PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
CONSOLIDATED BALANCE SHEETS
WELLTOWER INC. AND SUBSIDIARIES
(In thousands)
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
|
|
|
|
(Unaudited)
|
|
(Note)
|
Assets:
|
|
|
|
|
|
Real estate investments:
|
|
|
|
|
|
|
Real property owned:
|
|
|
|
|
|
|
|
Land and land improvements
|
$
|
2,650,473
|
|
$
|
2,591,071
|
|
|
Buildings and improvements
|
|
24,930,472
|
|
|
24,496,153
|
|
|
Acquired lease intangibles
|
|
1,421,277
|
|
|
1,402,884
|
|
|
Real property held for sale, net of accumulated depreciation
|
|
178,260
|
|
|
1,044,859
|
|
|
Construction in progress
|
|
390,180
|
|
|
506,091
|
|
|
|
Gross real property owned
|
|
29,570,662
|
|
|
30,041,058
|
|
|
Less accumulated depreciation and amortization
|
|
(4,335,160)
|
|
|
(4,093,494)
|
|
|
|
Net real property owned
|
|
25,235,502
|
|
|
25,947,564
|
|
Real estate loans receivable
|
|
574,080
|
|
|
622,628
|
|
|
Less allowance for losses on loans receivable
|
|
(6,196)
|
|
|
(6,563)
|
|
|
|
Net real estate loans receivable
|
|
567,884
|
|
|
616,065
|
|
Net real estate investments
|
|
25,803,386
|
|
|
26,563,629
|
Other assets:
|
|
|
|
|
|
|
|
Investments in unconsolidated entities
|
|
416,110
|
|
|
457,138
|
|
|
Goodwill
|
|
68,321
|
|
|
68,321
|
|
|
Cash and cash equivalents
|
|
380,360
|
|
|
419,378
|
|
|
Restricted cash
|
|
42,777
|
|
|
187,842
|
|
|
Straight-line rent receivable
|
|
348,085
|
|
|
342,578
|
|
|
Receivables and other assets
|
|
708,238
|
|
|
826,298
|
|
|
|
Total other assets
|
|
1,963,891
|
|
|
2,301,555
|
Total assets
|
$
|
27,767,277
|
|
$
|
28,865,184
|
|
|
|
|
|
|
|
|
|
|
Liabilities and equity
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Borrowings under primary unsecured credit facility
|
$
|
522,000
|
|
$
|
645,000
|
|
|
Senior unsecured notes
|
|
8,188,928
|
|
|
8,161,619
|
|
|
Secured debt
|
|
2,669,787
|
|
|
3,477,699
|
|
|
Capital lease obligations
|
|
73,470
|
|
|
73,927
|
|
|
Accrued expenses and other liabilities
|
|
817,411
|
|
|
827,034
|
Total liabilities
|
|
12,271,596
|
|
|
13,185,279
|
Redeemable noncontrolling interests
|
|
385,418
|
|
|
398,433
|
Equity:
|
|
|
|
|
|
|
|
Preferred stock
|
|
718,750
|
|
|
1,006,250
|
|
|
Common stock
|
|
365,187
|
|
|
363,071
|
|
|
Capital in excess of par value
|
|
17,134,490
|
|
|
16,999,691
|
|
|
Treasury stock
|
|
(62,306)
|
|
|
(54,741)
|
|
|
Cumulative net income
|
|
5,130,593
|
|
|
4,803,575
|
|
|
Cumulative dividends
|
|
(8,474,775)
|
|
|
(8,144,981)
|
|
|
Accumulated other comprehensive income (loss)
|
|
(177,200)
|
|
|
(169,531)
|
|
|
Other equity
|
|
1,464
|
|
|
3,059
|
|
|
|
Total Welltower Inc. stockholders’ equity
|
|
14,636,203
|
|
|
14,806,393
|
|
|
Noncontrolling interests
|
|
474,060
|
|
|
475,079
|
Total equity
|
|
15,110,263
|
|
|
15,281,472
|
Total liabilities and equity
|
$
|
27,767,277
|
|
$
|
28,865,184
|
NOTE: The consolidated balance sheet at December 31, 2016 has been
derived from the audited financial statements at that date but does not include
all of the information and footnotes required by U.S. generally accepted
accounting principles for complete financial statements.
See notes to
unaudited consolidated financial statements
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
WELLTOWER INC. AND SUBSIDIARIES
(In thousands, except per share data)
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
2016
|
Revenues:
|
|
|
|
|
|
|
Rental income
|
$
|
367,141
|
|
$
|
415,663
|
|
Resident fees and services
|
|
670,337
|
|
|
602,149
|
|
Interest income
|
|
20,748
|
|
|
25,188
|
|
Other income
|
|
4,072
|
|
|
4,050
|
|
|
Total revenues
|
|
1,062,298
|
|
|
1,047,050
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
Interest expense
|
|
118,597
|
|
|
132,960
|
|
Property operating expenses
|
|
510,169
|
|
|
449,636
|
|
Depreciation and amortization
|
|
228,276
|
|
|
228,696
|
|
General and administrative
|
|
31,101
|
|
|
45,691
|
|
Transaction costs
|
|
-
|
|
|
8,208
|
|
Loss (gain) on derivatives, net
|
|
1,224
|
|
|
-
|
|
Loss (gain) on extinguishment of debt, net
|
|
31,356
|
|
|
(24)
|
|
Impairment of assets
|
|
11,031
|
|
|
14,314
|
|
Other expenses
|
|
11,675
|
|
|
-
|
|
|
Total expenses
|
|
943,429
|
|
|
879,481
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
|
|
|
|
and income from unconsolidated entities
|
|
118,869
|
|
|
167,569
|
Income tax (expense) benefit
|
|
(2,245)
|
|
|
1,725
|
Income (loss) from unconsolidated entities
|
|
(23,106)
|
|
|
(3,820)
|
Income (loss) from continuing operations
|
|
93,518
|
|
|
165,474
|
Gain (loss) on real estate dispositions, net
|
|
244,092
|
|
|
-
|
Net income
|
|
337,610
|
|
|
165,474
|
Less:
|
Preferred stock dividends
|
|
14,379
|
|
|
16,352
|
Less:
|
Preferred stock redemption charge
|
|
9,769
|
|
|
-
|
Less:
|
Net income (loss) attributable to noncontrolling interests
(1)
|
|
823
|
|
|
153
|
Net income (loss) attributable to common stockholders
|
$
|
312,639
|
|
$
|
148,969
|
|
|
|
|
|
|
|
|
Average number of common shares outstanding:
|
|
|
|
|
|
|
Basic
|
|
362,534
|
|
|
355,076
|
|
Diluted
|
|
364,652
|
|
|
356,051
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
Income (loss) from continuing operations attributable to common
stockholders, including real estate dispositions
|
$
|
0.86
|
|
$
|
0.42
|
|
Net income (loss) attributable to common stockholders*
|
$
|
0.86
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
Income (loss) from continuing operations attributable to common
stockholders, including real estate dispositions
|
$
|
0.86
|
|
$
|
0.42
|
|
Net income (loss) attributable to common stockholders*
|
$
|
0.86
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
Dividends declared and paid per common share
|
$
|
0.87
|
|
$
|
0.86
|
* Amounts may
not sum due to rounding
(1) Includes amounts attributable to redeemable noncontrolling
interests.
See notes to
unaudited consolidated financial statements
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
WELLTOWER
INC. AND SUBSIDIARIES
(In thousands)
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2017
|
|
2016
|
|
Net income
|
$
|
337,610
|
|
$
|
165,474
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
Unrecognized gain (loss) on available for sale securities
|
|
(10,569)
|
|
|
(7,549)
|
|
|
Unrealized gains (losses) on cash flow hedges
|
|
-
|
|
|
483
|
|
|
Unrecognized actuarial gain (loss)
|
|
-
|
|
|
2
|
|
|
Foreign currency translation gain (loss)
|
|
5,713
|
|
|
1,372
|
|
Total other comprehensive income (loss)
|
|
(4,856)
|
|
|
(5,692)
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
332,754
|
|
|
159,782
|
|
Less: Total comprehensive income (loss) attributable to
noncontrolling interests
(1)
|
|
3,636
|
|
|
15,271
|
|
Total comprehensive income (loss) attributable to common
stockholders
|
$
|
329,118
|
|
$
|
144,511
|
|
|
|
|
|
|
|
|
|
|
(1) Includes amounts attributable to redeemable noncontrolling
interests.
|
|
See notes to unaudited consolidated financial statements
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
WELLTOWER INC. AND SUBSIDIARIES
(In thousands)
|
Three Months Ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Preferred
|
Common
|
Excess of
|
Treasury
|
Cumulative
|
Cumulative
|
Comprehensive
|
Other
|
Noncontrolling
|
|
|
|
|
|
Stock
|
Stock
|
Par Value
|
Stock
|
Net Income
|
Dividends
|
Income (Loss)
|
Equity
|
Interests
|
Total
|
Balances at beginning of period
|
$
|
1,006,250
|
$
|
363,071
|
$
|
16,999,691
|
$
|
(54,741)
|
$
|
4,803,575
|
$
|
(8,144,981)
|
$
|
(169,531)
|
$
|
3,059
|
$
|
475,079
|
$
|
15,281,472
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
336,787
|
|
|
|
|
|
|
|
1,780
|
|
338,567
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,669)
|
|
|
|
2,813
|
|
(4,856)
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
333,711
|
Net change in noncontrolling interests
|
|
|
|
|
|
932
|
|
|
|
|
|
|
|
|
|
|
|
(5,612)
|
|
(4,680)
|
Amounts related to stock incentive plans, net of forfeitures
|
|
|
|
336
|
|
6,903
|
|
(7,565)
|
|
|
|
|
|
|
|
(1,605)
|
|
|
|
(1,931)
|
Proceeds from issuance of common stock
|
|
|
|
1,780
|
|
117,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118,984
|
Redemption of preferred stock
|
|
(287,500)
|
|
|
|
9,760
|
|
|
|
(9,769)
|
|
|
|
|
|
|
|
|
|
(287,509)
|
Option compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
10
|
Dividends paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
(315,415)
|
|
|
|
|
|
|
|
(315,415)
|
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
(14,379)
|
|
|
|
|
|
|
|
(14,379)
|
Balances at end of period
|
$
|
718,750
|
$
|
365,187
|
$
|
17,134,490
|
$
|
(62,306)
|
$
|
5,130,593
|
$
|
(8,474,775)
|
$
|
(177,200)
|
$
|
1,464
|
$
|
474,060
|
$
|
15,110,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Preferred
|
Common
|
Excess of
|
Treasury
|
Cumulative
|
Cumulative
|
Comprehensive
|
Other
|
Noncontrolling
|
|
|
|
|
|
Stock
|
Stock
|
Par Value
|
Stock
|
Net Income
|
Dividends
|
Income (Loss)
|
Equity
|
Interests
|
Total
|
Balances at beginning of period
|
$
|
1,006,250
|
$
|
354,811
|
$
|
16,478,300
|
$
|
(44,372)
|
$
|
3,725,772
|
$
|
(6,846,056)
|
$
|
(88,243)
|
$
|
4,098
|
$
|
585,325
|
$
|
15,175,885
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
165,321
|
|
|
|
|
|
|
|
1,082
|
|
166,403
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,810)
|
|
|
|
15,118
|
|
(5,692)
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160,711
|
Net change in noncontrolling interests
|
|
|
|
|
|
(5,717)
|
|
|
|
|
|
|
|
|
|
|
|
(121,325)
|
|
(127,042)
|
Amounts related to stock incentive plans, net of forfeitures
|
|
|
|
637
|
|
25,555
|
|
(6,899)
|
|
|
|
|
|
|
|
(115)
|
|
|
|
19,178
|
Proceeds from issuance of common stock
|
|
|
|
1,505
|
|
91,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93,105
|
Option compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
|
|
|
|
79
|
Dividends paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
(305,770)
|
|
|
|
|
|
|
|
(305,770)
|
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
(16,352)
|
|
|
|
|
|
|
|
(16,352)
|
Balances at end of period
|
$
|
1,006,250
|
|
356,953
|
|
16,589,738
|
|
(51,271)
|
|
3,891,093
|
|
(7,168,178)
|
|
(109,053)
|
|
4,062
|
|
480,200
|
$
|
14,999,794
|
See notes to unaudited consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
WELLTOWER INC. AND SUBSIDIARIES
(In thousands)
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2017
|
|
2016
|
Operating activities:
|
|
|
|
|
|
Net income
|
$
|
337,610
|
|
$
|
165,474
|
Adjustments to reconcile net income to
|
|
|
|
|
|
|
net cash provided from (used in) operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
228,276
|
|
|
228,696
|
|
|
Other amortization expenses
|
|
3,361
|
|
|
1,118
|
|
|
Impairment of assets
|
|
11,031
|
|
|
14,314
|
|
|
Stock-based compensation expense
|
|
4,906
|
|
|
8,186
|
|
|
Loss (gain) on derivatives, net
|
|
1,224
|
|
|
-
|
|
|
Loss (gain) on extinguishment of debt, net
|
|
31,356
|
|
|
(24)
|
|
|
Loss (income) from unconsolidated entities
|
|
23,106
|
|
|
3,820
|
|
|
Rental income in excess of cash received
|
|
(18,141)
|
|
|
(29,669)
|
|
|
Amortization related to above (below) market leases, net
|
|
8
|
|
|
230
|
|
|
Loss (gain) on sales of properties, net
|
|
(244,092)
|
|
|
-
|
|
|
Distributions by unconsolidated entities
|
|
474
|
|
|
174
|
|
|
Increase (decrease) in accrued expenses and other liabilities
|
|
19,478
|
|
|
(13,526)
|
|
|
Decrease (increase) in receivables and other assets
|
|
(13,071)
|
|
|
1,816
|
Net cash provided from (used in) operating activities
|
|
385,526
|
|
|
380,609
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
Cash disbursed for acquisitions
|
|
(102,356)
|
|
|
(171,482)
|
|
Cash disbursed for capital improvements to existing properties
|
|
(42,115)
|
|
|
(35,025)
|
|
Cash disbursed for construction in progress
|
|
