$
(68,499
)
 
$
6,121,534

 
$
(10,818,557
)
 
$
(129,769
)
 
$
294

 
$
954,265

 
$
15,586,599

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Net income (loss)
 
 
 
 
 
 
 
 
 
280,470

 
 
 
 
 
 
 
10,785

 
291,255

Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
(14,849
)
 
 
 
5,787

 
(9,062
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
282,193

Net change in noncontrolling interests
 
 
 
 
 
(8,845
)
 
 
 
 
 
 
 
 
 
 
 
(1,497
)
 
(10,342
)
Amounts related to stock incentive plans, net of forfeitures
 
 
 
120

 
7,420

 
(5,993
)
 
 
 
 
 
 
 
(26
)
 
 
 
1,521

Proceeds from issuance of common stock
 
 
 
7,212

 
525,408

 
 
 
 
 
 
 
 
 
 
 
 
 
532,620

Conversion of preferred stock
 
(718,498
)
 
12,712

 
705,786

 
 
 
 
 
 
 
 
 
 
 
 
 

Dividends paid:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Common stock dividends
 
 
 
 
 
 
 
 
 
 
 
(344,760
)
 
 
 
 
 
 
 
(344,760
)
Balances at end of period
 
$

 
$
404,509

 
$
19,654,137

 
$
(74,492
)
 
$
6,402,004

 
$
(11,163,317
)
 
$
(144,618
)
 
$
268

 
$
969,340

 
$
16,047,831

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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



6


CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
WELLTOWER INC. AND SUBSIDIARIES
(In thousands)
 
 
Three Months Ended
 
 
March 31,
 
 
2019
 
2018
Operating activities:  
 
 

 
 

Net income  
 
$
292,302

 
$
453,555

Adjustments to reconcile net income to net cash provided from (used in) operating activities:  
 
 
 
 
Depreciation and amortization  
 
243,932

 
228,201

Other amortization expenses  
 
5,878

 
4,171

Provision for loan losses
 
18,690

 

Impairment of assets  
 

 
28,185

Stock-based compensation expense  
 
7,529

 
11,557

Loss (gain) on derivatives and financial instruments, net  
 
(2,487
)
 
(7,173
)
Loss (gain) on extinguishment of debt, net  
 
15,719

 
11,707

Loss (income) from unconsolidated entities
 
9,199

 
2,429

Rental income less than (in excess of) cash received  
 
(26,956
)
 
(21,406
)
Amortization related to above (below) market leases, net  
 
114

 
718

Loss (gain) on real estate dispositions, net  
 
(167,409
)
 
(338,184
)
Increase (decrease) in accrued expenses and other liabilities  
 
(27,368
)
 
(10,707
)
Decrease (increase) in receivables and other assets  
 
(25,248
)
 
5,591

Net cash provided from (used in) operating activities  
 
343,895


368,644

 
 
 
 
 

Investing activities:  
 
 
 
 
Cash disbursed for acquisitions
 
(237,610
)
 
(405,609
)
Cash disbursed for capital improvements to existing properties
 
(56,935
)
 
(46,547
)
Cash disbursed for construction in progress
 
(55,391
)
 
(22,735
)
Capitalized interest  
 
(2,327
)
 
(2,336
)
Investment in real estate loans receivable  
 
(42,964
)
 
(27,547
)
Principal collected on real estate loans receivable  
 
6,349

 
90,731

Other investments, net of payments  
 
(9,456
)
 
(49,279
)
Contributions to unconsolidated entities  
 
(26,854
)
 
(14,366
)
Distributions by unconsolidated entities  
 
19,724

 
14,880

Proceeds from (payments on) derivatives  
 

 
(8,324
)
Proceeds from sales of real property  
 
602,732

 
892,209

Net cash provided from (used in) investing activities  
 
197,268


421,077

 
 
 
 
 
Financing activities:  
 
 
 
 
Net increase (decrease) in unsecured credit facility and commercial paper
 
(727,707
)
 
146,000

Proceeds from issuance of senior unsecured notes
 
1,036,964

 

Payments to extinguish senior unsecured notes  
 
(1,050,000
)
 
(450,000
)
Net proceeds from the issuance of secured debt  
 
247,163

 
20,326

Payments on secured debt  
 
(128,113
)
 
(197,655
)
Net proceeds from the issuance of common stock  
 
533,543

 
7,214

Payments for deferred financing costs and prepayment penalties  
 
(19,566
)
 
(14,341
)
Contributions by noncontrolling interests(1)
 
27,860

 
5,734

Distributions to noncontrolling interests(1)
 
(21,830
)
 
(12,564
)
Cash distributions to stockholders  
 
(342,803
)
 
(335,508
)
Other financing activities
 
(7,716
)
 
(4,555
)
Net cash provided from (used in) financing activities  
 
(452,205
)

(835,349
)
Effect of foreign currency translation on cash, cash equivalents and restricted cash
 
2,352


444

Increase (decrease) in cash, cash equivalents and restricted cash  
 
91,310

 
(45,184
)
Cash, cash equivalents and restricted cash at beginning of period  
 
316,129


309,303

Cash, cash equivalents and restricted cash at end of period  
 
$
407,439

 
$
264,119

 
 
 
 
 
Supplemental cash flow information:
 
 
 
 
Interest paid
 
$
148,487

 
$
104,246

Income taxes paid (received), net
 
(250
)
 
(721
)
 
 
 
 
 
(1) Includes amounts attributable to redeemable noncontrolling interests.
 
 
 
 


7

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


1. Business
 
Welltower Inc., an S&P 500 company headquartered in Toledo, Ohio, is driving the transformation of health care infrastructure. The Company invests with leading seniors housing operators, post-acute providers and health systems to fund the real estate and infrastructure needed to scale innovative care delivery models and improve people’s wellness and overall health care experience.  Welltower™, a real estate investment trust (“REIT”), owns interests in properties concentrated in major, high-growth markets in the United States (“U.S.”), Canada and the United Kingdom (“U.K.”), 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, 2019 are not necessarily an indication of the results that may be expected for the year ending December 31, 2019. 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, 2018.
     New Accounting Standards     
We adopted Accounting Standards Update 2016-02, Leases (Topic 842) ("ASC 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 statement of comprehensive income over the lease term. We adopted ASC 842 as of January 1, 2019, using the modified retrospective approach and have elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, permits us to carry forward our prior conclusions for lease classification and initial direct costs on existing leases. We also made an accounting policy election to keep short-term leases less than twelve months off the balance sheet for all classes of underlying assets.
In July 2018, the FASB issued ASU 2018-11 "Leases (Topic 842): Targeted Improvements" that (1) simplifies transition requirements for both lessees and lessors by adding an option that permits entities to apply the transition provisions of the new standard at its adoption date instead of at the earliest comparative period presented in its financial statements and (2) allows lessors to elect, as a practical expedient, to not separate lease and non-lease components in a contract, and instead to account for as a single lease component, if certain criteria are met. This practical expedient causes an entity to asses whether a contract is predominantly lease or service-based and recognize the entire contract under the relevant accounting guidance (i.e. predominantly lease-based would be accounted for under ASC 842 and predominantly service-based would be accounted for under ASU 2014-09, "Revenue from Contracts with Customers (ASC 606)"). For the year ended December 31, 2018, we recognized revenue for our Seniors Housing Operating resident agreements in accordance with the provisions of the prior lease guidance, ASC 840, "Leases." Upon adoption of ASC 842, we elected the lessor practical expedient described above and recognized revenue for our Seniors Housing Operating segment based upon the predominant component, the non-lease service component. Therefore, beginning on January 1, 2019, we accounted for these resident agreements under ASC 606. The timing and pattern of revenue recognition is substantially the same as that prior to adoption.
The FASB also issued ASU 2018-20 "Leases (Topic 842) - Narrow Improvements for Lessors," which provides lessors the ability to make an accounting policy election not to evaluate whether certain sales taxes and other similar taxes imposed by a governmental authority on a specific lease revenue-producing transaction are the primary obligation of the lessor as owner of the underlying leased asset. A lessor that makes this election will exclude these taxes from the measurement of lease revenue and the associated expense. Upon adoption of ASC 842, we utilized this practical expedient in instances in which real estate taxes are paid directly by our tenants to taxing authorities. For triple-net leasing arrangements in which the tenant remits payment for real estate taxes to us and we pay the taxing authority, we have included the associated revenue and expense in rental income and property operating expenses on the Consolidated Statements of Comprehensive Income. This reporting had no impact on our net income.
For leases in which the Company is the lessee, primarily consisting of ground leases and various office and equipment leases, we recognized upon adoption a right of use asset of $509,386,000 which included the present value of minimum leases payments, existing above and/or below market lease intangible values and existing straight-line rent liabilities

8

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

associated with such leases. We also recognized operating lease liabilities of $357,070,000. The standard did not materially impact our Consolidated Statements of Comprehensive Income or our Consolidated Statement of Cash Flows. See Note 6 for additional details.
The following ASUs have been issued but not yet adopted:
In 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"). This standard requires a new forward-looking “expected loss” model to be used for receivables, held-to-maturity debt, loans, and other instruments. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, and early adoption is permitted for fiscal years beginning after December 15, 2018. We are currently evaluating the impact that the standard will have on our consolidated financial statements. 
3. Real Property Acquisitions and Development 
The total purchase price for all properties acquired has been allocated to the tangible and identifiable intangible assets, liabilities and noncontrolling interests based upon their relative fair values in accordance with our accounting policies. The results of operations for these acquisitions have been included in our consolidated results of operations since the date of acquisition and are 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.
The following is a summary of our real property investment activity by segment for the periods presented (in thousands):
 
Three Months Ended
 
March 31, 2019
 
March 31, 2018
 
Seniors Housing Operating
 
Triple-net
 
Outpatient
Medical
 
Totals
 
Seniors Housing Operating
 
Triple-net
 
Outpatient
Medical
 
Totals
Land and land improvements
$
6,831

 
$
7,427

 
$
29,304

 
$
43,562

 
$
35,193

 
$
1,691

 
$
7,369

 
$
44,253

Buildings and improvements
97,759

 
74,116

 
60,671

 
232,546

 
372,562

 
235

 
42,673

 
415,470

Acquired lease intangibles
4,945

 

 
10,202

 
15,147

 
48,805

 

 
5,852

 
54,657

Right of use assets, net

 

 
2,012

 
2,012

 

 

 

 

Receivables and other assets
264

 

 

 
264

 
265

 

 
1

 
266

Total assets acquired(1)
109,799

 
81,543

 
102,189

 
293,531

 
456,825

 
1,926

 
55,895

 
514,646

Secured debt
(43,209
)
 

 

 
(43,209
)
 
(89,973
)
 

 

 
(89,973
)
Lease liabilities

 

 
(961
)
 
(961
)
 

 

 

 

Accrued expenses and other liabilities  
(848
)
 

 
(1,952
)
 
(2,800
)
 
(12,808
)
 
(6
)
 
(632
)
 
(13,446
)
Total liabilities acquired
(44,057
)
 

 
(2,913
)
 
(46,970
)
 
(102,781
)
 
(6
)
 
(632
)
 
(103,419
)
Noncontrolling interests
(7,895
)
 
(1,056
)
 

 
(8,951
)
 
(5,618
)
 

 

 
(5,618
)
Cash disbursed for acquisitions
57,847

 
80,487

 
99,276

 
237,610

 
348,426

 
1,920

 
55,263

 
405,609

Construction in progress additions
37,088

 
7,543

 
14,475

 
59,106

 
10,562

 
15,850

 
2,803

 
29,215

Less: Capitalized interest
(1,136
)
 
(390
)
 
(801
)
 
(2,327
)
 
(891
)
 
(847
)
 
(598
)
 
(2,336
)
Foreign currency translation
(1,332
)
 
(101
)
 

 
(1,433
)
 
(5,032
)
 

 

 
(5,032
)
Accruals(2)

 

 
45

 
45

 

 

 
888

 
888

Cash disbursed for construction in progress
34,620

 
7,052

 
13,719

 
55,391

 
4,639

 
15,003

 
3,093

 
22,735

Capital improvements to existing properties
43,300

 
3,768

 
9,867

 
56,935

 
31,325

 
2,351

 
12,871

 
46,547

Total cash invested in real property, net of cash acquired
$
135,767

 
$
91,307

 
$
122,862

 
$
349,936

 
$
384,390

 
$
19,274

 
$
71,227

 
$
474,891

(1) Excludes $517,000 and $4,105,000 of unrestricted and restricted cash acquired during the three months ended March 31, 2019 and 2018, respectively.
(2) Represents non-cash accruals for amounts to be paid in future periods for properties that converted, off-set by amounts paid in the current period.





