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WELLTOWER INC. - Quarter Report: 2020 March (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
 
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
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)

Securities registered pursuant to Section 12(b) of the Act
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, $1.00 par value per share
WELL
New York Stock Exchange
4.800% Notes due 2028
WELL28
New York Stock Exchange
4.500% Notes due 2034
WELL34
New York Stock Exchange
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 May 1, 2020, the registrant had 417,479,297 shares of common stock outstanding. 



TABLE OF CONTENTS
 
 
Page
PART I. FINANCIAL INFORMATION
 
 
 
Item 1. Financial Statements (Unaudited)
 
 
Consolidated Balance Sheets
 
 
Consolidated Statements of Comprehensive Income
 
 
Consolidated Statements of Equity
 
 
Consolidated Statements of Cash Flows
 
 
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, 2020 (Unaudited)
 
December 31, 2019 (Note)
Assets:  
 
 
 
 
Real estate investments:  
 
 
 
 
Real property owned:  
 
 
 
 
Land and land improvements  
 
$
3,514,456

 
$
3,486,620

Buildings and improvements  
 
29,236,477

 
29,163,305

Acquired lease intangibles  
 
1,629,662

 
1,617,051

Real property held for sale, net of accumulated depreciation  
 
729,560

 
1,253,008

Construction in progress  
 
431,497

 
507,931

Less accumulated depreciation and amortization  
 
(5,910,979
)
 
(5,715,459
)
Net real property owned  
 
29,630,673

 
30,312,456

Right of use assets, net
 
523,217

 
536,433

Real estate loans receivable, net of credit allowance  
 
221,228

 
270,382

Net real estate investments  
 
30,375,118

 
31,119,271

Other assets:  
 
 
 
 
Investments in unconsolidated entities  
 
702,497

 
583,423

Goodwill  
 
68,321

 
68,321

Cash and cash equivalents  
 
303,423

 
284,917

Restricted cash  
 
89,643

 
100,849

Straight-line rent receivable
 
449,075

 
466,222

Receivables and other assets  
 
934,951

 
757,748

Total other assets  
 
2,547,910

 
2,261,480

Total assets  
 
$
32,923,028

 
$
33,380,751

 
 
 
 
 
Liabilities and equity  
 
 
 
 
Liabilities:  
 
 
 
 
Unsecured credit facility and commercial paper
 
$
844,985

 
$
1,587,597

Senior unsecured notes  
 
10,218,853

 
10,336,513

Secured debt  
 
2,901,232

 
2,990,962

Lease liabilities
 
464,659

 
473,693

Accrued expenses and other liabilities  
 
997,603

 
1,009,482

Total liabilities  
 
15,427,332

 
16,398,247

Redeemable noncontrolling interests  
 
429,359

 
475,877

Equity:  
 
 
 
 
Common stock  
 
418,226

 
411,005

Capital in excess of par value  
 
20,818,230

 
20,190,107

Treasury stock  
 
(86,975
)
 
(78,955
)
Cumulative net income  
 
7,659,038

 
7,353,966

Cumulative dividends  
 
(12,579,535
)
 
(12,223,534
)
Accumulated other comprehensive income (loss)  
 
(96,213
)
 
(112,157
)
Other equity  
 
12

 
12

Total Welltower Inc. stockholders’ equity  
 
16,132,783

 
15,540,444

Noncontrolling interests  
 
933,554

 
966,183

Total equity  
 
17,066,337

 
16,506,627

Total liabilities and equity  
 
$
32,923,028

 
$
33,380,751

 
NOTE: The consolidated balance sheet at December 31, 2019 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,
 
 
2020
 
2019
Revenues:
 
 
 
 
Resident fees and services
 
$
849,972

 
$
868,285

Rental income  
 
389,960

 
381,084

Interest income
 
15,241

 
15,119

Other income
 
3,429

 
7,757

Total revenues
 
1,258,602

 
1,272,245

 
 
 
 
 
Expenses:
 
 
 
 
Property operating expenses
 
681,781

 
670,807

Depreciation and amortization
 
274,801

 
243,932

Interest expense
 
142,007

 
145,232

General and administrative expenses
 
35,481

 
35,282

Loss (gain) on derivatives and financial instruments, net
 
7,651

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

 
15,719

Provision for loan losses
 
7,072

 
18,690

Impairment of assets
 
27,827

 

Other expenses
 
6,292

 
8,756

Total expenses
 
1,182,912

 
1,135,931

 
 
 
 
 
Income (loss) from continuing operations before income taxes and other items
 
75,690

 
136,314

Income tax (expense) benefit
 
(5,442
)
 
(2,222
)
Income (loss) from unconsolidated entities
 
(3,692
)
 
(9,199
)
Gain (loss) on real estate dispositions, net
 
262,824

 
167,409

Income (loss) from continuing operations
 
329,380

 
292,302

 
 
 
 
 
Net income
 
329,380

 
292,302

Less: Net income (loss) attributable to noncontrolling interests(1)
 
19,096

 
11,832

Net income (loss) attributable to common stockholders
 
$
310,284

 
$
280,470

 
 
 
 
 
Average number of common shares outstanding:
 
 
 
 
Basic
 
410,306

 
391,474

Diluted
 
412,420

 
393,452

 
 
 
 
 
Earnings per share:
 
 
 
 
Basic:
 
 
 
 
Income (loss) from continuing operations
 
$
0.80

 
$
0.75

Net income (loss) attributable to common stockholders
 
$
0.76

 
$
0.72

 
 
 
 
 
Diluted:
 
 
 
 
Income (loss) from continuing operations
 
$
0.80

 
$
0.74

Net income (loss) attributable to common stockholders
 
$
0.75

 
$
0.71

 
 
 
 
 
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,
 
 
 
2020
 
2019
 
Net income
 
$
329,380

 
$
292,302

 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
Foreign currency translation gain (loss)
 
(265,577
)
 
78,620

 
    Derivative and financial instruments designated as hedges gain (loss)

 
259,112

 
(87,682
)
 
Total other comprehensive income (loss)
 
(6,465
)
 
(9,062
)
 
 
 
 
 
 
 
Total comprehensive income (loss)
 
322,915

 
283,240

 
Less: Total comprehensive income (loss) attributable
to noncontrolling interests(1)
 
(3,313
)
 
17,619

 
Total comprehensive income (loss) attributable to common stockholders
 
$
326,228

 
$
265,621

 
 
 
 
 
 
 
(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, 2020
 
 
Preferred
Stock
 
Common
Stock
 
Capital in
Excess of
Par Value
 
Treasury
Stock
 
Cumulative
Net Income
 
Cumulative
Dividends
 
Accumulated Other
Comprehensive
Income (Loss)
 
Other
Equity
 
Noncontrolling
Interests
 
Total
Balances at January 1, 2020
 
$

 
$
411,005

 
$
20,190,107

 
$
(78,955
)
 
$
7,353,966

 
$
(12,223,534
)
 
$
(112,157
)
 
$
12

 
$
966,183

 
$
16,506,627

Cumulative change in accounting principle (Note 2)
 
 
 
 
 
 
 
 
 
(5,212
)
 
 
 
 
 
 
 
 
 
(5,212
)
Balances at January 1, 2020 (as adjusted for change in accounting principle)
 

 
411,005

 
20,190,107

 
(78,955
)
 
7,348,754

 
(12,223,534
)
 
(112,157
)
 
12

 
966,183

 
16,501,415

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 


 

 

 

 
310,284

 

 

 

 
18,988

 
329,272

Other comprehensive income (loss)
 


 

 

 

 

 

 
15,944

 

 
(21,955
)
 
(6,011
)
Total comprehensive income
 


 

 

 

 

 

 

 

 

 
323,261

Net change in noncontrolling interests
 


 
 
 
37,625

 

 

 

 

 

 
(29,662
)
 
7,963

Amounts related to stock incentive plans, net of forfeitures
 


 
246

 
6,608

 
(8,020
)
 

 

 

 

 

 
(1,166
)
Net proceeds from issuance of common stock
 


 
6,975

 
583,890

 

 

 

 

 

 

 
590,865

Dividends paid:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock dividends
 


 

 

 

 

 
(356,001
)
 

 

 

 
(356,001
)
Balances at March 31, 2020
 
$

 
$
418,226

 
$
20,818,230

 
$
(86,975
)
 
$
7,659,038

 
$
(12,579,535
)
 
$
(96,213
)
 
$
12

 
$
933,554

 
$
17,066,337

 
 
Three Months Ended March 31, 2019
 
 
Preferred
Stock
 
Common
Stock
 
Capital in
Excess of
Par Value
 
Treasury
Stock
 
Cumulative
Net Income
 
Cumulative
Dividends
 
Accumulated Other
Comprehensive
Income (Loss)
 
Other
Equity
 
Noncontrolling
Interests
 
Total
Balances at January 1, 2019
 
$
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 (loss)
 

 

 

 

 

 

 
(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

Net 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 March 31, 2019
 
$

 
$
404,509

 
$
19,654,137

 
$
(74,492
)
 
$
6,402,004

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

 
$
969,340

 
$
16,047,831



6


CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
WELLTOWER INC. AND SUBSIDIARIES
(In thousands)
 
 
Three Months Ended
 
 
March 31,
 
 
2020
 
2019
Operating activities:  
 
 

 
 

Net income  
 
$
329,380

 
$
292,302

Adjustments to reconcile net income to net cash provided from (used in) operating activities:  
 
 
 
 
Depreciation and amortization  
 
274,801

 
243,932

Other amortization expenses  
 
3,220

 
5,878

Provision for loan losses
 
7,072

 
18,690

Impairment of assets  
 
27,827

 

Stock-based compensation expense  
 
7,083

 
7,529

Loss (gain) on derivatives and financial instruments, net  
 
7,651

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

 
15,719

Loss (income) from unconsolidated entities
 
3,692

 
9,199

Rental income less than (in excess of) cash received  
 
(2,119
)
 
(26,956
)
Amortization related to above (below) market leases, net  
 
(565
)
 
114

Loss (gain) on real estate dispositions, net  
 
(262,824
)
 
(167,409
)
Distributions by unconsolidated entities
 
3,385

 

Increase (decrease) in accrued expenses and other liabilities  
 
(30,030
)
 
(27,368
)
Decrease (increase) in receivables and other assets  
 
43,284

 
(25,248
)
Net cash provided from (used in) operating activities  
 
411,857


343,895

 
 
 
 
 

Investing activities:  
 
 
 
 
Cash disbursed for acquisitions, net of cash acquired
 
(390,802
)
 
(237,610
)
Cash disbursed for capital improvements to existing properties
 
(69,382
)
 
(56,935
)
Cash disbursed for construction in progress
 
(48,775
)
 
(55,391
)
Capitalized interest  
 
(4,746
)
 
(2,327
)
Investment in loans receivable
 
(10,441
)
 
(45,452
)
Principal collected on loans receivable  
 
10,045

 
7,210

Other investments, net of payments  
 
(3,612
)
 
(7,829
)
Contributions to unconsolidated entities  
 
(137,129
)
 
(26,854
)
Distributions by unconsolidated entities  
 
3,555

 
19,724

Proceeds from (payments on) derivatives  
 
(357
)
 

Proceeds from sales of real property  
 
801,392

 
602,732

Net cash provided from (used in) investing activities  
 
149,748


197,268

 
 
 
 
 
Financing activities:  
 
 
 
 
Net increase (decrease) under unsecured credit facility and commercial paper
 
(742,612
)
 
(727,707
)
Proceeds from issuance of senior unsecured notes
 

 
1,036,964

Payments to extinguish senior unsecured notes  
 

 
(1,050,000
)
Net proceeds from the issuance of secured debt  
 
44,921

 
247,163

Payments on secured debt  
 
(31,566
)
 
(128,113
)
Net proceeds from the issuance of common stock  
 
591,001

 
533,543

Payments for deferred financing costs and prepayment penalties  
 
(722
)
 
(19,566
)
Contributions by noncontrolling interests(1)
 
9,084

 
27,860

Distributions to noncontrolling interests(1)
 
(50,124
)
 
(21,830
)
Cash distributions to stockholders  
 
(354,678
)
 
(342,803
)
Other financing activities
 
(9,599
)
 
(7,716
)
Net cash provided from (used in) financing activities  
 
(544,295
)

(452,205
)
Effect of foreign currency translation on cash and cash equivalents and restricted cash
 
(10,010
)

2,352

Increase (decrease) in cash, cash equivalents and restricted cash  
 
7,300

 
91,310

Cash, cash equivalents and restricted cash at beginning of period  
 
385,766


316,129

Cash, cash equivalents and restricted cash at end of period  
 
$
393,066

 
$
407,439

 
 
 
 
 
Supplemental cash flow information:
 
 
 
 
Interest paid
 
$
140,216

 
$
148,487

Income taxes paid (received), net
 
471

 
(250
)
 
 
 
 
 
(1) Includes amounts attributable to redeemable noncontrolling interests.
 
 
 
 


7

WELLTOWER INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


1. Business
 Welltower Inc. (the "Company"), 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, 2020 are not necessarily an indication of the results that may be expected for the year ending December 31, 2020. 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, 2019.
Impact of COVID-19 Pandemic
The extent to which the COVID-19 pandemic impacts our operations and those of our operators and tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic effects of the pandemic and containment measures, among others. The COVID-19 pandemic could have material and adverse effects on our financial condition, results of operations and cash flows in the future, including but not limited to, the following:
Our Seniors Housing Operating revenues and our Triple-net operators' revenues are dependent on occupancy. Declines in occupancy are expected due to heightened move-in criteria and screening, as well as increased mortality rates among seniors. In addition, increased expenses are expected to continue until the pandemic subsides. Such factors may impact our Triple-net operator's ability to pay rent and contractual obligations. Furthermore, various local and state stay at home orders and the temporary closure of certain medical practices as a result may impact our medical office building tenants' ability to pay rent. These factors may cause operators or tenants to seek modifications of such obligations, resulting in reductions in revenue and increases in uncollectible receivables.
Assessing properties for potential impairment involves subjectivity in determining if impairment indicators are present and in estimating the future undiscounted cash flows or estimated fair value of the asset. Key assumptions are made in this assessment and drive conclusions include the estimation of future rental revenues, operating expenses, capitalization rates and the ability and intent to hold the respective asset. All of these assumptions are significantly affected by our expectations of future market or economic conditions and can be highly impacted by the uncertainty of the COVID-19 pandemic, leading us to recognize increased impairment charges.
The determination of the allowance for credit losses is based on our evaluation of collectability of our loans receivable and includes review of factors such as delinquency status, historical loan charge-offs, financial strength of the borrower and guarantors and the value of the underlying collateral. Reduced economic activity severely impacts our borrowers' businesses, financial conditions and liquidity and may hinder their ability to make contractual payments to us, leading to an increase in loans deemed to have deteriorated credit which could result in an increase in the provision for loan losses.
New Accounting Standards     
On January 1, 2020, we adopted 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. In November 2018, the FASB issued an amendment excluding operating lease receivables accounted for under the new leases standard from the scope of the new credit losses standard. ASU 2016-13 primarily impacts our measurement for credit losses related to our real estate and non-real estate loans receivable. In conjunction with our adoption of ASU 2016-13, we recorded a $5,212,000 increase to our allowance for credit losses on loans receivable (both real estate and non-real estate) with a corresponding adjustment to cumulative net income related to the change in accounting principle. See Note 7 for further details.