(69,334)
|
|
|
(66,739)
|
|
Capitalized interest
|
|
(4,129)
|
|
|
(3,037)
|
|
Investment in real estate loans receivable
|
|
(25,375)
|
|
|
(27,251)
|
|
Other investments, net of payments
|
|
48,311
|
|
|
(30,773)
|
|
Principal collected on real estate loans receivable
|
|
8,792
|
|
|
93,774
|
|
Contributions to unconsolidated entities
|
|
(13,073)
|
|
|
(12,784)
|
|
Distributions by unconsolidated entities
|
|
24,161
|
|
|
11,747
|
|
Proceeds from (payments on) derivatives
|
|
8,218
|
|
|
-
|
|
Decrease (increase) in restricted cash
|
|
145,065
|
|
|
(394)
|
|
Proceeds from sales of real property
|
|
1,087,074
|
|
|
-
|
Net cash provided from (used in) investing activities
|
|
1,065,239
|
|
|
(241,964)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
Net increase (decrease) under unsecured credit facilities
|
|
(123,000)
|
|
|
(190,000)
|
|
Proceeds from issuance of senior unsecured notes
|
|
-
|
|
|
688,560
|
|
Payments to extinguish senior unsecured notes
|
|
-
|
|
|
(400,000)
|
|
Net proceeds from the issuance of secured debt
|
|
12,536
|
|
|
75,136
|
|
Payments on secured debt
|
|
(822,438)
|
|
|
(130,343)
|
|
Net proceeds from the issuance of common stock
|
|
119,651
|
|
|
93,433
|
|
Redemption of preferred stock
|
|
(287,500)
|
|
|
-
|
|
Payments for deferred financing costs and prepayment penalties
|
|
(36,674)
|
|
|
(1,217)
|
|
Contributions by noncontrolling interests
(1)
|
|
2,667
|
|
|
126,142
|
|
Distributions to noncontrolling interests
(1)
|
|
(20,014)
|
|
|
(76,222)
|
|
Acquisitions of noncontrolling interests
|
|
(38)
|
|
|
-
|
|
Cash distributions to stockholders
|
|
(329,794)
|
|
|
(322,122)
|
|
Other financing activities
|
|
(8,022)
|
|
|
(7,294)
|
Net cash provided from (used in) financing activities
|
|
(1,492,626)
|
|
|
(143,927)
|
Effect of foreign currency translation on cash and cash
equivalents
|
|
2,843
|
|
|
323
|
Increase (decrease) in cash and cash equivalents
|
|
(39,018)
|
|
|
(4,959)
|
Cash and cash equivalents at beginning of period
|
|
419,378
|
|
|
360,908
|
Cash and cash equivalents at end of period
|
$
|
380,360
|
|
$
|
355,949
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
Interest paid
|
$
|
109,438
|
|
$
|
134,872
|
|
Income taxes paid
|
|
3,349
|
|
|
2,431
|
|
|
|
|
|
|
|
|
|
(1) Includes amounts attributable to redeemable noncontrolling
interests.
|
See notes to unaudited consolidated financial statements
WELLTOWER
INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
1. Business
Welltower Inc.,
an
S&P 500 company headquartered in Toledo, Ohio, is driving the
transformation of health care infrastructure. The company invests with leading
seniors housing operators, post-acute providers and health systems to fund the
real estate and infrastructure needed to scale innovative care delivery models
and improve people’s wellness and overall health care experience. Welltower™,
a real estate investment trust (“REIT”), owns interests in properties
concentrated in major, high-growth markets in the United States, Canada and the
United Kingdom, consisting of seniors housing and post-acute communities and
outpatient medical properties
. Founded in 1970, we were
the first real estate investment trust to invest exclusively in health care
facilities.
2. Accounting
Policies and Related Matters
Basis of Presentation
The
accompanying unaudited consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for
interim financial information and with instructions to Quarterly Report on Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by U.S. GAAP for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 2017 are
not necessarily an indication of the results that may be expected for the year
ending December 31, 2017. For further information, refer to the financial
statements and notes thereto included in our Annual Report on Form 10-K for the
year ended December 31, 2016.
New
Accounting Standards
In May 2014, the Financial Accounting
Standards Board (the “FASB”) issued ASU No. 2014-09, “Revenue from Contracts
with Customers (Topic 606)”. The standard is a comprehensive new revenue
recognition model that requires revenue to be recognized in a manner to depict
the transfer of goods or services to a customer at an amount that reflects the
consideration expected to be received in exchange for those goods or services.
ASU 2014-09 is effective for fiscal years, and interim periods within those
years, beginning after December 15, 2017, and early adoption is permitted
beginning after December 15, 2016. A reporting entity may apply the new
standard using either a modified retrospective approach by recording a cumulative-effect
adjustment to equity as of the beginning of the fiscal year of adoption or a
full retrospective approach. We are currently evaluating the impact that the
adoption of the standard will have on our consolidated financial statements and
have not yet determined the method by which we will adopt the new standard. A
significant source of our revenue is generated through leasing arrangements,
which are specifically excluded from the new standard. We expect that the new
standard will affect our accounting policies related to non-lease revenue,
including certain fees in our RIDEA joint ventures, common area maintenance in
our outpatient medical properties and real estate sales. Under ASU 2014-09,
revenue recognition for real estate sales is mainly based on the transfer of
control versus current guidance of continuing involvement. We expect that the
new guidance will result in more transactions qualifying as sales of real
estate and being recognized at an earlier date than under the current guidance.
In January 2016, the FASB issued ASU
No. 2016-01, “Financial Instruments – Overall: Recognition and Measurement of
Financial Assets and Financial Liabilities,” which will require entities to
measure their investments at fair value and recognize any changes in fair value
in net income unless the investments qualify for the new practicability
exception. The practicability exception will be available for equity
investments that do not have readily determinable fair values. ASU 2016-01 is
effective for fiscal years and interim periods within those years, beginning
after December 15, 2017. We are currently evaluating the impact that the
standard will have on our consolidated financial statements.
In February
2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which requires
lessees to recognize assets and liabilities on their balance sheet related to
the rights and obligations created by most leases, while continuing to
recognize expenses on their income statements over the lease term. It will
also require disclosures designed to give financial statement users information
regarding amount, timing, and uncertainty of cash flows arising from leases. ASU
2016-02 is effective for fiscal years, and interim periods within those years,
beginning after December 15, 2018, and early adoption is permitted. Entities
are required to use a modified retrospective approach for leases that exist or
are entered into after the beginning of the earliest comparative period in the
financial statements. We are currently evaluating the impact of this standard
on our consolidated financial statements. We believe that the adoption of this
standard will likely have a material impact to our consolidated balance sheet
for the recognition of certain operating leases as right-of-use assets and
lease liabilities. We are in the process of analyzing our lease portfolio and
evaluating systems to comply with the standard’s retrospective adoption
requirements
.
In March
2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based
Payment Accounting”. ASU 2016-09 is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2016, and early
adoption is permitted. We adopted ASU 2016-09 on January 1, 2017. The
standard allows companies to make a policy election as to whether
WELLTOWER
INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
they will include an estimate of awards expected to be forfeited
or whether they will account for forfeitures as they occur. We have elected to
account for forfeitures as they occur. This election had an immaterial impact
on our consolidated financial statements. The standard also requires an
employer to classify as a financing activity in the statement of cash flow the
cash paid to a tax authority when shares are withheld to satisfy the employer’s
statutory income tax withholding obligation. This standard is required to be
applied on a retrospective basis and resulted in an increase in net cash
provided by operating activities and a decrease in net cash used in financing
activities of $6,897,000 for the three months ended March 31, 2016. Upon
adoption, no other provisions of ASU 2016-09 had an effect on our unaudited
consolidated
financial statements or related footnote disclosures.
In June
2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on
Financial Instruments”. This standard requires a new forward-looking “expected
loss” model to be used for receivables, held-to-maturity debt, loans, and other
instruments. ASU 2016-13 is effective for fiscal years, and interim periods
within those years, beginning after December 15, 2019, and early adoption is
permitted for fiscal years beginning after December 15, 2018. We are currently
evaluating the impact that the standard will have on our consolidated financial
statements
.
In January 2017, the FASB issued ASU
No. 2017-01, “Clarifying the Definition of a Business”. This standard changes
the definition of a business to assist entities with evaluating when a set of
transferred assets and activities is a business. ASU 2017-01 is effective for
fiscal years, and interim periods within those years, beginning after December
15, 2017, and early adoption is permitted.
A reporting entity must apply ASU
2017-01 using a prospective approach. We adopted ASU 2017-01 on January 1,
2017 and as a result, have classified our real estate acquisitions completed
during the three months ended March 31, 2017 as asset acquisitions rather than
business combinations due to the fact that substantially all of the fair value
of the gross assets acquired were concentrated in a single asset or group of
similar identifiable assets. We have recorded identifiable assets acquired,
liabilities assumed and any noncontrolling interests associated with any asset
acquisitions at cost on a relative fair value basis and have capitalized
transaction costs incurred.
3. Real Property
Acquisitions and Development
The total purchase price for all properties acquired has been
allocated to the tangible and identifiable intangible assets, liabilities and
noncontrolling interests based upon their relative fair values in accordance
with our accounting policies. The results of operations for these acquisitions
have been included in our consolidated results of operations since the date of
acquisition and are a component of the appropriate segments. Transaction costs
primarily represent costs incurred with acquisitions, including due diligence
costs, fees for legal and valuation services and termination of pre-existing
relationships computed based on the fair value of the assets acquired, lease
termination fees and other acquisition-related costs. Effective January 1,
2017, with our adoption of ASU 2017-01, transaction costs related to asset
acquisitions are capitalized as a component of purchase price and all other
non-capitalizable costs are reflected in “Other Expenses” on our Consolidated
Statements of Comprehensive Income. Certain of our subsidiaries’ functional
currencies are the local currencies of their respective countries. See Note 2
to the financial statements included in our Annual Report on Form 10-K for the
year ended December 31, 2016 for information regarding our foreign currency
policies.