9

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Construction Activity 
The following is a summary of the construction projects that were placed into service and began generating revenues during the periods presented (in thousands):
 
 
Three Months Ended
 
 
March 31, 2019
 
March 31, 2018
Development projects:
 
 
 
 
Seniors Housing Operating
 
$

 
$
36,218

Triple-net
 

 
49,759

Total construction in progress conversions
 
$

 
$
85,977

 
4. Real Estate Intangibles 
The following is a summary of our real estate intangibles, excluding those classified as held for sale, as of the dates indicated (dollars in thousands):
 
 
March 31, 2019
 
December 31, 2018
Assets:
 
 
 
 
In place lease intangibles
 
$
1,430,342

 
$
1,410,725

Above market tenant leases
 
64,684

 
63,935

Below market ground leases (1)
 

 
64,513

Lease commissions
 
44,337

 
41,986

Gross historical cost
 
1,539,363

 
1,581,159

Accumulated amortization
 
(1,214,735
)
 
(1,197,336
)
Net book value
 
$
324,628

 
$
383,823

 
 
 
 
 
Weighted-average amortization period in years
 
10.1

 
16.0

 
 
 
 
 
Liabilities:
 
 
 
 
Below market tenant leases
 
$
82,981

 
$
81,676

Above market ground leases (1)
 

 
8,540

Gross historical cost
 
82,981

 
90,216

Accumulated amortization
 
(44,580
)
 
(44,266
)
Net book value
 
$
38,401

 
$
45,950

 
 
 
 
 
Weighted-average amortization period in years
 
8.7

 
14.7

 
(1) Effective on January 1, 2019 with the adoption of ASC 842, above and below market ground lease intangibles are reported within the right of use assets, net line on the Consolidated Balance Sheet.
The following is a summary of real estate intangible amortization for the periods presented (in thousands):
 
 
Three Months Ended March 31,
  
 
2019
 
2018
Rental income related to (above)/below market tenant leases, net
 
$
(155
)
 
$
(351
)
Amortization related to in place lease intangibles and lease commissions
 
(24,905
)
 
(32,261
)
 

10

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The future estimated aggregate amortization of intangible assets and liabilities is as follows for the periods presented (in thousands):
 
 
Assets
 
Liabilities
2019
 
$
80,093

 
$
5,233

2020
 
60,916

 
6,506

2021
 
30,530

 
5,870

2022
 
24,734

 
5,273

2023
 
20,582

 
3,395

Thereafter
 
107,773

 
12,124

Total
 
$
324,628

 
$
38,401

 
5. Dispositions and Assets Held for Sale
We periodically sell properties for various reasons, including favorable market conditions, the exercise of tenant purchase options or reduction of concentrations (e.g., property type, relationship or geography). At March 31, 2019, 13 Seniors Housing Operating, 16 Triple-net, and two Outpatient Medical properties with an aggregate real estate balance of $330,327,000 were classified as held for sale. The following is a summary of our real property disposition activity for the periods presented (in thousands):
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Real estate dispositions:
 
 
 
 
Seniors Housing Operating
 
$

 
$
2,200

Triple-net
 
436,071

 
323,667

Outpatient Medical
 

 
223,069

Total dispositions
 
436,071

 
548,936

Gain (loss) on real estate dispositions, net
 
167,409

 
338,184

Net other assets/liabilities disposed
 
(748
)
 
5,089

Proceeds from real estate dispositions
 
$
602,732

 
$
892,209


     Dispositions and Assets Held for Sale
Pursuant to our adoption of ASU 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,
 
 
2019
 
2018
Revenues:
 
 
 
 
Total revenues
 
$
27,628

 
$
43,894

Expenses:
 
 
 
 
Interest expense
 
18

 
148

Property operating expenses
 
19,206

 
20,295

Provision for depreciation
 

 
6,061

Total expenses
 
19,224

 
26,504

Income (loss) from real estate dispositions, net
 
$
8,404

 
$
17,390

 

11

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


6. Leases
We lease land, buildings, office space and certain equipment. Many of our leases include a renewal option to extend the term from one to 25 years or more. Renewal options that we are reasonably certain to exercise are recognized in our right-of-use assets and lease liabilities. As most of our leases do not provide a rate implicit in the lease agreement, we use our incremental borrowing rate available at lease commencement to determine the present value of lease payments. The incremental borrowing rates were determined using our longer term borrowing rates (actual pricing through 30 years, as well as other longer-term market rates). For leases that commenced prior to January 1, 2019, we used the incremental borrowing rate on December 31, 2018.
We sublease certain real estate to a third party. Our sublease portfolio consists of a finance lease with Genesis HealthCare for seven buildings.
The components of lease expense were as follows for the period presented (in thousands):
 
 
Classification
 
Three Months Ended March 31, 2019
Operating lease cost: (1)
 
 
 
 
Real estate lease expense
 
Property operating expenses
 
$
7,412

Non-real estate lease expense
 
General and administrative expenses
 
362

Finance lease cost:
 
 
 
 
Amortization of leased assets
 
Property operating expenses
 
2,092

Interest on lease liabilities
 
Interest expense
 
1,002

Sublease income
 
Rental income
 
(1,886
)
Total
 
 
 
$
8,982


(1) Includes short-term leases which are immaterial.

Maturities of lease liabilities as of March 31, 2019 are as follows (in thousands):

 
 
Operating Leases
 
Finance Leases
2019
 
$
12,139

 
$
5,726

2020
 
16,186

 
7,444

2021
 
16,058

 
7,093

2022
 
15,111

 
6,454

2023
 
15,158

 
67,593

Thereafter
 
1,418,839

 

Total lease payments
 
1,493,491

 
94,310

Less: Imputed interest
 
(1,146,378
)
 
(14,784
)
Total present value of lease liabilities
 
$
347,113

 
$
79,526





12

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


Supplemental balance sheet information related to leases was as follows for the date indicated (in thousands, except lease terms and discount rate):
 
Classification
 
March 31, 2019
Right of use assets:
 
 
 
Operating leases - real estate
Right of use assets, net
 
$
358,325

Finance leases
Right of use assets, net
 
144,104

Real estate right of use assets, net
 
 
502,429

Operating leases - corporate
Receivables and other assets
 
3,642

Total right of use assets, net
 
 
$
506,071

 
 
 
 
Lease liabilities:
 
 
 
Operating leases
 
 
$
347,113

Financing leases
 
 
79,526

Total
 
 
$
426,639

 
 
 
 
Weighted average remaining lease term (years):
 
 
 
Operating leases
 
 
52.5

Finance leases
 
 
3.9

 
 
 
 
Weighted average discount rate:
 
 
 
Operating leases
 
 
5.24
%
Finance leases
 
 
5.21
%


Supplemental cash flow information related to leases was as follows for the date indicated (in thousands):
 
Classification
 
Three Months Ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows from operating leases
Decrease (increase) in receivables and other assets
 
$
1,805

Operating cash flows from finance leases
Decrease (increase) in receivables and other assets
 
1,932

Financing cash flows from finance leases
Other financing activities
 
(775
)


Substantially all of our operating leases in which we are the lessor contain 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. Leases in our outpatient medical portfolio typically include some form of operating expense reimbursement by the tenant. We recognized $381,084,000 of rental and other revenues related to operating lease payments, of which $47,350,000 was for variable lease payments for the three months ended March 31, 2019, which primarily represents the reimbursement of operating costs such as common area maintenance expenses, utilities, insurance, and real estate taxes. The following table sets forth the undiscounted cash flows for future minimum lease payments receivable for leases in effect at March 31, 2019 (excluding properties in our Seniors Housing Operating partnerships and excluding any operating expense reimbursements) (in thousands):

2019
 
$
950,205

2020
 
1,240,401

2021
 
1,210,470

2022
 
1,187,277

2023
 
1,134,217

Thereafter
 
9,199,476

Totals
 
$
14,922,046



7. 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, 2018 for discussion of our accounting policies for real estate loans receivable and related interest income. 




13

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following is a summary of our net real estate loans receivable (in thousands):
 
 
March 31, 2019
 
December 31, 2018
Mortgage loans
 
$
326,687

 
$
317,443

Other real estate loans
 
111,459

 
81,268

Less allowance for losses on loans receivable
 
(87,062
)
 
(68,372
)
Totals
 
$
351,085

 
$
330,339


The following is a summary of our real estate loan activity for the periods presented (in thousands):
 
 
Three Months Ended
 
 
March 31, 2019
 
March 31, 2018
 
 
Seniors Housing Operating
 
Triple-net
 
Outpatient
Medical
 
Totals
 
Seniors Housing Operating
 
Triple-net
 
Outpatient
Medical
 
Totals
Advances on real estate loans receivable:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments in new loans
 
$
25,000

 
$

 
$

 
$
25,000

 
$
11,806

 
$
1,172

 
$
2,458

 
$
15,436

Draws on existing loans
 

 
12,956

 
5,008

 
17,964

 

 
12,111

 

 
12,111

Net cash advances on real estate loans
 
25,000

 
12,956

 
5,008

 
42,964

 
11,806

 
13,283

 
2,458

 
27,547

Receipts on real estate loans receivable:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan payoffs
 

 
4,384

 

 
4,384

 

 
58,557

 

 
58,557

Principal payments on loans
 

 
1,965

 

 
1,965

 

 
32,174

 

 
32,174

Net cash receipts on real estate loans
 

 
6,349

 

 
6,349

 

 
90,731

 

 
90,731

Net cash advances (receipts) on real estate loans
 
$
25,000

 
$
6,607

 
$
5,008

 
$
36,615

 
$
11,806

 
$
(77,448
)
 
$
2,458

 
$
(63,184
)
 
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. In March 2019, we recognized a provision for loan losses of $18,690,000 to fully reserve for certain Triple-net real estate loans receivable that are no longer deemed collectible. At March 31, 2019, the allowance for loan loss of $87,062,000 is deemed to be sufficient to absorb expected losses. At March 31, 2019, we had three real estate loans with an outstanding balance of $21,224,000 on non-accrual status.
The following is a summary of our impaired loans (in thousands):
 
 
Three Months Ended
 
 
March 31, 2019
 
March 31, 2018
Balance of impaired loans at end of period
 
$
206,783

 
$
214,896

Allowance for loan losses
 
87,062

 
68,372

Balance of impaired loans not reserved
 
$
119,721

 
$
146,524

Average impaired loans for the period
 
$
198,028

 
$
265,973

Interest recognized on impaired loans(1)
 
3,971

 
5,327

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

8. 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, 2019
 
December 31, 2018
Seniors Housing Operating
 
10% to 50%
 
$
360,896

 
$
344,982

Triple-net
 
10% to 49%
 
9,772

 
34,284

Outpatient Medical
 
43% to 50%
 
113,597

 
103,648

Total
 
 
 
$
484,265

 
$
482,914

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

At March 31, 2019, the aggregate unamortized basis difference of our joint venture investments of $102,358,000 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. 
9. Credit Concentration
We use consolidated net operating income (“NOI”) as our credit concentration metric. See Note 18 for additional information and reconciliation. The following table summarizes certain information about our credit concentration for the three months ended March 31, 2019, excluding our share of NOI in unconsolidated entities (dollars in thousands):
 
 
Number of
 
Total
 
Percent of
Concentration by relationship:(1)
 
Properties
 
NOI
 
NOI(2)
Sunrise Senior Living(3)
 
161

 
$
90,592

 
15%
ProMedica
 
218

 
53,771

 
9%
Revera(3)
 
98

 
36,682

 
6%
Genesis HealthCare
 
63

 
32,298

 
5%
Benchmark Senior Living  
 
48

 
25,027

 
4%
Remaining portfolio  
 
906

 
363,068

 
61%
Totals  
 
1,494

 
$
601,438

 
100%
 
(1) Genesis Healthcare and ProMedica are in our Triple-net segment. Sunrise Senior Living and Revera are in our Seniors Housing Operating segment.     Benchmark Senior Living is both our Triple-net and Seniors Housing Operating segments.
(2) NOI with our top five relationships comprised 38% of total NOI for the year ended December 31, 2018.
(3) Revera owns a controlling interest in Sunrise Senior Living.

10. Borrowings Under Credit Facilities and Commercial Paper Program 
 At March 31, 2019, we had a primary unsecured credit facility with a consortium of 31 banks that includes a $3,000,000,000 unsecured revolving credit facility (none outstanding at March 31, 2019), 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, 2019). Borrowings under the unsecured revolving credit facility are subject to interest payable at the applicable margin over LIBOR interest rate. The applicable margin is based on our debt ratings and was 0.825% at March 31, 2019. 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, 2019. The term credit facilities mature on July 19, 2023. The revolving credit facility is scheduled to mature on July 19, 2022 and can be extended for two successive terms of six months each at our option.
In January 2019, we established an unsecured commercial paper program (the "Commercial Paper Program"). Under the terms of the program, we may issue unsecured commercial paper notes with maturities that vary, but do not exceed 397 days from the date of issue, up to a maximum aggregate face or principal amount outstanding at any time of $1,000,000,000. As of March 31, 2019, there was a balance of $419,293,000 outstanding on the Commercial Paper Program ($419,700,000 in principal outstanding net of an unamortized discount of $407,000), which reduces the borrowing capacity on the unsecured revolving credit facility. The notes bear interest at various floating rates with a weighted average of 2.84% as of March 31, 2019 and a weighted average maturity of 12 days as of March 31, 2019.
The following information relates to aggregate borrowings under the unsecured revolving credit facility and Commercial Paper Program for the periods presented (dollars in thousands): 


15

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


 
 
Three Months Ended
 
 
March 31,
 
 
2019
 
2018
Balance outstanding at quarter end
 
$
419,293

 
$
865,000

Maximum amount outstanding at any month end
 
$
1,150,000

 
$
865,000

Average amount outstanding (total of daily
 
 
 
 
principal balances divided by days in period)
 
$
790,516

 
$
364,111

Weighted average interest rate (actual interest
 
 
 
 
expense divided by average borrowings outstanding)
 
3.22
%
 
2.72
%
 
11. 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, 2019, the annual principal payments due on these debt obligations were as follows (in thousands):
 
 
Senior
Unsecured Notes(1,2)
 
Secured
Debt (1,3)
 
Totals
2019
 
$

 
$
384,466

 
$
384,466

2020(4)
 
232,051

 
140,969

 
373,020

2021
 
450,000

 
376,808

 
826,808

2022
 
600,000

 
283,452

 
883,452

2023(5,6)
 
1,787,126

 
328,511

 
2,115,637

Thereafter(7,8)
 
6,668,360

 
1,158,752

 
7,827,112

Totals
 
$
9,737,537

 
$
2,672,958

 
$
12,410,495

 
(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 Consolidated Balance Sheet.
(2) Annual interest rates range from 2.88% to 6.50%.
(3) Annual interest rates range from 1.69% to 12.00%. Carrying value of the properties securing the debt totaled $5,892,563,000 at March 31, 2019.
(4) Includes a $300,000,000 Canadian-denominated 3.35% senior unsecured notes due 2020 (approximately $224,551,000 based on the Canadian/U.S. Dollar exchange rate on March 31, 2019).
(5) Includes a $250,000,000 Canadian-denominated unsecured term credit facility (approximately $187,126,000 based on the Canadian/U.S. Dollar exchange rate on March 31, 2019). The loan matures on July 19, 2023 and bears interest at the Canadian Dealer Offered Rate plus 0.9% (2.88% at March 31, 2019).
(6) Includes a $500,000,000 unsecured term credit facility. The loan matures on July 19, 2023 and bears interest at LIBOR plus 0.9% (3.38% at March 31, 2019).
(7) Includes a £550,000,000 4.80% senior unsecured notes due 2028 (approximately $716,760,000 based on the Sterling/U.S. Dollar exchange rate in effect on March 31, 2019).
(8) Includes a £500,000,000 4.50% senior unsecured notes due 2034 (approximately $651,600,000 based on the Sterling/U.S. Dollar exchange rate in effect on March 31, 2019).
The following is a summary of our senior unsecured notes principal activity during the periods presented (dollars in thousands):
 
 
Three Months Ended
 
 
March 31, 2019
 
March 31, 2018
 
 
 
 
Weighted Avg.
 
 
 
Weighted Avg.
 
 
Amount
 
Interest Rate
 
Amount
 
Interest Rate
Beginning balance
 
$
9,699,984

 
4.48%
 
$
8,417,447

 
4.31%
Debt issued
 
1,050,000

 
3.89%
 

 
0.00%
Debt extinguished
 
(1,050,000
)
 
4.98%
 
(450,000
)
 
2.25%
Foreign currency
 
37,553

 
4.33%
 
39,542

 
5.22%
Ending balance
 
$
9,737,537

 
4.35%
 
$
8,006,989

 
4.45%
 




16

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following is a summary of our secured debt principal activity for the periods presented (dollars in thousands): 
 
 
Three Months Ended
 
 
March 31, 2019
 
March 31, 2018
 
 
 
 
Weighted Avg.
 