8

WELLTOWER INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

At the FASB's April 8, 2020 Board meeting, the staff acknowledged that the economics of lease concessions that result from a global pandemic may not be aligned with the underlying premise of the modification framework in ASC 842, under which the concession would be recognized over the remainder of the lease term. The FASB thus determined that it would be appropriate for entities to make a policy election regarding how to account for lease concessions resulting directly from COVID-19. Rather than analyzing each lease contract individually, entities can elect to account for lease concessions "as though the enforceable rights and obligations for the concessions explicitly exist in the contract." Accordingly, entities that choose to apply the relief provided can either (1) apply the modification framework for these concessions in accordance with ASC 842 as applicable or (2) account for concessions as if they were made under the enforceable rights included in the original agreement as long as total cash flows resulting from the modified contract are substantially the same or less than cash flows in the original contract. As of March 31, 2020, we have adopted the relief put forth by the FASB and intend to account for qualifying concessions as lease modifications, but had not yet made significant lease concessions within our portfolio as a result of the COVID-19 pandemic.
3. Real Property Acquisitions and Development 
The total purchase price for all properties acquired has been allocated to the tangible and identifiable intangible assets and liabilities at cost on a relative fair value basis. Liabilities assumed and any associated noncontrolling interests are reflected at fair value. 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, 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.
The following is a summary of our real property investment activity by segment for the periods presented (in thousands):
 
Three Months Ended
 
March 31, 2020
 
March 31, 2019
 
Seniors Housing Operating
 
Triple-net
 
Outpatient
Medical
 
Totals
 
Seniors Housing Operating
 
Triple-net
 
Outpatient
Medical
 
Totals
Land and land improvements
$
15,758

 
$

 
$
40,847

 
$
56,605

 
$
6,831

 
$
7,427

 
$
29,304

 
$
43,562

Buildings and improvements
132,480

 
765

 
171,457

 
304,702

 
97,759

 
74,116

 
60,671

 
232,546

Acquired lease intangibles
10,810

 

 
23,823

 
34,633

 
4,945

 

 
10,202

 
15,147

Right of use assets, net

 

 

 

 

 

 
2,012

 
2,012

Receivables and other assets
257

 

 
139

 
396

 
264

 

 

 
264

Total assets acquired (1)
159,305

 
765

 
236,266

 
396,336

 
109,799

 
81,543

 
102,189

 
293,531

Secured debt

 

 

 

 
(43,209
)
 

 

 
(43,209
)
Lease liabilities

 

 

 

 

 

 
(961
)
 
(961
)
Accrued expenses and other liabilities  
(671
)
 

 
(2,036
)
 
(2,707
)
 
(848
)
 

 
(1,952
)
 
(2,800
)
Total liabilities acquired
(671
)
 

 
(2,036
)
 
(2,707
)
 
(44,057
)
 

 
(2,913
)
 
(46,970
)
Noncontrolling interests (2)
(2,827
)
 

 

 
(2,827
)
 
(7,895
)
 
(1,056
)
 

 
(8,951
)
Cash disbursed for acquisitions
155,807

 
765

 
234,230

 
390,802

 
57,847

 
80,487

 
99,276

 
237,610

Construction in progress additions
29,841

 
13,929

 
13,645

 
57,415

 
35,756

 
7,442

 
14,475

 
57,673

Less: Capitalized interest
(2,812
)
 
(941
)
 
(993
)
 
(4,746
)
 
(1,136
)
 
(390
)
 
(801
)
 
(2,327
)
Accruals (3)
(2,600
)
 

 
(1,294
)
 
(3,894
)
 

 

 
45

 
45

Cash disbursed for construction in progress
24,429

 
12,988

 
11,358

 
48,775

 
34,620

 
7,052

 
13,719

 
55,391

Capital improvements to existing properties
52,503

 
3,248

 
13,631

 
69,382

 
43,300

 
3,768

 
9,867

 
56,935

Total cash invested in real property, net of cash acquired
$
232,739

 
$
17,001

 
$
259,219

 
$
508,959

 
$
135,767

 
$
91,307

 
$
122,862

 
$
349,936

(1) Excludes $580,000 and $517,000 of unrestricted and restricted cash acquired during the three months ended March 31, 2020 and 2019, respectively.
(2) Includes amounts attributable to both redeemable noncontrolling interests and noncontrolling interests.
(3) 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, 2020
 
March 31, 2019
Development projects:
 
 
 
 
Seniors Housing Operating
 
$
93,188

 
$

Outpatient Medical
 
19,369

 

Total construction in progress conversions
 
$
112,557

 
$

 
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, 2020
 
December 31, 2019
Assets:
 
 
 
 
In place lease intangibles
 
$
1,523,390

 
$
1,513,836

Above market tenant leases
 
60,484

 
59,540

Lease commissions
 
45,788

 
43,675

Gross historical cost
 
1,629,662

 
1,617,051

Accumulated amortization
 
(1,195,330
)
 
(1,181,158
)
Net book value
 
$
434,332

 
$
435,893

 
 
 
 
 
Weighted-average amortization period in years
 
10.4

 
10.3

 
 
 
 
 
Liabilities:
 
 
 
 
Below market tenant leases
 
$
86,233

 
$
99,035

Accumulated amortization
 
(40,354
)
 
(49,390
)
Net book value
 
$
45,879

 
$
49,645

 
 
 
 
 
Weighted-average amortization period in years
 
8.6

 
8.6

 
The following is a summary of real estate intangible amortization income (expense) for the periods presented (in thousands):
 
 
Three Months Ended March 31,
  
 
2020
 
2019
Rental income related to (above)/below market tenant leases, net
 
$
524

 
$
(155
)
Amortization related to in place lease intangibles and lease commissions
 
(35,976
)
 
(24,905
)

The future estimated aggregate amortization of intangible assets and liabilities is as follows for the periods presented (in thousands):
 
 
Assets
 
Liabilities
2020
 
$
89,792

 
$
6,817

2021
 
68,777

 
8,313

2022
 
44,647

 
7,607

2023
 
37,400

 
5,343

2024
 
29,529

 
3,215

Thereafter
 
164,187

 
14,584

Total
 
$
434,332

 
$
45,879

 

10

WELLTOWER INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 (i.e., property type, relationship or geography). At March 31, 2020, 18 Seniors Housing Operating, six Triple-net, and nine Outpatient Medical properties with an aggregate real estate balance of $729,560,000 were classified as held for sale. In addition to the real property balances held for sale, secured debt of $112,625,000 and net other assets and liabilities of $27,800,000 are included in the Consolidated Balance Sheet related to the held for sale properties. Subsequent to March 31, 2020, the expected sale of a Seniors Housing Operating portfolio, which met the held for sale criteria as of December 31, 2019, was not consummated as a result of the uncertainty of the COVID-19 pandemic on our business and industry and the 11 properties with a carrying value of $386,744,000 will be moved out of held for sale during the second quarter. Expected gross sales proceeds related to the remaining held for sale properties is approximately $412,535,000.
During the three months ended March 31, 2020, we recorded net impairment charges of $27,827,000 related to certain held for use properties for which the carrying value exceeded the fair values. The following is a summary of our real property disposition activity for the periods presented (in thousands):
 
 
Three Months Ended March 31,
 
 
2020
 
2019
Real estate dispositions:
 
 
 
 
Triple-net
 
$
33,445

 
$
436,071

Outpatient Medical
 
495,003

 

Total dispositions
 
528,448

 
436,071

Gain (loss) on real estate dispositions, net
 
262,824

 
167,409

Net other assets/liabilities disposed
 
10,120

 
(748
)
Proceeds from real estate dispositions
 
$
801,392

 
$
602,732


Operating results attributable to properties sold subsequent to or classified as held for sale and which do not meet the definition of discontinued operations, are not 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,
 
 
2020
 
2019
Revenues:
 
 
 
 
Total revenues
 
$
48,563

 
$
159,048

Expenses:
 
 
 
 
Interest expense
 
876

 
1,547

Property operating expenses
 
27,793

 
96,143

Provision for depreciation
 

 
22,739

Total expenses
 
28,669

 
120,429

Income (loss) from real estate dispositions, net
 
$
19,894

 
$
38,619

 
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.
The components of lease expense were as follows for the period presented (in thousands):

11

WELLTOWER INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


 
 
 
 
Three Months Ended
 
 
Classification
 
March 31, 2020
 
March 31, 2019
Operating lease cost: (1)
 
 
 
 
 
 
Real estate lease expense
 
Property operating expenses
 
$
6,492

 
$
7,412

non-real estate investment lease expense
 
General and administrative expenses
 
1,267

 
362

Finance lease cost:
 
 
 
 
 
 
Amortization of leased assets
 
Property operating expenses
 
2,243

 
2,092

Interest on lease liabilities
 
Interest expense
 
1,379

 
1,002

Sublease income
 
Rental income
 
(1,043
)
 
(1,886
)
Total
 
 
 
$
10,338

 
$
8,982


(1) Includes short-term leases which are immaterial.
Supplemental balance sheet information related to leases was as follows (in thousands):
 
Classification
 
March 31, 2020
 
December 31, 2019
Right of use assets:
 
 
 
 
 
Operating leases - real estate
Right of use assets, net
 
$
362,685

 
$
374,217

Finance leases - real estate
Right of use assets, net
 
160,532

 
162,216

Real estate right of use assets, net
 
 
523,217

 
536,433

Operating leases - non-real estate investments
Receivables and other assets
 
11,753

 
12,474

Total right of use assets, net
 
 
$
534,970

 
$
548,907

 
 
 
 
 
 
Lease liabilities:
 
 
 
 
 
Operating leases
 
 
$
356,311

 
$
364,803

Financing leases
 
 
108,348

 
108,890

Total
 
 
$
464,659

 
$
473,693


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 Triple-net and Outpatient Medical portfolios typically include some form of operating expense reimbursement by the tenant. For the three months ended March 31, 2020, we recognized $389,960,000 of rental and other revenues related to operating leases, of which $55,754,000 was for variable lease payments which primarily represents the reimbursement of operating costs such as common area maintenance expenses, utilities, insurance and real estate taxes. For the three months ended March 31, 2019, we recognized $381,084,000 of rental and other revenues related to operating leases, of which $47,350,000 was for variable lease payments.
7. Loans Receivable
Loans receivable are recorded on our Consolidated Balance Sheets in real estate loans receivable, net of allowance for credit losses, or for non-real estate loans receivable, in receivables and other assets, net of allowance for credit losses. Real estate loans receivable consists of mortgage loans and other real estate loans which are primarily collateralized by a first, second or third mortgage lien, a leasehold mortgage on, or an assignment of the partnership interest in, the related properties, corporate guarantees and/or personal guarantees. Non-real estate loans are generally corporate loans with no real estate backing. Interest income on loans is recognized as earned based upon the principal amount outstanding subject to an evaluation of the risk of credit loss. Accrued interest receivable was $7,868,000 and $6,897,000 as of March 31, 2020 and December 31, 2019, respectively, and is included in receivables and other assets on the Consolidated Balance Sheets. The following is a summary of our loans receivable (in thousands):
 
 
March 31, 2020
 
December 31, 2019
Mortgage loans
 
$
97,896

 
$
188,062

Other real estate loans
 
125,811

 
124,696

Allowance for credit losses on real estate loans receivable
 
(2,479
)
 
(42,376
)
Real estate loans receivable, net of credit allowance
 
$
221,228

 
$
270,382

Non-real estate loans
 
451,271

 
362,850

Allowance for credit losses on non-real estate loans receivable
 
(78,092
)
 
(25,996
)
Non-real estate loans receivable, net of credit allowance (1)
 
373,179

 
336,854

Total loans receivable, net of credit allowance
 
$
594,407

 
$
607,236


(1) Included in receivables and other assets on the Consolidated Balance Sheets.
During the three months ended March 31, 2020, the real estate collateral associated with one loan was released, therefore, the principal balance of $86,411,000 and related allowance for credit losses of $42,376,000 was reclassified to a non-real estate loan.

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


12

WELLTOWER INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 
 
Three Months Ended
 
 
March 31, 2020
 
March 31, 2019
Advances on loans receivable:
 
 
 
 
Investments in new loans
 
$

 
$
25,000

Draws on existing loans
 
10,441

 
20,452

Net cash advances on loans receivable
 
10,441

 
45,452

 
 
 
 
 
Receipts on loans receivable:
 
 
 
 
Loan payoffs
 

 
4,384

Principal payments on loans
 
10,045

 
2,826

Net cash receipts on loans receivable
 
10,045

 
7,210

Net cash advances (receipts) on loans receivable
 
$
396

 
$
38,242


The allowance for credit loss on loans receivable is maintained at a level believed adequate to absorb potential losses in our loans receivable. The determination of the credit allowance is based on a quarterly evaluation of each of these loans, including general economic conditions and estimated collectability of loan payments. We evaluate the collectability of our loans receivable based on a combination of credit quality indicators, including, but not limited to, payment status, historical loan charge-offs, financial strength of the borrower and guarantors, and nature, extent, and value of the underlying collateral.
A loan is considered to have deteriorated credit quality when, based on current information and events, it is probable that we will be unable to collect all amounts due as scheduled according to the contractual terms of the loan agreement. For those loans we identified as having deteriorated credit quality we determine the amount of credit loss on an individual basis. Placement on non-accrual status may be required. Consistent with this definition, all loans on non-accrual are deemed to have deteriorated credit quality. To the extent circumstances improve and the risk of collectability is diminished, we will return these loans to income accrual status. While a loan is on non-accrual status, any cash receipts are applied against the outstanding principal balance.
For the remaining loans we assess credit loss on a collective pool basis and use our historical loss experience for similar loans to determine the reserve for credit losses. The following is a summary of our loans by credit loss category (in thousands):
 
March 31, 2020
Loan category
Years of Origination
Loan Carrying Value
Allowance for Credit Loss
Net Loan Balance
No. of Loans
Deteriorated loans
 2007 - 2018
$
185,982

$
(75,372
)
$
110,610

4

Collective loan pool
 2007 - 2015
128,971

(1,873
)
127,098

15

Collective loan pool (1)
 2016
183,218

(1,534
)
181,684

6

Collective loan pool
 2017
117,156

(970
)
116,186

7

Collective loan pool
 2018
15,865

(229
)
15,636

2

Collective loan pool
 2019
43,786

(593
)
43,193

6

Total loans
 
$
674,978

$
(80,571
)
$
594,407

40

 
(1) Carrying value is exclusive of deferred gains of $62,819,000 recorded in accrued expenses and other liabilities on the Consolidated Balance Sheets.