Triple-net
Activity
|
|
Three Months Ended
|
|
(In thousands)
|
March 31, 2017
|
March 31, 2016
|
|
Land and land improvements
|
|
$
|
4,017
|
|
$
|
15,331
|
|
Buildings and improvements
|
|
|
37,241
|
|
|
114,235
|
|
Acquired lease intangibles
|
|
|
-
|
|
|
1,623
|
|
|
Total assets acquired
|
|
|
41,258
|
|
|
131,189
|
|
Accrued expenses and other liabilities
|
|
|
-
|
|
|
(809)
|
|
|
Total liabilities assumed
|
|
|
-
|
|
|
(809)
|
|
Non-cash acquisition related activity
(1)
|
|
|
-
|
|
|
(28,621)
|
|
|
Cash disbursed for acquisitions
|
|
|
41,258
|
|
|
101,759
|
|
Construction in progress additions
|
|
|
46,754
|
|
|
43,835
|
|
Less:
|
Capitalized interest
|
|
|
(2,028)
|
|
|
(1,684)
|
|
|
Foreign currency translation
|
|
|
(164)
|
|
|
(583)
|
|
Cash disbursed for construction in progress
|
|
|
44,562
|
|
|
41,568
|
|
Capital improvements to existing properties
|
|
|
10,495
|
|
|
7,438
|
|
|
Total cash invested in real property, net of cash acquired
|
|
$
|
96,315
|
|
$
|
150,765
|
|
|
|
|
|
|
|
|
|
|
(1) Includes $25,691,000 related to the acquisition of assets
previously financed as real estate loans receivable and $2,871,000 related to
the acquisition of assets previously financed as an investment in an
unconsolidated entity.
|
WELLTOWER
INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Seniors
Housing Operating Activity
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
(In thousands)
|
March 31, 2017
|
March 31, 2016
|
|
Land and land improvements
|
|
$
|
4,304
|
|
$
|
3,440
|
|
Building and improvements
|
|
|
44,075
|
|
|
48,218
|
|
Acquired lease intangibles
|
|
|
1,741
|
|
|
1,942
|
|
Receivables and other assets
|
|
|
74
|
|
|
36
|
|
|
Total assets acquired
(1)
|
|
|
50,194
|
|
|
53,636
|
|
Accrued expenses and other liabilities
|
|
|
(2,755)
|
|
|
(11)
|
|
|
Total liabilities assumed
|
|
|
(2,755)
|
|
|
(11)
|
|
Noncontrolling interests
|
|
|
(647)
|
|
|
(549)
|
|
Non-cash acquisition related activity
(2)
|
|
|
(14,148)
|
|
|
-
|
|
|
Cash disbursed for acquisitions
|
|
|
32,644
|
|
|
53,076
|
|
Construction in progress additions
|
|
|
8,062
|
|
|
4,033
|
|
Less:
|
Capitalized interest
|
|
|
(1,707)
|
|
|
(565)
|
|
|
Foreign currency translation
|
|
|
691
|
|
|
(1,107)
|
|
Cash disbursed for construction in progress
|
|
|
7,046
|
|
|
2,361
|
|
Capital improvements to existing properties
|
|
|
24,254
|
|
|
16,808
|
|
|
Total cash invested in real property, net of cash acquired
|
|
$
|
63,944
|
|
$
|
72,245
|
|
|
|
|
|
|
|
|
|
|
(1) Excludes $400,000 and $113,000 of cash acquired during the
three months ended March 31, 2017 and 2016, respectively.
|
(2) Includes $6,349,000 related to the acquisition of assets
previously financed as real estate loans receivable and $7,799,000 previously
financed as an investment in an unconsolidated entity.
|
|
|
|
|
|
|
|
|
|
Outpatient Medical Activity
|
|
Three Months Ended
|
|
(In thousands)
|
March 31, 2017
|
|
March 31, 2016
|
|
Land and land improvements
|
|
$
|
2,895
|
|
$
|
-
|
|
Buildings and improvements
|
|
|
23,310
|
|
|
17,637
|
|
Acquired lease intangibles
|
|
|
3,496
|
|
|
-
|
|
Receivables and other assets
|
|
|
3
|
|
|
-
|
|
|
Total assets acquired
|
|
|
29,704
|
|
|
17,637
|
|
Accrued expenses and other liabilities
|
|
|
(1,250)
|
|
|
(990)
|
|
|
Total liabilities assumed
|
|
|
(1,250)
|
|
|
(990)
|
|
|
Cash disbursed for acquisitions
|
|
|
28,454
|
|
|
16,647
|
|
Construction in progress additions
|
|
|
14,921
|
|
|
28,934
|
|
Less:
|
Capitalized interest
|
|
|
(717)
|
|
|
(788)
|
|
|
Accruals
(1)
|
|
|
3,522
|
|
|
(5,336)
|
|
Cash disbursed for construction in progress
|
|
|
17,726
|
|
|
22,810
|
|
Capital improvements to existing properties
|
|
|
7,366
|
|
|
10,779
|
|
|
Total cash invested in real property
|
|
$
|
53,546
|
|
$
|
50,236
|
|
|
|
|
|
|
|
|
|
|
(1) Represents the change in non-cash consideration accruals for
amounts to be paid in periods other than the period in which the construction
projects converted to operations.
|
|
|
|
|
|
|
|
|
|
WELLTOWER
INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Construction
Activity
The following
is a summary of the construction projects that were placed into service and
began generating revenues during the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31, 2017
|
|
March 31, 2016
|
|
Development projects:
|
|
|
|
|
|
|
|
|
|
|
Triple-net
|
|
|
$
|
157,460
|
|
|
$
|
-
|
|
|
Seniors housing operating
|
|
|
|
3,634
|
|
|
|
-
|
|
|
Outpatient medical
|
|
|
|
25,910
|
|
|
|
35,363
|
|
Total development projects
|
|
|
|
187,004
|
|
|
|
35,363
|
Total construction in progress conversions
|
|
|
$
|
187,004
|
|
|
$
|
35,363
|
|
|
|
|
|
|
|
|
|
|
|
4. Real Estate
Intangibles
The
following is a summary of our real estate intangibles, excluding those
classified as held for sale, as of the dates indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Assets:
|
|
|
|
|
|
|
|
In place lease intangibles
|
|
$
|
1,267,280
|
|
$
|
1,252,143
|
|
Above market tenant leases
|
|
|
63,184
|
|
|
61,700
|
|
Below market ground leases
|
|
|
62,224
|
|
|
61,628
|
|
Lease commissions
|
|
|
28,589
|
|
|
27,413
|
|
Gross historical cost
|
|
|
1,421,277
|
|
|
1,402,884
|
|
Accumulated amortization
|
|
|
(1,010,364)
|
|
|
(966,714)
|
|
Net book value
|
|
$
|
410,913
|
|
$
|
436,170
|
|
|
|
|
|
|
|
|
|
Weighted-average amortization period in years
|
|
|
14.4
|
|
|
13.7
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Below market tenant leases
|
|
$
|
90,745
|
|
$
|
89,468
|
|
Above market ground leases
|
|
|
8,107
|
|
|
8,107
|
|
Gross historical cost
|
|
|
98,852
|
|
|
97,575
|
|
Accumulated amortization
|
|
|
(54,354)
|
|
|
(52,134)
|
|
Net book value
|
|
$
|
44,498
|
|
$
|
45,441
|
|
|
|
|
|
|
|
|
|
Weighted-average amortization period in years
|
|
|
15.1
|
|
|
15.2
|
|
|
|
|
|
|
|
|
The
following is a summary of real estate intangible amortization for the periods presented
(in thousands):
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
Rental income related to above/below market tenant leases, net
|
|
$
|
304
|
|
$
|
81
|
Property operating expenses related to above/below market ground
leases, net
|
|
|
(312)
|
|
|
(311)
|
Depreciation and amortization related to in place lease
intangibles and lease commissions
|
|
|
(39,302)
|
|
|
(34,454)
|
|
|
|
|
|
|
|
WELLTOWER
INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
The future estimated
aggregate amortization of intangible assets and liabilities is as follows for
the periods presented (in thousands):
|
|
|
Assets
|
|
|
Liabilities
|
2017
|
|
$
|
105,454
|
|
$
|
4,959
|
2018
|
|
|
77,561
|
|
|
6,106
|
2019
|
|
|
37,948
|
|
|
5,685
|
2020
|
|
|
24,169
|
|
|
5,208
|
2021
|
|
|
20,191
|
|
|
4,720
|
Thereafter
|
|
|
145,590
|
|
|
17,820
|
Total
|
|
$
|
410,913
|
|
$
|
44,498
|
5. Dispositions,
Assets Held for Sale and Discontinued Operations
We
periodically sell properties for various reasons, including favorable market
conditions, the exercise of tenant purchase options or reduction of
concentrations (e.g., property type, operator or geography).
During the three months ended March 31, 2017 and 2016, we recorded
impairment charges on certain held-for-sale seniors housing operating and
outpatient medical properties as the fair values less estimated costs to sell
exceeded our carrying values.
The following is a
summary of our real property disposition activity for the periods presented (in
thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31, 2017
|
March 31, 2016
|
Real estate dispositions:
|
|
|
|
|
|
|
|
Triple-net
|
|
$
|
808,204
|
|
$
|
-
|
|
Seniors housing operating
|
|
|
13,845
|
|
|
-
|
|
Total dispositions
|
|
|
822,049
|
|
|
-
|
Gain (loss) on real estate dispositions, net
|
|
|
244,092
|
|
|
-
|
|
Net other assets/liabilities disposed
|
|
|
20,933
|
|
|
-
|
Proceeds from real estate dispositions
|
|
$
|
1,087,074
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dispositions and
Assets Held for Sale
Pursuant to our adoption
of ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and
Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations
and Disclosures of Disposals of Components of an Entity”, operating results
attributable to properties sold subsequent to or classified as held for sale
after January 1, 2014 and which do not meet the definition of discontinued
operations are no longer reclassified on our Consolidated Statements of
Comprehensive Income. The following represents the activity related to these
properties for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
2017
|
|
2016
|
Revenues:
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
16,734
|
|
$
|
5,477
|
Expenses:
|
|
|
|
|
|
|
|
Interest expense
|
|
|
1,301
|
|
|
851
|
|
Property operating expenses
|
|
|
1,855
|
|
|
1,362
|
|
Provision for depreciation
|
|
|
245
|
|
|
820
|
|
Total expenses
|
|
|
3,401
|
|
|
3,033
|
Income (loss) from real estate dispositions, net
|
|
$
|
13,333
|
|
$
|
2,444
|
|
|
|
|
|
|
|
|
WELLTOWER
INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
6. Real Estate Loans Receivable
Please see Note 2 to the financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2016 for discussion of our accounting policies for real estate
loans receivable and related interest income.
The following is a summary of our real estate
loan activity for the periods presented (in thousands):
|
|
|
Three Months Ended
|
|
|
|
March 31, 2017
|
|
March 31, 2016
|
|
|
|
|
|
Outpatient
|
|
|
|
|
|
|
Outpatient
|
|
|
|
|
|
|
Triple-net
|
|
Medical
|
|
Totals
|
|
Triple-net
|
|
Medical
|
|
Totals
|
Advances on real estate loans receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in new loans
|
|
$
|
7,828
|
|
$
|
-
|
|
$
|
7,828
|
|
$
|
8,013
|
|
$
|
-
|
|
$
|
8,013
|
|
Draws on existing loans
|
|
|
17,547
|
|
|
-
|
|
|
17,547
|
|
|
19,206
|
|
|
32
|
|
|
19,238
|
|
Net cash advances on real estate loans
|
|
|
25,375
|
|
|
-
|
|
|
25,375
|
|
|
27,219
|
|
|
32
|
|
|
27,251
|
Receipts on real estate loans receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan payoffs
|
|
|
14,474
|
|
|
60,500
|
|
|
74,974
|
|
|
104,068
|
|
|
12,290
|
|
|
116,358
|
|
Principal payments on loans
|
|
|
667
|
|
|
-
|
|
|
667
|
|
|
3,107
|
|
|
-
|
|
|
3,107
|
|
Sub-total
|
|
|
15,141
|
|
|
60,500
|
|
|
75,641
|
|
|
107,175
|
|
|
12,290
|
|
|
119,465
|
|
Less: Non-cash activity
(1)(2)
|
|
|
(6,349)
|
|
|
(60,500)
|
|
|
(66,849)
|
|
|
(25,691)
|
|
|
-
|
|
|
(25,691)
|
|
Net cash receipts on real estate loans
|
|
|
8,792
|
|
|
-
|
|
|
8,792
|
|
|
81,484
|
|
|
12,290
|
|
|
93,774
|
Net cash advances (receipts) on real estate loans
|
|
|
16,583
|
|
|
-
|
|
|
16,583
|
|
|
(54,265)
|
|
|
(12,258)
|
|
|
(66,523)
|
Change in balance due to foreign currency translation
|
|
|
1,718
|
|
|
-
|
|
|
1,718
|
|
|
(1,987)
|
|
|
-
|
|
|
(1,987)
|
Net change in real estate loans receivable
|
|
$
|
11,952
|
|
$
|
(60,500)
|
|
$
|
(48,548)
|
|
$
|
(81,943)
|
|
$
|
(12,258)
|
|
$
|
(94,201)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Triple-net represents acquisitions of assets previously
financed as real estate loans. Please see Note 3 for additional information.
|
(2) Outpatient medical represents a deed in lieu of foreclosure
on a previously financed first mortgage property.
|
In 2016, we restructured two existing real estate loans in
the triple-net segment with Genesis Healthcare. The two existing loans, with a
combined principal balance of $317,000,000, were scheduled to mature in 2017
and 2018. These loans were restructured into four separate loans effective
October 1, 2016. Each loan has a five-year term, a 10% interest rate and 25
basis point annual escalator. In 2016, we recorded a loan loss charge in the amount
of $6,935,000 on one of the loans as the present value of expected future cash
flows was less than the carrying value of the loan. We expect to collect all
principal amounts due under the loans and, due to the passage of time, at March
31, 2017, the allowance for loan losses related to these loans is $6,196,000.