 
 
Weighted Avg.
 
 
Amount
 
Interest Rate
 
Amount
 
Interest Rate
Beginning balance
 
$
2,485,711

 
3.90%
 
$
2,618,408

 
3.76%
Debt issued
 
247,163

 
3.68%
 
20,326

 
3.77%
Debt assumed
 
42,000

 
4.62%
 
85,192

 
4.40%
Debt extinguished
 
(114,570
)
 
4.96%
 
(183,408
)
 
5.81%
Principal payments
 
(13,543
)
 
3.85%
 
(14,247
)
 
3.87%
Foreign currency
 
26,197

 
3.33%
 
(27,876
)
 
3.33%
Ending balance
 
$
2,672,958

 
3.84%
 
$
2,498,395

 
3.70%
 
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, 2019, we were in compliance with all of the covenants under our debt agreements. 
12. Derivative Instruments
We are exposed to, among other risks, the impact of changes in foreign currency exchange rates as a result of our non-U.S. investments. Our risk management program is designed to manage the exposure and volatility arising from these risks, and utilizes derivative financial instruments and debt issued in foreign currencies to offset a portion of these risks.
  Foreign Currency Forward Contracts Designated as Cash Flow Hedges
For instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is deferred as a component of other comprehensive income (“OCI”), and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in earnings. 
     Foreign Currency Forward Contracts and Cross Currency Swap Contracts Designated as Net Investment Hedges
We use foreign currency forward and cross currency forward swap contracts to hedge a portion of the net investment in foreign subsidiaries against fluctuations in foreign exchange rates. For instruments that are designated and qualify as net investment hedges, the variability in the foreign currency to U.S. Dollar of the instrument is recorded as a cumulative translation adjustment component of OCI. 
During the three months ended March 31, 2019 and 2018, we settled certain net investment hedges generating cash proceeds of $0 and $8,055,000, respectively. The balance of the cumulative translation adjustment will be reclassified to earnings if the hedged investment is sold or substantially liquidated.
Derivative Contracts Undesignated
We use foreign currency exchange contracts to manage existing exposures to foreign currency exchange risk. Gains and losses resulting from the changes in fair value of these instruments are recorded in interest expense on the Consolidated Statements of Comprehensive Income, and are substantially offset by net revaluation impacts on foreign currency denominated balance sheet exposures. In addition, we have several interest rate cap contracts related to variable rate secured debt agreements. Gains and losses resulting from the changes in fair values of these instruments are also recorded in interest expense.
The following presents the notional amount of derivatives and other financial instruments as of the dates indicated (in thousands):     

17

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 
 
March 31, 2019
 
December 31, 2018
Derivatives designated as net investment hedges:
 
 
 
 
Denominated in Canadian Dollars
 
$
575,000

 
$
575,000

Denominated in Pounds Sterling
 
£
1,340,708

 
£
890,708

 
 
 
 
 
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

 
 
 
 
 
Derivative instruments not designated:
 
 
 
 
Interest rate caps denominated in U.S. Dollars
 
$
405,819

 
$
405,819

Forward purchase contracts denominated in Canadian Dollars
 
$
(325,000
)
 
$
(325,000
)
Forward sales contracts denominated in Canadian Dollars
 
$
405,000

 
$
405,000

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

 
£
350,000

 
The following presents the impact of derivative instruments on the Consolidated Statements of Comprehensive Income for the periods presented (in thousands):
 
 
 
 
Three Months Ended March 31,
 
 
Location
 
2019
 
2018
Gain (loss) on derivative instruments designated as hedges recognized in income
 
Interest expense
 
$
5,333

 
$
(269
)
 
 
 
 
 
 
 
Gain (loss) on derivative instruments not designated as hedges recognized in income
 
Interest expense
 
$
(1,538
)
 
$
1,720

 
 
 
 
 
 
 
Gain (loss) on foreign exchange contracts and term loans designated as net investment hedge recognized in OCI
 
OCI
 
$
(87,682
)
 
$
(62,698
)
 
13. Commitments and Contingencies
At March 31, 2019, we had 14 outstanding letter of credit obligations totaling $49,439,000 and expiring between 2019 and 2024. At March 31, 2019, we had outstanding construction in progress of $253,478,000 and were committed to providing additional funds of approximately $526,306,000 to complete construction. Purchase obligations at March 31, 2019, include 1,250,000,000 representing a definitive agreement to acquire outpatient medical facilities in 2019. Purchase obligations also include contingent purchase obligations totaling $20,913,000. 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.
14. Stockholders’ Equity 
The following is a summary of our stockholders’ equity capital accounts as of the dates indicated: 
 
 
March 31, 2019
 
December 31, 2018
Preferred Stock:
 
 
 
 
Authorized shares
 
50,000,000

 
50,000,000

Issued shares
 

 
14,375,000

Outstanding shares
 

 
14,369,965

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

 
700,000,000

Issued shares
 
404,995,443

 
384,849,236

Outstanding shares
 
403,740,032

 
383,674,603

 
  


18

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

   Preferred Stock. The following is a summary of our preferred stock activity during the periods indicated: 
 
 
Three Months Ended
 
 
March 31, 2019
 
March 31, 2018
 
 
 
 
Weighted Avg.
 
 
 
Weighted Avg.
 
 
Shares
 
Dividend Rate
 
Shares
 
Dividend Rate
Beginning balance
 
14,369,965

 
6.50%
 
14,370,060

 
6.50%
Shares converted
 
(14,369,965
)
 
6.50%
 
(95
)
 
6.50%
Ending balance
 

 
—%
 
14,369,965

 
6.50%
 
During the three months ended March 31, 2019, we converted all of the outstanding Series I Preferred Stock. Each share was converted into 0.8857 shares of common stock.
     Common Stock. The following is a summary of our common stock issuances during the three months ended March 31, 2019 and 2018 (dollars in thousands, except average price amounts): 
 
 
Shares Issued
 
Average Price
 
Gross Proceeds
 
Net Proceeds
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

 
 
 
 
 
 
 
 
 
2019 Dividend reinvestment plan issuances
 
4,148,667

 
$75.04
 
$
311,301

 
$
307,821

2019 Option exercises
 
2,505

 
53.89
 
135

 
135

2019 Equity shelf program issuances
 
3,060,865

 
74.22
 
227,180

 
225,587

2019 Preferred stock conversions
 
12,712,452

 
 
 

 

2019 Stock incentive plans, net of forfeitures
 
140,940

 
 
 

 

2019 Totals
 
20,065,429

 
 
 
$
538,616

 
$
533,543

 
Dividends.  The increase in dividends is primarily attributable to increases in our common shares outstanding, offset by the conversion of the Series I Preferred Stock as described above.  The following is a summary of our dividend payments (in thousands, except per share amounts): 
 
 
Three Months Ended
 
 
March 31, 2019
 
March 31, 2018
  
 
Per Share
 
Amount
 
Per Share
 
Amount
Common Stock
 
$
0.8700

 
$
344,760

 
$
0.8700

 
$
323,726

Series I Preferred Stock
 
 
 

 
0.8125

 
11,676

Totals
 
 
 
$
344,760

 
 
 
$
335,402

 
Accumulated Other Comprehensive Income.  The following is a summary of accumulated other comprehensive income (loss) for the periods presented (in thousands):
 
March 31, 2019
 
December 31, 2018
Foreign currency translation
$
(795,173
)
 
$
(868,006
)
Derivative instruments
651,095

 
738,777

Actuarial losses
(540
)
 
(540
)
Total accumulated other comprehensive loss
$
(144,618
)
 
$
(129,769
)


19

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


15. Stock Incentive Plans
Our 2016 Long-Term Incentive Plan (“2016 Plan”) authorizes up to 10,000,000 shares of common stock to be issued at the discretion of the Compensation Committee of the Board of Directors. Our non-employee directors, officers and key employees are eligible to participate in the 2016 Plan. The 2016 Plan allows for the issuance of, among other things, stock options, stock appreciation rights, restricted stock, deferred stock units, performance units and dividend equivalent rights. Vesting periods for options, deferred stock units and restricted shares generally range from three to five years. Options expire ten years from the date of grant. Stock-based compensation expense totaled $7,529,000 and $11,557,000 for the three months ended March 31, 2019 and 2018, respectively.
16. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
 
 
Three Months Ended
 
 
March 31,
 
 
2019
 
2018
Numerator for basic and diluted earnings
 
 
 
 
per share - net income (loss) attributable
 
 
 
 
to common stockholders
 
$
280,470

 
$
437,671

 
 
 
 
 
Denominator for basic earnings per
 
 
 
 
share - weighted average shares
 
391,474

 
371,426

Effect of dilutive securities:
 
 
 
 
Employee stock options
 
1

 
15

Non-vested restricted shares
 
868

 
720

Redeemable shares
 
1,096

 
1,096

Employee stock purchase program
 
13
 

Dilutive potential common shares
 
1,978

 
1,831

Denominator for diluted earnings per
 
 
 
 
share - adjusted weighted average shares
 
393,452

 
373,257

 
 
 
 
 
Basic earnings per share
 
$
0.72

 
$
1.18

Diluted earnings per share
 
$
0.71

 
$
1.17


The Series I Cumulative Convertible Perpetual Preferred Stock were excluded from the 2018 calculation as the effect of the conversions were anti-dilutive.
17. 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, 2018 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. 


20

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Mortgage Loans and Other Real Estate Loans Receivable — The fair value of mortgage loans and other real estate loans receivable is generally estimated by using Level 2 and Level 3 inputs such as discounting the estimated future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.  
Cash and Cash Equivalents and Restricted Cash — The carrying amount approximates fair value. 
Equity Securities — Equity securities are recorded at their fair value based on Level 1 publicly available trading prices. 
Unsecured Revolving Credit Facility and Commercial Paper Program — The carrying amount of the unsecured revolving credit facility and Commercial Paper Program approximates fair value because the borrowings are interest rate adjustable. 
Senior Unsecured Notes — The fair value of the senior unsecured notes payable was estimated based on Level 1 publicly available trading prices. The carrying amount of the variable rate senior unsecured notes approximates fair value because they are interest rate adjustable. 
Secured Debt — The fair value of fixed rate secured debt is estimated using Level 2 inputs by discounting the estimated future cash flows using the current rates at which similar loans would be made with similar credit ratings and for the same remaining maturities. The carrying amount of variable rate secured debt approximates fair value because the borrowings are interest rate adjustable. 
Foreign Currency Forward Contracts and Cross Currency Swaps — Foreign currency forward contracts and cross currency swaps are recorded in other assets or other liabilities on the balance sheet at fair market value. Fair market value is determined using Level 2 inputs by estimating the future value of the currency pair based on existing exchange rates, comprised of current spot and traded forward points, and calculating a present value of the net amount using a discount factor based on observable traded interest rates. 
Redeemable OP Unitholder Interests — Our redeemable unitholder interests are recorded on the balance sheet at fair value using Level 2 inputs. The fair value is measured using the closing price of our common stock, as units may be redeemed at the election of the holder for cash or, at our option, one share of our common stock per unit, subject to adjustment in certain circumstances. 
The carrying amounts and estimated fair values of our financial instruments are as follows (in thousands):
 
 
March 31, 2019
 
December 31, 2018
 
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Financial assets:
 
 
 
 
 
 
 
 
Mortgage loans receivable
 
$
258,315

 
$
267,143

 
$
249,071

 
$
257,337

Other real estate loans receivable
 
92,770

 
93,767

 
81,268

 
82,742

Equity securities
 
13,773

 
13,773

 
11,286

 
11,286

Cash and cash equivalents
 
249,127

 
249,127

 
215,376

 
215,376

Restricted cash
 
158,312

 
158,312

 
100,753

 
100,753

Foreign currency forward contracts and cross currency swaps
 
53,078

 
53,078

 
94,729

 
94,729

 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
Unsecured revolving credit facility and unsecured commercial paper note program
 
$
419,293

 
$
419,293

 
$
1,147,000

 
$
1,147,000

Senior unsecured notes
 
9,632,013

 
10,409,527

 
9,603,299

 
10,043,797

Secured debt
 
2,660,190

 
2,709,741

 
2,476,177

 
2,499,130

Foreign currency forward contracts and cross currency swaps
 
85,687

 
85,687

 
71,109

 
71,109

 
 
 
 
 
 
 
 
 
Redeemable OP unitholder interests
 
$
115,218

 
$
115,218

 
$
103,071

 
$
103,071


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

21

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 
 
Fair Value Measurements as of March 31, 2019
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Equity securities
 
$
13,773

 
$
13,773

 
$

 
$

Foreign currency forward contracts and cross currency swaps, net asset (liability)(1)
 
(32,609
)
 

 
(32,609
)
 

Redeemable OP unitholder interests
 
115,218

 

 
115,218

 

Totals 
 
$
96,382

 
$
13,773

 
$
82,609

 
$

(1) Please see Note 12 for additional information.
Items Measured at Fair Value on a Nonrecurring Basis 
In addition to items that are measured at fair value on a recurring basis, we also have assets and liabilities in our balance sheet that are measured at fair value on a nonrecurring basis. As these assets and liabilities are not measured at fair value on a recurring basis, they are not included in the tables above. Assets, liabilities and noncontrolling interests that are measured at fair value on a nonrecurring basis include those acquired/assumed. Asset impairments (if applicable, see Note 5 for impairments of real property and Note 7 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. 
18. 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: Seniors Housing Operating, Triple-net and Outpatient Medical. Our seniors housing operating properties include assisted living, independent living/continuing care retirement communities, independent supportive living communities (Canada), care homes with and without nursing (U.K.) and combinations thereof that are owned and/or operated through RIDEA structures (see Note 19). 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 outpatient medical properties are typically leased to multiple tenants and generally require a certain level of property management by us.
We evaluate performance based upon consolidated 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, 2018). 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.