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 were no longer deemed collectible. During the quarter ended June 30, 2019, these loans were written off. In March 31, 2020, we recognized a provision for loan losses of $6,898,000 to fully reserve for one Triple-net non-real estate loan receivable that was no longer deemed collectible. The following is a summary of the allowance for credit losses on loans receivable for the periods presented (in thousands):
 
Three Months Ended
 
March 31, 2020
 
March 31, 2019
Balance at beginning of period
$
68,372

 
$
68,372

Adoption of ASU 2016-13
5,212

 

Provision for loan losses
7,072

 
18,690

Foreign currency translation
(85
)
 

Balance at end of period
$
80,571

 
$
87,062



13

WELLTOWER INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following is a summary of our deteriorated loans (in thousands):
 
 
Three Months Ended
 
 
March 31, 2020
 
March 31, 2019
Balance of deteriorated loans at end of period (1)
 
$
185,982

 
$
206,783

Allowance for credit losses
 
(75,372
)
 
(87,062
)
Balance of deteriorated loans not reserved
 
$
110,610

 
$
119,721

Interest recognized on deteriorated loans (2)
 
$
4,046

 
$
3,971

 
(1) Includes two loans that are on non-accrual as of March 31, 2020, with a total carrying value of $9,534,000 at both the beginning and the end of the first quarter of 2020.
(2) Represents cash interest recognized in the period.
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 properties have been included in our consolidated results of operations from the date of acquisition by the joint ventures and are reflected in our Consolidated Statements of Comprehensive Income as income or loss from unconsolidated entities. The following is a summary of our investments in unconsolidated entities (dollars in thousands): 
 
 
Percentage Ownership (1)
 
March 31, 2020
 
December 31, 2019
Seniors Housing Operating
 
10% to 50%
 
$
511,645

 
$
463,741

Triple-net
 
10% to 25%
 
7,438

 
7,740

Outpatient Medical
 
15% to 50%
 
183,414

 
111,942

Total
 
 
 
$
702,497

 
$
583,423

 
(1) Excludes ownership of in substance real estate.
At March 31, 2020, the aggregate unamortized basis difference of our joint venture investments of $112,258,000 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.
We have made loans totaling $210,994,000 related to eight properties as of March 31, 2020 for the development and construction of certain properties which are classified as in substance real estate investments. We believe that such borrowers typically represent variable interest entities ("VIE" or "VIEs") in accordance with ASC 810 Consolidation. VIEs are required to be consolidated by their primary beneficiary ("PB") which is the enterprise that has both: (i) the power to direct the activities of the VIE that most significantly impacts the entity's economic performance; and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could be significant to the entity. We have concluded that we are not the PB of such borrowers, therefore, the loan arrangements were assessed based on among other factors, the amount and timing of expected residual profits, the estimated fair value of the collateral and the significance of the borrower's equity in the project. Based on these assessments, the arrangements have been classified as in substance real estate investments. We expect to fund an additional $251,495,000 related to these investments.
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, 2020, excluding our share of NOI in unconsolidated entities (dollars in thousands):
Concentration by relationship: (1)
 
Number of Properties
 
Total NOI
 
Percent of NOI (2)
Sunrise Senior Living (3)
 
165

 
$
81,577

 
14%
ProMedica
 
215

 
53,498

 
9%
Revera(3)
 
94

 
32,874

 
6%
Genesis Healthcare
 
52

 
29,391

 
5%
Belmont Village
 
21

 
19,615

 
3%
Remaining portfolio  
 
1,016

 
359,866

 
63%
Totals  
 
1,563

 
$
576,821

 
100%
(1) Genesis Healthcare and ProMedica are in our Triple-net segment. Sunrise Senior Living, Revera and Belmont Village are in our Seniors Housing Operating segment.
(2) NOI with our top five relationships comprised 37% of total NOI for the year ended December 31, 2019.
(3) Revera owns a controlling interest in Sunrise Senior Living.

14

WELLTOWER INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


10. Borrowings Under Credit Facilities and Commercial Paper Program 
At March 31, 2020, we had a primary unsecured credit facility with a consortium of 31 banks that includes a $3,000,000,000 unsecured revolving credit facility ($795,000,000 outstanding at March 31, 2020), 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, 2020). Borrowings under the unsecured revolving credit facility are subject to interest payable at the applicable margin over LIBOR interest rate (1.82% at March 31, 2020). The applicable margin is based on our debt ratings and was 0.825% at March 31, 2020. 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, 2020. 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. 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, 2020, there was a balance of $49,985,000 outstanding on the commercial paper program ($50,000,000 in principal outstanding net of an unamortized discount of $15,000), which reduces the borrowing capacity on the unsecured revolving credit facility. The notes bear interest at various floating rates with a weighted average of 1.55% as of March 31, 2020 and a weighted average maturity of seven days as of March 31, 2020.
The following information relates to aggregate borrowings under the unsecured revolving credit facility and commercial paper program for the periods presented (dollars in thousands):
 
 
Three Months Ended March 31,
 
 
2020
 
2019
Balance outstanding at quarter end
 
$
845,000

 
$
419,293

Maximum amount outstanding at any month end
 
$
2,100,000

 
$
1,150,000

Average amount outstanding (total of daily
 
 
 
 
principal balances divided by days in period)
 
$
1,593,816

 
$
790,516

Weighted average interest rate (actual interest
 
 
 
 
expense divided by average borrowings outstanding)
 
2.21
%
 
3.22
%
 
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: (i) 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 (ii) 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, 2020, the annual principal payments due on these debt obligations were as follows (in thousands):
 
 
Senior
Unsecured Notes (1,2)
 
Secured
Debt (1,3)
 
Totals
2020
 
$

 
$
275,279

 
$
275,279

2021
 

 
424,952

 
424,952

2022
 
10,000

 
449,900

 
459,900

2023 (4,5)
 
1,777,054

 
473,564

 
2,250,618

2024
 
1,350,000

 
295,714

 
1,645,714

Thereafter (6,7,8)
 
7,169,819

 
985,229

 
8,155,048

Totals
 
$
10,306,873

 
$
2,904,638

 
$
13,211,511

 
(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 1.65% to 6.50%.
(3) Annual interest rates range from 1.69% to 12.00%. Carrying value of the properties securing the debt totaled $6,324,000 at March 31, 2020.


15

WELLTOWER INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(4) Includes a $250,000,000 Canadian-denominated unsecured term credit facility (approximately $177,054,000 based on the Canadian/U.S. Dollar exchange rate on March 31, 2020). The loan matures on July 19, 2023 and bears interest at the Canadian Dealer Offered Rate plus 0.9% (2.49% at March 31, 2020).
(5) Includes a $500,000,000 unsecured term credit facility. The loan matures on July 19, 2023 and bears interest at LIBOR plus 0.9% (1.65% at March 31, 2020).
(6) Includes a $300,000,000 Canadian-denominated 2.95% senior unsecured notes due 2027 (approximately $212,465,000 based on the Canadian/U.S. Dollar exchange rate on March 31, 2020).
(7) Includes a £550,000,000 4.80% senior unsecured notes due 2028 (approximately $684,804,000 based on the Sterling/U.S. Dollar exchange rate in effect on March 31, 2020).
(8) Includes a £500,000,000 4.50% senior unsecured notes due 2034 (approximately $622,550,000 based on the Sterling/U.S. Dollar exchange rate in effect on March 31, 2020).
On April 1, 2020, we closed on a $1,000,000,000 unsecured term credit facility that matures on April 1, 2022. The term loan carries a 60-day delayed draw and bears interest at a rate of LIBOR plus 1.20%.
The following is a summary of our senior unsecured notes principal activity during the periods presented (dollars in thousands):
 
 
Three Months Ended
 
 
March 31, 2020
 
March 31, 2019
 
 
 
 
Weighted Avg.
 
 
 
Weighted Avg.
 
 
Amount
 
Interest Rate
 
Amount
 
Interest Rate
Beginning balance
 
$
10,427,562

 
4.03%
 
$
9,699,984

 
4.48%
Debt issued
 

 
—%
 
1,050,000

 
3.89%
Debt extinguished
 

 
—%
 
(1,050,000
)
 
4.98%
Foreign currency
 
(120,689
)
 
4.15%
 
37,553

 
4.33%
Ending balance
 
$
10,306,873

 
3.97%
 
$
9,737,537

 
4.35%
 
The following is a summary of our secured debt principal activity for the periods presented (dollars in thousands): 
 
 
Three Months Ended
 
 
March 31, 2020
 
March 31, 2019
 
 
 
 
Weighted Avg.
 
 
 
Weighted Avg.
 
 
Amount
 
Interest Rate
 
Amount
 
Interest Rate
Beginning balance
 
$
2,993,342

 
3.63%
 
$
2,485,711

 
3.90%
Debt issued
 
44,921

 
2.58%
 
247,163

 
3.68%
Debt assumed
 

 
—%
 
42,000

 
4.62%
Debt extinguished
 
(16,040
)
 
4.51%
 
(114,570
)
 
4.96%
Principal payments
 
(15,526
)
 
3.78%
 
(13,543
)
 
3.85%
Foreign currency
 
(102,059
)
 
3.27%
 
26,197

 
3.33%
Ending balance
 
$
2,904,638

 
3.63%
 
$
2,672,958

 
3.84%
 
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, 2020, 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 and interest rate risk related to our capital structure. Our risk management program is designed to manage the exposure and volatility arising from these risks, and utilizes foreign currency forward contracts, cross currency swap contracts, interest rate swaps, interest rate locks 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. 
Cash Flow Hedges of Interest Rate Risk
We enter into interest rate swaps in order to maintain a capital structure containing targeted amounts of fixed and floating-rate debt and manage interest rate risk. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from

16

WELLTOWER INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

a counterparty in exchange for our fixed-rate payments. These interest rate swap agreements were used to hedge the variable cash flows associated with variable-rate debt.
Periodically, we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments attributable to increases in the benchmark interest rate during the period leading up to the probable issuance of fixed-rate debt. We designate our interest rate locks as cash flow hedges. Gains and losses when we settle our interest rate locks are amortized into income over the life of the related debt, except where a material amount is deemed to be ineffective, which would be immediately reclassified to the Consolidated Statements of Comprehensive Income.
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. 
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): 
 
 
March 31, 2020
 
December 31, 2019
Derivatives designated as net investment hedges:
 
 
 
 
Denominated in Canadian Dollars
 
$
700,000

 
$
725,000

Denominated in Pounds Sterling
 
£
1,340,708

 
£
1,340,708

 
 
 
 
 
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

 
 
 
 
 
Interest rate swaps designated as cash flow hedges:
 
 
 
 
Denominated in U.S Dollars (1)
 
$
1,188,250

 
$
1,188,250

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

 
$
405,819

Forward sales contracts denominated in Canadian Dollars
 
$
80,000

 
$

Forward purchase contracts denominated in Pounds Sterling
 
£
(125,000
)
 
£
(125,000
)
Forward sales contracts denominated in Pounds Sterling
 
£
125,000

 
£
125,000

 
(1) At March 31, 2020 the maximum maturity date was July 15, 2021.
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,
Description
 
Location
 
2020
 
2019
Gain (loss) on derivative instruments designated as hedges recognized in income
 
Interest expense
 
$
6,644

 
$
5,333

Gain (loss) on derivative instruments not designated as hedges recognized in income
 
Interest expense
 
$
(95
)
 
$
(1,538
)
Gain (loss) on derivative and financial instruments designated as hedges recognized in OCI
 
OCI
 
$
259,112

 
$
(87,682
)
 

17

WELLTOWER INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

13. Commitments and Contingencies
At March 31, 2020, we had 12 outstanding letter of credit obligations totaling $42,219,000 and expiring between 2020 and 2024. At March 31, 2020, we had outstanding construction in progress of $431,497,000 and were committed to providing additional funds of approximately $373,422,000 to complete construction. Additionally, at March 31, 2020, we had outstanding investments classified as in substance real estate of $210,994,000 and were committed to provide additional funds of $251,495,000 (see Note 8 for additional information). Purchase obligations at March 31, 2020 also include $20,764,000 of contingent purchase obligations to fund capital improvements. 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, 2020
 
December 31, 2019
Preferred Stock:
 
 
 
 
Authorized shares
 
50,000,000

 
50,000,000

Issued shares
 

 

Outstanding shares
 

 

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

 
700,000,000

Issued shares
 
418,781,215

 
411,550,857

Outstanding shares
 
417,390,540

 
410,256,615

 
Preferred Stock The following is a summary of our preferred stock activity during the periods indicated: 
 
 
Three Months Ended
 
 
March 31, 2020
 
March 31, 2019
 
 
 
 
Weighted Avg.
 
 
 
Weighted Avg.
 
 
Shares
 
Dividend Rate
 
Shares
 
Dividend Rate
Beginning balance
 

 
—%
 
14,369,965

 
6.50%
Shares converted
 

 
—%
 
(14,369,965
)
 
6.50%
Ending balance
 

 
—%
 

 
—%
 
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 In February 2019, we entered into a separate amended and restated equity distribution agreement whereby we can offer and sell 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. During the three months ended March 31, 2020, we physically settled all of our outstanding forward sales agreements for cash proceeds of $576,196,000. As of March 31, 2020, we had $499,341,000 of remaining capacity under the Equity Shelf Program.
The following is a summary of our common stock issuances during the three months ended March 31, 2020 and 2019 (dollars in thousands, except shares and average price amounts): 
 
 
Shares Issued
 
Average Price
 
Gross Proceeds
 
Net Proceeds
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

 
 
 
 
 
 
 
 
 
2020 Dividend reinvestment plan issuances
 
175,129

 
$
84.54

 
$
14,805

 
$
14,805

2020 Equity shelf program issuances
 
6,799,978

 
86.48

 
588,072

 
576,196

2020 Stock incentive plans, net of forfeitures
 
158,818

 
 
 

 

2020 Totals
 
7,133,925

 
 
 
$
602,877

 
$
591,001

 

18

WELLTOWER INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Dividends  The increase in dividends is attributable to increases in our common shares outstanding. The following is a summary of our dividend payments (in thousands, except per share amounts): 
 
 
Three Months Ended
 
 
March 31, 2020
 
March 31, 2019
  
 
Per Share
 
Amount
 
Per Share
 
Amount
Common stock
 
$
0.8700

 
$
356,001

 
$
0.8700

 
$
344,760

 
Accumulated Other Comprehensive Income  The following is a summary of accumulated other comprehensive income (loss) for the periods presented (in thousands):
 
March 31, 2020
 
December 31, 2019
Foreign currency translation
$
(962,982
)
 
$
(719,814
)
Derivative and financial instruments designated as hedges
866,769

 
607,657

Total accumulated other comprehensive loss
$
(96,213
)
 
$
(112,157
)

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 $7,083,000 and $7,529,000 for the three months ended March 31, 2020 and 2019, respectfully.
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,
 
 
2020
 
2019
Numerator for basic earnings per share - net income (loss) attributable to common stockholders
 
$
310,284

 
$
280,470

 
 
 
 
 
 
 
 
 
 
Adjustment for net income (loss) attributable to OP units
 
(1,388
)
 
46

Numerator for diluted earnings per share
 
$
308,896

 
$
280,516

 
 
 
 
 
Denominator for basic earnings per share - weighted average shares
 
410,306

 
391,474

Effect of dilutive securities:
 
 
 
 
Employee stock options
 

 
1

Non-vested restricted shares
 
702

 
868

Redeemable shares
 
1,396

 
1,096

Employee stock purchase program
 
16

 
13

Dilutive potential common shares
 
2,114

 
1,978

Denominator for diluted earnings per share - adjusted weighted average shares
 
412,420

 
393,452

 
 
 
 
 
Basic earnings per share
 
$
0.76

 
$
0.72

Diluted earnings per share
 
$
0.75

 
$
0.71


17. Disclosure about Fair Value of Financial Instruments 
Fair value is defined 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. A three-level valuation hierarchy exists for disclosures of fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Please see Note 2 to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 for additional information. The three levels are defined below: 


19

WELLTOWER INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Level 1 - Quoted prices in active markets for identical assets or liabilities. 
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted            prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market            data for substantially the full term of the assets or liabilities. 
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value        of the assets or liabilities. 
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. 
Mortgage Loans, Other Real Estate Loans and Non-real Estate Loans Receivable — The fair value of mortgage loans, other real estate loans and non-real estate loans receivable is generally estimated by using Level 2 and Level 3 inputs such as discounting the estimated future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.  
Cash and Cash Equivalents and Restricted Cash — The carrying amount approximates fair value. 
Equity Securities — Equity securities are recorded at their fair value based on Level 1 publicly available trading prices. 
Borrowings Under Primary Unsecured Credit Facility and Commercial Paper Program — The carrying amount of the primary unsecured 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, Interest Rate Swaps and Cross Currency Swaps — Foreign currency forward contracts, interest rate swaps and cross currency swaps are recorded in other assets or other liabilities on the balance sheet at fair value that is derived from observable market data, including yield curves and foreign exchange rates (all of our derivatives are Level 2).
Redeemable OP Unitholder Interests — Our redeemable OP unitholder interests are recorded on the balance sheet at fair value using Level 2 inputs unless the fair value is below the initial amount in which case the redeemable OP unitholder interests are recorded at the initial amount adjusted for distribution to the unitholders and income or loss attributable to the unitholders. 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, 2020
 
December 31, 2019
 
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Financial assets:
 
 
 
 
 
 
 
 
Mortgage loans receivable
 
$
96,480

 
$
96,702

 
$
145,686

 
$
150,217

Other real estate loans receivable
 
124,748

 
123,101

 
124,696

 
128,512

Equity securities
 
8,034

 
8,034

 
15,685

 
15,685

Cash and cash equivalents
 
303,423

 
303,423

 
284,917

 
284,917

Restricted cash
 
89,643

 
89,643

 
100,849

 
100,849

Non-real estate loans receivable
 
373,179

 
418,221

 
336,854

 
379,239

Foreign currency forward contracts, interest rate swaps and cross currency swaps
 
210,837

 
210,837

 
18,554

 
18,554

 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
Borrowings under unsecured credit facility and commercial paper program
 
$
844,985

 
$
844,985

 
$
1,587,597

 
$
1,587,597

Senior unsecured notes
 
10,218,853

 
10,565,256

 
10,336,513

 
11,400,571

Secured debt
 
2,901,232

 
3,032,376

 
2,990,962

 
3,041,893

Foreign currency forward contracts, interest rate swaps and cross currency swaps
 
87,557

 
87,557

 
53,601

 
53,601

 
 
 
 
 
 
 
 
 
Redeemable OP unitholder interests
 
$
94,048

 
$
81,717

 
$
121,440

 
$
121,440



20

WELLTOWER INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Items Measured at Fair Value on a Recurring Basis 
The market approach is utilized to measure fair value for our financial assets and liabilities reported at fair value on a recurring basis. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The following summarizes items measured at fair value on a recurring basis (in thousands):
 
 
Fair Value Measurements as of March 31, 2020
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Equity securities
 
$
8,034

 
$
8,034

 
$

 
$

Foreign currency forward contracts, interest rate swaps and cross currency swaps, net asset (liability) (1)
 
123,280

 

 
123,280

 

Totals 
 
$
131,314

 
$
8,034

 
$
123,280

 
$

(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 that 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 or 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 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 seniors apartments, 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). Our Triple-net properties include the property types described above as well as long-term/post-acute care facilities. 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, 2019). 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.