At March 31, 2017, we had no real estate loans with outstanding balances on
non-accrual status and recorded no provision for loan losses during the three months
ended March 31, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2017
|
|
March 31, 2016
|
Balance of impaired loans at end of period
|
|
$
|
317,049
|
|
$
|
-
|
Allowance for loan losses
|
|
|
6,196
|
|
|
-
|
Balance of impaired loans not reserved
|
|
$
|
310,853
|
|
$
|
-
|
Average impaired loans for the period
|
|
$
|
340,920
|
|
$
|
-
|
Interest recognized on impaired loans
(1)
|
|
|
8,243
|
|
|
-
|
|
|
|
|
|
|
|
|
(1) Represents interest recognized in period since loans were
identified as impaired.
|
|
|
|
|
|
|
|
|
|
|
|
WELLTOWER
INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
7. Investments in
Unconsolidated Entities
We participate in
a number of joint ventures, which generally invest in seniors housing and
health care real estate. The results of operations for these properties have
been included in our consolidated results of operations from the date of
acquisition by the joint ventures and are reflected in our Consolidated
Statements of Comprehensive Income as income or loss from unconsolidated
entities. The following is a summary of our investments in unconsolidated
entities (dollars in thousands):
|
Percentage Ownership
(1)
|
|
March 31, 2017
|
|
December 31, 2016
|
|
Triple-net
|
10% to 49%
|
|
$
|
23,108
|
|
$
|
27,005
|
|
Seniors housing
operating
|
10% to 50%
|
|
|
360,260
|
|
|
407,172
|
|
Outpatient
medical
|
43%
|
|
|
32,742
|
|
|
22,961
|
|
Total
|
|
|
$
|
416,110
|
|
$
|
457,138
|
|
|
|
|
|
|
|
|
|
|
(1) Excludes
ownership of in-substance real estate.
|
|
At March 31,
2017, the aggregate unamortized basis difference of our joint venture
investments of $211,268,000 is primarily attributable to the difference between
the amount for which we purchase our interest in the entity, including
transaction costs, and the historical carrying value of the net assets of the
entity. This difference is being amortized over the remaining useful life of
the related properties and included in the reported amount of income from
unconsolidated entities.
8. Credit Concentration
We
use net operating income from continuing operations (“NOICO”) as our credit
concentration metric. See Note 17 for additional information and
reconciliation. The following table summarizes certain information about our credit
concentration for the three months ended March 31, 2017, excluding our share of
NOICO in unconsolidated entities (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Total
|
|
Percent of
|
Concentration by relationship:
(1)
|
|
Properties
|
|
NOICO
|
|
NOICO
(2)
|
|
Genesis Healthcare
|
|
86
|
|
$
|
49,048
|
|
9%
|
|
Sunrise Senior Living
(3)
|
|
153
|
|
|
74,893
|
|
14%
|
|
Brookdale Senior Living
|
|
137
|
|
|
38,372
|
|
7%
|
|
Revera
(3)
|
|
98
|
|
|
37,802
|
|
7%
|
|
Benchmark Senior Living
|
|
48
|
|
|
22,614
|
|
4%
|
|
Remaining portfolio
|
|
755
|
|
|
329,400
|
|
59%
|
|
Totals
|
|
1,277
|
|
$
|
552,129
|
|
100%
|
|
|
|
|
|
|
|
|
|
(1) Genesis Healthcare is in our triple-net segment. Sunrise
Senior Living and Revera are in our seniors housing operating segment.
Benchmark Senior Living and Brookdale Senior Living are in both our
triple-net and seniors housing operating segments.
|
(2) NOICO with our top five relationships comprised 45% of total
NOICO for the year ending December 31, 2016.
|
(3) Revera owns a controlling interest in Sunrise Senior Living.
|
|
|
|
|
|
|
|
|
|
9. Borrowings
Under Credit Facilities and Related Items
At March 31, 2017, we had a primary unsecured
credit facility with a consortium of 29 banks that includes a $3,000,000,000
unsecured revolving credit facility, a $500,000,000 unsecured term credit
facility and a $250,000,000 Canadian-denominated unsecured term credit facility.
We have an option, through an accordion feature, to upsize the unsecured
revolving credit facility and the $500,000,000 unsecured term credit facility
by up to an additional $1,000,000,000, in the aggregate, and the $250,000,000
Canadian-denominated unsecured term credit facility by up to an additional
$250,000,000. The primary unsecured credit facility also allows us to borrow
up to $1,000,000,000 in alternate currencies (none outstanding at March 31,
2017). Borrowings under the unsecured revolving credit facility are subject to
interest payable at the applicable margin over LIBOR interest rate (1.88% at
March 31, 2017). The applicable margin is based on certain of our debt ratings
and was 0.90% at March 31, 2017. In addition, we pay a facility fee quarterly
to each bank based on the bank’s commitment amount. The facility fee depends
on certain of our debt ratings and was 0.15% at March 31, 2017. The term
credit facilities mature on May 13, 2021. The revolving credit facility is
scheduled to mature on May 13, 2020 and can be extended for two successive
terms of six months each at our option.
WELLTOWER
INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
The following information relates to
aggregate borrowings under the primary unsecured revolving credit facility for
the periods presented (dollars in thousands):
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
2017
|
|
2016
|
|
|
|
|
Balance outstanding at quarter end
(1)
|
|
$
|
522,000
|
|
$
|
645,000
|
|
|
|
|
|
Maximum amount outstanding at any month end
|
|
$
|
1,010,000
|
|
$
|
945,000
|
|
|
|
|
|
Average amount outstanding (total of daily
|
|
|
|
|
|
|
|
|
|
|
|
|
principal balances divided by days in period)
|
|
$
|
796,356
|
|
$
|
671,044
|
|
|
|
|
|
Weighted average interest rate (actual interest
|
|
|
|
|
|
|
|
|
|
|
|
|
expense divided by average borrowings outstanding)
|
|
|
1.81%
|
|
|
1.29%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) As of March 31, 2017, letters of credit in the aggregate
amount of $32,456,000 have been issued, which reduces the borrowing capacity
on the unsecured revolving credit facility.
|
10. Senior
Unsecured Notes and Secured Debt
We may repurchase, redeem or refinance senior unsecured notes
from time to time, taking advantage of favorable market conditions when
available. We may purchase senior notes for cash through open market purchases,
privately negotiated transactions, a tender offer or, in some cases, through the
early redemption of such securities pursuant to their terms. The senior
unsecured notes are redeemable at our option, at any time in whole or from time
to time in part, at a redemption price equal to the sum of (1) the principal
amount of the notes (or portion of such notes) being redeemed plus accrued and
unpaid interest thereon up to the redemption date and (2) any “make-whole”
amount due under the terms of the notes in connection with early redemptions.
Redemptions and repurchases of debt, if any, will depend on prevailing market
conditions, our liquidity requirements, contractual restrictions and other
factors.
At March 31, 2017, the annual principal payments due
on these debt obligations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Senior
|
|
Secured
|
|
|
|
|
|
Unsecured Notes
(1,2)
|
|
Debt
(1,3)
|
|
Totals
|
|
2017
|
$
|
-
|
|
$
|
284,879
|
|
$
|
284,879
|
|
2018
|
|
450,000
|
|
|
421,751
|
|
|
871,751
|
|
2019
|
|
605,000
|
|
|
499,895
|
|
|
1,104,895
|
|
2020
(4)
|
|
675,208
|
|
|
149,888
|
|
|
825,096
|
|
2021
(5,6)
|
|
1,137,674
|
|
|
228,993
|
|
|
1,366,667
|
|
Thereafter
(7,8,9,10)
|
|
5,416,385
|
|
|
1,080,071
|
|
|
6,496,456
|
|
Totals
|
$
|
8,284,267
|
|
$
|
2,665,477
|
|
$
|
10,949,744
|
|
|
|
|
|
|
|
|
|
|
|
(1) Amounts represent principal amounts due and do not include
unamortized premiums/discounts, debt issuance costs, or other fair value
adjustments as reflected on the balance sheet.
|
|
(2) Annual interest rates range from 1.6% to 6.5%.
|
|
(3) Annual interest rates range from 1.32% to 7.93%. Carrying
value of the properties securing the debt totaled $4,947,646,000 at March 31,
2017.
|
|
(4) In November 2015, one of our wholly-owned subsidiaries
issued and we guaranteed $300,000,000 of Canadian-denominated 3.35% senior
unsecured notes due 2020 (approximately $225,208,000 based on the
Canadian/U.S. Dollar exchange rate on March 31, 2017).
|
|
(5) On May 13, 2016, we refinanced the funding on a $250,000,000
Canadian-denominated unsecured term credit facility (approximately
$187,674,000 based on the Canadian/U.S. Dollar exchange rate on March 31,
2017). The loan matures on May 13, 2021 and bears interest at the Canadian
Dealer Offered Rate plus 95 basis points (1.84% at March 31, 2017).
|
|
(6) On May 13, 2016, we refinanced the funding on a $500,000,000
unsecured term credit facility. The loan matures on May 13, 2021 and bears
interest at LIBOR plus 95 basis points (1.83% at March 31, 2017).
|
|
(7) On November 20, 2013, we completed the sale of
£
550,000,000 (approximately $689,535,000
based on the Sterling/U.S. Dollar exchange rate in effect on March 31, 2017)
of 4.8% senior unsecured notes due 2028.
|
|
(8) On November 25, 2014, we completed the sale of
£
500,000,000 (approximately $626,850,000
based on the Sterling/U.S. Dollar exchange rate in effect on March 31, 2017)
of 4.5% senior unsecured notes due 2034.
|
|
(9) In May 2015, we issued $750,000,000 of 4.0% senior unsecured
notes due 2025. In October 2015, we issued an additional $500,000,000 of
these notes under a re-opening of the offer.
|
|
(10) In March 2016, we issued $700,000,000 of 4.25% senior
unsecured notes due 2026.
|
|
|
|
WELLTOWER
INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
The following is a
summary of our senior unsecured notes principal activity during the periods
presented (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2017
|
|
March 31, 2016
|
|
|
|
|
Weighted Avg.
|
|
|
|
|
Weighted Avg.
|
|
Amount
|
|
Interest Rate
|
|
Amount
|
|
Interest Rate
|
Beginning balance
|
$
|
8,260,038
|
|
4.245%
|
|
$
|
8,645,758
|
|
4.237%
|
Debt issued
|
|
-
|
|
0.000%
|
|
|
700,000
|
|
4.250%
|
Debt extinguished
|
|
-
|
|
0.000%
|
|
|
(400,000)
|
|
3.625%
|
Foreign currency
|
|
24,229
|
|
4.391%
|
|
|
(11,665)
|
|
3.943%
|
Ending balance
|
$
|
8,284,267
|
|
4.262%
|
|
$
|
8,934,093
|
|
4.266%
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of our secured debt principal activity for the
periods presented (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2017
|
|
March 31, 2016
|
|
|
|
|
|
Weighted Avg.
|
|
|
|
|
Weighted Avg.
|
|
|
Amount
|
|
Interest Rate
|
|
Amount
|
|
Interest Rate
|
Beginning balance
|
|
$
|
3,465,066
|
|
4.094%
|
|
$
|
3,478,207
|
|
4.440%
|
Debt issued
|
|
|
12,536
|
|
2.340%
|
|
|
75,136
|
|
3.060%
|
Debt extinguished
|
|
|
(806,189)
|
|
5.580%
|
|
|
(111,701)
|
|
4.450%
|
Principal payments
|
|
|
(16,249)
|
|
4.469%
|
|
|
(18,642)
|
|
4.539%
|
Foreign currency
|
|
|
10,313
|
|
3.262%
|
|
|
65,488
|
|
3.669%
|
Ending balance
|
|
$
|
2,665,477
|
|
3.744%
|
|
$
|
3,488,488
|
|
4.400%
|
|
|
|
|
|
|
|
|
|
|
|
Our debt agreements
contain various covenants, restrictions and events of default. Certain
agreements require us to maintain certain financial ratios and minimum net
worth and impose certain limits on our ability to incur indebtedness, create
liens and make investments or acquisitions. As of March 31, 2017, we were in
compliance with all of the covenants under our debt agreements.