22

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Summary information for the reportable segments (which excludes unconsolidated entities) is as follows (in thousands): 
Three Months Ended March 31, 2019:

Seniors Housing Operating

Triple-net
 
Outpatient Medical

Non-segment / Corporate

Total
Resident fees and services

$
868,285


$

 
$


$


$
868,285

Rental income



232,032

 
149,052




381,084

Interest income



14,946

 
173




15,119

Other income

4,101


1,263

 
236


2,157


7,757

Total revenues

872,386

 
248,241

 
149,461

 
2,157


1,272,245

 
 
 
 
 
 
 
 
 
 


Property operating expenses

607,686


14,955

 
48,166




670,807

Consolidated net operating income

264,700

 
233,286

 
101,295

 
2,157


601,438

 
 
 
 
 
 
 
 
 
 


Depreciation and amortization

131,575


61,348

 
51,009




243,932

Interest expense

18,251


3,440

 
3,348


120,193


145,232

General and administrative expenses




 


35,282


35,282

Loss (gain) on derivatives and financial instruments, net



(2,487
)
 




(2,487
)
Loss (gain) on extinguishment of debt, net




 


15,719


15,719

Provision for loan losses
 

 
18,690

 

 

 
18,690

Other expenses

2,946


3,029


754


2,027


8,756

Income (loss) from continuing operations before income taxes and other items

111,928

 
149,266

 
46,184

 
(171,064
)

136,314

Income tax (expense) benefit

(619
)

(951
)
 
(365
)

(287
)

(2,222
)
(Loss) income from unconsolidated entities

(16,580
)

5,658

 
1,723




(9,199
)
Gain (loss) on real estate dispositions, net

(160
)

167,574

 
(5
)



167,409

Income (loss) from continuing operations

94,569

 
321,547

 
47,537

 
(171,351
)

292,302

Net income (loss)

$
94,569

 
$
321,547

 
$
47,537

 
$
(171,351
)

$
292,302

 
 
 
 
 
 
 
 
 
 


Total assets

$
15,237,260


$
9,494,799

 
$
5,729,959


$
175,318


$
30,637,336

Three Months Ended March 31, 2018:
 
Seniors Housing Operating
 
Triple-net
 
Outpatient Medical
 
Non-segment/Corporate
 
Total
Resident fees and services
 
$
735,934

 
$

 
$

 
$

 
$
735,934

Rental income
 

 
206,831

 
136,538

 

 
343,369

Interest income
 
85

 
14,551

 
12

 

 
14,648

Other income
 
1,148

 
1,377

 
121

 
368

 
3,014

Total revenues
 
737,167

 
222,759

 
136,671

 
368

 
1,096,965

 
 
 
 
 
 
 
 
 
 


Property operating expenses
 
511,941

 
21

 
44,503

 

 
556,465

Consolidated net operating income
 
225,226

 
222,738

 
92,168

 
368

 
540,500

 
 
 
 
 
 
 
 
 
 


Depreciation and amortization
 
125,769

 
56,032

 
46,400

 

 
228,201

Interest expense
 
16,935

 
3,442

 
1,676

 
100,722

 
122,775

General and administrative expenses
 

 

 

 
33,705

 
33,705

Loss (gain) on derivatives and financial instruments, net
 

 
(7,173
)
 

 

 
(7,173
)
Loss (gain) on extinguishment of debt, net
 
(189
)
 
(32
)
 
11,928

 

 
11,707

Impairment of assets
 
2,301

 
25,884

 

 

 
28,185

Other expenses
 
(188
)
 
1,120


598

 
2,182

 
3,712

Income (loss) from continuing operations before income taxes and other items
 
80,598

 
143,465

 
31,566

 
(136,241
)
 
119,388

Income tax (expense) benefit
 
162

 
(1,136
)
 
(428
)
 
(186
)
 
(1,588
)
(Loss) income from unconsolidated entities
 
(9,480
)
 
5,821

 
1,230

 

 
(2,429
)
Gain (loss) on real estate dispositions, net
 
5

 
123,397

 
214,782

 

 
338,184

Income (loss) from continuing operations
 
71,285

 
271,547

 
247,150

 
(136,427
)
 
453,555

Net income (loss)
 
$
71,285

 
$
271,547

 
$
247,150

 
$
(136,427
)
 
$
453,555

 
 
 
 
 
 
 
 
 
 
 

Our portfolio of properties and other investments are located in the United States, the United Kingdom and Canada. Revenues and assets are attributed to the country in which the property is physically located. The following is a summary of geographic information for the periods presented (dollars in thousands): 
 
 
Three Months Ended
 
 
 
March 31, 2019
 
March 31, 2018
 
Revenues:
 
Amount
 
%
 
Amount
 
%
 
United States
 
$
1,043,667

 
82.1
%
 
$
863,789

 
78.8
%
 
United Kingdom
 
112,418

 
8.8
%
 
116,525

 
10.6
%
 
Canada
 
116,160

 
9.1
%
 
116,651

 
10.6
%
 
Total
 
$
1,272,245

 
100.0
%
 
$
1,096,965

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
As of
 
 
 
March 31, 2019
 
December 31, 2018
 
Assets:
 
Amount
 
%
 
Amount
 
%
 
United States
 
$
24,984,680

 
81.6
%
 
$
24,884,292

 
82.0
%
 
United Kingdom
 
3,230,152

 
10.5
%
 
3,078,994

 
10.2
%
 
Canada
 
2,422,504

 
7.9
%
 
2,378,786

 
7.8
%
 
Total
 
$
30,637,336

 
100.0
%
 
$
30,342,072

 
100.0
%
 




23

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

19. Income Taxes and Distributions 
     We elected to be taxed as a REIT commencing with our first taxable year. To qualify as a REIT for federal income tax purposes, at least 90% of taxable income (excluding 100% of net capital gains) must be distributed to stockholders. REITs that do not distribute a certain amount of current year taxable income in the current year are also subject to a 4% federal excise tax. The main differences between undistributed net income for federal income tax purposes and financial statement purposes are the recognition of straight-line rent for reporting purposes, basis differences in acquisitions, recording of impairments, differing useful lives and depreciation and amortization methods for real property and the provision for loan losses for reporting purposes versus bad debt expense for tax purposes. 
     Under the provisions of the REIT Investment Diversification and Empowerment Act of 2007 (“RIDEA”), for taxable years beginning after July 30, 2008, a REIT may lease “qualified health care properties” on an arm’s-length basis to a taxable REIT subsidiary (“TRS”) if the property is operated on behalf of such TRS by a person who qualifies as an “eligible independent contractor.” Generally, the rent received from the TRS will meet the related party rent exception and will be treated as “rents from real property.” A “qualified health care property” includes real property and any personal property that is, or is necessary or incidental to the use of, a hospital, nursing facility, assisted living facility, congregate care facility, qualified continuing care facility, or other licensed facility which extends medical or nursing or ancillary services to patients. We have entered into various joint ventures that were structured under RIDEA. Resident level rents and related operating expenses for these facilities are reported in the unaudited consolidated financial statements and are subject to federal and state income taxes as the operations of such facilities are included in TRS entities. Certain net operating loss carryforwards could be utilized to offset taxable income in future years. 
Income taxes reflected in the financial statements primarily represents U.S. federal, state and local income taxes as well as non-U.S. income based or withholding taxes on certain investments located in jurisdictions outside the U.S. The provision for income taxes for the three months ended March 31, 2019 and 2018, 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 for the year ended December 31, 2015 and subsequent years and by state taxing authorities for the year ended December 31, 2014 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 2013, by HM Revenue & Customs for periods subsequent to our initial investments in the United Kingdom in August 2013.
20. 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, 2019
 
December 31, 2018
Assets:
 
 
 
 
Net real estate investments
 
$
971,038

 
$
973,813

Cash and cash equivalents
 
18,712

 
18,678

Receivables and other assets
 
16,798

 
14,600

Total assets(1)
 
$
1,006,548

 
$
1,007,091

 
 
 
 
 
Liabilities and equity:
 
 
 
 
Secured debt
 
$
464,186

 
$
465,433

Lease liabilities
 
1,327

 

Accrued expenses and other liabilities
 
22,101

 
18,229

Total equity
 
518,934

 
523,429

Total liabilities and equity
 
$
1,006,548

 
$
1,007,091

(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.

24

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

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

25

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, 2018, 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, 2019 (dollars in thousands):  
 
 
 
 
Percentage of
 
Number of
Type of Property
 
NOI(1)
 
NOI
 
Properties
Seniors Housing Operating
 
$
264,700

 
44.2
%
 
530

Triple-net
 
233,286

 
38.9
%
 
671

Outpatient Medical
 
101,295

 
16.9
%
 
293

Totals
 
$
599,281

 
100.0
%
 
1,494

 
 
 
 
 
 
 
(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 generally aim to intervene at an early stage to address any negative trends, and in so doing, support both the collectability of revenue and the value of our investment.
In addition to our asset management and research efforts, we also aim to structure our relevant investments to mitigate payment risk. Operating leases and loans are normally credit enhanced by guaranties and/or letters of credit. In addition, operating leases are typically structured as master leases and loans are generally cross-defaulted and cross-collateralized with other real estate loans, operating leases or agreements between us and the obligor and its affiliates.

26

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

For the three months ended March 31, 2019, resident fees and services and rental income represented 68% and 30%, 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 resident fees and services, rent and interest receipts, borrowings under our unsecured revolving credit facility and Commercial Paper Program, 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 unsecured revolving credit facility and Commercial Paper Program, 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 unsecured revolving credit facility and Commercial Paper Program, 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 unsecured revolving credit facility and Commercial Paper Program. At March 31, 2019, we had $249,127,000 of cash and cash equivalents, $158,312,000 of restricted cash and $2,580,300,000 of available borrowing capacity under our unsecured revolving credit facility.
Key Transactions
     Capital  The following summarizes key capital transaction that occurred during the three months ended March 31, 2019:
In January 2019, we established an unsecured Commercial Paper Program. Under the terms of the program, we may issue, from time to time, unsecured commercial paper with maturities that vary, but do not exceed 397 days from the date of issue, up to a maximum aggregate principal amount outstanding at any time of $1,000,000,000.
In February 2019, we completed the issuance of $500,000,000 of 3.625% senior unsecured notes due 2024 and $550,000,000 of 4.125% senior unsecured notes due 2029 for net proceeds of approximately $1,036,964,000.
In February 2019, we elected to effect the mandatory conversion of all of the outstanding 6.50% Series I Cumulative Convertible Perpetual Preferred Stock. Each share of convertible stock was converted into 0.8857 shares of common stock.
During the quarter, we extinguished $114,570,000 of secured debt at a blended average interest rate of 4.96% and in March 2019 we repaid our $600,000,000 of 4.125% senior unsecured notes due 2019 and $450,000,000 of 6.125% senior unsecured notes due 2020.
During the quarter, we entered into amended and restated Equity Shelf Program (as defined below) pursuant to which we may offer and sell up to $1,500,000,000 billion of common stock from time to time. We raised $538,481,000 through our DRIP (as defined below) and our Equity Shelf Program.

27

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

Investments  The following summarizes our property acquisitions and joint venture investments completed during the three months ended March 31, 2019 (dollars in thousands): 
 
 
Properties
 
Investment Amount(1)
 
Capitalization Rates(2)
 
Book Amount(3)
Seniors Housing Operating
 
5

 
$
95,927

 
6.3
%
 
$
109,535

Triple-net
 
3

 
79,544

 
6.4
%
 
81,543

Outpatient Medical
 
9

 
83,300

 
6.3
%
 
102,189

Totals
 
17

 
$
258,771

 
6.3
%
 
$
293,267

 
 
 
 
 
 
 
 
 
(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 in Net real estate investments including fair value adjustments pursuant to U.S. GAAP. See Note 3 to our unaudited consolidated financial statements for additional information.
    Dispositions  The following summarizes property dispositions made during the three months ended March 31, 2019 (dollars in thousands): 
 
 
Properties
 
Proceeds(1)
 
Capitalization Rates(2)
 
Book Amount(3)
Seniors Housing Operating(4)
 
1

 
$
4,382

 
5.8
%
 
$

Triple-net
 
33

 
607,823

 
6.7
%
 
436,071

Totals
 
34

 
$
612,205

 
6.7
%
 
$
436,071

 
 
 
 
 
 
 
 
 
(1) Represents pro rata proceeds received upon disposition including any seller financing.
(2) Represents annualized contractual income that was being received in cash at date of disposition divided by disposition proceeds.
(3) Represents carrying value of net real estate assets at time of disposition. See Note 5 to our unaudited consolidated financial statements for additional information.
(4) Represents disposition of an unconsolidated real estate investment.
 
     Dividends Our Board of Directors announced the annual cash dividend of $3.48 per common share ($0.87 per share quarterly), consistent with 2018. The dividend declared for the quarter ended March 31, 2019 represents the 192nd consecutive quarterly dividend payment.
Key Performance Indicators, Trends and Uncertainties
We utilize several key performance indicators to evaluate the various aspects of our business. These indicators are discussed below and relate to operating performance, concentration risk and credit strength. Management uses these key performance indicators to facilitate internal and external comparisons to our historical operating results, in making operating decisions and for budget planning purposes.
     Operating Performance We believe that net income and net income attributable to common stockholders (“NICS”) per the Consolidated Statements 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):

28

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,
 
 
 
2018
 
2018
 
2018
 
2018
 
2019
 
Net income (loss)
 
$
453,555

 
$
167,273

 
$
84,226

 
$
124,696

 
$
292,302

 
NICS
 
437,671

 
154,432

 
64,384

 
101,763

 
280,470

 
FFO
 
353,220

 
378,725

 
285,272

 
374,966

 
358,383

 
NOI
 
540,500

 
557,161

 
579,222

 
590,599

 
601,438

 
SSNOI
 
436,609

 
448,544

 
442,878

 
439,472

 
446,984

 
 
 
 
 
 
 
 
 
 
 
 
 
Per share data (fully diluted):
 
 
 
 
 
 
 
NICS
 
$
1.17

 
$
0.41

 
$
0.17

 
$
0.27

 
$
0.71

 
FFO
 
$
0.95

 
$
1.02

 
$
0.76

 
$
0.99

 
$
0.91

 
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 Internal Revenue Code ("IRC") Section 1031 deposits. The coverage ratios indicate our ability to service interest and fixed charges (interest, secured debt principal amortization and preferred dividends). We expect to maintain capitalization ratios and coverage ratios sufficient to maintain a capital structure consistent with our current profile. The coverage ratios are based on earnings before interest, taxes, depreciation and amortization (“EBITDA”). Please refer to the section entitled “Non-GAAP Financial Measures” for further discussion and reconciliations of these measures. Leverage ratios and coverage ratios are widely used by investors, analysts and rating agencies in the valuation, comparison, investment recommendations and rating of companies. The following table reflects the recent historical trends for our credit strength measures for the periods presented: 
 
 
Three Months Ended
 
 
March, 31
 
June 30,
 
September 30,
 
December 31,
 
March 31,
 
 
2018
 
2018
 
2018
 
2018
 
2019
 
 
 
 
 
 
 
 
 
 
 
Net debt to book capitalization ratio
 
42%
 
42%
 
46%
 
45%
 
43%
Net debt to undepreciated book capitalization ratio
 
35%
 
36%
 
39%
 
38%
 
36%
Net debt to market capitalization ratio
 
34%
 
31%
 
34%
 
31%
 
28%
 
 
 
 
 
 
 
 
 