21

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, 2020:

Seniors Housing Operating

Triple-net
 
Outpatient Medical

Non-segment / Corporate

Total
Resident fees and services

$
849,972


$

 
$


$


$
849,972

Rental income



191,385

(1) 
198,575




389,960

Interest income

104


14,671

 
466




15,241

Other income

1,052


1,673

 
288


416


3,429

Total revenues

851,128

 
207,729

 
199,329

 
416


1,258,602

 
 
 
 
 
 
 
 
 
 


Property operating expenses

607,871


13,302

 
60,608




681,781

Consolidated net operating income

243,257

 
194,427

 
138,721

 
416


576,821

 
 
 
 
 
 
 
 
 
 


Depreciation and amortization

146,774


57,694

 
70,333




274,801

Interest expense

16,434


2,852

 
4,808


117,913


142,007

General and administrative expenses




 


35,481


35,481

Loss (gain) on derivatives and financial instruments, net



7,651

 




7,651

Provision for loan losses
 

 
7,072

 

 

 
7,072

Impairment of assets

3,495


24,332

 




27,827

Other expenses

2,989


513

 
1,007


1,783


6,292

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

73,565

 
94,313

 
62,573

 
(154,761
)

75,690

Income tax (expense) benefit


 

 

 
(5,442
)

(5,442
)
Income (loss) from unconsolidated entities

(11,024
)

5,796

 
1,536




(3,692
)
Gain (loss) on real estate dispositions, net

(149
)

49,637

 
213,336




262,824

Income (loss) from continuing operations

62,392

 
149,746

 
277,445

 
(160,203
)

329,380

Net income (loss)

$
62,392

 
$
149,746

 
$
277,445

 
$
(160,203
)

$
329,380

 
 
 
 
 
 
 
 
 
 


Total assets

$
15,691,090


$
9,200,458

 
$
7,722,679


$
308,801


$
32,923,028

(1) During the three months ended March 31, 2020, we wrote off straight-line rent receivables of $32,268,000 recorded in rental income in conjunction with an amended lease.
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
 

 

 

 
(2,222
)
 
(2,222
)
Income (loss) 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
 
95,188

 
322,498

 
47,902

 
(173,286
)
 
292,302

Net income (loss)
 
$
95,188

 
$
322,498

 
$
47,902

 
$
(173,286
)
 
$
292,302



22

WELLTOWER INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Our portfolio of properties and other investments are located in the United States, the United Kingdom and Canada. Revenues and assets are attributed to the country in which the property is physically located. The following is a summary of geographic information for the periods presented (dollars in thousands): 
 
 
Three Months Ended
 
 
 
March 31, 2020
 
March 31, 2019
 
Revenues:
 
Amount(1)
 
%
 
Amount
 
%
 
United States
 
$
1,027,781

 
81.6
%
 
$
1,043,667

 
82.1
%
 
United Kingdom
 
117,882

 
9.4
%
 
112,418

 
8.8
%
 
Canada
 
112,939

 
9.0
%
 
116,160

 
9.1
%
 
Total
 
$
1,258,602

 
100.0
%
 
$
1,272,245

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
As of
 
 
 
March 31, 2020
 
December 31, 2019
 
Assets:
 
Amount
 
%
 
Amount
 
%
 
United States
 
$
27,431,135

 
83.3
%
 
$
27,513,911

 
82.4
%
 
United Kingdom
 
3,216,727

 
9.8
%
 
3,405,388

 
10.2
%
 
Canada
 
2,275,166

 
6.9
%
 
2,461,452

 
7.4
%
 
Total
 
$
32,923,028

 
100.0
%
 
$
33,380,751

 
100.0
%
 

(1) The United States, United Kingdom and Canada represent 77%, 10% and 13%, respectively, of our resident fees and services revenue stream for the three months ended March 31, 2020.
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 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, 2020 and 2019, 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. Subsequent to 2014 we transferred certain subsidiaries to the United Kingdom, while some wholly-owned direct and indirect subsidiaries remain in Luxembourg and Jersey. The company reflects current and deferred tax liabilities for any such withholding taxes incurred from this holding company structure in its consolidated financial statements. Generally, given current statutes of limitations, we are subject to audit by the foreign, federal, state and local taxing authorities under applicable local laws.


23

WELLTOWER INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

On March 27, 2020, the President of the United States signed the Coronavirus Aid Relief, and Economic Security Act (“CARES Act”) into law. The CARES Act, among its economic stimulus provisions, includes a number of tax provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carrybacks, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. Certain of these provisions may impact the provision for taxes in our consolidated financial statements, including in particular the provision allowing for the carryback of net operating losses which would be applicable to our TRSs. We have made a reasonable estimate of the tax impact to us of the CARES Act in our consolidated financial statements, and while we do not believe that there will be further material impacts to the consolidated financial statements related to the CARES Act tax provisions, we will continue to evaluate the impact of the CARES Act and any guidance provided by the U.S. Treasury and the IRS on our consolidated financial statements. It is possible our estimates could differ materially from the actual tax impact to us of the CARES Act.
20. Variable Interest Entities 
We have entered into joint ventures to own certain seniors housing and outpatient medical assets which are deemed to be VIEs. 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, 2020
 
December 31, 2019
Assets:
 
 
 
 
Net real estate investments
 
$
956,254

 
$
960,093

Cash and cash equivalents
 
23,539

 
27,522

Receivables and other assets
 
16,461

 
14,586

Total assets (1)
 
$
996,254

 
$
1,002,201

 
 
 
 
 
Liabilities and equity:
 
 
 
 
Secured debt
 
$
458,191

 
$
460,117

Lease liabilities
 
1,326

 
1,326

Accrued expenses and other liabilities
 
20,569

 
22,215

Total equity
 
516,168

 
518,543

Total liabilities and equity
 
$
996,254

 
$
1,002,201

(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, 2019, 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.
The following table summarizes our consolidated portfolio for the three months ended March 31, 2020 (dollars in thousands):  
 
 
 
 
Percentage of
 
Number of
Type of Property
 
NOI (1)
 
NOI
 
Properties
Seniors Housing Operating
 
$
243,257

 
42.2
%
 
539

Triple-net
 
194,427

 
33.7
%
 
653

Outpatient Medical
 
138,721

 
24.1
%
 
371

Totals
 
$
576,405

 
100.0
%
 
1,563

 
 
 
 
 
 
 
(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.
The extent to which the COVID-19 pandemic impacts our operations and those of our operators and tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic effects of the pandemic and containment measures, among others. The COVID-19 pandemic could have material and adverse effects on our financial condition, results of operations and cash flows in the future.
Our Seniors Housing Operating revenues are dependent on occupancy. Declines in occupancy are expected due to increases in mortality rates and decreases in move-in rates as the pandemic has prevented prospective occupants and their families from visiting our facilities and limited the ability of new occupants to move into our facilities due to heightened move-in criteria and screening. Occupancy rates remained relatively steady through March 31, 2020 but trended downward in April 2020.
We have incurred increased operational costs as a result of the introduction of public health measures and other regulations affecting our properties, as well as additional health and safety measures adopted by us and our operators related to the COVID-19 pandemic, including increases in labor and property cleaning expenses and expenditures related to our efforts to procure PPE and supplies. These increased expenses are expected to continue through the pandemic and potentially beyond as these additional health and safety measures become standard practice.
Our Triple-net operators are experiencing similar impacts on occupancy and operating costs as described above with respect to our Seniors Housing Operating properties which may impact the ability of our Triple-net operators to make contractual rent payments to us in the future. Our Outpatient Medical tenants are experiencing temporary medical practice closures or decreases in revenue due to government imposed restrictions on elective medical procedures, stay at home orders or decisions by patients to delay treatments which may adversely effect their ability to make contractual rent payments. Accordingly, our medical office building tenants' ability to pay rent may be impacted. These factors may cause operators or tenants to seek modifications of such obligations, resulting in reductions in revenue and increases in uncollectible receivables. We will evaluate each request on a case-by-case basis and determine if a form of rent relief is warranted following an examination of the tenant’s financial health, rent coverage, current operating situation and other factors.



26

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

As a result of uncertainty regarding the length and severity of the COVID-19 pandemic and the impact of the pandemic on our business and related industries, our investments in and acquisitions of senior housing and health care properties, as well as our ability to transition or sell properties with profitable results, may be limited. During April 2020, a planned disposition of a portfolio of 11 Seniors Housing Operating properties was not consummated as a result of the uncertainty of the COVID-19 pandemic on our business and industry. We have a significant development portfolio and as of March 31, 2020, have not experience significant delays or disruptions, but may in the future. Such disruptions to acquisition, disposition and development activity may negatively impact our long-term competitive position.
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 guarantees 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.
For the three months ended March 31, 2020, resident fees and services and rental income represented 68% and 31%, 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

27

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

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, 2020, we had $303,423,000 of cash and cash equivalents, $89,643,000 of restricted cash and $2,155,000,000 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, 2020 and subsequent events:
During the three months ended March 31, 2020, we extinguished $16,040,000 of secured debt at a blended average interest rate of 4.51%.
During the three months ended March 31, 2020, we sold 2,039,000 shares of common stock under our ATM and DRIP programs, via both cash settle and forward sale agreements, generating gross proceeds of approximately $171,183,000. The sale of these shares and settlement of previously outstanding forward sales resulted in gross proceeds of approximately $602,877,000 which were used to reduce borrowings under our unsecured revolving credit facility.
On April 1, 2020, we closed on a previously announced $1.0 billion two-year unsecured term loan. The term loan carries a 60-day delayed draw and bears interest at a rate of 1-month LIBOR + 1.20%, based on our credit rating.
Investments  The following summarizes our property acquisitions and joint venture investments completed during the three months ended March 31, 2020 (dollars in thousands): 
 
 
Properties
 
Investment Amount (1)
 
Capitalization Rates (2)
 
Book Amount (3)
Seniors Housing Operating
 
5

 
$
162,524

 
4.8
%
 
$
159,048

Triple-net (4)
 

 

 
%
 
765

Outpatient Medical
 
16

 
235,387

 
6.1
%
 
236,127

Totals
 
21

 
$
397,911

 
5.6
%
 
$
395,940

 
 
 
 
 
 
 
 
 
(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.
(4) Represents the acquisition of a condo unit at a previously acquired property.
Dispositions  The following summarizes property dispositions completed during the three months ended March 31, 2020 (dollars in thousands): 
 
 
Properties
 
Proceeds (1)
 
Capitalization Rates (2)
 
Book Amount (3)
Triple-net
 
5

 
$
70,439

 
5.0
%
 
$
33,445

Outpatient Medical
 
31

 
637,770

 
5.4
%
 
495,003

Totals
 
36

 
$
708,209

 
5.4
%
 
$
528,448

 
 
 
 
 
 
 
 
 
(1) Represents pro rata proceeds received upon disposition including any seller financing.
(2) Represents annualized contractual income that was being received in cash at date of disposition divided by disposition proceeds.
(3) Represents carrying value of net real estate assets at time of disposition. See Note 5 to our unaudited consolidated financial statements for additional information.
 
Dividends Our Board of Directors declared a cash dividend for the quarter ended March 31, 2020 of $0.61 per share. On May 28, 2020, we will pay our 196th consecutive quarterly cash dividend to stockholders of record on May 19, 2020.

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, credit strength and concentration risk. 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.

28

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

     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”) and consolidated net operating income (“NOI”); 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 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):
 
Three Months Ended
 
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
 
2020
 
2019
 
2019
 
2019
 
2019
Net income (loss)
 
$
329,380

 
$
240,136

 
$
647,932

 
$
150,040

 
$
292,302

NICS
 
310,284

 
224,324

 
589,876

 
137,762

 
280,470

FFO
 
356,124

 
476,298

 
352,378

 
390,021

 
358,383

NOI
 
576,821

 
600,302

 
610,545

 
618,979

 
601,438

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 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 reconciliation 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,
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
 
2020
 
2019
 
2019
 
2019
 
2019
 
 
 
 
 
 
 
 
 
 
 
Net debt to book capitalization ratio
 
44%
 
46%
 
45%
 
48%
 
43%
Net debt to undepreciated book capitalization ratio
 
37%
 
39%
 
38%
 
41%
 
36%
Net debt to market capitalization ratio
 
40%
 
30%
 
26%
 
30%
 
28%
 
 
 
 
 
 
 
 
 
 
 
Interest coverage ratio
 
5.42x
 
4.64x
 
7.61x
 
3.74x
 
4.80x
Fixed charge coverage ratio
 
4.88x
 
4.20x
 
6.96x
 
3.42x
 
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,
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
 
2020
 
2019
 
2019
 
2019
 
2019
Property mix:(1)
 
 
 
 
 
 
 
 
 
 
Seniors Housing Operating
 
42%
 
40%
 
42%
 
45%
 
44%
Triple-net
 
34%
 
38%
 
38%
 
37%
 
39%
Outpatient Medical
 
24%
 
22%
 
20%
 
18%
 
17%
 
 
 
 
 
 
 
 
 
 
 
Relationship mix: (1)
 
 
 
 
 
 
 
 
 
 
Sunrise Senior Living (2)
 
14%
 
14%
 
14%
 
14%
 
15%
ProMedica
 
9%
 
9%
 
9%
 
9%
 
9%
Revera (2)
 
6%
 
6%
 
6%
 
6%
 
6%
Genesis Healthcare
 
5%
 
5%
 
5%
 
5%
 
5%
Belmont Village
 
3%
 
3%
 
4%
 
3%
 
3%
Remaining relationships
 
63%
 
63%
 
62%
 
63%
 
62%
 
 
 
 
 
 
 
 
 
 
 
Geographic mix:(1)
 
 
 
 
 
 
 
 
 
 
California
 
15%
 
13%
 
14%
 
13%
 
13%
United Kingdom
 
9%
 
9%
 
8%
 
8%
 
9%
New Jersey
 
8%
 
8%
 
7%
 
7%
 
7%
Canada
 
7%
 
7%
 
7%
 
7%
 
7%
Texas
 
7%
 
9%
 
8%
 
8%
 
8%
Remaining geographic areas
 
54%
 
54%
 
56%
 
57%
 
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, 2020 (dollars in thousands):
 
 
Expiration Year (1)
 