11. Derivative Instruments
We are exposed to various market risks, including the potential loss arising
from adverse changes in interest rates. We may elect to use financial
derivative instruments to hedge interest rate exposure. These decisions are
principally based on our policy to manage the general trend in interest rates
at the applicable dates and our perception of the future volatility of interest
rates. In addition, non-U.S. investments expose us to the potential losses
associated with adverse changes in foreign currency to U.S. Dollar exchange
rates. We may elect to manage this risk through the use of forward contracts
and issuing debt in foreign currencies.
Interest Rate Swap Contracts and
Foreign Currency Forward Contracts Designated as Cash Flow Hedges
For instruments that are designated and qualify as a cash flow hedge, the
effective portion of the gain or loss on the derivative is reported as a
component of other comprehensive income (“OCI”), and reclassified into earnings
in the same period or periods, during which the hedged transaction affects
earnings. Gains and losses on the derivative representing either hedge ineffectiveness
or hedge components excluded from the assessment of effectiveness are
recognized in earnings. Approximately $3,395,000 of gains, which are included
in accumulated other comprehensive income (“AOCI”), are expected to be
reclassified into earnings in the next 12 months.
Foreign
Currency Hedges
For instruments that are designated and qualify as net investment hedges, the
variability in the foreign currency to U.S. Dollar of the instrument is
recorded as a cumulative translation adjustment component of OCI. During the three
months ended March 31, 2017 and 2016, we settled certain net investment hedges
generating cash proceeds of $8,218,000 and $0, respectively. The balance
of the cumulative translation adjustment will be reclassified to earnings when
the hedged investment is sold or substantially liquidated.
WELLTOWER
INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
The following presents the notional amount of derivatives and other
financial instruments as of the dates indicated (in thousands):
|
|
March 31, 2017
|
|
December 31, 2016
|
Derivatives designated as net investment hedges:
|
|
|
|
|
Denominated in Canadian Dollars
|
$
|
875,000
|
$
|
900,000
|
Denominated in Pounds Sterling
|
£
|
550,000
|
£
|
550,000
|
|
|
|
|
|
Financial instruments designated as net investment hedges:
|
|
|
|
|
Denominated in Canadian Dollars
|
$
|
250,000
|
$
|
250,000
|
Denominated in Pounds Sterling
|
£
|
1,050,000
|
£
|
1,050,000
|
|
|
|
|
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
Denominated in U.S. Dollars
|
$
|
-
|
$
|
57,000
|
Denominated in Canadian Dollars
|
$
|
72,000
|
$
|
54,000
|
Denominated in Pounds Sterling
|
£
|
69,000
|
£
|
48,000
|
|
|
|
|
|
Derivative instruments not designated:
|
|
|
|
|
Denominated in Canadian Dollars
|
$
|
37,000
|
$
|
37,000
|
The following presents the
impact of derivative instruments on the Consolidated Statements of Comprehensive
Income for the periods presented (in thousands):
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
March 31,
|
|
|
|
Location
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on interest rate swaps reclassified from AOCI into
income (effective portion)
|
|
Interest expense
|
|
$
|
-
|
|
$
|
(483)
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on forward exchange contracts recognized in income
|
|
Interest expense
|
|
|
2,457
|
|
|
(1,327)
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on foreign exchange contracts and term loans
designated as net investment hedge recognized in OCI
|
|
OCI
|
|
|
(44,341)
|
|
|
(2,739)
|
12. Commitments
and Contingencies
At March 31, 2017, we had 14
outstanding letter of credit obligations totaling
$169,961,000 and expiring between 2017 and 2024.
At March 31, 2017, we
had outstanding construction in progress of $390,180,000 and were committed to
providing additional funds of approximately $466,031,000 to complete
construction. At March 31, 2017, we had contingent purchase obligations totaling
$17,058,000. These contingent purchase obligations relate to unfunded capital
improvement obligations and contingent obligations on acquisitions. Rents due
from the tenant are increased to reflect the additional investment in the
property.
We evaluate our leases for operating
versus capital lease treatment in accordance with ASC Topic 840 “Leases.”
A lease is classified as a capital lease if it provides for transfer of
ownership of the leased asset at the end of the lease term, contains a bargain
purchase option, has a lease term greater than 75% of the economic life of the
leased asset, or if the net present value of the future minimum lease payments
are in excess of 90% of the fair value of the leased asset. Certain leases
contain bargain purchase options and have been classified as capital leases. At
March 31, 2017, we had operating lease obligations of $1,092,169,000 relating
to certain ground leases and company office space and capital lease obligations
of $93,697,000 relating primarily to certain investment properties. Regarding
ground leases, we have sublease agreements with certain of our operators that
require the operators to reimburse us for our monthly operating lease
obligations. At March 31, 2017
,
aggregate future minimum rentals to be
received under these noncancelable subleases totaled $73,840,000.
WELLTOWER
INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
13. Stockholders’
Equity
The
following is a summary of our stockholders’ equity capital accounts as of the
dates indicated:
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Preferred Stock:
|
|
|
|
|
Authorized shares
|
|
50,000,000
|
|
50,000,000
|
Issued shares
|
|
14,375,000
|
|
25,875,000
|
Outstanding shares
|
|
14,375,000
|
|
25,875,000
|
|
|
|
|
|
Common Stock, $1.00 par value:
|
|
|
|
|
Authorized shares
|
|
700,000,000
|
|
700,000,000
|
Issued shares
|
|
365,651,576
|
|
363,576,924
|
Outstanding shares
|
|
364,563,653
|
|
362,602,173
|
|
|
|
|
|
Preferred
Stock.
The following is a summary of our preferred stock activity during
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2017
|
|
March 31, 2016
|
|
|
|
|
|
Weighted Avg.
|
|
|
|
Weighted Avg.
|
|
|
|
Shares
|
|
Dividend Rate
|
|
Shares
|
|
Dividend Rate
|
|
Beginning balance
|
|
25,875,000
|
|
6.500%
|
|
25,875,000
|
|
6.500%
|
|
Shares redeemed
|
|
(11,500,000)
|
|
6.500%
|
|
-
|
|
0.000%
|
|
Ending balance
|
|
14,375,000
|
|
6.500%
|
|
25,875,000
|
|
6.500%
|
|
|
|
|
|
|
|
|
|
|
|
During the
three months ended March 31, 2017, we recognized a charge of $9,769,000 in
connection with the redemption of the Series J preferred stock.
Common
Stock.
The following is a summary of our common stock issuances during the three
months ended March 31, 2017 and 2016 (dollars in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued
|
|
|
Average Price
|
|
|
Gross Proceeds
|
|
|
Net Proceeds
|
2016 Dividend reinvestment plan issuances
|
|
1,058,085
|
|
$
|
60.00
|
|
$
|
63,484
|
|
$
|
63,484
|
2016 Option exercises
|
|
9,864
|
|
|
21.29
|
|
|
210
|
|
|
210
|
2016 Equity shelf program issuances
|
|
443,096
|
|
|
67.12
|
|
|
30,192
|
|
|
29,739
|
2016 Stock incentive plans, net of forfeitures
|
|
484,005
|
|
|
|
|
|
-
|
|
|
-
|
2016 Totals
|
|
1,995,050
|
|
|
|
|
$
|
93,886
|
|
$
|
93,433
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Dividend reinvestment plan issuances
|
|
1,284,719
|
|
$
|
68.33
|
|
$
|
87,985
|
|
$
|
87,784
|
2017 Option exercises
|
|
156,675
|
|
|
52.71
|
|
|
8,258
|
|
|
8,258
|
2017 Equity shelf program issuances
|
|
338,486
|
|
|
69.75
|
|
|
23,776
|
|
|
23,609
|
2017 Stock incentive plans, net of forfeitures
|
|
181,600
|
|
|
|
|
|
-
|
|
|
-
|
2017 Totals
|
|
1,961,480
|
|
|
|
|
$
|
120,019
|
|
$
|
119,651
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
.
The increase in dividends is primarily attributable to increases in our common
shares outstanding as described above and an increase in common dividends per
share. The following is a summary of our dividend payments (in thousands,
except per share amounts):
WELLTOWER
INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31, 2017
|
|
March 31, 2016
|
|
|
Per Share
|
|
Amount
|
|
Per Share
|
|
Amount
|
Common Stock
|
|
$
|
0.8700
|
|
$
|
315,415
|
|
$
|
0.8600
|
|
$
|
305,770
|
Series I Preferred Stock
|
|
|
0.8125
|
|
|
11,680
|
|
|
0.8125
|
|
|
11,680
|
Series J Preferred Stock
|
|
|
0.2347
|
|
|
2,699
|
|
|
0.4064
|
|
|
4,672
|
Totals
|
|
|
|
|
$
|
329,794
|
|
|
|
|
$
|
322,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Other Comprehensive Income
.
The following is a summary of accumulated other comprehensive
income (loss) for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized gains (losses)
related to:
|
|
|
|
|
|
|
Foreign Currency
Translation
|
|
|
Available for Sale
Securities
|
|
|
Actuarial Losses
|
|
|
Cash Flow Hedges
|
|
|
Total
|
Balance at December 31, 2016
|
|
$
|
(173,496)
|
|
$
|
5,120
|
|
$
|
(1,153)
|
|
$
|
(2)
|
|
$
|
(169,531)
|
Other comprehensive income before reclassification adjustments
|
|
|
2,900
|
|
|
(10,569)
|
|
|
-
|
|
|
-
|
|
|
(7,669)
|
Net current-period other comprehensive income
|
|
|
2,900
|
|
|
(10,569)
|
|
|
-
|
|
|
-
|
|
|
(7,669)
|
Balance at March 31, 2017
|
|
$
|
(170,596)
|
|
$
|
(5,449)
|
|
$
|
(1,153)
|
|
$
|
(2)
|
|
$
|
(177,200)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
(85,484)
|
|
$
|
-
|
|
$
|
(1,343)
|
|
$
|
(1,416)
|
|
$
|
(88,243)
|
Other comprehensive income before reclassification adjustments
|
|
|
(13,746)
|
|
|
(7,549)
|
|
|
2
|
|
|
-
|
|
|
(21,293)
|
Reclassification amount to net income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
483
(1)
|
|
|
483
|
Net current-period other comprehensive income
|
|
|
(13,746)
|
|
|
(7,549)
|
|
|
2
|
|
|
483
|
|
|
(20,810)
|
Balance at March 31, 2016
|
|
$
|
(99,230)
|
|
$
|
(7,549)
|
|
$
|
(1,341)
|
|
$
|
(933)
|
|
$
|
(109,053)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Please see Note 11 for additional information.
|
|
|
|
|
|
|
|
|
|
|
|
|
14. Stock
Incentive Plans
Our
2016 Long-Term Incentive Plan (“2016 Plan”) authorizes up to 10,000,000 shares
of common stock to be issued at the discretion of the Compensation Committee of
the Board of Directors. Our non-employee directors, officers and key employees
are eligible to participate in the 2016 Plan. The 2016 Plan allows for the
issuance of, among other things, stock options, stock appreciation rights, restricted
stock, deferred stock units and dividend equivalent rights. Vesting periods for
options, deferred stock units and restricted shares generally range from three
to five years. Options expire ten years from the date of grant. Stock-based
compensation expense totaled $4,906,000 for the three months ended March 31,
2017 and $8,186,000 for the same period in 2016.