 
 
Interest coverage ratio
 
6.67x
 
4.34x
 
3.38x
 
3.60x
 
4.80x
Fixed charge coverage ratio
 
5.49x
 
3.58x
 
2.85x
 
3.05x
 
4.38x
 
      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 current top five relationships. Geographic mix measures the portion of our NOI that relates to our current top five states (or international equivalents). The following table reflects our recent historical trends of concentration risk by NOI for the periods indicated below: 

29

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

 
 
Three Months Ended
 
 
March 31,
 
June 30,
 
September 30,
 
December 31,
 
March 31,
 
 
2018
 
2018
 
2018
 
2018
 
2019
Property mix:(1)
 
 
 
 
 
 
 
 
 
 
Seniors Housing Operating
 
42%
 
43%
 
46%
 
43%
 
44%
Triple-net
 
41%
 
40%
 
38%
 
40%
 
39%
Outpatient Medical
 
17%
 
17%
 
16%
 
17%
 
17%
 
 
 
 
 
 
 
 
 
 
 
Relationship mix:(1)
 
 
 
 
 
 
 
 
 
 
Sunrise Senior Living(2)
 
15%
 
15%
 
15%
 
14%
 
15%
ProMedica
 
—%
 
—%
 
7%
 
9%
 
9%
Revera(2)
 
7%
 
7%
 
7%
 
6%
 
6%
Genesis HealthCare
 
6%
 
6%
 
6%
 
6%
 
5%
Benchmark Senior Living
 
4%
 
5%
 
4%
 
4%
 
4%
Remaining relationships
 
68%
 
67%
 
61%
 
61%
 
61%
 
 
 
 
 
 
 
 
 
 
 
Geographic mix:(1)
 
 
 
 
 
 
 
 
 
 
California
 
14%
 
14%
 
13%
 
13%
 
13%
United Kingdom
 
10%
 
9%
 
9%
 
9%
 
9%
Texas
 
8%
 
8%
 
7%
 
8%
 
8%
Canada
 
9%
 
8%
 
8%
 
8%
 
7%
New Jersey
 
8%
 
7%
 
7%
 
7%
 
7%
Remaining geographic areas
 
51%
 
54%
 
56%
 
55%
 
56%
 
 
 
 
 
 
 
 
 
 
 
(1) Excludes our share of investments in unconsolidated entities and non-segment/corporate NOI. Entities in which we have a joint venture with a minority partner are shown at 100% of the joint venture amount.
(2) Revera owns a controlling interest in Sunrise Senior Living.
Lease Expirations The following table sets forth information regarding lease expirations for certain portions of our portfolio as of March 31, 2019 (dollars in thousands):
 
 
Expiration Year(1)
 
 
2019
 
2020
 
2021
 
2022
 
2023
 
2024
 
2025
 
2026
 
2027
 
2028
 
Thereafter
Triple-net:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Properties
 
14

 

 
6

 
12

 

 
4

 
48

 
95

 
19

 
33

 
413

Base rent(2)
 
$
10,021

 
$

 
$
12,254

 
$
9,813

 
$

 
$
11,096

 
$
52,276

 
$
125,783

 
$
35,026

 
$
54,498

 
$
455,667

% of base rent
 
1.3
%
 
%
 
1.6
%
 
1.3
%
 
%
 
1.4
%
 
6.8
%
 
16.4
%
 
4.6
%
 
7.1
%
 
59.5
%
Units/beds
 
1,444

 

 
1,023

 
1,257

 

 
692

 
3,033

 
7,839

 
2,401

 
2,840

 
43,385

% of Units/beds
 
2.3
%
 
%
 
1.6
%
 
2.0
%
 
%
 
1.1
%
 
4.7
%
 
12.3
%
 
3.8
%
 
4.4
%
 
67.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Outpatient Medical:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Square feet
 
911,902

 
1,385,821

 
1,623,029

 
1,868,369

 
1,487,962

 
1,536,609

 
892,902

 
1,299,847

 
587,879

 
788,154

 
4,923,889

Base rent(2)
 
$
26,666

 
$
39,089

 
$
45,715

 
$
50,060

 
$
40,537

 
$
45,665

 
$
24,157

 
$
32,667

 
$
14,823

 
$
21,303

 
$
102,094

% of base rent
 
6.0
%
 
8.8
%
 
10.3
%
 
11.3
%
 
9.2
%
 
10.3
%
 
5.5
%
 
7.4
%
 
3.3
%
 
4.8
%
 
23.1
%
Leases
 
260

 
336

 
325

 
331

 
325

 
214

 
143

 
155

 
94

 
94

 
209

% of Leases
 
10.4
%
 
13.5
%
 
13.1
%
 
13.3
%
 
13.1
%
 
8.6
%
 
5.8
%
 
6.2
%
 
3.8
%
 
3.8
%
 
8.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Excludes investments in unconsolidated entities. Investments classified as held for sale are included in the current year.
(2) The most recent monthly cash base rent annualized. Base rent does not include tenant recoveries or amortization of above and below market lease intangibles or other non cash income.
 
We evaluate our key performance indicators in conjunction with current expectations to determine if historical trends are indicative of future results. Our expected results may not be achieved and actual results may differ materially from our expectations. Factors that may cause actual results to differ from expected results are described in more detail in “Cautionary Statement Regarding Forward-Looking Statements” and other sections of this Quarterly Report on Form 10-Q. Management regularly monitors economic and other factors to develop strategic and tactical plans designed to improve performance and maximize our competitive position. Our ability to achieve our financial objectives is dependent upon our ability to effectively execute these plans and to appropriately respond to emerging economic and company-specific trends. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2018, 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.

30

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

Corporate Governance
Maintaining investor confidence and trust is important in today’s business environment. Our Board of Directors and management are strongly committed to policies and procedures that reflect the highest level of ethical business practices. Our corporate governance guidelines provide the framework for our business operations and emphasize our commitment to increase stockholder value while meeting all applicable legal requirements. These guidelines meet the listing standards adopted by the New York Stock Exchange and are available on the Internet at www.welltower.com/investors/governance. The information on our website is not incorporated by reference in this Quarterly Report on Form 10-Q, and our web address is included as an inactive textual reference only.
Liquidity and Capital Resources
Sources and Uses of Cash
Our primary sources of cash include resident fees and services, rent and interest receipts, borrowings under our unsecured revolving credit facility and Commercial Paper Program, 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):
 
 
Three Months Ended
 
Change
 
 
March 31, 2019
 
March 31, 2018
 
$
 
%
Cash, cash equivalents and restricted cash at beginning of period
 
$
316,129

 
$
309,303

 
$
6,826

 
2
 %
Cash provided from (used in) operating activities
 
343,895

 
368,644

 
(24,749
)
 
-7
 %
Cash provided from (used in) investing activities
 
197,268

 
421,077

 
(223,809
)
 
-53
 %
Cash provided from (used in) financing activities
 
(452,205
)
 
(835,349
)
 
383,144

 
-46
 %
Effect of foreign currency translation
 
2,352

 
444

 
1,908

 
430
 %
Cash, cash equivalents and restricted cash at end of period
 
$
407,439

 
$
264,119

 
$
143,320

 
54
 %
 
     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, 2019 and 2018, 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, 2019
 
March 31, 2018
 
$
 
%
New development
 
$
55,391

 
$
22,735

 
$
32,656

 
144
%
Recurring capital expenditures, tenant improvements and lease commissions
 
21,898

 
18,564

 
3,334

 
18
%
Renovations, redevelopments and other capital improvements
 
35,037

 
27,983

 
7,054

 
25
%
Total
 
$
112,326

 
$
69,282

 
$
43,044

 
62
%
The change in new development is primarily due to the number and size of construction projects on-going during the relevant periods. Renovations, redevelopments and other capital improvements include expenditures to maximize property value, increase net operating income, maintain a market-competitive position and/or achieve property stabilization. Generally, these expenditures have increased as a result of acquisitions, primarily in our Seniors Housing Operating segment.

31

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

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 10, 11 and 14 of our unaudited consolidated financial statements for additional information.
Off-Balance Sheet Arrangements 
At March 31, 2019, we had investments in unconsolidated entities with our ownership interests ranging from 10% to 50%. We use financial derivative instruments to hedge interest rate and foreign currency exchange rate exposure. At March 31, 2019, we had 14 outstanding letter of credit obligations. Please see Notes 8, 12 and 13 to our unaudited consolidated financial statements for additional information.
Contractual Obligations
The following table summarizes our payment requirements under contractual obligations as of March 31, 2019 (in thousands):
 
 
Payments Due by Period
Contractual Obligations
 
Total
 
2019
 
2020-2021
 
2022-2023
 
Thereafter
Unsecured credit facility and commercial paper(1,2)
 
$
419,700

 
$
419,700

 
$

 
$

 
$

Senior unsecured notes and term credit facilities:(2)
 

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

 

 
450,000

 
1,700,000

 
5,300,000

Canadian Dollar senior unsecured notes(3)
 
224,551

 

 
224,551

 

 

Pounds Sterling senior unsecured notes(3)
 
1,368,360

 

 

 

 
1,368,360

U.S. Dollar term credit facility
 
507,500

 

 
7,500

 
500,000

 

Canadian Dollar term credit facility(3)
 
187,126

 

 

 
187,126

 

Secured debt:(2,3)
 

 
 
 
 
 
 
 
 
Consolidated
 
2,672,958

 
384,466

 
517,777

 
611,963

 
1,158,752

Unconsolidated  
 
803,769

 
49,318

 
92,053

 
47,480

 
614,918

Contractual interest obligations:(4)
 

 
 
 
 
 
 
 
 
Unsecured credit facility and commercial paper
 
407

 
407

 

 

 

Senior unsecured notes and term loans(3)
 
4,110,311

 
312,548

 
825,032

 
718,778

 
2,253,953

Consolidated secured debt(3)
 
548,775

 
75,067

 
162,603

 
115,367

 
195,738

Unconsolidated secured debt(3)
 
205,852

 
23,725

 
52,822

 
48,450

 
80,855

Financing lease liabilities(5)
 
94,310

 
5,726

 
14,537

 
74,047

 

Operating lease liabilities(5)
 
1,493,491

 
12,139

 
32,244

 
30,269

 
1,418,839

Purchase obligations(5)
 
1,797,219

 
1,614,840

 
179,466

 

 
2,913

Other long-term liabilities(6)
 
860

 
860

 

 

 

Total contractual obligations
 
$
21,885,189

 
$
2,898,796

 
$
2,558,585

 
$
4,033,480

 
$
12,394,328

 
 
 
 
 
 
 
 
 
 
 
(1) Relates to our unsecured credit facility and commercial paper with an aggregate commitment of $3,000,000,000. See Note 10 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 6 to our unaudited consolidated financial statements for additional information.
(6) Primarily relates to payments to be made under a supplemental executive retirement plan for one former executive officer.
Capital Structure
Please refer to “Credit Strength” above for a discussion of our leverage and coverage ratio trends. Our debt agreements contain various covenants, restrictions and events of default. Certain agreements require us to maintain financial ratios and minimum net worth and impose certain limits on our ability to incur indebtedness, create liens and make investments or acquisitions. As of March 31, 2019, 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.

32

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

On May 17, 2018, we filed with the Securities and Exchange Commission (1) an open-ended automatic or “universal” shelf registration statement covering an indeterminate amount of future offerings of debt securities, common stock, preferred stock, depositary shares, warrants and units and (2) a registration statement in connection with our enhanced dividend reinvestment plan (“DRIP”) under which we may issue up to 15,000,000 shares of common stock. As of April 19, 2019, 4,456,215 shares of common stock remained available for issuance under the DRIP registration statement. On February 25, 2019 we entered into separate amended and restated equity distribution agreements with each of Barclays Capital Inc., Citigroup Global Markets Inc., Credit Agricole Securities (USA) Inc., Deutsche Bank Securities Inc., Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, KeyBanc Capital Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. LLC, MUFG Securities Americas Inc., RBC Capital Markets, LLC, UBS Securities LLC and Wells Fargo Securities, LLC relating to the offer and sale from time to time of up to $1,500,000,000 aggregate amount of our common stock (“Equity Shelf Program”). The Equity Shelf Program also allows us to enter into forward sale agreements. We expect that, if entered into, we will physically settle each forward sale agreement on one or more dates on or prior to the maturity date of that particular forward sale agreement, in which case we 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 19, 2019, we had $1,370,738,000 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 unsecured revolving credit facility and Commercial Paper Program.
Results of Operations
Summary
     Our primary sources of revenue include resident fees and services, rent and interest income. Our primary expenses include depreciation and amortization, interest expense, property operating expenses, general and administrative expenses and other expenses. We evaluate our business and make resource allocations on our three business segments: Seniors Housing Operating, Triple-net 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,
 
 
 
 
 
 
2019

2018
 
Amount
 
%
Net income
 
$
292,302

 
$
453,555

 
$
(161,253
)
 
-36
 %
NICS
 
280,470

 
437,671

 
(157,201
)
 
-36
 %
FFO
 
358,383

 
353,220

 
5,163

 
1
 %
EBITDA
 
683,688

 
806,119

 
(122,431
)
 
-15
 %
NOI
 
601,438

 
540,500

 
60,938

 
11
 %
SSNOI
 
446,984

 
436,609

 
10,375

 
2
 %
Per share data (fully diluted):
 
 
 
 
 
 
 
 
NICS
 
$
0.71

 
$
1.17

 
$
(0.46
)
 
-39
 %
FFO
 
$
0.91

 
$
0.95

 
$
(0.04
)
 
-4
 %
 
 
 
 
 
 
 
 
 
Interest coverage ratio
 
4.80
x
 
6.67
x
 
(1.87
)x
 
-28
 %
Fixed charge coverage ratio
 
4.38
x
 
5.49
x
 
(1.11
)x
 
-20
 %
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,
 
 
 
 
 
 
2019
 
2018
 
$
 
%
NOI
 
$
264,700

 
$
225,226

 
$
39,474

 
18
%
Non SSNOI attributable to same store properties
 
1,971

 
324

 
1,647

 
508
%
NOI attributable to non same store properties(1)
 
(46,779
)
 
(12,968
)
 
(33,811
)
 
261
%
SSNOI(2)
 
$
219,892

 
$
212,582

 
$
7,310

 
3
%
(1) Change is primarily due to the acquisition of 21 properties subsequent to January 1, 2018 and the transition of 82 properties from Triple-net to Seniors Housing Operating.
(2) Relates to 409 same store properties.