 
2020
 
2021
 
2022
 
2023
 
2024
 
2025
 
2026
 
2027
 
2028
 
2029
 
Thereafter
Triple-net:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Properties
 
8

 
7

 
11

 
1

 
4

 
48

 
76

 
18

 
15

 
15

 
430

Base rent (2)
 
$
3,098

 
$
12,511

 
$
10,442

 
$
840

 
$
11,262

 
$
53,997

 
$
103,210

 
$
35,381

 
$
22,324

 
$
33,042

 
$
484,385

% of base rent
 
0.4
%
 
1.6
%
 
1.4
%
 
0.1
%
 
1.5
%
 
7.0
%
 
13.4
%
 
4.6
%
 
2.9
%
 
4.3
%
 
62.8
%
Units/beds
 
618

 
1,453

 
1,182

 
1,185

 
692

 
3,033

 
6,078

 
2,350

 
1,633

 
1,429

 
44,716

% of Units/beds
 
1.0
%
 
2.3
%
 
1.8
%
 
1.8
%
 
1.1
%
 
4.7
%
 
9.4
%
 
3.7
%
 
2.5
%
 
2.2
%
 
69.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Outpatient Medical:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Square feet
 
1,750,908

 
1,705,507

 
2,009,981

 
2,048,945

 
2,076,707

 
1,149,292

 
1,320,925

 
1,039,589

 
1,086,659

 
951,687

 
6,015,269

Base rent (2)
 
$
45,383

 
$
50,113

 
$
56,393

 
$
55,851

 
$
61,655

 
$
31,499

 
$
36,434

 
$
26,554

 
$
28,463

 
$
25,480

 
$
140,354

% of base rent
 
8.1
%
 
9.0
%
 
10.1
%
 
10.0
%
 
11.0
%
 
5.6
%
 
6.5
%
 
4.8
%
 
5.1
%
 
4.6
%
 
25.2
%
Leases
 
464

 
391

 
405

 
416

 
342

 
219

 
157

 
141

 
127

 
109

 
220

% of Leases
 
15.5
%
 
13.1
%
 
13.5
%
 
13.9
%
 
11.4
%
 
7.3
%
 
5.2
%
 
4.7
%
 
4.2
%
 
3.6
%
 
7.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Excludes investments in unconsolidated entities, developments, land parcels, loans receivable and sub-leases. 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, 2019, 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 for the periods presented (dollars in thousands):
 
 
Three Months Ended
 
Change
 
 
March 31, 2020
 
March 31, 2019
 
$
 
%
Cash, cash equivalents and restricted cash at beginning of period
 
$
385,766

 
$
316,129

 
$
69,637

 
22
 %
Cash provided from (used in) operating activities
 
411,857

 
343,895

 
67,962

 
20
 %
Cash provided from (used in) investing activities
 
149,748

 
197,268

 
(47,520
)
 
-24
 %
Cash provided from (used in) financing activities
 
(544,295
)
 
(452,205
)
 
(92,090
)
 
-20
 %
Effect of foreign currency translation
 
(10,010
)
 
2,352

 
(12,362
)
 
-526
 %
Cash, cash equivalents and restricted cash at end of period
 
$
393,066

 
$
407,439

 
$
(14,373
)
 
-4
 %
 
Operating Activities
The changes in net cash provided from operating activities are primarily attributable to improvements in net working capital. Please see “Results of Operations” for discussion of net income fluctuations. For the three months ended March 31, 2020 and 2019, cash flows 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 net changes in real property investments and dispositions, loans receivable and investments in unconsolidated entities, 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 for the periods presented (dollars in thousands): 
 
 
Three Months Ended
 
Change
 
 
March 31, 2020
 
March 31, 2019
 
$
 
%
New development
 
$
48,775

 
$
55,391

 
$
(6,616
)
 
-12
 %
Recurring capital expenditures, tenant improvements and lease commissions
 
22,566

 
21,898

 
668

 
3
 %
Renovations, redevelopments and other capital improvements
 
46,816

 
35,037

 
11,779

 
34
 %
Total
 
$
118,157

 
$
112,326

 
$
5,831

 
5
 %
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. 
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 issuances of common stock and dividend payments which are summarized above

31

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

in "Key Transactions". Please refer to Notes 10, 11 and 14 of our unaudited consolidated financial statements for additional information.
On April 1, 2020, in response to uncertain financial market conditions arising from the COVID-19 pandemic, we undertook steps to strengthen our balance sheet and to enhance our liquidity by entering into a $1.0 billion two-year unsecured term loan. After consideration of this unsecured term loan, we have total near-term available liquidity of approximately $3.5 billion. However, we are unable to accurately predict the full impact that the pandemic will have on our results from operations, financial condition, liquidity and cash flows due to numerous factors discussed in Part II Item 1A. Risk Factors.
Off-Balance Sheet Arrangements 
At March 31, 2020, we had investments in unconsolidated entities with our ownership generally ranging from 10% to 50%. We use financial derivative instruments to hedge interest rate and foreign currency exchange rate exposure. At March 31, 2020, we had 12 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, 2020 (in thousands):
 
 
Payments Due by Period
Contractual Obligations
 
Total
 
2020
 
2021-2022
 
2023-2024
 
Thereafter
Unsecured credit facility and commercial paper (1,2)
 
$
845,000

 
$
50,000

 
$

 
$
795,000

 
$

Senior unsecured notes and term credit facilities: (2)
 

 
 
 
 
 
 
 
 
U.S. Dollar senior unsecured notes
 
8,100,000

 

 

 
2,450,000

 
5,650,000

Canadian Dollar senior unsecured notes (3)
 
212,465

 

 

 

 
212,465

Pounds Sterling senior unsecured notes (3)
 
1,307,354

 

 

 

 
1,307,354

U.S. Dollar term credit facility
 
510,000

 

 
10,000

 
500,000

 

Canadian Dollar term credit facility (3)
 
177,054

 

 

 
177,054

 

Secured debt: (2,3)
 

 
 
 
 
 
 
 
 
Consolidated
 
2,904,638

 
275,279

 
874,852

 
769,278

 
985,229

Unconsolidated  
 
874,113

 
18,019

 
80,948

 
114,264

 
660,882

Contractual interest obligations: (4)
 

 
 
 
 
 
 
 
 
Unsecured credit facility and commercial paper
 
42,616

 
9,904

 
26,170

 
6,542

 

Senior unsecured notes and term loans (3)
 
3,959,479

 
294,616

 
811,318

 
721,169

 
2,132,376

Consolidated secured debt (3)
 
410,097

 
68,573

 
143,500

 
86,356

 
111,668

Unconsolidated secured debt (3)
 
203,363

 
23,464

 
57,187

 
52,291

 
70,421

Financing lease liabilities (5)
 
183,556

 
6,756

 
16,521

 
70,601

 
89,678

Operating lease liabilities (5)
 
1,160,976

 
17,256

 
44,524

 
42,455

 
1,056,741

Purchase obligations (6)
 
645,682

 
382,054

 
201,469

 
47,531

 
14,628

Total contractual obligations
 
$
21,536,393

 
$
1,145,921

 
$
2,266,489

 
$
5,832,541

 
$
12,291,442

 
 
 
 
 
 
 
 
 
 
 
(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) See Note 13 to our unaudited consolidated financial statements for additional information.
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, 2020, 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

32

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

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 have a material adverse impact on our consolidated results of operations, liquidity and/or financial condition.
On May 17, 2018, we filed with the Securities and Exchange Commission (1) an open-ended automatic or “universal” shelf registration statement covering an indeterminate amount of future offerings of debt securities, common stock, preferred stock, depositary shares, warrants and units and (2) a registration statement in connection with our enhanced dividend reinvestment plan (“DRIP”) under which we may issue up to 15,000,000 shares of common stock. As of May 1, 2020, 2,541,750 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. As of May 1, 2020, we had $499,341,000 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 property operating expenses, depreciation and amortization, interest expense, 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 same store NOI ("SSNOI"), and other supplemental measures include FFO and Adjusted EBITDA, which are further 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,
 
 
 
 
 
 
 
2020

2019
 
Amount
 
%
 
Net income
 
$
329,380

 
$
292,302

 
$
37,078

 
13
 %
 
NICS
 
310,284

 
280,470

 
29,814

 
11
 %
 
FFO
 
356,124

 
358,383

 
(2,259
)
 
-1
 %
 
EBITDA
 
751,630

 
683,688

 
67,942

 
10
 %
 
NOI
 
576,821

 
601,438

 
(24,617
)
 
-4
 %
 
SSNOI
 
455,205

 
458,647

 
(3,442
)
 
-1
 %
 
Per share data (fully diluted):
 
 
 
 
 
 
 
 
 
NICS
 
$
0.75

 
$
0.71

 
$
0.04

 
6
 %
 
FFO
 
$
0.86

 
$
0.91

 
$
(0.05
)
 
-5
 %
 
 
 
 
 
 
 
 
 
 
 
Interest coverage ratio
 
4.64
x
 
4.80
x
 
(0.16
)x
 
-3
 %
 
Fixed charge coverage ratio
 
4.20
x
 
4.38
x
 
(0.18
)x
 
-4
 %
 
Seniors Housing Operating
The following is a summary of our SSNOI at Welltower's Share for the Seniors Housing Operating segment (dollars in thousands):
 
 
Three Months Ended
 
Change
 
 
 
March 31, 2020
 
March 31, 2019
 
$
 
%
 
SSNOI (1)
 
$
199,831

 
$
210,753

 
$
(10,922
)
 
-5.2
 %
 
(1) For the three months ended March 31, 2020 and 2019, amounts relate to 425 same store properties. The same store property pools exclude 73 properties that have undergone operator transitions or segment transitions during the relevant period. Please see Non-GAAP Financial Measures for additional information and reconciliations.





33

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 Seniors Housing Operating segment (dollars in thousands):
 
 
Three Months Ended
 
Change
 
 
 
March 31,
 
March 31,
 
 
 
 
 
 
 
2020
 
2019
 
$
 
%
 
Revenues:
 
 
 
 
 
 
 
 
 
Resident fees and services
 
$
849,972

 
$
868,285

 
$
(18,313
)
 
-2
 %
 
Interest income
 
104

 

 
104

 
n/a

 
Other income
 
1,052

 
4,101

 
(3,049
)
 
-74
 %
 
Total revenues
 
851,128

 
872,386

 
(21,258
)
 
-2
 %
 
Property operating expenses
 
607,871

 
607,686

 
185

 
 %
 
NOI (1)
 
243,257

 
264,700

 
(21,443
)
 
-8
 %
 
Other expenses:
 
 
 
 
 
 
 
 

 
Depreciation and amortization
 
146,774

 
131,575

 
15,199

 
12
 %
 
Interest expense
 
16,434

 
18,251

 
(1,817
)
 
-10
 %
 
Impairment of assets
 
3,495

 

 
3,495

 
n/a

 
Other expenses
 
2,989

 
2,946

 
43

 
1
 %
 
 
 
169,692

 
152,772

 
16,920

 
11
 %
 
Income (loss) from continuing operations before income taxes and other items
 
73,565

 
111,928

 
(38,363
)
 
-34
 %
 
Income (loss) from unconsolidated entities
 
(11,024
)
 
(16,580
)
 
5,556

 
34
 %
 
Gain (loss) on real estate dispositions, net
 
(149
)
 
(160
)
 
11

 
7
 %
 
Income from continuing operations
 
62,392

 
95,188

 
(32,796
)
 
-34
 %
 
Net income (loss)
 
62,392

 
95,188

 
(32,796
)
 
-34
 %
 
Less: Net income (loss) attributable to noncontrolling interests
 
(1,932
)
 
1,741

 
(3,673
)
 
-211
 %
 
Net income (loss) attributable to common stockholders
 
$
64,324

 
$
93,447

 
$
(29,123
)
 
-31
 %
 
 
 
 
 
 
 
 
 
 
 
(1) See Non-GAAP Financial Measures below.
 
Fluctuations in resident fees and services and property operating expenses are primarily a result of acquisitions, segment transitions, offset by dispositions, and the movement of U.S. and foreign currency exchange rates. Despite the COVID-19 pandemic, occupancy rates remained relatively steady through March 31, 2020, however, we incurred increased operational costs of $7,294,000 included in property operating expenses as a result of the introduction of public health measures and other regulations affecting our properties, as well as additional health and safety measures adopted by us and our operators related to the COVID-19 pandemic, including increases in labor and property cleaning expenses and expenditures related to our efforts to procure PPE and supplies.
The fluctuations in depreciation and amortization are due to acquisitions and dispositions and variations in amortization of short-lived intangible assets. To the extent that we acquire or dispose of additional properties in the future, these amounts will change accordingly. 
During the three months ended March 31, 2020, we recorded impairment charges on one held for use property as the carrying values exceeded the estimated fair value. Transaction costs related to asset acquisitions are capitalized as a component of the purchase price. The increase in other expenses is primarily due to additional noncapitalizable transaction costs associated with acquisitions and operator transitions. 
During the three months ended March 31, 2020, we completed three Seniors Housing Operating construction projects representing $93,188,000 or $300,606 per unit. The following is a summary of our Seniors Housing Operating construction projects, excluding expansions, pending as of March 31, 2020 (dollars in thousands):

34

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

Location
 
Units
 
Commitment
 
Balance
 
Est. Completion
Potomac, MD
 
120

 
$
56,720

 
$
30,043

 
4Q20
Beckenham, UK
 
100

 
58,644

 
28,808

 
3Q21
Hendon, UK
 
102

 
69,477

 
34,519

 
4Q21
Barnet, UK
 
100

 
64,123

 
28,222

 
4Q21
 
 
422

 
$
248,964

 
121,592

 
 
Toronto, ON
 
Project in planning stage
 
40,918

 
 
Washington, DC
 
Project in planning stage
 
20,165

 
 
Brookline, MA
 
Project in planning stage
 
17,477

 
 
 
 
 
 
 
 
$
200,152

 
 
 
Interest expense represents secured debt interest expense which fluctuates based on the net effect and timing of assumptions, segment transitions, fluctuations in foreign currency rates, extinguishments and principal amortizations. The following is a summary of our Seniors Housing Operating segment property secured debt principal activity (dollars in thousands):
 
 
Three Months Ended
 
 
 
March 31, 2020
 
March 31, 2019
 
 
 
 
 
Wtd. Avg.
 
 
 
Wtd. Avg.
 