WELLTOWER
INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
15. Earnings Per
Share
The following table sets
forth the computation of basic and diluted earnings per share (in thousands,
except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
2016
|
Numerator for basic and diluted earnings
|
|
|
|
|
|
|
|
per share - net income (loss) attributable
|
|
|
|
|
|
|
|
to common stockholders
|
|
$
|
312,639
|
|
$
|
148,969
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per
|
|
|
|
|
|
|
|
share - weighted average shares
|
|
|
362,534
|
|
|
355,076
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
70
|
|
|
101
|
|
Non-vested restricted shares
|
|
|
397
|
|
|
253
|
|
Redeemable shares
|
|
|
1,651
|
|
|
621
|
Dilutive potential common shares
|
|
|
2,118
|
|
|
975
|
Denominator for diluted earnings per
|
|
|
|
|
|
|
|
share - adjusted weighted average shares
|
|
|
364,652
|
|
|
356,051
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.86
|
|
$
|
0.42
|
Diluted earnings per share
|
|
$
|
0.86
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
The Series I
Cumulative Convertible Perpetual Preferred Stock was not included in the calculations
as the effect of conversions into common stock was anti-dilutive.
16. Disclosure
about Fair Value of Financial Instruments
U.S. GAAP provides authoritative guidance for
measuring and disclosing fair value measurements of assets and liabilities.
The guidance defines fair value as the exchange price that would be received
for an asset or paid to transfer a liability (an exit price) in the principal
or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. The guidance
also establishes a fair value hierarchy which requires an entity to maximize
the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. Please see Note 2 to the financial statements included
in our Annual Report on Form 10-K for the year ended December 31, 2016 for
additional information. The guidance describes three levels of inputs that may
be used to measure fair value:
Level 1 - Quoted
prices in active markets for identical assets or liabilities.
Level 2 - Observable
inputs other than Level 1 prices such as quoted prices for similar assets or
liabilities, quoted prices in markets that are not active, or other inputs that
are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
Level 3 -
Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities.
The following methods and assumptions were used to
estimate the fair value of each class of financial instruments for which it is
practicable to estimate that value.
Mortgage Loans and Other Real Estate Loans Receivable
— The fair value of mortgage loans and other real estate
loans receivable is generally estimated by using Level 2 and Level 3 inputs
such as discounting the estimated future cash flows using the current rates at
which similar loans would be made to borrowers with similar credit ratings and
for the same remaining maturities.
Cash and Cash Equivalents
—
The carrying amount approximates fair value.
WELLTOWER
INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Available-for-sale Equity Investments
— Available-for-sale equity investments are recorded at
their fair value based on Level 1 publicly available trading prices.
Borrowings Under Primary Unsecured Credit Facility
— The carrying amount of the primary unsecured credit
facility approximates fair value because the borrowings are interest rate
adjustable.
Senior Unsecured Notes
—
The fair value of the senior unsecured notes payable was estimated based on
Level 1 publicly available trading prices. The carrying amount of the variable
rate senior unsecured notes approximates fair value because they are interest
rate adjustable.
Secured Debt
— The
fair value of fixed rate secured debt is estimated using Level 2 inputs by
discounting the estimated future cash flows using the current rates at which
similar loans would be made with similar credit ratings and for the same
remaining maturities. The carrying amount of variable rate secured debt
approximates fair value because the borrowings are interest rate adjustable.
Foreign Currency Forward Contracts
— Foreign currency forward contracts are recorded in other
assets or other liabilities on the balance sheet at fair market value. Fair
market value is determined using Level 2 inputs by estimating the future value
of the currency pair based on existing exchange rates, comprised of current
spot and traded forward points, and calculating a present value of the net
amount using a discount factor based on observable traded interest rates.
Redeemable OP Unitholder Interests
— Our redeemable unitholder interests are recorded on the
balance sheet at fair value using Level 2 inputs. The fair value is measured
using the closing price of our common stock, as units may be redeemed at the
election of the holder for cash or, at our option, one share of our common
stock per unit, subject to adjustment in certain circumstances.
The carrying amounts and estimated fair values of our
financial instruments are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans receivable
|
|
$
|
430,607
|
|
$
|
465,548
|
|
$
|
485,735
|
|
$
|
521,773
|
|
Other real estate loans receivable
|
|
|
143,473
|
|
|
149,151
|
|
|
136,893
|
|
|
138,050
|
|
Available-for-sale equity investments
|
|
|
17,330
|
|
|
17,330
|
|
|
27,899
|
|
|
27,899
|
|
Cash and cash equivalents
|
|
|
380,360
|
|
|
380,360
|
|
|
419,378
|
|
|
419,378
|
|
Foreign currency forward contracts
|
|
|
110,439
|
|
|
110,439
|
|
|
135,561
|
|
|
135,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under unsecured credit facilities
|
|
$
|
522,000
|
|
$
|
522,000
|
|
$
|
645,000
|
|
$
|
645,000
|
|
Senior unsecured notes
|
|
|
8,188,928
|
|
|
8,965,318
|
|
|
8,161,619
|
|
|
8,879,176
|
|
Secured debt
|
|
|
2,669,787
|
|
|
2,728,171
|
|
|
3,477,699
|
|
|
3,558,378
|
|
Foreign currency forward contracts
|
|
|
9,840
|
|
|
9,840
|
|
|
4,342
|
|
|
4,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable OP unitholder interests
|
|
$
|
116,917
|
|
$
|
116,917
|
|
$
|
110,502
|
|
$
|
110,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Items
Measured at Fair Value on a Recurring Basis
The market approach is utilized to measure fair value for
our financial assets and liabilities reported at fair value on a recurring
basis. The market approach uses prices and other relevant information
generated by market transactions involving identical or comparable assets or
liabilities. The following summarizes items measured at fair value on a
recurring basis (in thousands):
WELLTOWER
INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as
of March 31, 2017
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Available-for-sale equity investments
(1)
|
|
$
|
17,330
|
|
$
|
17,330
|
|
$
|
-
|
|
$
|
-
|
Foreign currency forward contracts, net
(2)
|
|
|
100,599
|
|
|
-
|
|
|
100,599
|
|
|
-
|
Redeemable OP unitholder interests
|
|
|
116,917
|
|
|
-
|
|
|
116,917
|
|
|
-
|
Totals
|
|
$
|
234,846
|
|
$
|
17,330
|
|
$
|
217,516
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Unrealized gains or losses on equity investments are
recorded in accumulated other comprehensive income (loss) at each measurement
date.
|
(2) Please see Note 11 for additional information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Items
Measured at Fair Value on a Nonrecurring Basis
In addition to items that are measured at fair value on a
recurring basis, we also have assets and liabilities in our balance sheet that
are measured at fair value on a nonrecurring basis. As these assets and
liabilities are not measured at fair value on a recurring basis, they are not
included in the tables above. Assets, liabilities and noncontrolling interests
that are measured at fair value on a nonrecurring basis include those
acquired/assumed. Asset impairments (if applicable, see Note 5 for impairments
of real property and Note 6 for impairments of loans receivable) are also
measured at fair value on a nonrecurring basis. We have determined that the
fair value measurements included in each of these assets and liabilities rely
primarily on company-specific inputs and our assumptions about the use of the
assets and settlement of liabilities, as observable inputs are not available.
As such, we have determined that each of these fair value measurements
generally resides within Level 3 of the fair value hierarchy. We estimate
the fair value of real estate and related intangibles using the income approach
and unobservable data such as net operating income and estimated capitalization
and discount rates. We also consider local and national industry market data
including comparable sales, and commonly engage an external real estate
appraiser to assist us in our estimation of fair value. We estimate the fair
value of assets held for sale based on current sales price expectations or, in
the absence of such price expectations, Level 3 inputs described above. We
estimate the fair value of secured debt assumed in business combinations using
current interest rates at which similar borrowings could be obtained on the
transaction date.
17. Segment
Reporting
We invest in seniors housing and health care real
estate. We evaluate our business and make resource allocations on our three
operating segments: triple-net, seniors housing operating and outpatient
medical. During the three months ended December 31, 2016, we reclassified interest
expense on our foreign-denominated senior notes from the seniors housing
operating segment to non-segment. Accordingly, the segment information
provided in this Note has been reclassified to conform to the current
presentation for all periods presented.
Our triple-net properties
include long-term/post-acute care facilities, assisted living facilities,
independent living/continuing care retirement communities, care homes (United
Kingdom), independent support living facilities (Canada), care homes with
nursing (United Kingdom) and combinations thereof. Under the triple-net
segment, we invest in seniors housing and health care real estate through
acquisition and financing of primarily single tenant properties. Properties
acquired are primarily leased under triple-net leases and we are not involved
in the management of the property. Our seniors housing operating properties
include the seniors housing communities referenced above that are owned and/or
operated through RIDEA structures (see Notes 3 and 18). Our outpatient medical
properties are typically leased to multiple tenants and generally require a
certain level of property management.
We evaluate performance
based upon net operating income from continuing operations (“NOICO”) of each
segment. We define NOICO as total revenues, including tenant reimbursements,
less property operating expenses. We believe NOICO provides investors relevant
and useful information as it measures the operating performance of our
properties at the property level on an unleveraged basis. We use NOICO to make
decisions about resource allocations and to assess the property level
performance of our properties.
Non-segment revenue
consists mainly of interest income on certain non-real estate investments and
other income. Non-segment assets consist of corporate assets including cash,
deferred loan expenses and corporate offices and equipment among others.