33

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

The following is a summary of our Seniors Housing Operating results of operations (dollars in thousands):
 
 
Three Months Ended
 
Change
 
 
March 31,
 
March 31,
 
 
 
 
 
 
2019
 
2018
 
$
 
%
Revenues:
 
 
 
 
 
 
 
 
Resident fees and services
 
$
868,285

 
$
735,934

 
$
132,351

 
18
 %
Interest income
 

 
85

 
(85
)
 
-100
 %
Other income
 
4,101

 
1,148

 
2,953

 
257
 %
Total revenues
 
872,386

 
737,167

 
135,219

 
18
 %
Property operating expenses
 
607,686

 
511,941

 
95,745

 
19
 %
NOI(1)
 
264,700

 
225,226

 
39,474

 
18
 %
Other expenses:
 
 
 
 
 
 
 
 

Depreciation and amortization
 
131,575

 
125,769

 
5,806

 
5
 %
Interest expense
 
18,251

 
16,935

 
1,316

 
8
 %
Loss (gain) on extinguishment of debt, net
 

 
(189
)
 
189

 
-100
 %
Impairment of assets
 

 
2,301

 
(2,301
)
 
-100
 %
Other expenses
 
2,946

 
(188
)
 
3,134

 
n/a

 
 
152,772

 
144,628

 
8,144

 
6
 %
Income (loss) from continuing operations
before income taxes and other items
 
111,928

 
80,598

 
31,330

 
39
 %
Income tax benefit (expense)
 
(619
)
 
162

 
(781
)
 
n/a

Income (loss) from unconsolidated entities
 
(16,580
)
 
(9,480
)
 
(7,100
)
 
75
 %
Gain (loss) on real estate dispositions, net
 
(160
)
 
5

 
(165
)
 
n/a

Income from continuing operations
 
94,569

 
71,285

 
23,284

 
33
 %
Net income (loss)
 
94,569

 
71,285

 
23,284

 
33
 %
Less: Net income (loss) attributable to
noncontrolling interests
 
1,741

 
(898
)
 
2,639

 
n/a

Net income (loss) attributable to
common stockholders
 
$
92,828

 
$
72,183

 
$
20,645

 
29
 %
 
 
 
 
 
 
 
 
 
(1) See Non-GAAP Financial Measures.
Fluctuations in revenues and property operating expenses are primarily a result of acquisitions, segment transitions and the movement of U.S. and foreign currency exchange rates. The fluctuations in depreciation and amortization are due to acquisitions and variations in amortization of short-lived intangible assets. To the extent that we acquire or dispose of additional properties in the future, these amounts will change accordingly. 
During the three months ended March 31, 2018, we recorded impairment charges on certain held for sale properties as the carrying value exceeded the estimated fair value less costs to sell. Changes in the gain/loss on sale of properties are related to the volume of property sales and sales prices. Transaction costs related to asset acquisitions are capitalized as a component of purchase price. The increase in other expenses is primarily due to additional noncapitalizable transactions costs from acquisitions. 
The following is a summary of our Seniors Housing Operating construction projects, excluding expansions, pending as of March 31, 2019 (dollars in thousands):
Location
 
Units
 
Commitment
 
Balance
 
Est. Completion
Wandsworth, UK
 
98

 
$
76,824

 
$
46,095

 
1Q20
Potomac, MD
 
120

 
56,720

 
7,710

 
4Q20
 
 
218

 
$
133,544

 
53,805

 
 
Toronto, ON
 
Project in planning stage
 
41,168

 
 
Hendon, UK
 
Project in planning stage
 
26,958

 
 
 
 
 
 
 
 
$
121,932

 
 
 
Interest expense represents secured debt interest expense which fluctuates based on the net effect and timing of assumptions, segment transitions, fluctuations in currency rates, extinguishments and principal amortizations. The following is a summary of our Seniors Housing Operating segment secured debt principal activity (dollars in thousands):

34

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

 
 
Three Months Ended
 
 
March 31, 2019
 
March 31, 2018
 
 
 
 
Wtd. Avg.
 
 
 
Wtd. Avg.
 
 
Amount
 
Interest Rate
 
Amount
 
Interest Rate
Beginning balance
 
$
1,810,587

 
3.87
%
 
$
1,988,700

 
3.66
%
Debt issued
 
247,163

 
3.68
%
 
20,326

 
3.77
%
Debt assumed
 
42,000

 
4.62
%
 
85,192

 
4.40
%
Debt extinguished
 
(114,570
)
 
4.96
%
 
(118,010
)
 
5.00
%
Principal payments
 
(11,205
)
 
3.58
%
 
(11,940
)
 
3.48
%
Foreign currency
 
21,368

 
3.34
%
 
(32,867
)
 
3.29
%
Ending balance
 
$
1,995,343

 
3.79
%
 
$
1,931,401

 
3.68
%
 
 
 
 
 
 
 
 
 
Monthly averages
 
$
1,915,650

 
3.84
%
 
$
1,942,292

 
3.64
%
 
     The majority of our Seniors Housing Operating properties are formed through partnership interests. Losses from unconsolidated entities are largely attributable to depreciation and amortization of short-lived intangible assets related to certain investments in unconsolidated joint ventures. Net income attributable to noncontrolling interests represents our partners’ share of net income (loss) related to joint ventures.
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,
 
 
 
 
 
 
2019
 
2018
 
$
 
%
NOI
 
$
233,286

 
$
222,738

 
$
10,548

 
5
 %
Non SSNOI attributable to same store properties
 
(8,022
)
 
(11,258
)
 
3,236

 
-29
 %
NOI attributable to non same store properties(1)
 
(85,869
)
 
(74,250
)
 
(11,619
)
 
16
 %
SSNOI(2)
 
$
139,395

 
$
137,230

 
$
2,165

 
2
 %
 
(1) Change is primarily due to the acquisition of 239 properties, the transitioning/restructuring of 5 properties, and the conversion of 6 construction projects into revenue-generating properties subsequent to January 1, 2018 and 16 held for sale properties at March 31, 2019.
(2) Relates to 404 same store properties.
The following is a summary of our results of operations for the Triple-net segment (dollars in thousands):

35

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

 
 
Three Months Ended
 
Change
 
 
March 31,
 
March 31,
 
 
 
 
 
 
2019
 
2018
 
$
 
%
Revenues:
 
 
 
 
 
 
 
 
Rental income
 
$
232,032

 
$
206,831

 
$
25,201

 
12
 %
Interest income
 
14,946

 
14,551

 
395

 
3
 %
Other income
 
1,263

 
1,377

 
(114
)
 
-8
 %
Total revenues
 
248,241

 
222,759

 
25,482

 
11
 %
Property operating expenses
 
14,955

 
21

 
14,934

 
71,114
 %
NOI(1)
 
233,286

 
222,738

 
10,548

 
5
 %
Other expenses:
 
 
 
 
 
 
 
 

Depreciation and amortization
 
61,348

 
56,032

 
5,316

 
9
 %
Interest expense
 
3,440

 
3,442

 
(2
)
 
 %
Loss (gain) on derivatives and financial instruments, net
 
(2,487
)
 
(7,173
)
 
4,686

 
-65
 %
Loss (gain) on extinguishment of debt, net
 

 
(32
)
 
32

 
-100
 %
Provision for loan losses
 
18,690

 

 
18,690

 
n/a

Impairment of assets
 

 
25,884

 
(25,884
)
 
-100
 %
Other expenses
 
3,029

 
1,120

 
1,909

 
170
 %
 
 
84,020

 
79,273

 
4,747

 
6
 %
Income from continuing operations before income taxes and other items
 
149,266

 
143,465

 
5,801

 
4
 %
Income tax (expense) benefit
 
(951
)
 
(1,136
)
 
185

 
-16
 %
Income (loss) from unconsolidated entities
 
5,658

 
5,821

 
(163
)
 
-3
 %
Gain (loss) on real estate dispositions, net
 
167,574

 
123,397

 
44,177

 
36
 %
Income from continuing operations
 
321,547

 
271,547

 
50,000

 
18
 %
Net income
 
321,547

 
271,547

 
50,000

 
18
 %
Less: Net income (loss) attributable to noncontrolling interests
 
9,096

 
1,963

 
7,133

 
363
 %
Net income attributable to
common stockholders
 
$
312,451

 
$
269,584

 
$
42,867

 
16
 %
 
 
 
 
 
 
 
 
 
(1) See Non-GAAP Financial Measures.
 
The increase in rental income is primarily attributable to acquisitions including Quality Care Properties Inc. in July 2018, partially offset by the disposition or segment transition of various properties. In addition, we have recorded certain real estate property taxes on a gross basis, with the offset to property operating expenses, as a component of the ASC 842 adoption on January 1, 2019. 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, 2019, we had 21 leases with rental rate increasers ranging from 0.13% to 0.94% in our Triple-net portfolio.
Depreciation and amortization increased primarily as a result of the acquisitions of triple-net properties exceeding dispositions. To the extent that we acquire or dispose of additional properties in the future, our provision for depreciation and amortization will change accordingly. 
In March 2019, we recognized a provision for loan losses of $18,690,000 to fully reserve for certain real estate loans receivable that are no longer deemed collectible. 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 and timing of property sales and the sales prices. Transaction costs related to asset acquisitions are capitalized as a component of purchase price. The increase in other expenses is primarily due to additional noncapitalizable transaction costs from acquisitions.
The following is a summary of Triple-net construction projects, excluding expansions, pending as of March 31, 2019 (dollars in thousands): 
Location
 
Units/Beds
 
Commitment
 
Balance
 
Est. Completion
Westerville, OH
 
90

 
$
22,800

 
$
9,974

 
3Q19
Union, KY
 
162

 
34,600

 
13,148

 
1Q20
Droitwich, UK
 
70

 
16,505

 
6,313

 
2Q20
 
 
322

 
$
73,905

 
$
29,435

 
 
 

36

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

Interest expense 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 fluctuations in loss (gain) on extinguishment of debt is primarily attributable to the volume of extinguishments and terms of the related secured debt. The fluctuation in loss (gain) on derivatives and financial instruments, net is primarily attributable to the mark-to-market adjustment recorded on the Genesis HealthCare available-for-sale investment. The following is a summary of our Triple-net secured debt principal activity (dollars in thousands):
 
 
Three Months Ended
 
 
March 31, 2019
 
March 31, 2018
 
 
 
 
Wtd. Avg.
 
 
 
Wtd. Avg.
 
 
Amount
 
Interest Rate
 
Amount
 
Interest Rate
Beginning balance
 
$
288,386

 
3.63
%
 
$
347,474

 
3.55
%
Debt extinguished
 

 
0.00
%
 
(4,107
)
 
4.94
%
Principal payments
 
(957
)
 
5.24
%
 
(1,016
)
 
5.40
%
Foreign currency
 
4,829

 
3.30
%
 
4,991

 
3.05
%
Ending balance
 
$
292,258

 
3.62
%
 
$
347,342

 
3.50
%
 
 
 
 
 
 
 
 
 
Monthly averages
 
$
293,113

 
3.62
%
 
$
348,190

 
3.52
%
 
A portion of our Triple-net properties were formed through partnerships.  Income or loss from unconsolidated entities represents our share of net income or losses from partnerships where we are the noncontroliling partner. Net income attributable to noncontrolling interest represents our partners’ share of net income relating to those partnerships where we are the controlling partner.
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,
 
 
 
 
 
 
2019
 
2018
 
$
 
%
NOI
 
$
101,295

 
$
92,168

 
$
9,127

 
10
%
Non SSNOI on same store properties
 
(1,561
)
 
(1,274
)
 
(287
)
 
23
%
NOI attributable to non same store properties(1)
 
(12,037
)
 
(4,097
)
 
(7,940
)
 
194
%
SSNOI(2)
 
$
87,697

 
$
86,797

 
$
900

 
1
%
 
 
 
 
 
 
 
 
 
 
(1) Change is primarily due to acquisitions of 44 properties and the conversion of 11 construction projects into revenue-generating properties subsequent to January 1, 2018.
(2) Relates to 229 same store properties.
 

37

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

The following is a summary of our results of operations for the Outpatient Medical segment (dollars in thousands):
 
 
Three Months Ended
 
Change
 
 
March 31,
 
March 31,
 
 
 
 
 
 
2019
 
2018
 
$
 
%
Revenues:
 
 
 
 
 
 
 
 
Rental income
 
$
149,052

 
$
136,538

 
$
12,514

 
9
 %
Interest income
 
173

 
12

 
161

 
1,342
 %
Other income
 
236

 
121

 
115

 
95
 %
Total revenues
 
149,461

 
136,671

 
12,790

 
9
 %
Property operating expenses
 
48,166

 
44,503

 
3,663

 
8
 %
NOI(1)
 
101,295

 
92,168

 
9,127

 
10
 %
Other expenses:
 
 
 
 
 
 

 
 

Depreciation and amortization
 
51,009

 
46,400

 
4,609

 
10
 %
Interest expense
 
3,348

 
1,676

 
1,672

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

 
11,928

 
(11,928
)
 
-100
 %
Other expenses
 
754

 
598

 
156

 
26
 %
 
 
55,111

 
60,602

 
(5,491
)
 
-9
 %
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
before income taxes and other items

 
46,184

 
31,566

 
14,618

 
46
 %
Income tax (expense) benefit
 
(365
)
 
(428
)
 
63

 
-15
 %
Income from unconsolidated entities
 
1,723

 
1,230

 
493

 
40
 %
Gain (loss) on real estate dispositions, net
 
(5
)
 
214,782

 
(214,787
)
 
n/a

Income from continuing operations
 
47,537

 
247,150

 
(199,613
)
 
-81
 %
Net income (loss)
 
47,537

 
247,150

 
(199,613
)
 
-81
 %
Less: Net income (loss) attributable to
noncontrolling interests
 
995

 
3,143

 
(2,148
)
 
-68
 %
Net income (loss) attributable to
common stockholders
 
$
46,542

 
$
244,007

 
$
(197,465
)
 
-81
 %
 
 
 
 
 
 
 
 
 
(1) See Non-GAAP Financial Measures.
 