 
 
Amount
 
Interest Rate
 
Amount
 
Interest Rate
 
Beginning balance
 
$
2,115,037

 
3.54
%
 
$
1,810,587

 
3.87
%
 
Debt issued
 
44,921

 
2.58
%
 
247,163

 
3.68
%
 
Debt assumed
 

 
%
 
42,000

 
4.62
%
 
Debt extinguished
 
(16,040
)
 
4.51
%
 
(114,570
)
 
4.96
%
 
Principal payments
 
(12,174
)
 
3.49
%
 
(11,205
)
 
3.58
%
 
Foreign currency
 
(86,818
)
 
3.25
%
 
21,368

 
3.34
%
 
Ending balance
 
$
2,044,926

 
3.56
%
 
$
1,995,343

 
3.79
%
 
 
 
 
 
 
 
 
 
 
 
Monthly averages
 
$
2,080,448

 
3.54
%
 
$
1,915,650

 
3.84
%
 
 
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 SSNOI at Welltower's Share for the Triple-net segment (dollars in thousands):
 
 
Three Months Ended
 
Change
 
 
 
March 31, 2020
 
March 31, 2019
 
$
 
%
 
SSNOI (1)
 
$
171,716

 
$
166,415

 
$
5,301

 
3.2
%
 
 
(1) For the three months ended March 31, 2020 and 2019, amounts relate to 632 same store properties. The same store property pools exclude 19 properties that have undergone operator transitions or segment transitions during the relevant period. Please see Non-GAAP Financial Measures for additional information and reconciliations.
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,
 
 
 
 
 
 
 
2020
 
2019
 
$
 
%
 
Revenues:
 
 
 
 
 
 
 
 
 
Rental income
 
$
191,385

 
$
232,032

 
$
(40,647
)
 
-18
 %
 
Interest income
 
14,671

 
14,946

 
(275
)
 
-2
 %
 
Other income
 
1,673

 
1,263

 
410

 
32
 %
 
Total revenues
 
207,729

 
248,241

 
(40,512
)
 
-16
 %
 
Property operating expenses
 
13,302

 
14,955

 
(1,653
)
 
-11
 %
 
NOI (1)
 
194,427

 
233,286

 
(38,859
)
 
-17
 %
 
Other expenses:
 
 
 
 
 
 
 
 

 
Depreciation and amortization
 
57,694

 
61,348

 
(3,654
)
 
-6
 %
 
Interest expense
 
2,852

 
3,440

 
(588
)
 
-17
 %
 
Loss (gain) on derivatives and financial instruments, net
 
7,651

 
(2,487
)
 
10,138

 
408
 %
 
Provision for loan losses
 
7,072

 
18,690

 
(11,618
)
 
-62
 %
 
Impairment of assets
 
24,332

 

 
24,332

 
n/a

 
Other expenses
 
513

 
3,029

 
(2,516
)
 
-83
 %
 
 
 
100,114

 
84,020

 
16,094

 
19
 %
 
Income (loss) from continuing operations before income taxes and other items
 
94,313

 
149,266

 
(54,953
)
 
-37
 %
 
Income (loss) from unconsolidated entities
 
5,796

 
5,658

 
138

 
2
 %
 
Gain (loss) on real estate dispositions, net
 
49,637

 
167,574

 
(117,937
)
 
-70
 %
 
Income from continuing operations
 
149,746

 
322,498

 
(172,752
)
 
-54
 %
 
Net income
 
149,746

 
322,498

 
(172,752
)
 
-54
 %
 
Less: Net income (loss) attributable to noncontrolling interests
 
18,575

 
9,096

 
9,479

 
104
 %
 
Net income attributable to common stockholders
 
$
131,171

 
$
313,402

 
$
(182,231
)
 
-58
 %
 
 
 
 
 
 
 
 
 
 
 
(1) See Non-GAAP Financial Measures below.
 
 
The decrease in rental income is primarily attributable to the write off of straight-line rent receivables of $32,268,000 recognized during the quarter ended March 31, 2020 in conjunction with a lease amendment, as well as property dispositions. 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, 2020, we had 17 leases with rental rate increases ranging from 0.13% to 1.07% in our Triple-net portfolio. Our Triple-net operators are experiencing similar impacts on occupancy and operating costs as described above with respect to our Seniors Housing Operating properties which may impact the ability of our Triple-net operators to make contractual rent payments to us in the future. However, rent collections for the three months ended March 31, 2020 were consistent with prior periods.
Depreciation and amortization fluctuates as a result of the acquisitions, dispositions and transitions of triple-net properties. To the extent 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. In March 2020, we recognized a provision for loan losses of $6,898,000 to fully reserve for a non-real estate loan receivable that was no longer deemed collectible. During the three months ended March 31, 2020, we recorded impairment charges on certain held for use properties as the carrying values exceeded the estimated fair values. 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 fluctuation in other expenses is primarily due to noncapitalizable transaction costs from acquisitions and segment transitions.
The following is a summary of Triple-net construction projects, excluding expansions, pending as of March 31, 2020 (dollars in thousands): 

36

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

Location
 
Units/Beds
 
Commitment
 
Balance
 
Est. Completion
Union, KY
 
162

 
$
34,600

 
$
28,823

 
2Q20
Westerville, OH
 
102

 
27,200

 
23,806

 
2Q20
Droitwich, UK
 
70

 
15,769

 
12,626

 
2Q20
Thousand Oaks, CA
 
82

 
24,763

 
12,100

 
4Q20
Redhill, UK
 
76

 
19,797

 
8,477

 
1Q21
Wombourne, UK
 
66

 
14,941

 
3,330

 
4Q21
Leicester, UK
 
60

 
13,945

 
3,320

 
4Q21
 
 
618

 
$
151,015

 
$
92,482

 
 
 
Interest expense represents secured debt interest expense and related fees. The change in secured debt interest expense is due to the net effect and timing of assumptions, segment transitions, fluctuations in foreign currency rates, extinguishments and principal amortizations. The fluctuation in loss (gain) on derivatives and financial instruments, net is primarily attributable to the mark-to-market adjustment recorded on our Genesis Healthcare, Inc. available-for-sale investment. The following is a summary of our Triple-net secured debt principal activity for the periods presented (dollars in thousands):
 
 
Three Months Ended
 
 
 
March 31, 2020
 
March 31, 2019
 
 
 
 
 
Wtd. Avg.
 
 
 
Wtd. Avg.
 
 
 
Amount
 
Interest Rate
 
Amount
 
Interest Rate
 
Beginning balance
 
$
306,038

 
3.60
%
 
$
288,386

 
3.63
%
 
Principal payments
 
(1,059
)
 
5.17
%
 
(957
)
 
5.24
%
 
Foreign currency
 
(15,240
)
 
3.40
%
 
4,829

 
3.30
%
 
Ending balance
 
$
289,739

 
3.55
%
 
$
292,258

 
3.62
%
 
 
 
 
 
 
 
 
 
 
 
Monthly averages
 
$
299,111

 
3.59
%
 
$
293,113

 
3.62
%
 
A portion of our Triple-net properties were formed through partnerships. Income or loss from unconsolidated entities represents our share of net income or losses from partnerships where we are the noncontrolling partner. Net income attributable to noncontrolling interests 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 SSNOI at Welltower Share for the Outpatient Medical segment (dollars in thousands):
 
 
Three Months Ended
 
Change
 
 
 
March 31, 2020
 
March 31, 2019
 
$
 
%
 
SSNOI (1)
 
$
83,658

 
$
81,479

 
$
2,179

 
2.7
%
 
 
(1) For the three months ended March 31, 2020 and 2019, amounts relate to 261 same store properties, respectively. Please see Non-GAAP Financial Measures for additional information and reconciliations.

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 for the periods presented (dollars in thousands):
 
 
Three Months Ended
 
Change
 
 
 
March 31,
 
March 31,
 
 
 
 
 
 
 
2020
 
2019
 
$
 
%
 
Revenues:
 
 
 
 
 
 
 
 
 
Rental income
 
$
198,575

 
$
149,052

 
$
49,523

 
33
 %
 
Interest income
 
466

 
173

 
293

 
169
 %
 
Other income
 
288

 
236

 
52

 
22
 %
 
Total revenues
 
199,329

 
149,461

 
49,868

 
33
 %
 
Property operating expenses
 
60,608

 
48,166

 
12,442

 
26
 %
 
NOI (1)
 
138,721

 
101,295

 
37,426

 
37
 %
 
Other expenses:
 
 
 
 
 
 

 
 

 
Depreciation and amortization
 
70,333

 
51,009

 
19,324

 
38
 %
 
Interest expense
 
4,808

 
3,348

 
1,460

 
44
 %
 
Other expenses
 
1,007

 
754

 
253

 
34
 %
 
 
 
76,148

 
55,111

 
21,037

 
38
 %
 
Income (loss) from continuing operations before income taxes and other items

 
62,573

 
46,184

 
16,389

 
35
 %
 
Income (loss) from unconsolidated entities
 
1,536

 
1,723

 
(187
)
 
-11
 %
 
Gain (loss) on real estate dispositions, net
 
213,336

 
(5
)
 
213,341

 
n/a

 
Income from continuing operations
 
277,445

 
47,902

 
229,543

 
479
 %
 
Net income (loss)
 
277,445

 
47,902

 
229,543

 
479
 %
 
Less: Net income (loss) attributable to noncontrolling interests
 
2,453

 
995

 
1,458

 
147
 %
 
Net income (loss) attributable to common stockholders
 
$
274,992

 
$
46,907

 
$
228,085

 
486
 %
 
 
 
 
 
 
 
 
 
 
 
(1) See Non-GAAP Financial Measures.
 
 
The increases in rental income are primarily attributable to acquisitions of new properties and the conversion of newly constructed outpatient medical properties, particularly the $1.25 billion CNL Healthcare Properties portfolio acquisition that closed in May 2019, partially offset by dispositions. 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. 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, 2020, our consolidated outpatient medical portfolio signed 144,185 square feet of new leases and 210,308 square feet of renewals. The weighted-average term of these leases was seven years, with a rate of $36.71 per square foot and tenant improvement and lease commission costs of $27.89 per square foot. Substantially all of these leases contain an annual fixed or contingent escalation rent structure ranging from 1.5% to 4.0%. In addition, our Outpatient Medical tenants are experiencing temporary medical practice closures or decreases in revenue due to government imposed restrictions on elective medical procedures or decisions by patients to delay treatments which may adversely effect their ability to make contractual rent payments. However, rent collections for the three months ended March 31, 2020 were consistent with prior periods.
The fluctuation in property operating expenses and depreciation and amortization are primarily attributable to acquisitions and construction conversions of outpatient medical facilities, offset by dispositions. To the extent that we acquire or dispose of additional properties in the future, these amounts will change accordingly. Changes in gains/losses on sales of properties are related to volume of property sales and the sales prices.
During the three months ended March 31, 2020, we completed one Outpatient Medical construction project representing $19,369,000 or $352 per square foot. The following is a summary of the Outpatient Medical construction projects, excluding expansions, pending as of March 31, 2020 (dollars in thousands):
Location
 
Square Feet
 
Commitment
 
Balance
 
Est. Completion
Lowell, MA
 
50,668

 
$
12,300

 
$
11,684

 
2Q20
Katy, TX
 
36,500

 
12,028

 
6,063

 
2Q20
Brooklyn, NY
 
140,955

 
105,306

 
86,990

 
3Q20
Total
 
228,123

 
$
129,634

 
$
104,737

 
 

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 following is a summary of our outpatient medical secured debt principal activity (dollars in thousands):
 
 
Three Months Ended
 
 
 
March 31, 2020
 
March 31, 2019
 
 
 
 
 
Wtd. Ave
 
 
 
Wtd. Ave
 
 
 
Amount
 
Interest Rate
 
Amount
 
Interest Rate
 
Beginning balance
 
$
572,267

 
3.97
%
 
$
386,738

 
4.20
%
 
Principal payments
 
(2,293
)
 
4.65
%
 
(1,381
)
 
5.11
%
 
Ending balance
 
$
569,974

 
3.94
%
 
$
385,357

 
4.25
%
 
 
 
 
 
 
 
 
 
 
 
Monthly averages
 
$
571,200

 
3.97
%
 
$
386,088

 
4.24
%
 
 
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 or loss 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 for the periods presented (dollars in thousands):  
 
 
Three Months Ended
 
Change
 
 
 
March 31,
 
March 31,
 
 
 
 
 
 
 
2020
 
2019
 
$
 
%
 
Revenues:
 
 
 
 
 
 
 
 
 
Other income
 
$
416

 
$
2,157

 
$
(1,741
)
 
-81
 %
 
Total revenue
 
416

 
2,157

 
(1,741
)
 
-81
 %
 
Expenses:
 
 
 
 
 
 
 
 

 
Interest expense
 
117,913

 
120,193

 
(2,280
)
 
-2
 %
 
General and administrative expenses
 
35,481

 
35,282

 
199

 
1
 %
 
Loss (gain) on extinguishment of debt, net
 

 
15,719

 
(15,719
)
 
-100
 %
 
Other expenses
 
1,783

 
2,027

 
(244
)
 
-12
 %
 
 
 
155,177

 
173,221

 
(18,044
)
 
-10
 %
 
Loss from continuing operations before
 income taxes and other items
 
(154,761
)
 
(171,064
)
 
16,303

 
10
 %
 
Income tax (expense) benefit
 
(5,442
)
 
(2,222
)
 
(3,220
)
 
-145
 %
 
Loss from continuing operations
 
(160,203
)
 
(173,286
)
 
13,083

 
8
 %
 
Net loss attributable to common stockholders
 
$
(160,203
)
 
$
(173,286
)
 
$
13,083

 
8
 %
 
 
The following is a summary of our Non-Segment/Corporate interest expense or the periods presented (dollars in thousands):
 
 
Three Months Ended
 
Change
 
 
 
March 31,
 
March 31,
 
 
 
 
 
 
 
2020
 
2019
 
$
 
%
 
Senior unsecured notes
 
$
103,533

 
$
108,755

 
$
(5,222
)
 
-5
 %
 
Unsecured credit facility and commercial paper program
 
10,169

 
7,520

 
2,649

 
35
 %
 
Loan expense
 
4,211

 
3,918

 
293

 
7
 %
 
Totals
 
$
117,913

 
$
120,193

 
$
(2,280
)
 
-2
 %
 
 
The change in interest expense on senior unsecured notes is due to the net effect of issuances and extinguishments, as well as the movement in foreign exchange rates and related hedge activity. Please refer to Note 11 for additional information. The change in interest expense on our 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 for additional information regarding our unsecured revolving credit facility and commercial paper program. The loss on extinguishment recognized during the three months

39

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

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, 2020 and 2019 were 2.82% and 2.77%, respectively. The provision for income taxes primarily relates to state taxes, foreign taxes and taxes based on income generated by entities that are structured as TRSs.

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 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. We believe the drivers of property level NOI for both consolidated properties and unconsolidated properties are generally the same and therefore, we evaluate SSNOI based on our ownership interest in each property ("Welltower Share"). To arrive at Welltower's Share, NOI is adjusted by adding our minority ownership share related to unconsolidated properties and by subtracting the minority partners' noncontrolling ownership interests for consolidated properties. We do not control investments in unconsolidated properties and while we consider disclosures at Welltower Share to be useful, they may not accurately depict the legal and economic implications of our joint venture arrangements and should be used with caution. As used herein, same store is generally defined as those revenue-generating properties in the portfolio for the relevant year-over-year reporting periods. Acquisitions and development conversions are included in SSNOI five full quarters after acquisition or being placed into service for the QTD Pool. Land parcels, loans and sub-leases, as well as any properties sold or classified as held for sale during the respective periods are excluded from SSNOI. Redeveloped properties (including major refurbishments of a Seniors Housing Operating property where 20% or more of units are simultaneously taken out of commission for 30 days or more or Outpatient Medical properties undergoing a change in intended use) are excluded from SSNOI until five full quarters post completion of the redevelopment for the QTD Pool. Properties undergoing operator transitions and/or segment transitions are also excluded from SSNOI until five full quarters post completion of the transition for the QTD Pool. In addition, properties significantly impacted by force majeure, acts of God, or other extraordinary adverse events are excluded from SSNOI until five full quarters after the properties are placed back into service for the QTD Pool. SSNOI excludes non-cash NOI and includes adjustments to present consistent ownership percentages and to translate Canadian properties and UK properties using a consistent exchange rate. 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 and secured debt principal amortization. Covenants in our senior unsecured notes and primary unsecured credit facility 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

40

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

Adjusted EBITDA divided by fixed charges on a trailing twelve months basis. Fixed charges include total interest (excluding capitalized interest and non-cash interest expenses), secured debt principal amortization and preferred dividends. Our covenant requires an adjusted fixed charge coverage ratio of at least 1.50 times.
Our supplemental reporting measures and similarly entitled financial measures are widely used by investors, equity and debt analysts and rating agencies in the valuation, comparison, rating and investment recommendations of companies. Management uses these financial measures to facilitate internal and external comparisons to our historical operating results and in making operating decisions. Additionally, these measures are utilized by the Board of Directors to evaluate management. None of our supplemental measures represent net income or cash flow provided from operating activities as determined in accordance with U.S. GAAP and should not be considered as alternative measures of profitability or liquidity. Finally, the supplemental measures, as defined by us, may not be comparable to similarly entitled items reported by other real estate investment trusts or other companies. 