Non-property specific revenues and expenses are not allocated to individual
segments in determining NOICO. The accounting policies of the segments are the
same as those described in the summary of significant accounting policies (see
Note 2 to the financial statements included in our Annual Report on Form 10-K
for the year ended December 31, 2016). The results of operations for all
acquisitions described in Note 3 are included in our consolidated results of
operations from the acquisition dates and are components of the appropriate
segments. There are no intersegment sales or transfers. Summary information
for the reportable segments (which excludes unconsolidated entities) is as
follows (in thousands):
WELLTOWER
INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017:
|
|
|
Triple-net
|
|
|
Seniors Housing Operating
|
|
|
Outpatient Medical
|
|
|
Non-segment / Corporate
|
|
|
Total
|
Rental income
|
|
$
|
227,290
|
|
$
|
-
|
|
$
|
139,851
|
|
$
|
-
|
|
$
|
367,141
|
Resident fees and services
|
|
|
-
|
|
|
670,337
|
|
|
-
|
|
|
-
|
|
|
670,337
|
Interest income
|
|
|
20,679
|
|
|
69
|
|
|
-
|
|
|
-
|
|
|
20,748
|
Other income
|
|
|
1,766
|
|
|
1,461
|
|
|
612
|
|
|
233
|
|
|
4,072
|
Total revenues
|
|
|
249,735
|
|
|
671,867
|
|
|
140,463
|
|
|
233
|
|
|
1,062,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses
|
|
|
-
|
|
|
462,425
|
|
|
47,744
|
|
|
-
|
|
|
510,169
|
Net operating income from continuing operations
|
|
|
249,735
|
|
|
209,442
|
|
|
92,719
|
|
|
233
|
|
|
552,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
5,511
|
|
|
15,816
|
|
|
2,291
|
|
|
94,979
|
|
|
118,597
|
Loss (gain) on derivatives, net
|
|
|
1,224
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,224
|
Depreciation and amortization
|
|
|
59,608
|
|
|
119,737
|
|
|
48,931
|
|
|
-
|
|
|
228,276
|
General and administrative
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
31,101
|
|
|
31,101
|
Loss (gain) on extinguishment of debt, net
|
|
|
29,084
|
|
|
890
|
|
|
1,382
|
|
|
-
|
|
|
31,356
|
Impairment of assets
|
|
|
-
|
|
|
5,406
|
|
|
5,625
|
|
|
-
|
|
|
11,031
|
Other expenses
|
|
|
5,010
|
|
|
1,778
|
|
|
360
|
|
|
4,527
|
|
|
11,675
|
Income (loss) from continuing operations before income taxes and
income from unconsolidated entities
|
|
|
149,298
|
|
|
65,815
|
|
|
34,130
|
|
|
(130,374)
|
|
|
118,869
|
Income tax (expense) benefit
|
|
|
(800)
|
|
|
(1,087)
|
|
|
(335)
|
|
|
(23)
|
|
|
(2,245)
|
Income (loss) from unconsolidated entities
|
|
|
5,638
|
|
|
(29,191)
(1)
|
|
|
447
|
|
|
-
|
|
|
(23,106)
|
Income (loss) from continuing operations
|
|
|
154,136
|
|
|
35,537
|
|
|
34,242
|
|
|
(130,397)
|
|
|
93,518
|
Gain (loss) on real estate dispositions, net
|
|
|
231,081
|
|
|
13,011
|
|
|
-
|
|
|
-
|
|
|
244,092
|
Net income (loss)
|
|
$
|
385,217
|
|
$
|
48,548
|
|
$
|
34,242
|
|
$
|
(130,397)
|
|
$
|
337,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
9,906,585
|
|
$
|
12,646,321
|
|
$
|
4,947,544
|
|
$
|
266,827
|
|
$
|
27,767,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Primarily due to the recognition of goodwill and intangible
asset impairments, as well as non-recurring income tax expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016:
|
|
|
Triple-net
|
|
|
Seniors Housing Operating
|
|
|
Outpatient Medical
|
|
|
Non-segment / Corporate
|
|
|
Total
|
Rental income
|
|
$
|
283,825
|
|
$
|
-
|
|
$
|
131,838
|
|
$
|
-
|
|
$
|
415,663
|
Resident fees and services
|
|
|
-
|
|
|
602,149
|
|
|
-
|
|
|
-
|
|
|
602,149
|
Interest income
|
|
|
22,853
|
|
|
1,031
|
|
|
1,304
|
|
|
-
|
|
|
25,188
|
Other income
|
|
|
1,490
|
|
|
2,189
|
|
|
313
|
|
|
58
|
|
|
4,050
|
Total revenues
|
|
|
308,168
|
|
|
605,369
|
|
|
133,455
|
|
|
58
|
|
|
1,047,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses
|
|
|
-
|
|
|
408,894
|
|
|
40,742
|
|
|
-
|
|
|
449,636
|
Net operating income from continuing operations
|
|
|
308,168
|
|
|
196,475
|
|
|
92,713
|
|
|
58
|
|
|
597,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
6,364
|
|
|
20,523
|
|
|
5,744
|
|
|
100,329
|
|
|
132,960
|
Depreciation and amortization
|
|
|
79,800
|
|
|
101,832
|
|
|
47,064
|
|
|
-
|
|
|
228,696
|
General and administrative
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
45,691
|
|
|
45,691
|
Transaction costs
|
|
|
2,852
|
|
|
3,933
|
|
|
1,423
|
|
|
-
|
|
|
8,208
|
Loss (gain) on extinguishment of debt, net
|
|
|
(24)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(24)
|
Impairment of assets
|
|
|
14,314
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
14,314
|
Income (loss) from continuing operations before income taxes and
income from unconsolidated entities
|
|
|
204,862
|
|
|
70,187
|
|
|
38,482
|
|
|
(145,962)
|
|
|
167,569
|
Income tax (expense) benefit
|
|
|
(317)
|
|
|
2,767
|
|
|
(228)
|
|
|
(497)
|
|
|
1,725
|
Income (loss) from unconsolidated entities
|
|
|
3,081
|
|
|
(6,935)
|
|
|
34
|
|
|
-
|
|
|
(3,820)
|
Income (loss) from continuing operations
|
|
|
207,626
|
|
|
66,019
|
|
|
38,288
|
|
|
(146,459)
|
|
|
165,474
|
Net income (loss)
|
|
$
|
207,626
|
|
$
|
66,019
|
|
$
|
38,288
|
|
$
|
(146,459)
|
|
$
|
165,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WELLTOWER
INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Our portfolio of
properties and other investments are located in the United States, the United
Kingdom and Canada. Revenues and assets are attributed to the country in which
the property is physically located. The following is a summary of geographic
information for the periods presented (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
Revenues:
|
|
|
Amount
|
%
|
|
|
Amount
|
%
|
|
United States
|
|
$
|
858,668
|
80.9%
|
|
$
|
842,357
|
80.5%
|
|
United Kingdom
|
|
|
93,843
|
8.8%
|
|
|
100,555
|
9.6%
|
|
Canada
|
|
|
109,787
|
10.3%
|
|
|
104,138
|
9.9%
|
|
Total
|
|
$
|
1,062,298
|
100.0%
|
|
$
|
1,047,050
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Assets:
|
|
|
Amount
|
%
|
|
|
Amount
|
%
|
|
United States
|
|
$
|
22,425,964
|
80.8%
|
|
$
|
23,572,459
|
81.7%
|
|
United Kingdom
|
|
|
2,835,782
|
10.2%
|
|
|
2,782,489
|
9.6%
|
|
Canada
|
|
|
2,505,531
|
9.0%
|
|
|
2,510,236
|
8.7%
|
|
Total
|
|
$
|
27,767,277
|
100.0%
|
|
$
|
28,865,184
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
18.
Income Taxes
and Distributions
We elected to be taxed as a REIT commencing with our first taxable
year. To qualify as a REIT for federal income tax purposes, at least 90% of
taxable income (excluding 100% of net capital gains) must be distributed to
stockholders. REITs that do not distribute a certain amount of current year taxable
income in the current year are also subject to a 4% federal excise tax. The
main differences between undistributed net income for federal income tax
purposes and financial statement purposes are the recognition of straight-line
rent for reporting purposes, basis differences in acquisitions, recording of
impairments, differing useful lives and depreciation and amortization methods
for real property and the provision for loan losses for reporting purposes
versus bad debt expense for tax purposes.
Under the
provisions of the REIT Investment Diversification and Empowerment Act of 2007
(“RIDEA”), for taxable years beginning after July 30, 2008, a REIT may lease
“qualified health care properties” on an arm’s-length basis to a taxable REIT
subsidiary (“TRS”) if the property is operated on behalf of such TRS by a
person who qualifies as an “eligible independent contractor.” Generally, the
rent received from the TRS will meet the related party rent exception and will
be treated as “rents from real property.” A “qualified health care
property” includes real property and any personal property that is, or is
necessary or incidental to the use of, a hospital, nursing facility, assisted
living facility, congregate care facility, qualified continuing care facility,
or other licensed facility which extends medical or nursing or ancillary
services to patients. We have entered into various joint ventures that were
structured under RIDEA. Resident level rents and related operating expenses for
these facilities are reported in the unaudited consolidated financial
statements and are subject to federal and state income taxes as the operations
of such facilities are included in TRS entities. Certain net operating loss
carryforwards could be utilized to offset taxable income in future years.
Income
taxes reflected in the financial statements primarily represents U.S. federal
and state and local income taxes as well as non-U.S. income based or
withholding taxes on certain investments located in jurisdictions outside the
U.S. The provision for income taxes for the three months ended March 31, 2017
and 2016, was primarily due to operating income or losses, offset by certain
discrete items at our TRS entities. In 2014, we established certain
wholly-owned direct and indirect subsidiaries in Luxembourg and Jersey and
transferred interests in certain foreign investments into this holding company
structure. The structure includes a property holding company that is tax
resident in the United Kingdom. No material adverse current tax consequences
in Luxembourg, Jersey or the United Kingdom resulted from the creation of this
holding company structure and all of the subsidiary entities in the structure
are treated as disregarded entities of the company for U.S. federal income tax
purposes. The company reflects current and deferred tax liabilities for any
such withholding taxes incurred as a result of this holding company structure
in its consolidated financial statements. Generally, given current statutes of
limitations, we are subject to audit by the Internal Revenue Service (“IRS”)
for the year ended December 31, 2013 and subsequent years and by state taxing
authorities for the year ended December 31, 2012 and subsequent
WELLTOWER
INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
years. The company and its subsidiaries are also
subject to audit by the Canada Revenue Agency and provincial authorities
generally for periods subsequent to our initial investments in Canada in May
2012, by HM Revenue & Customs for periods subsequent to our initial
investments in the United Kingdom in August 2012 and by Luxembourg taxing
authorities generally for periods subsequent to our establishment of certain
Luxembourg-based subsidiaries during 2014.
19.
Variable
Interest Entities
We have entered into
joint ventures to own certain seniors housing and outpatient medical assets
which are deemed to be variable interest entities (“VIE”). We have concluded
that we are the primary beneficiary of these VIE’s based on a combination of
operational control of the joint venture and the rights to receive residual
returns or the obligation to absorb losses arising from the joint ventures.
Except for capital contributions associated with the initial joint venture
formations, the joint ventures have been and are expected to be funded from the
ongoing operations of the underlying properties. Accordingly, such joint
ventures have been consolidated, and the table below summarizes the balance
sheets of consolidated VIE’s in the aggregate (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
Assets
|
|
|
|
|
|
|
|
|
Net real property owned
|
|
$
|
980,570
|
|
|
$
|
989,596
|
|
Cash and cash equivalents
|
|
|
7,390
|
|
|
|
10,501
|
|
Receivables and other assets
|
|
|
16,530
|
|
|
|
12,102
|
|
Total assets
(1)
|
|
$
|
1,004,490
|
|
|
$
|
1,012,199
|
|
|
|
|
|
|
|
|
|
Liabilities and equity
|
|
|
|
|
|
|
|
|
Secured debt
|
|
$
|
449,163
|
|
|
$
|
450,255
|
|
Accrued expenses and other liabilities
|
|
|
13,880
|
|
|
|
13,803
|
|
Redeemable noncontrolling interests
|
|
|
72,957
|
|
|
|
185,556
|
|
Total equity
|
|
|
468,490
|
|
|
|
362,585
|
|
Total liabilities and equity
|
|
$
|
1,004,490
|
|
|
$
|
1,012,199
|
|
|
|
|
|
|
|
|
|
(1) Note that assets of the consolidated variable interest
entities can only be used to settle obligations relating to such variable interest
entities. Liabilities of the consolidated variable interest entities
represent claims against the specific assets of the variable interest
entities.
|
|
|
|
|
|
|
|
|
|
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
|
EXECUTIVE
SUMMARY
|
|
|
|
|
Company Overview
Business Strategy
Key Transactions in 2017
Key Performance Indicators,
Trends and Uncertainties
Corporate Governance
|
27
27
28
29
31
|
|
|
|
|
LIQUIDITY
AND CAPITAL RESOURCES
|
|
|
|
|
Sources and Uses of Cash
Off-Balance Sheet
Arrangements
Contractual Obligations
Capital Structure
|
31
32
33
33
|
|
|
|
|
RESULTS
OF OPERATIONS
|
|
|
|
|
Summary
Triple-net
Seniors Housing Operating
Outpatient Medical
Non-Segment/Corporate
|
34
34
36
38
41
|
|
|
|
|
OTHER
|
|
|
|
|
Cautionary Statement
Regarding Forward-Looking Statements
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion and analysis is based primarily on the unaudited consolidated
financial statements of Welltower Inc. for the periods presented and should be
read together with the notes thereto contained in this Quarterly Report on Form
10-Q. Other important factors are identified in our Annual Report on Form 10-K
for the year ended December 31, 2016, including factors identified under the
headings “Business,” “Risk Factors,” and “Management’s Discussion and Analysis
of Financial Condition and Results of Operations.” References herein to “we,”
“us,” “our,” or the “company” refer to Welltower Inc. and its subsidiaries
unless specifically noted otherwise.
Executive Summary
Company Overview
Welltower
Inc. (NYSE:HCN), an S&P 500 company headquartered in Toledo, Ohio, is
driving the transformation of health care infrastructure. The company invests
with leading seniors housing operators, post-acute providers and health systems
to fund the real estate and infrastructure needed to scale innovative care
delivery models and improve people’s wellness and overall health care
experience. Welltower™, a real estate investment trust (“REIT”), owns
properties concentrated in major, high-growth markets in the United States, Canada
and the United Kingdom, consisting of seniors housing and post-acute
communities and outpatient medical properties
. Our
capital programs, when combined with comprehensive planning, development and
property management services, make us a single-source solution for acquiring,
planning, developing, managing, repositioning and monetizing real estate
assets.
The following table
summarizes our consolidated portfolio for the three months ended March 31, 2017
(dollars in thousands):
|
|
|
|
Percentage of
|
|
Number of
|
|
Type of Property
|
NOICO
(1)
|
|
NOICO
|
|
Properties
|
|
Triple-net
|
$
|
249,735
|
|
45.3%
|
|
592
|
|
Seniors housing operating
|
|
209,442
|
|
37.9%
|
|
421
|
|
Outpatient medical
|
|
92,719
|
|
16.8%
|
|
264
|
|
Totals
|
$
|
551,896
|
|
100.0%
|
|
1,277
|
|
|
|
|
|
|
|
|
|
(1) Represents net operating income from continuing operations
per Note 17 of our unaudited consolidated financial statements. Excludes our
share of investments in unconsolidated entities. Entities in which we have a
joint venture with a minority partner are shown at 100% of the joint venture
amount.
|
Business Strategy
Our
primary objectives are to protect stockholder capital and enhance stockholder
value. We seek to pay consistent cash dividends to stockholders and create
opportunities to increase dividend payments to stockholders as a result of
annual increases in net operating income from continuing operations and
portfolio growth. To meet these objectives, we invest across the full spectrum
of seniors housing and health care real estate and diversify our investment
portfolio by property type, relationship and geographic location.