The increase in rental income is primarily attributable to acquisitions and development conversions, partially offset by dispositions of outpatient medical properties. Certain of our leases contain annual rental escalators that are contingent upon changes in the Consumer Price Index. These escalators are not fixed, so no straight-line rent is recorded; however, rental income is recorded based on the contractual cash rental payments due for the period. If the Consumer Price Index does not increase, a portion of our revenues may not continue to increase. Sales of real property would offset revenue increases and, to the extent that they exceed new acquisitions, could result in decreased revenues. Our leases could renew above or below current rental rates, resulting in an increase or decrease in rental income. For the three months ended March 31, 2019, our consolidated outpatient medical portfolio signed 117,824 square feet of new leases and 378,482 square feet of renewals. The weighted-average term of these leases was seven years, with a rate of $36.73 per square foot and tenant improvement and lease commission costs of $16.18 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 acquisitions and construction conversions of new outpatient medical facilities, partially offset by dispositions. The fluctuation in depreciation and amortization is primarily 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. Changes in the gain/loss on sale of properties are related to the volume and timing of property sales and sales prices.  
The following is a summary of the Outpatient Medical construction projects, excluding expansions, pending as of March 31, 2019 (dollars in thousands):
Location
 
Square Feet
 
Commitment
 
Balance
 
Est. Completion
Brooklyn, NY
 
140,955

 
$
105,306

 
$
68,251

 
4Q19
Houston, TX
 
73,500

 
23,455

 
8,046

 
4Q19
Porter, TX
 
55,000

 
20,800

 
5,863

 
1Q20
Total
 
269,455

 
$
149,561

 
$
82,160

 
 

38

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

 Total interest expense represents secured debt interest expense. The change in secured debt interest expense is primarily due to the net effect and timing of assumptions, extinguishments and principal amortizations. The fluctuation in losses/gains on debt extinguishment is primarily attributable to the prepayment penalties paid on certain extinguishments in the first quarter of 2018.  The following is a summary of our outpatient medical secured debt principal activity (dollars in thousands):
 
 
Three Months Ended
 
 
March 31, 2019
 
March 31, 2018
 
 
 
 
Wtd. Ave
 
 
 
Wtd. Ave
 
 
Amount
 
Interest Rate
 
Amount
 
Interest Rate
Beginning balance
 
$
386,738

 
4.20
%
 
$
279,951

 
4.72
%
Debt extinguished
 

 
0.00
%
 
(61,291
)
 
7.43
%
Principal payments
 
(1,381
)
 
5.11
%
 
(963
)
 
6.20
%
Ending balance
 
$
385,357

 
4.25
%
 
$
217,697

 
4.14
%
 
 
 
 
 
 
 
 
 
Monthly averages
 
$
386,088

 
4.24
%
 
$
233,394

 
4.29
%
 
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 from partnerships where we are the noncontrolling partner. 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,
 
 
 
 
 
 
2019
 
2018
 
$
 
%
Revenues:
 
 
 
 
 
 
 
 
Other income
 
$
2,157

 
$
368

 
$
1,789

 
486
 %
Total revenue
 
2,157

 
368

 
1,789

 
486
 %
Expenses:
 
 
 
 
 
 
 
 

Interest expense
 
120,193

 
100,722

 
19,471

 
19
 %
General and administrative expenses
 
35,282

 
33,705

 
1,577

 
5
 %
Loss (gain) on extinguishment of debt, net
 
15,719

 

 
15,719

 
n/a

Other expenses
 
2,027

 
2,182

 
(155
)
 
-7
 %
 
 
173,221

 
136,609

 
36,612

 
27
 %
Loss from continuing operations before
 income taxes and other items
 
(171,064
)
 
(136,241
)
 
(34,823
)
 
26
 %
Income tax (expense) benefit
 
(287
)
 
(186
)
 
(101
)
 
54
 %
Loss from continuing operations
 
(171,351
)
 
(136,427
)
 
(34,924
)
 
26
 %
Less: Preferred stock dividends
 

 
11,676

 
(11,676
)
 
-100
 %
Net loss attributable to common stockholders
 
$
(171,351
)
 
$
(148,103
)
 
$
(23,248
)
 
16
 %
 
The following is a summary of our Non-Segment/Corporate interest expense (dollars in thousands):
 
 
Three Months Ended
 
Change
 
 
March 31,
 
March 31,
 
 
 
 
 
 
2019
 
2018
 
$
 
%
Senior unsecured notes
 
$
108,755

 
$
93,414

 
$
15,341

 
16
 %
Secured debt
 

 
38

 
(38
)
 
-100
 %
Unsecured revolving credit facility and unsecured commercial paper note program
 
7,520

 
4,013

 
3,507

 
87
 %
Loan expense
 
3,918

 
3,257

 
661

 
20
 %
Totals
 
$
120,193

 
$
100,722

 
$
19,471

 
19
 %
 


39

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

The change in interest expense on senior unsecured notes is due to the net effect of issuances and extinguishments, as well as the movement of foreign exchange rates and related hedge activity. Please refer to Note 11 for additional information. The change in interest expense on the unsecured revolving credit facility and Commercial Paper Program is due primarily to the net effect and timing of draws, paydowns and variable interest rate changes. Please refer to Note 10 of our unaudited consolidated financial statements for additional information regarding our unsecured revolving credit facility and Commercial Paper Program. The loss on extinguishment recognized during the three months ended March 31, 2019 is due to the early extinguishment of the $600,000,000 of 4.125% senior unsecured notes due 2019 and the $450,000,000 of 6.125% senior unsecured notes due 2020.
General and administrative expenses as a percentage of consolidated revenues for the three months ended March 31, 2019 and 2018 were 2.77% and 3.07%, respectively. Other expenses primarily represent severance-related costs associated with the departure of certain executive officers and key employees.
The decrease in preferred dividends is due to the conversion of all outstanding Series I Cumulative Convertible Perpetual Preferred Stock during the quarter ended March 31, 2019.
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 using a consistent population which controls for 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, 2018. 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 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.

40

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

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. 

 
 
Three Months Ended
 
 
March 31,
 
June 30,
 
September 30,
 
December 31,
 
March 31,
NOI Reconciliations:
 
2018
 
2018
 
2018
 
2018
 
2019
Net income (loss)
 
$
453,555

 
$
167,273

 
$
84,226

 
$
124,696

 
$
292,302

Loss (gain) on real estate dispositions, net
 
(338,184
)
 
(10,755
)
 
(24,723
)
 
(41,913
)
 
(167,409
)
Loss (income) from unconsolidated entities
 
2,429

 
(1,249
)
 
(344
)
 
(195
)
 
9,199

Income tax expense (benefit)
 
1,588

 
3,841

 
1,741

 
1,504

 
2,222

Other expenses
 
3,712

 
10,058

 
88,626

 
10,502

 
8,756

Impairment of assets
 
28,185

 
4,632

 
6,740

 
76,022

 

Provision for loan losses
 

 

 

 

 
18,690

Loss (gain) on extinguishment of debt, net
 
11,707

 
299

 
4,038

 
53

 
15,719

Loss (gain) on derivatives and financial instruments, net
 
(7,173
)
 
(7,460
)
 
8,991

 
1,626

 
(2,487
)
General and administrative expenses
 
33,705

 
32,831

 
28,746

 
31,101

 
35,282

Depreciation and amortization
 
228,201

 
236,275

 
243,149

 
242,834

 
243,932

Interest expense
 
122,775

 
121,416

 
138,032

 
144,369

 
145,232

Consolidated net operating income (NOI)
 
$
540,500

 
$
557,161

 
$
579,222

 
$
590,599

 
$
601,438

 
 
 
 
 
 
 
 
 
 
 
NOI by segment:
 
 

 
 

 
 

 
 

 
 

Seniors Housing Operating
 
$
225,226

 
$
239,505

 
$
265,846

 
$
254,445

 
$
264,700

Triple-net
 
222,738

 
224,284

 
218,684

 
234,343

 
233,286

Outpatient Medical
 
92,168

 
92,874

 
93,997

 
101,097

 
101,295

Non-segment/corporate
 
368

 
498

 
695

 
714

 
2,157

Total NOI
 
$
540,500

 
$
557,161

 
$
579,222

 
$
590,599

 
$
601,438




41

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,
SSNOI Reconciliations:
 
 
 
2018
 
2018
 
2018
 
2018
 
2019
NOI:
 
 
 
 
 
 
 
 
 
 
 
 
Seniors Housing Operating
 
 
 
$
225,226

 
$
239,505

 
$
265,846

 
$
254,445

 
$
264,700

Triple-net
 
 
 
222,738

 
224,284

 
218,684

 
234,343

 
233,286

Outpatient Medical
 
 
 
92,168

 
92,874

 
93,997

 
101,097

 
101,295

Total
 
 
 
540,132

 
556,663

 
578,527

 
589,885

 
599,281

Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
Seniors Housing Operating:
 
 
 
 
 
 
 
 
 
 
 
 
Non SSNOI on same store properties
 
324

 
413

 
267

 
393

 
1,971

NOI attributable to non same store properties
 
(12,968
)
 
(22,210
)
 
(50,509
)
 
(40,991
)
 
(46,779
)
Subtotal
 
 
 
(12,644
)
 
(21,797
)
 
(50,242
)
 
(40,598
)
 
(44,808
)
Triple-net:
 
 
 
 
 
 
 
 
 
 
 
 
Non SSNOI on same store properties
 
(11,258
)
 
(4,578
)
 
(5,912
)
 
(6,813
)
 
(8,022
)
NOI attributable to non same store properties
 
(74,250
)
 
(75,951
)
 
(72,679
)
 
(89,625
)
 
(85,869
)
Subtotal
 
 
 
(85,508
)
 
(80,529
)
 
(78,591
)
 
(96,438
)
 
(93,891
)
Outpatient Medical:
 
 
 
 
 
 
 
 
 
 
 
 
Non SSNOI on same store properties
 
(1,274
)
 
(1,422
)
 
(1,644
)
 
(5,660
)
 
(1,561
)
NOI attributable to non same store properties
 
(4,097
)
 
(4,371
)
 
(5,172
)
 
(7,717
)
 
(12,037
)
Subtotal
 
 
 
(5,371
)
 
(5,793
)
 
(6,816
)
 
(13,377
)
 
(13,598
)
SSNOI:
 
Properties
 
 
 
 
 
 
 
 
 
 
Seniors Housing Operating
 
409

 
212,582

 
217,708

 
215,604

 
213,847

 
219,892

Triple-net
 
404

 
137,230

 
143,755

 
140,093

 
137,905

 
139,395

Outpatient Medical
 
229

 
86,797

 
87,081

 
87,181

 
87,720

 
87,697

Total
 
1,042

 
$
436,609

 
$
448,544

 
$
442,878

 
$
439,472

 
$
446,984

SSNOI Property Reconciliation:
 
 
 
 
 
 
 
 
 
 
Total properties
 
1,494

 
 
 
 
 
 
 
 
 
 
Acquisitions
 
(304
)
 
 
 
 
 
 
 
 
 
 
Developments
 
(21
)
 
 
 
 
 
 
 
 
 
 
Held for sale
 
(31
)
 
 
 
 
 
 
 
 
 
 
Transitions/restructurings
 
(87
)
 
 
 
 
 
 
 
 
 
 
Other(1)
 
(9
)
 
 
 
 
 
 
 
 
 
 
Same store properties
 
1,042

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Includes eight land parcels and one loan.
 
 
 
 
 
 
 
 



42

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:
 
2018
 
2018
 
2018
 
2018
 
2019
Net income attributable to common stockholders
 
$
437,671

 
$
154,432

 
$
64,384

 
$
101,763

 
$
280,470

Depreciation and amortization
 
228,201

 
236,275

 
243,149

 
242,834

 
243,932

Impairment of assets
 
28,185

 
4,632

 
6,740

 
76,022

 

Loss (gain) on real estate dispositions, net
 
(338,184
)
 
(10,755
)
 
(24,723
)
 
(41,913
)
 
(167,409
)
Noncontrolling interests
 
(16,353
)
 
(17,692
)
 
(17,498
)
 
(17,650
)
 
(17,760
)
Unconsolidated entities
 
13,700

 
11,833

 
13,220

 
13,910

 
19,150

FFO
 
$
353,220

 
$
378,725

 
$
285,272

 
$
374,966

 
$
358,383

 
 
 
 
 
 
 
 
 
 
 
Average common shares outstanding:
 
 
 
 
 
 
 
 
 
 
Basic
 
371,426

 
371,640

 
373,023

 
378,240

 
391,474

Diluted
 
373,257

 
373,075

 
374,487

 
380,002

 
393,452

 
 
 
 
 
 
 
 
 
 
 
Per share data:
 
 
 
 
 
 
 
 
 
 
Net income attributable to common stockholders
 
 
 
 
 
 
 
 
 
 
Basic
 
$
1.18

 
$
0.42

 
$
0.17

 
$
0.27

 
$
0.72

Diluted
 
1.17

 
0.41

 
0.17

 
0.27

 
0.71

 
 
 
 
 
 
 
 
 
 
 
FFO
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.95

 
$
1.02

 
$
0.76

 
$
0.99

 
$
0.92

Diluted
 
0.95

 
1.02

 
0.76

 
0.99

 
0.91




43

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

The table below reflects the reconciliation of EBITDA to net income, the most directly comparable U.S. GAAP measure, for the periods presented. Dollars are in thousands.
 
 
Three Months Ended
 
 
March 31,
 
June 30,
 
September 30,
 
December 31,
 
March 31,
EBITDA Reconciliations:
 
2018
 
2018
 
2018
 
2018
 
2019
Net income (loss)
 
$
453,555

 
$
167,273

 
$
84,226

 
$
124,696

 
$
292,302

Interest expense
 
122,775

 
121,416

 
138,032

 
144,369

 
145,232

Income tax expense (benefit)
 
1,588

 
3,841

 
1,741

 
1,504

 
2,222

Depreciation and amortization
 
228,201

 
236,275

 
243,149

 
242,834

 
243,932

EBITDA
 
$
806,119

 
$
528,805

 
$
467,148

 
$
513,403

 
$
683,688

 
 
 
 
 
 
 
 
 
 
 
Interest Coverage Ratio:
 
 
 
 
 
 
 
 
 
 
Interest expense
 
$
122,775

 
$
121,416

 
$
138,032

 
$
144,369

 
$
145,232

Non-cash interest expense
 
(4,179
)
 
(1,716
)
 
(1,658
)
 
(3,307
)
 
(5,171
)
Capitalized interest
 
2,336

 
2,100

 
1,921

 
1,548

 
2,327

Total interest
 
120,932

 
121,800

 
138,295

 
142,610

 
142,388

EBITDA
 
$
806,119

 
$
528,805

 
$
467,148

 
$
513,403

 
$
683,688

Interest coverage ratio
 
6.67
x
 
4.34
x
 
3.38
x
 
3.60
x
 
4.80
x
 
 
 
 
 
 
 
 
 
 
 
Fixed Charge Coverage Ratio:
 
 
 
 
 
 
 
 
 
 
Total interest
 
$
120,932

 
$
121,800

 
$
138,295

 
$
142,610

 
$
142,388

Secured debt principal payments
 
14,247

 
14,139

 
13,908

 
13,994

 
13,543

Preferred dividends
 
11,676

 
11,676

 
11,676

 
11,676

 

Total fixed charges
 
146,855

 
147,615

 
163,879

 
168,280

 
155,931

EBITDA
 
$
806,119

 
$
528,805

 
$
467,148

 
$
513,403

 
$
683,688

Fixed charge coverage ratio
 
5.49
x
 
3.58
x
 
2.85
x
 
3.05
x
 
4.38
x


44

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

The table below reflects the reconciliation of Adjusted EBITDA to net income, the most directly comparable U.S. GAAP measure, for the periods presented. Dollars are in thousands.
 