 
Three Months Ended
 
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
March 31,
NOI Reconciliations:
 
2020
 
2019
 
2019
 
2019
 
2019
Net income (loss)
 
$
329,380

 
$
240,136

 
$
647,932

 
$
150,040

 
$
292,302

Loss (gain) on real estate dispositions, net
 
(262,824
)
 
(12,064
)
 
(570,250
)
 
1,682

 
(167,409
)
Loss (income) from unconsolidated entities
 
3,692

 
(57,420
)
 
(3,262
)
 
9,049

 
9,199

Income tax expense (benefit)
 
5,442

 
(4,832
)
 
3,968

 
1,599

 
2,222

Other expenses
 
6,292

 
16,042

 
6,186

 
21,628

 
8,756

Impairment of assets
 
27,827

 
98

 
18,096

 
9,939

 

Provision for loan losses
 
7,072

 

 

 

 
18,690

Loss (gain) on extinguishment of debt, net
 

 
2,612

 
65,824

 

 
15,719

Loss (gain) on derivatives and financial instruments, net
 
7,651

 
(5,069
)
 
1,244

 
1,913

 
(2,487
)
General and administrative expenses
 
35,481

 
26,507

 
31,019

 
33,741

 
35,282

Depreciation and amortization
 
274,801

 
262,644

 
272,445

 
248,052

 
243,932

Interest expense
 
142,007

 
131,648

 
137,343

 
141,336

 
145,232

Consolidated net operating income (NOI)
 
$
576,821

 
$
600,302

 
$
610,545

 
$
618,979

 
$
601,438

 
 
 
 
 
 
 
 
 
 
 
NOI by segment:
 
 

 
 

 
 

 
 
 
 
Seniors Housing Operating
 
$
243,257

 
$
242,453

 
$
254,155

 
$
278,212

 
$
264,700

Triple-net
 
194,427

 
226,837

 
230,685

 
227,935

 
233,286

Outpatient Medical
 
138,721

 
130,498

 
124,864

 
112,378

 
101,295

Non-segment/corporate
 
416

 
514

 
841

 
454

 
2,157

Total NOI
 
$
576,821

 
$
600,302

 
$
610,545

 
$
618,979

 
$
601,438



41

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

 
 
Three Months Ended
SSNOI Reconciliations:
 
March 31, 2020
 
March 31, 2019
 
 
 
 
 
Seniors Housing Operating:
 
 
 
 
Consolidated NOI
 
$
243,257

 
$
264,700

NOI attributable to unconsolidated investments
 
14,954

 
16,439

NOI attributable to noncontrolling interests
 
(18,754
)
 
(20,118
)
NOI attributable to non-same store properties
 
(40,059
)
 
(52,927
)
Non-cash NOI attributable to same store properties
 
(839
)
 
553

Currency and ownership adjustments (1)
 
1,272

 
2,106

SSNOI at Welltower Share
 
199,831

 
210,753

 
 
 
 
 
Triple-net:
 
 
 
 
Consolidated NOI
 
194,427

 
233,286

NOI attributable to unconsolidated investments
 
5,133

 
5,078

NOI attributable to noncontrolling interests
 
(14,783
)
 
(14,592
)
NOI attributable to non-same store properties
 
(25,838
)
 
(41,648
)
Non-cash NOI attributable to same store properties
 
12,432

 
(15,629
)
Currency and ownership adjustments (1)
 
345

 
(80
)
SSNOI at Welltower Share
 
171,716

 
166,415

 
 
 
 
 
Outpatient Medical:
 
 
 
 
Consolidated NOI
 
138,721

 
101,295

NOI attributable to unconsolidated investments
 
1,063

 
310

NOI attributable to noncontrolling interests
 
(4,358
)
 
(6,738
)
NOI attributable to non-same store properties
 
(43,599
)
 
(4,841
)
Non-cash NOI attributable to same store properties
 
(1,974
)
 
(2,505
)
Currency and ownership adjustments (1)
 
(6,195
)
 
(6,042
)
SSNOI at Welltower Share
 
83,658

 
81,479

 
 
 
 
 
SSNOI at Welltower Share:
 
 
 
 
Seniors Housing Operating
 
199,831

 
210,753

Triple-net
 
171,716

 
166,415

Outpatient Medical
 
83,658

 
81,479

Total
 
$
455,205

 
$
458,647

 
 
 
 
 
(1) Includes adjustments to reflect consistent property ownership percentages, to translate Canadian properties at a USD/CAD rate of 1.32 and to translate UK properties at a GBP/USD rate of 1.30.




 
 
 
QTD Pool
 
 
SSNOI Property Reconciliations:
 
Seniors Housing Operating
 
Triple-net
 
Outpatient Medical
 
Total
 
 
Consolidated properties
 
539

 
653

 
371

 
1,563

 
 
Unconsolidated properties
 
81

 
39

 
29

 
149

 
 
Total properties
 
620

 
692

 
400

 
1,712

 
 
Recent acquisitions/development conversions(1)
 
(69
)
 
(10
)
 
(124
)
 
(203
)
 
 
Under development
 
(24
)
 
(8
)
 
(3
)
 
(35
)
 
 
Under redevelopment(2)
 
(12
)
 

 
(2
)
 
(14
)
 
 
Current held for sale(3)
 
(7
)
 
(6
)
 
(2
)
 
(15
)
 
 
Land parcels, loans and subleases
 
(9
)
 
(17
)
 
(8
)
 
(34
)
 
 
Transitions(4)
 
(73
)
 
(19
)
 

 
(92
)
 
 
Other
 
(1
)
 

 

 
(1
)
 
 
Same store properties
 
425

 
632

 
261

 
1,318

 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Acquisitions and development conversions will enter the QTD Pool 5 full quarters after acquisition or certificate of occupancy, respectively.
 
 
(2) Redevelopment properties will enter the QTD Pool after 5 full quarters of operations post redevelopment completion.
 
(3) Excludes 11 Seniors Housing Operating properties classified as held for sale which will transition back into held for use during the quarter ended June 30, 2020.
 
 
(4) Transitioned properties will enter the QTD Pool after 5 full quarters of operations with the new operator in place or under the new structure.
 

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, gains/loss on real estate dispositions and impairment of assets. Amounts are in thousands except for per share data.
 
Three Months Ended
 
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
March 31,
FFO Reconciliation:
 
2020
 
2019
 
2019
 
2019
 
2019
Net income attributable to common stockholders
 
$
310,284

 
$
224,324

 
$
589,876

 
$
137,762

 
$
280,470

Depreciation and amortization
 
274,801

 
262,644

 
272,445

 
248,052

 
243,932

Impairment of assets
 
27,827

 
98

 
18,096

 
9,939

 

Loss (gain) on real estate dispositions, net
 
(262,824
)
 
(12,064
)
 
(570,250
)
 
1,682

 
(167,409
)
Noncontrolling interests
 
(9,409
)
 
(14,895
)
 
31,347

 
(18,889
)
 
(17,760
)
Unconsolidated entities
 
15,445

 
16,191

 
10,864

 
11,475

 
19,150

FFO
 
$
356,124

 
$
476,298

 
$
352,378

 
$
390,021

 
$
358,383

 
 
 
 
 
 
 
 
 
 
 
Average diluted shares outstanding
 
412,420

 
407,904

 
406,891

 
406,673

 
393,452

 
 
 
 
 
 
 
 
 
 
 
Per diluted share data:
 
 
 
 
 
 
 
 
 
 
Net income attributable to common stockholders
 
$
0.75

 
$
0.55

 
$
1.45

 
$
0.34

 
$
0.71

FFO
 
$
0.86

 
$
1.17

 
$
0.87

 
$
0.96

 
$
0.91



The tables 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,
 
December 31,
 
September 30,
 
June 30,
 
March 31,
EBITDA Reconciliations:
 
2020
 
2019
 
2019
 
2019
 
2019
Net income (loss)
 
$
329,380

 
$
240,136

 
$
647,932

 
$
150,040

 
$
292,302

Interest expense
 
142,007

 
131,648

 
137,343

 
141,336

 
145,232

Income tax expense (benefit)
 
5,442

 
(4,832
)
 
3,968

 
1,599

 
2,222

Depreciation and amortization
 
274,801

 
262,644

 
272,445

 
248,052

 
243,932

EBITDA
 
$
751,630

 
$
629,596

 
$
1,061,688

 
$
541,027

 
$
683,688

 
 
 
 
 
 
 
 
 
 
 
Interest Coverage Ratio:
 
 
 
 
 
 
 
 
 
 
Interest expense
 
$
142,007

 
$
131,648

 
$
137,343

 
$
141,336

 
$
145,232

Non-cash interest expense
 
(8,125
)
 
(734
)
 
(1,988
)
 
(752
)
 
(5,171
)
Capitalized interest
 
4,746

 
4,868

 
4,148

 
3,929

 
2,327

Total interest
 
138,628

 
135,782

 
139,503

 
144,513

 
142,388

EBITDA
 
$
751,630

 
$
629,596

 
$
1,061,688

 
$
541,027

 
$
683,688

Interest coverage ratio
 
5.42
x
 
4.64
x
 
7.61
x
 
3.74
x
 
4.80
x
 
 
 
 
 
 
 
 
 
 
 
Fixed Charge Coverage Ratio:
 
 
 
 
 
 
 
 
 
 
Total interest
 
$
138,628

 
$
135,782

 
$
139,503

 
$
144,513

 
$
142,388

Secured debt principal payments
 
15,526

 
13,977

 
13,121

 
13,684

 
13,543

Total fixed charges
 
154,154

 
149,759

 
152,624

 
158,197

 
155,931

EBITDA
 
$
751,630

 
$
629,596

 
$
1,061,688

 
$
541,027

 
$
683,688

Fixed charge coverage ratio
 
4.88
x
 
4.20
x
 
6.96
x
 
3.42
x
 
4.38
x


43

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,
 
December 31,
 
September 30,
 
June 30,
 
March 31,
Adjusted EBITDA Reconciliations:
 
2020
 
2019
 
2019
 
2019
 
2019
Net income
 
$
1,367,488

 
$
1,330,410

 
$
1,214,970

 
$
651,264

 
$
668,497

Interest expense
 
552,334

 
555,559

 
568,280

 
568,969

 
549,049

Income tax expense (benefit)
 
6,177

 
2,957

 
9,293

 
7,066

 
9,308

Depreciation and amortization
 
1,057,942

 
1,027,073

 
1,007,263

 
977,967

 
966,190

EBITDA
 
2,983,941

 
2,915,999

 
2,799,806

 
2,205,266

 
2,193,044

Loss (income) from unconsolidated entities
 
(47,941
)
 
(42,434
)
 
14,791

 
17,709

 
7,411

Stock-based compensation expense (1)
 
24,601

 
25,047

 
25,347

 
26,113

 
23,618

Loss (gain) on extinguishment of debt, net
 
68,436

 
84,155

 
81,596

 
19,810

 
20,109

Loss (gain) on real estate dispositions, net
 
(843,456
)
 
(748,041
)
 
(777,890
)
 
(232,363
)
 
(244,800
)
Impairment of assets
 
55,960

 
28,133

 
104,057

 
92,701

 
87,394

Provision for loan losses
 
7,072

 
18,690

 
18,690

 
18,690

 
18,690

Loss (gain) on derivatives and financial instruments, net
 
5,739

 
(4,399
)
 
2,296

 
10,043

 
670

Other expenses (1)
 
48,327

 
51,052

 
45,512

 
126,994

 
117,942

Other impairment (2)
 
32,268

 

 

 

 

Additional other income
 

 

 
(4,027
)
 
(4,027
)
 
(14,832
)
Adjusted EBITDA
 
$
2,334,947

 
$
2,328,202

 
$
2,310,178

 
$
2,280,936

 
$
2,209,246

 
 
 
 
 
 
 
 
 
 
 
Adjusted Interest Coverage Ratio:
 
 
 
 
 
 
 
 
 
 
Interest expense
 
$
552,334

 
$
555,559

 
$
568,280

 
$
568,969

 
$
549,049

Capitalized interest
 
17,691

 
15,272

 
11,952

 
9,725

 
7,896

Non-cash interest expense
 
(11,599
)
 
(8,645
)
 
(11,218
)
 
(10,888
)
 
(11,852
)
Total interest
 
558,426

 
562,186

 
569,014

 
567,806

 
545,093

Adjusted EBITDA
 
$
2,334,947

 
$
2,328,202

 
$
2,310,178

 
$
2,280,936

 
$
2,209,246

Adjusted interest coverage ratio
 
4.18
x
 
4.14
x
 
4.06
x
 
4.02
x
 
4.05
x
 
 
 
 
 
 
 
 
 
 
 
Adjusted Fixed Charge Coverage Ratio:
 
 
 
 
 
 
 
 
 
 
Total interest
 
$
558,426

 
$
562,186

 
$
569,014

 
$
567,806

 
$
545,093

Secured debt principal payments
 
56,308

 
54,325

 
54,342

 
55,129

 
55,584

Preferred dividends
 

 

 
11,676

 
23,352

 
35,028

Total fixed charges
 
614,734

 
616,511

 
635,032

 
646,287

 
635,705

Adjusted EBITDA
 
$
2,334,947

 
$
2,328,202

 
$
2,310,178

 
$
2,280,936

 
$
2,209,246

Adjusted fixed charge coverage ratio
 
3.80
x
 
3.78
x
 
3.64
x
 
3.53
x
 
3.48
x
 
 
 
 
 
 
 
 
 
 
 
(1) Certain severance-related costs are included in stock-based compensation and excluded from other expenses.
(2) Represents a write off of straight-line rent receivables recorded in rental income in conjunction with an amended lease.


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. 

44

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

 
As of
 
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
March 31,
 
 
2020
 
2019
 
2019
 
2019
 
2019
Book capitalization:
 
 
 
 
 
 
 
 
 
 
Unsecured credit facility and commercial paper
 
$
844,985

 
$
1,587,597

 
$
1,334,586

 
$
1,869,188

 
$
419,293

Long-term debt obligations (1)
 
13,228,433

 
13,436,365

 
12,463,680

 
13,390,344

 
12,371,729

Cash and cash equivalents (2)
 
(303,423
)
 
(284,917
)
 
(265,788
)
 
(268,666
)
 
(249,127
)
Total net debt
 
13,769,995

 
14,739,045

 
13,532,478

 
14,990,866

 
12,541,895

Total equity and noncontrolling interests(3)
 
17,495,696

 
16,982,504

 
16,696,070

 
16,452,806

 
16,498,376

Book capitalization
 
$
31,265,691

 
$
31,721,549

 
$
30,228,548

 
$
31,443,672

 
$
29,040,271

Net debt to book capitalization ratio
 
44
%
 
46
%
 
45
%
 
48
%
 
43
%
 
 
 
 
 
 
 
 
 
 
 
Undepreciated book capitalization:
 
 

 
 

 
 

 
 
 
 
Total net debt
 
$
13,769,995

 
$
14,739,045

 
$
13,532,478

 
$
14,990,866

 
$
12,541,895

Accumulated depreciation and amortization
 
5,910,979

 
5,715,459

 
5,769,843

 
5,539,435

 
5,670,111

Total equity and noncontrolling interests(3)
 
17,495,696

 
16,982,504

 
16,696,070

 
16,452,806

 
16,498,376

Undepreciated book capitalization
 
$
37,176,670

 
$
37,437,008

 
$
35,998,391

 
$
36,983,107

 
$
34,710,382

Net debt to undepreciated book
capitalization ratio
 
37
%
 
39
%
 
38
%
 
41
%
 
36
%
 
 
 
 
 
 
 
 
 
 
 
Market capitalization:
 
 

 
 

 
 

 
 
 
 
Common shares outstanding
 
417,391

 
410,257

 
405,758

 
405,254

 
403,740

Period end share price
 
$
45.78

 
$
81.78

 
$
90.65

 
$
81.53

 
$
77.6

Common equity market capitalization
 
$
19,108,160

 
$
33,550,817

 
$
36,781,963

 
$
33,040,359

 
$
31,330,224

Total net debt
 
13,769,995

 
14,739,045

 
13,532,478

 
14,990,866

 
12,541,895

Noncontrolling interests(3)
 
1,362,913

 
1,442,060

 
1,430,005

 
1,458,351

 
1,419,885

Market capitalization
 
$
34,241,068

 
$
49,731,922

 
$
51,744,446

 
$
49,489,576

 
$
45,292,004

Net debt to market capitalization ratio
 
40
%
 
30
%
 
26
%
 
30
%
 
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 amounts attributable to both redeemable noncontrolling interests and noncontrolling interests 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, 2019 for further information regarding significant accounting policies that impact us. There have been no material changes to these policies in 2020, except the adoption of ASC 2016-13. See Notes 2 and 7 to the unaudited consolidated financial statements for details.

45

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 Welltower uses words such as “may,” “will,” “intend,” “should,” “believe,” “expect,” “anticipate,” “project,” “pro forma,” “estimate” or similar expressions that do not relate solely to historical matters, Welltower is making forward-looking statements. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that may cause Welltower’s actual results to differ materially from Welltower’s expectations discussed in the forward-looking statements. This may be a result of various factors, including, but not limited to: the duration and scope of the COVID-19 pandemic; the impact of the COVID-19 pandemic on occupancy rates and on the operations of Welltower and its operators/tenants; actions governments take in response to the COVID-19 pandemic, including the introduction of public health measures and other regulations affecting Welltower’s properties and the operations of Welltower and its operators/tenants; the effects of health and safety measures adopted by Welltower and its operators/tenants related to the COVID-19 pandemic; increased operational costs as a result of health and safety measures related to COVID-19; the impact of the COVID-19 pandemic on the business and financial condition of operators/tenants and their ability to make payments to Welltower; disruptions to Welltower's property acquisition and disposition activity due to economic uncertainty caused by COVID-19; general economic uncertainty in key markets as a result of the COVID-19 pandemic and a worsening of global economic conditions or low levels of economic growth; the status of capital markets, including availability and cost of capital; uncertainty from the expected discontinuance of LIBOR and the transition to any other interest rate benchmark; 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; Welltower’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 Welltower’s properties; Welltower’s ability to re-lease space at similar rates as vacancies occur; Welltower’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 Welltower’s properties; changes in rules or practices governing Welltower’s financial reporting; the movement of U.S. and foreign currency exchange rates; Welltower’s ability to maintain Welltower’s qualification as a REIT; key management personnel recruitment and retention; and other risks described in Welltower’s reports filed from time to time with the SEC. Other important factors are identified in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, 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

46

Item 3. Quantitative and Qualitative Disclosures About Market Risk

rate debt or equity or repaid by the sale of assets. To illustrate the impact of changes in the interest rate markets, we performed a sensitivity analysis on our fixed rate debt instruments whereby we modeled the change in net present values arising from a hypothetical 1% increase in interest rates to determine the instruments’ change in fair value. The following table summarizes the analysis performed as of the dates indicated (in thousands):
 
 
March 31, 2020
 
December 31, 2019
 
 
Principal
 
Change in
 
Principal
 
Change in
 
 
balance
 
fair value
 
balance
 
fair value
Senior unsecured notes
 
$
9,619,820

 
$
(469,732
)
 
$
9,724,691

 
$
(751,848
)
Secured debt
 
1,694,442

 
(68,855
)
 
1,814,229

 
(69,756
)
Totals
 
$
11,314,262

 
$
(538,587
)
 
$
11,538,920

 
$
(821,604
)
Our variable rate debt, including our unsecured revolving credit facility and commercial paper program, is reflected at fair value. At March 31, 2020, we had $2,742,249,000 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 $27,422,000. At December 31, 2019, we had $3,470,584,000 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 $34,706,000. 
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 British 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, 2020, 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 $9,000,000. 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 British 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, 2020
 
December 31, 2019
 
 
Carrying
 
Change in
 
Carrying
 
Change in
 
 
Value
 
fair value
 
Value
 
fair value
Foreign currency forward contracts
 
$
182,620

 
$
11,049

 
$
26,767

 
$
12,136

Debt designated as hedges
 
1,484,409

 
14,844

 
1,586,116

 
15,861

Totals
 
$
1,667,029

 
$
25,893

 
$
1,612,883

 
$
27,997

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.

47


PART II. OTHER INFORMATION
Item 1.  Legal Proceedings
 From time to time, there are various legal proceedings pending against us that arise in the ordinary course of our business.  Management does not believe that the resolution of any of these legal proceedings either individually or in the aggregate will have a material adverse effect on our business, results of operations or financial condition. Further, from time to time, we are party to certain legal proceedings for which third parties, such as tenants, operators and/or managers are contractually obligated to indemnify, defend and hold us harmless. In some of these matters, the indemnitors have insurance for the potential damages. In other matters, we are being defended by tenants and other obligated third parties and these indemnitors may not have sufficient insurance, assets, income or resources to satisfy their defense and indemnification obligations to us. The unfavorable resolution of such legal proceedings could, individually or in the aggregate, materially adversely affect the indemnitors’ ability to satisfy their respective obligations to us, which, in turn, could have a material adverse effect on our business, results of operations or financial condition.  It is management’s opinion that there are currently no such legal proceedings pending that will, individually or in the aggregate, have such a material adverse effect. Despite management’s view of the ultimate resolution of these legal proceedings, we may have significant legal expenses and costs associated with the defense of such matters. Further, management cannot predict the outcome of these legal proceedings and if management’s expectation regarding such matters is not correct, such proceedings could have a material adverse effect on our business, results of operations or financial condition.
Item 1A. Risk Factors
The ongoing COVID-19 pandemic may adversely affect our business, results of operations and financial condition.
In March 2020, the World Health Organization classified the COVID-19 outbreak as a pandemic. We are unable to accurately predict the full impact that the pandemic will have on our results from operations, financial condition, liquidity and cash flows due to numerous factors that are not within our control, including the duration and severity of the outbreak, public health measures, such as business closures and stay-at-home orders, and other actions taken by governments and business in response to the pandemic, the availability of federal, state, local or non-U.S. funding programs, general economic disruption and uncertainty in key markets and financial market volatility, and the impact of the COVID-19 pandemic on general macroeconomic conditions and the pace of recovery when the pandemic subsides.
The COVID-19 pandemic has subjected our business, operations and financial condition to a number of risks, including, but not limited to, those discussed below:
Risks Related to Revenue: Our revenues and our operators’ revenues are dependent on occupancy. Our Seniors Housing Operating portfolio has experienced a decline in spot occupancy from 85.8% at February 28, 2020 to 84.8% at April 3, 2020, and a further decline to 82.7% as of May 1, 2020. In addition to the impact of increases in mortality rates on occupancy of our Seniors Housing Operating facilities, the ongoing COVID-19 pandemic has prevented prospective occupants and their families from visiting our facilities and limited the ability of new occupants to move into our facilities due to heightened move-in criteria and screening. Although the ongoing impact of the pandemic on occupancy remain uncertain, occupancy of our Seniors Housing Operating and Triple-net properties could further decrease. Such a decrease could affect the net operating income of our Seniors Housing Operating properties and the ability of our Triple-net operators to make contractual payments to us. In addition, rental income in our Outpatient Medical segment may decrease if our tenants do not renew leases or do not make timely or full lease payments as a result of temporary medical practice closures or decreases in revenue due to government imposed restrictions on elective medical procedures or decisions by patients to delay treatments. As a result of the financial impact of the COVID-19 pandemic on our operators and tenants, we may offer certain tenants concessions such as rent deferrals or rent abatements across Triple-net and Outpatient Medical segments.
Risks Related to Operator and Tenant Financial Condition: In addition to the risk of decreased revenue from tenant and operator payments, the impact of the COVID-19 pandemic creates a heightened risk of tenant, operator, borrower, manager or other obligor bankruptcy or insolvency due to factors such as decreased occupancy, medical practice disruptions resulting from stay-at-home orders, increased health and safety and labor expenses or litigation resulting from developments related to the COVID-19 pandemic. Although our operating lease agreements provide us with the right to evict a tenant, demand immediate payment of rent and exercise other remedies, and our loans provide us with the right to terminate any funding obligation, demand immediate repayment of principal and unpaid interest, foreclose on the collateral and exercise other remedies, the bankruptcy and insolvency laws afford certain rights to a party that has filed for bankruptcy or reorganization. A tenant, operator, borrower, manager or other obligor in bankruptcy or subject to insolvency proceedings may be able to limit or delay our ability to collect unpaid rent in the case of a lease or to receive


48

WELLTOWER INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


unpaid principal and interest in the case of a loan, and to exercise other rights and remedies. In addition, if a lease is rejected in a tenant bankruptcy, our claim against the tenant may be limited by applicable provisions of the bankruptcy law. We may be required to fund certain expenses (e.g., real estate taxes and maintenance) to preserve the value of an investment property, avoid the imposition of liens on a property and/or transition a property to a new tenant. In some past instances, we have terminated our lease with a tenant and relet the property to another tenant; however, our ability to do so may be severely limited under current conditions due to the industry and macroeconomic effects of the COVID-19 pandemic. If we cannot transition a leased property to a new tenant due to the effects of the COVID-19 pandemic or for other reasons, we may take possession of that property, which may expose us to certain successor liabilities. Publicity about the operator's financial condition and insolvency proceedings, particularly in light of ongoing publicity related to the COVID-19 pandemic, may also negatively impact their and our reputations, decreasing customer demand and revenues. Should such events occur, our revenue and operating cash flow may be adversely affected.
Risks Related to Operations: Across all of our properties, we and our operators have incurred increased operational costs as a result of the introduction of public health measures and other regulations affecting our properties and our operations, as well additional health and safety measures adopted by us and our operators related to the COVID-19 pandemic, including increases in labor and property cleaning expenses and expenditures related to our efforts to procure PPE and supplies on behalf of our operators. Such operational costs may increase in the future based on the duration and severity of the pandemic or the introduction of additional public health regulations. Operators and tenants are also subject to risks arising from the unique pressures on seniors housing and medical practice employees during the COVID-19 pandemic. As a result of difficult conditions and stresses related to the COVID-19 pandemic, employee morale and productivity may suffer and additional pay, such as hazard pay, may not be sufficient to retain key operator and tenant employees. In addition, our operations or those of our operators or tenants may be adversely impacted if a significant number of our employees or those of our operators or tenants contract COVID-19. Although we continue to undertake extensive efforts to ensure the safety of our properties, employees and residents and to provide operator support in this regard, the impact of the COVID-19 pandemic on our facilities could result in additional operational costs and reputational and litigation risk to us and our operators. As a result of the COVID-19 pandemic, operator and tenant cost of insurance is expected to increase and such insurance may not cover certain claims related to COVID-19. Our exposure to COVID-19 related litigation risk may be increased if the operators or tenants of the relevant facilities are subject to bankruptcy or insolvency. In addition, we are facing increased operational challenges and costs resulting from logistical challenges such as supply chain interruptions, business closures and restrictions on the movement of people. In response to stay-at-home orders and to support the health and well-being of our employees, the large majority of our employees are currently working remotely. The effects of such work arrangements for an extended period of time could impact employee productivity and morale and introduce additional operational risk, including but not limited to cybersecurity risks.
Risks Related to Property Acquisitions and Dispositions: As a result of uncertainty regarding the length and severity of the COVID-19 pandemic and the impact of the pandemic on our business and related industries, our investments in and acquisitions of senior housing and health care properties, as well as our ability to transition or sell properties with profitable results, may be limited. During April 2020, a previously announced disposition of a prominent portfolio of 11 Seniors Housing Operating properties was not consummated as a result of the uncertainty of COVID-19 pandemic on our business and industry. We have a significant development portfolio and as of March 31, 2020, have not experience significant delays or disruptions, but may in the future. Such disruptions to acquisition, disposition and development activity may negatively impact our long-term competitive position.
Risks Related to Liquidity: The COVID-19 pandemic and related public health measures implemented by governments worldwide has had severe global macroeconomic impacts and has resulted in significant financial market volatility. An extended period of volatility or a downturn in the financial markets could result in increased cost of capital. In addition, in order to maintain our REIT status, we may be unable to participate in any government stimulus program or lending facility that would limit our ability to pay dividends. On April 1, 2020, in response to uncertain financial market conditions arising from the pandemic, we undertook steps to strengthen our balance sheet and to enhance our liquidity by entering into a $1.0 billion two-year unsecured term loan. After consideration of this unsecured term loan, we have total near-term available liquidity of approximately $3.5 billion. If our access to capital is restricted or our borrowing costs increase as a result of developments in financial markets relating to the pandemic, our operations and financial condition could be adversely impacted. In addition, a prolonged period of decreased revenue and limited acquisition and disposition activity operations could adversely affect our financial condition and long-term growth prospects and there can also be no assurance that we will not face credit rating downgrades. Future downgrades could adversely affect our cost of capital, liquidity, competitive position and access to capital markets.
Risks Related to Dividends The impacts of COVID-19 pandemic on our results of operations, liquidity and financial condition could adversely affect our ability to pay dividend distributions at expected levels or at all. All distributions are


49

WELLTOWER INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


made at the discretion of our Board of Directors in accordance with Delaware law and depend on our earnings, our financial condition, debt and equity capital available to us, our expectation of our future capital requirements and operating performance, restrictive covenants in our financial and other contractual arrangements, maintenance of our REIT qualification, restrictions under Delaware law and other factors as our Board of Directors may deem relevant from time to time. Our Board of Directors will continue to assess our dividend rate on an ongoing basis, as the COVID-19 pandemic and related market conditions and our financial position continue to evolve. Our Board of Directors declared a cash dividend for the quarter ended March 31, 2020 of $0.61 per share, representing a 30% decrease from the previous $0.87 per share dividend. This dividend payment will be the 196th consecutive quarterly cash dividend to stockholders of record as of May 19, 2020 and payable on May 28, 2020.
The events and consequences discussed in these risk factors could, in circumstances we may not be able to accurately predict, recognize or control, have a material adverse effect on our business, growth, reputation, prospects, financial condition, operating results, cash flows, liquidity, ability to pay dividends and stock price. As the COVID-19 pandemic continues to adversely affect our operating and financial results, it may also have the effect of heightening many of the other risks described in the risk factors in our Annual Report on Form 10-K for the year ended December 31, 2019.


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, 2020 through January 31, 2020
 
65,085

 
$
82.79

 
 
 
 
February 1, 2020 through February 29, 2020
 
31,142

 
89.24

 
 
 
 
March 1, 2020 through March 31, 2020
 
206

 
72.39

 
 
 
 
Totals
 
96,433

 
$
84.85

 
 
 
 
(1) During the three months ended March 31, 2020, the company acquired shares of common stock held by employees who tendered owned shares to satisfy tax withholding obligations.
(2) No shares were purchased as part of publicly announced plans or programs.
Item 5. Other Information 
None.


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Item 6. Exhibits
31.1
 
31.2
 
 
32.1
 
32.2
 
 
101.INS
 
XBRL Instance Document. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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
 
104
 
The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, formatted in Inline XBRL
 
 
 
 
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
WELLTOWER INC.
  
 
Date:

May 7, 2020
By:  
/s/ THOMAS J. DEROSA  
 
 
 
Thomas J. DeRosa, 
 
 
 
Chairman and Chief Executive Officer
 (Principal Executive Officer) 
 
 
 
 
 
 
Date:
May 7, 2020
By:  
/s/ TIMOTHY G. MCHUGH  
 
 
 
Timothy G. McHugh, 
 
 
 
Executive Vice President and Chief Financial Officer
 (Principal Financial Officer) 
 
 
 
 
 
 
Date:
May 7, 2020
By:  
/s/ JOSHUA T. FIEWEGER 
 
 
 
Joshua T. Fieweger, 
 
 
 
Senior Vice President and Controller
 (Principal Accounting Officer) 
 

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