 
Twelve Months Ended
 
 
March 31,
 
June 30,
 
September 30,
 
December 31,
 
March 31,
Adjusted EBITDA Reconciliations:
 
2018
 
2018
 
2018
 
2018
 
2019
Net income
 
$
656,551

 
$
620,384

 
$
615,311

 
$
829,750

 
$
668,497

Interest expense
 
488,800

 
493,986

 
509,440

 
526,592

 
549,049

Income tax expense (benefit)
 
19,471

 
31,761

 
32,833

 
8,674

 
9,308

Depreciation and amortization
 
921,645

 
933,072

 
946,083

 
950,459

 
966,190

EBITDA
 
2,086,467

 
2,079,203

 
2,103,667

 
2,315,475

 
2,193,044

Loss (income) from unconsolidated entities
 
62,448

 
57,221

 
60,285

 
641

 
7,411

Stock-based compensation expense(1)
 
25,753

 
26,158

 
25,443

 
27,646

 
23,618

Loss (gain) on extinguishment of debt, net
 
17,593

 
12,377

 
16,415

 
16,097

 
20,109

Loss (gain) on real estate dispositions, net
 
(438,342
)
 
(406,942
)
 
(430,043
)
 
(415,575
)
 
(244,800
)
Impairment of assets
 
141,637

 
132,638

 
139,378

 
115,579

 
87,394

Provision for loan losses
 
62,966

 
62,966

 
62,966

 

 
18,690

Loss (gain) on derivatives and financial instruments, net
 
(6,113
)
 
(14,309
)
 
(5,642
)
 
(4,016
)
 
670

Other expenses(1)
 
167,524

 
171,243

 
161,655

 
111,990

 
117,942

Additional other income
 

 
(10,805
)
 
(10,805
)
 
(14,832
)
 
(14,832
)
Adjusted EBITDA
 
$
2,119,933

 
$
2,109,750

 
$
2,123,319

 
$
2,153,005

 
$
2,209,246

 
 
 
 
 
 
 
 
 
 
 
Adjusted Fixed Charge Coverage Ratio:
 
 
 
 
 
 
 
 
 
 
Interest expense
 
$
488,800

 
$
493,986

 
$
509,440

 
$
526,592

 
$
549,049

Capitalized interest
 
11,696

 
10,437

 
9,813

 
7,905

 
7,896

Non-cash interest expense
 
(12,858
)
 
(11,628
)
 
(10,087
)
 
(10,860
)
 
(11,852
)
Total interest
 
487,638

 
492,795

 
509,166

 
523,637

 
545,093

Adjusted EBITDA
 
$
2,119,933

 
$
2,109,750

 
$
2,123,319

 
$
2,153,005

 
$
2,209,246

Adjusted interest coverage ratio
 
4.35
x
 
4.28
x
 
4.17
x
 
4.11
x
 
4.05
x
 
 
 
 
 
 
 
 
 
 
 
Total interest
 
$
487,638

 
$
492,795

 
$
509,166

 
$
523,637

 
$
545,093

Secured debt principal payments
 
62,077

 
60,258

 
58,866

 
56,288

 
55,584

Preferred dividends
 
46,707

 
46,704

 
46,704

 
46,704

 
35,028

Total fixed charges
 
596,422

 
599,757

 
614,736

 
626,629

 
635,705

Adjusted EBITDA
 
$
2,119,933

 
$
2,109,750

 
$
2,123,319

 
$
2,153,005

 
$
2,209,246

Adjusted fixed charge coverage ratio
 
3.55
x
 
3.52
x
 
3.45
x
 
3.44
x
 
3.48
x
 
 
 
 
 
 
 
 
 
 
 
(1) Certain severance-related costs are included in stock-based compensation and excluded from other expenses.

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

45

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

 
 
As of
 
 
March 31,
 
June 30,
 
September 30,
 
December 31,
 
March 31,
 
 
2018
 
2018
 
2018
 
2018
 
2019
Book capitalization:
 
 
 
 
 
 
 
 
 
 
Unsecured credit facility and commercial paper
 
$
865,000

 
$
540,000

 
$
1,312,000

 
$
1,147,000

 
$
419,293

Long-term debt obligations(1)
 
10,484,840

 
10,895,559

 
12,192,060

 
12,150,144

 
12,371,729

Cash & cash equivalents(2)
 
(202,824
)
 
(215,120
)
 
(191,199
)
 
(215,376
)
 
(249,127
)
Total net debt
 
11,147,016

 
11,220,439

 
13,312,861

 
13,081,768

 
12,541,895

Total equity and noncontrolling interests(3)
 
15,448,201

 
15,198,644

 
15,670,065

 
16,010,645

 
16,498,376

Book capitalization
 
$
26,595,217

 
$
26,419,083

 
$
28,982,926

 
$
29,092,413

 
$
29,040,271

Net debt to book capitalization ratio
 
42
%
 
42
%
 
46
%
 
45
%
 
43
%
 
 
 
 
 
 
 
 
 
 
 
Undepreciated book capitalization:
 
 
 
 
 
 
 
 
 
 
Total net debt
 
$
11,147,016

 
$
11,220,439

 
$
13,312,861

 
$
13,081,768

 
$
12,541,895

Accumulated depreciation and amortization
 
4,990,780

 
5,113,928

 
5,394,274

 
5,499,958

 
5,670,111

Total equity and noncontrolling interests(3)
 
15,448,201

 
15,198,644

 
15,670,065

 
16,010,645

 
16,498,376

Undepreciated book capitalization
 
$
31,585,997

 
$
31,533,011

 
$
34,377,200

 
$
34,592,371

 
$
34,710,382

Net debt to undepreciated book
capitalization ratio
 
35
%
 
36
%
 
39
%
 
38
%
 
36
%
 
 
 
 
 
 
 
 
 
 
 
Market capitalization:
 
 
 
 
 
 
 
 
 
 
Common shares outstanding
 
371,971

 
372,030

 
375,577

 
383,675

 
403,740

Period end share price
 
$
54.43

 
$
62.69

 
$
64.32

 
$
69.41

 
$
77.60

Common equity market capitalization
 
$
20,246,382

 
$
23,322,561

 
$
24,157,113

 
$
26,630,882

 
$
31,330,224

Total net debt
 
11,147,016

 
11,220,439

 
13,312,861

 
13,081,768

 
12,541,895

Noncontrolling interests(3)
 
889,766

 
856,721

 
1,362,380

 
1,378,311

 
1,419,885

Preferred stock
 
718,498

 
718,498

 
718,498

 
718,498

 

Enterprise value
 
$
33,001,662

 
$
36,118,219

 
$
39,550,852

 
$
41,809,459

 
$
45,292,004

Net debt to market capitalization ratio
 
34
%
 
31
%
 
34
%
 
31
%
 
28
%
 
 
 
 
 
 
 
 
 
 
 
(1) Amounts include senior unsecured notes, secured debt and lease liabilities related to financing leases, as reflected on our Consolidated Balance Sheet. Operating lease liabilities related to the ASC 842 adoption are excluded.
(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, 2018 for further information regarding significant accounting policies that impact us. There have been no material changes to these policies in 2019.

46

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

Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q may contain “forward-looking” statements as defined in the Private Securities Litigation Reform Act of 1995. When the Company uses words such as “may,” “will,” “intend,” “should,” “believe,” “expect,” “anticipate,” “project,” “estimate” or similar expressions that do not relate solely to historical matters, it is making forward-looking statements. In particular, these forward-looking statements include, but are not limited to, those relating to the Company’s opportunities to acquire, develop or sell properties; the Company’s ability to close its anticipated acquisitions, investments or dispositions on currently anticipated terms or within currently anticipated timeframes; the expected performance of the Company’s operators/tenants and properties; the Company’s expected occupancy rates; the Company’s ability to declare and to make distributions to shareholders; the Company’s investment and financing opportunities and plans; the Company’s continued qualification as a real estate investment trust (“REIT”); the Company’s ability to access capital markets or other sources of funds; and the Company’s ability to meet its earnings guidance. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that may cause the Company’s actual results to differ materially from the Company’s expectations discussed in the forward-looking statements. This may be a result of various factors, including, but not limited to: the status of the economy; the status of capital markets, including availability and cost of capital; issues facing the health care industry, including compliance with, and changes to, regulations and payment policies, responding to government investigations and punitive settlements and operators’/tenants’ difficulty in cost-effectively obtaining and maintaining adequate liability and other insurance; changes in financing terms; competition within the health care and seniors housing industries; negative developments in the operating results or financial condition of operators/tenants, including, but not limited to, their ability to pay rent and repay loans; the Company’s ability to transition or sell properties with profitable results; the failure to make new investments or acquisitions as and when anticipated; natural disasters and other acts of God affecting the Company’s properties; the Company’s ability to re-lease space at similar rates as vacancies occur; the Company’s ability to timely reinvest sale proceeds at similar rates to assets sold; operator/tenant or joint venture partner bankruptcies or insolvencies; the cooperation of joint venture partners; government regulations affecting Medicare and Medicaid reimbursement rates and operational requirements; liability or contract claims by or against operators/tenants; unanticipated difficulties and/or expenditures relating to future investments or acquisitions; environmental laws affecting the Company’s properties; changes in rules or practices governing the Company’s financial reporting; the movement of U.S. and foreign currency exchange rates; the Company’s ability to maintain its qualification as a REIT; and key management personnel recruitment and retention.  Other important factors are identified in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, including factors identified under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Finally, the Company undertakes no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events or otherwise, or to update the reasons why actual results could differ from those projected in any forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various market risks, including the potential loss arising from adverse changes in interest rates and foreign currency exchange rates. We seek to mitigate the underlying foreign currency exposures with gains and losses on derivative contracts hedging these exposures. We seek to mitigate the effects of fluctuations in interest rates by matching the terms of new investments with new long-term fixed rate borrowings to the extent possible. We may or may not elect to use financial derivative instruments to hedge interest rate exposure. These decisions are principally based on our policy to match our variable rate investments with comparable borrowings, but are also based on the general trend in interest rates at the applicable dates and our perception of the future volatility of interest rates. This section is presented to provide a discussion of the risks associated with potential fluctuations in interest rates and foreign currency exchange rates.
We historically borrow on our unsecured revolving credit facility and Commercial Paper Program 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 unsecured revolving credit facility and Commercial Paper Program. 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):

47


 
 
March 31, 2019
 
December 31, 2018
 
 
Principal
 
Change in
 
Principal
 
Change in
 
 
balance
 
fair value
 
balance
 
fair value
Senior unsecured notes
 
$
9,042,911

 
$
(630,144
)
 
$
9,009,159

 
$
(548,558
)
Secured debt
 
1,585,589

 
(62,037
)
 
1,639,983

 
(59,522
)
Totals
 
$
10,628,500

 
$
(692,181
)
 
$
10,649,142

 
$
(608,080
)
Our variable rate debt, including our unsecured revolving credit facility and Commercial Paper Program, is reflected at fair value. At March 31, 2019, we had $2,201,695,000 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 $22,017,000. At December 31, 2018, we had $2,683,553,000 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 $26,836,000. 
     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, 2019, 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 $12,000,000. 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, 2019
 
December 31, 2018
 
 
Carrying
 
Change in
 
Carrying
 
Change in
 
 
Value
 
fair value
 
Value
 
fair value
Foreign currency forward contracts
 
$
32,609

 
$
22,383

 
$
23,620

 
$
16,163

Debt designated as hedges
 
1,592,911

 
15,929

 
1,559,159

 
15,592

Totals
 
$
1,625,520

 
$
38,312

 
$
1,582,779

 
$
31,755

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 12 and 17 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

48

WELLTOWER INC.
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


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, 2018.
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, 2019 through January 31, 2019
 
46,219

 
$
72.03

 
 
 
 
February 1, 2019 through February 28, 2019
 
34,376

 
76.95

 
 
 
 
March 1, 2019 through March 31, 2019
 
183

 
75.22

 
 
 
 
Totals
 
80,778

 
$
74.13

 
 
 
 
 
 
 
 
 
 
 
 
 
(1) During the three months ended March 31, 2019, the company acquired shares of common stock held by employees who tendered owned shares to satisfy tax withholding obligations.
(2) No shares were purchased as part of publicly announced plans or programs.
Item 5. Other Information 
On April 26, 2019, we entered into a First Amendment to the Credit Agreement dated July 19, 2018 between the Company and a consortium of 31 banks. This amendment to our primary unsecured credit facility deleted Section 8.01(i), pursuant to which a "Material Adverse Event" constituted an event of default. The foregoing description of the First Amendment does not purport to be complete and is qualified in its entirety by reference to the full text of the First Amendment, a copy of which is filed as Exhibit 10.1 to this report and is incorporated herein by reference.


49


Item 6. Exhibits
4.1
 

10.1
 
First Amendment, dated April 26, 2019, to the Credit Agreement dated as of July 19, 2018 by and among the Company; the lenders listed therein; KeyBank National Association, as administrative agent, L/C issuer and a swingline lender; Bank of America, N.A. and JPMorgan Chase Bank, N.A., as co-syndication agents; Deutsche Bank Securities Inc., as documentation agent; Merrill Lynch, Pierce, Fenner & Smith Incorporated, JPMorgan Chase Bank, N.A., KeyBanc Capital Markets Inc. and Deutsche Bank Securities Inc., as U.S. joint lead arrangers; Merrill Lynch, Pierce, Fenner & Smith Incorporated, JPMorgan Chase Bank, N.A., KeyBanc Capital Markets Inc. and RBC Capital Markets, as Canadian joint lead arrangers; and Merrill Lynch, Pierce, Fenner & Smith Incorporated and JPMorgan Chase Bank, N.A., as joint book runners.

31.1
 
 
31.2
 
 
32.1
 
 
32.2
 
 
101.INS
 
XBRL Instance Document
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
 
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:

April 30, 2019
By:  
/s/ THOMAS J. DEROSA  
 
 
 
Thomas J. DeRosa, 
 
 
 
Chief Executive Officer
 (Principal Executive Officer) 
 
 
 
 
 
 
Date:
April 30, 2019
By:  
/s/ JOHN A. GOODEY  
 
 
 
John A. Goodey, 
 
 
 
Executive Vice President & Chief Financial Officer
 (Principal Financial Officer) 
 
 
 
 
 
 
Date:
April 30, 2019
By:  
/s/ JOSHUA T. FIEWEGER 
 
 
 
Joshua T. Fieweger, 
 
 
 
Senior Vice President & Controller
 (Principal Accounting Officer) 
 

50