Substantially all of our
revenues are derived from operating lease rentals, resident fees and services,
and interest earned on outstanding loans receivable. These items represent our
primary sources of liquidity to fund distributions and depend upon the
continued ability of our obligors to make contractual rent and interest
payments to us and the profitability of our operating properties. To the extent
that our customers/partners experience operating difficulties and become unable
to generate sufficient cash to make payments to us, there could be a material
adverse impact on our consolidated results of operations, liquidity and/or
financial condition. To mitigate this risk, we monitor our investments through
a variety of methods determined by the type of property. Our proactive and
comprehensive asset management process for seniors housing properties generally
includes review of monthly financial statements and other operating data for
each property, review of obligor/partner creditworthiness, property
inspections, and review of covenant compliance relating to licensure, real
estate taxes, letters of credit and other collateral. Our internal property
management division actively manages and monitors the outpatient medical
portfolio with a comprehensive process including tenant relations, lease
expirations, the mix of health service providers, hospital/health system
relationships, property performance, capital improvement needs, and market
conditions among other things. In monitoring our portfolio, our personnel use a
proprietary database to collect and analyze property-specific data.
Additionally, we conduct extensive research to ascertain industry trends. We
evaluate the operating environment in each property’s market to determine the
likely trend in operating performance of the facility. When we identify
unacceptable trends, we seek to mitigate, eliminate or transfer the risk.
Through these efforts, we are generally able to intervene at an early stage to
address any negative trends, and in so doing, support both the collectability
of revenue and the value of our investment.
In addition to our asset management
and research efforts, we also structure our investments to help mitigate
payment risk. Operating leases and loans are normally credit enhanced by
guaranties and/or letters of credit. In addition, operating leases are
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
typically structured as master leases and loans are
generally cross-defaulted and cross-collateralized with other real estate
loans, operating leases or agreements between us and the obligor and its
affiliates.
For the three months
ended March 31, 2017, rental income and resident fees and services represented
35% and 63%, respectively, of total revenues. Substantially all of our
operating leases are designed with escalating rent structures. Leases with
fixed annual rental escalators are generally recognized on a straight-line
basis over the initial lease period, subject to a collectability assessment.
Rental income related to leases with contingent rental escalators is generally
recorded based on the contractual cash rental payments due for the period. Our
yield on loans receivable depends upon a number of factors, including the
stated interest rate, the average principal amount outstanding during the term
of the loan and any interest rate adjustments.
Our primary sources of
cash include rent and interest receipts, resident fees and services, borrowings
under our primary unsecured credit facility, public issuances of debt and
equity securities, proceeds from investment dispositions and principal payments
on loans receivable. Our primary uses of cash include dividend distributions,
debt service payments (including principal and interest), real property
investments (including acquisitions, capital expenditures, construction
advances and transaction costs), loan advances, property operating expenses and
general and administrative expenses. Depending upon the availability and cost
of external capital, we believe our liquidity is sufficient to fund these uses
of cash.
We also continuously
evaluate opportunities to finance future investments. New investments are
generally funded from temporary borrowings under our primary unsecured credit
facility, internally generated cash and the proceeds from investment
dispositions. Our investments generate cash from net operating income from
continuing operations and principal payments on loans receivable. Permanent
financing for future investments, which replaces funds drawn under our primary
unsecured credit facility, has historically been provided through a combination
of the issuance of public debt and equity securities and the incurrence or
assumption of secured debt.
Depending upon market
conditions, we believe that new investments will be available in the future
with spreads over our cost of capital that will generate appropriate returns to
our stockholders. It is also possible that investment dispositions may occur in
the future. To the extent that investment dispositions exceed new investments,
our revenues and cash flows from operations could be adversely affected. We
expect to reinvest the proceeds from any investment dispositions in new
investments. To the extent that new investment requirements exceed our
available cash on-hand, we expect to borrow under our primary unsecured credit
facility. At March 31, 2017, we had $380,360,000 of cash and cash equivalents,
$42,777,000 of restricted cash and $2,445,544,000 of available borrowing
capacity under our primary unsecured credit facility.
Key Transactions in 2017
Capital
.
During the three months ended March 31, 2017,
we extinguished $806,189,000 of secured debt at a blended average interest rate
of 5.6%. In addition, we redeemed all 11,500,000 shares of our 6.5% Series J
Cumulative Redeemable Preferred Stock. During the three months ended March 31,
2017, we raised $111,761,000 through our dividend reinvestment program and our
Equity Shelf Program (as defined below).
Investments
.
The following summarizes our acquisitions and joint venture investments
completed during the three months ended March 31, 2017 (dollars in thousands):
|
Properties
|
|
Investment Amount
(1)
|
|
Capitalization Rates
(2)
|
|
|
Book Amount
(3)
|
|
Triple-net
|
3
|
$
|
41,301
|
|
6.7%
|
|
$
|
41,258
|
|
Seniors housing operating
|
1
|
|
34,200
|
|
6.1%
|
|
|
50,194
|
|
Outpatient medical
|
2
|
|
28,995
|
|
6.5%
|
|
|
29,704
|
|
Totals
|
6
|
$
|
104,496
|
|
6.4%
|
|
$
|
121,156
|
|
|
|
|
|
|
|
|
|
|
|
(1) Represents stated pro rata purchase price including cash and
any assumed debt but excludes fair value adjustments pursuant to U.S. GAAP.
|
(2) Represents annualized contractual or projected income to be
received in cash divided by investment amounts.
|
(3) Represents amounts recorded on our books including fair
value adjustments pursuant to U.S. GAAP. See Notes 3 and 7 to our unaudited
consolidated financial statements for additional information.
|
|
|
|
|
|
|
|
|
|
|
Dispositions
. The following summarizes property
dispositions made during the three months ended March 31, 2017 (dollars in
thousands):
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
|
Properties
|
|
Proceeds
(1)
|
|
Capitalization Rates
(2)
|
|
|
Book Amount
(3)
|
|
Triple-net
|
43
|
$
|
1,027,951
|
|
6.5%
|
|
$
|
808,204
|
|
Seniors housing operating
|
1
|
|
27,519
|
|
4.8%
|
|
|
13,845
|
|
Totals
|
44
|
$
|
1,055,470
|
|
6.5%
|
|
$
|
822,049
|
|
|
|
|
|
|
|
|
|
|
|
(1) Represents pro rata proceeds received upon disposition
including any seller financing.
|
(2) Represents annualized contractual income that was being
received in cash at date of disposition divided by disposition proceeds.
|
(3) Represents carrying value of assets at time of disposition.
See Note 5 to our unaudited consolidated financial statements for additional
information.
|
Dividends
. Our Board of Directors increased the annual
cash dividend to $3.48 per common share ($0.87 per share quarterly), as
compared to $3.44 per common share for 2016, beginning in February 2017. The
dividend declared for the quarter ended March 31, 2017 represents the 184
th
consecutive quarterly dividend payment.
Key Performance
Indicators, Trends and Uncertainties
We
utilize several key performance indicators to evaluate the various aspects of
our business. These indicators are discussed below and relate to operating
performance, concentration risk and credit strength. Management uses these key
performance indicators to facilitate internal and external comparisons to our
historical operating results, in making operating decisions and for budget
planning purposes.
Operating
Performance
. We believe that net income attributable to common stockholders
(“NICS”) per the Statement of Comprehensive Income and net operating income
from continuing operations (“NOICO”) per Note 17 to the Consolidated Financial
Statements are the most appropriate earnings measures. Other useful supplemental
measures of our operating performance include funds from operations attributable
to common stockholders (“FFO”) and same store NOI (“SSNOI”); however, these
supplemental measures are not defined by U.S. generally accepted accounting
principles (“U.S. GAAP”). Please refer to the section entitled “Non-GAAP
Financial Measures” for further discussion and reconciliations of FFO and
SSNOI. These earnings measures (and FFO per share amounts) are widely used by
investors and analysts in the valuation, comparison and investment
recommendations of companies. The following table reflects the recent
historical trends of our operating performance measures for the periods
presented (in thousands, except per share amounts):
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
March 31,
|
|
|
|
2016
|
|
2016
|
|
2016
|
|
2016
|
|
|
2017
|
Net income (loss) attributable to common stockholders
|
$
|
148,969
|
|
$
|
195,474
|
|
$
|
334,910
|
|
$
|
333,042
|
|
$
|
312,639
|
Funds from operations attributable to common stockholders
|
|
391,264
|
|
|
416,974
|
|
|
401,870
|
|
|
372,829
|
|
|
306,231
|
Net operating income from continuing operations
|
|
597,414
|
|
|
617,825
|
|
|
605,453
|
|
|
583,486
|
|
|
552,128
|
Same store net operating income
|
|
469,784
|
|
|
485,091
|
|
|
472,347
|
|
|
469,928
|
|
|
468,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data (fully diluted):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
$
|
0.42
|
|
$
|
0.54
|
|
$
|
0.93
|
|
$
|
0.91
|
|
$
|
0.86
|
|
Funds from operations attributable to common stockholders
|
|
1.10
|
|
|
1.16
|
|
|
1.11
|
|
|
1.02
|
|
|
0.84
|
Credit Strength.
We measure our credit strength both in terms of leverage ratios
and coverage ratios. The leverage ratios indicate how much of our balance sheet
capitalization is related to long-term debt, net of cash and IRC section 1031
deposits. The coverage ratios indicate our ability to service interest and
fixed charges (interest, secured debt principal amortization and preferred
dividends). We expect to maintain capitalization ratios and coverage ratios
sufficient to maintain a capital structure consistent with our current profile.
The coverage ratios are based on earnings before interest, taxes, depreciation
and amortization (“EBITDA”). Please refer to the section entitled “Non-GAAP
Financial Measures” for further discussion and reconciliations of these
measures. Leverage ratios and coverage ratios are widely used by investors,
analysts and rating agencies in the valuation, comparison, investment
recommendations and rating of companies. The following table reflects the
recent historical trends for our credit strength measures for the periods
presented:
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
|
|
|
|
Three Months Ended
|
|
|
|
|
March, 31
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
March 31,
|
|
|
|
|
2016
|
|
2016
|
|
2016
|
|
2016
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net debt to book capitalization ratio
|
|
45%
|
|
45%
|
|
45%
|
|
43%
|
|
42%
|
Net debt to undepreciated book
|
|
|
|
|
|
|
|
|
|
|
|
capitalization ratio
|
|
40%
|
|
39%
|
|
39%
|
|
37%
|
|
36%
|
Net debt to market capitalization ratio
|
|
32%
|
|
30%
|
|
31%
|
|
31%
|
|
29%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest coverage ratio
|
|
3.85x
|
|
4.21x
|
|
5.24x
|
|
5.26x
|
|
5.67x
|
Fixed charge coverage ratio
|
|
3.06x
|
|
3.34x
|
|
4.17x
|
|
4.15x
|
|
4.53x
|
Concentration Risk
.
We evaluate our concentration risk in terms of NOICO by property mix,
relationship mix and geographic mix. Concentration risk is a valuable measure
in understanding what portion of our NOICO could be at risk if certain sectors
were to experience downturns. Property mix measures the portion of our NOICO
that relates to our various property types. Relationship mix measures the
portion of our NOICO that relates to our top five relationships. Geographic mix
measures the portion of our NOICO that relates to our top five states (or
international equivalents). The following table reflects our recent historical
trends of concentration risk by NOICO for the periods indicated below:
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
March 31,
|
|
|
|
|
2016
|
|
2016
|
|
2016
|
|
2016
|
|
2017
|
Property mix:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
Triple-net
|
|
52%
|
|
50%
|
|
51%
|
|
48%
|
|
45%
|
|
Seniors housing operating
|
|
32%
|
|
34%
|
|
33%
|
|
36%
|
|
38%
|
|
Outpatient medical
|
|
16%
|
|
16%
|
|
16%
|
|
16%
|
|
17%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relationship mix:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
Sunrise Senior Living
(2)
|
|
13%
|
|
14%
|
|
12%
|
|
13%
|
|
14%
|
|
Genesis Healthcare
|
|
17%
|
|
16%
|
|
16%
|
|
13%
|
|
9%
|
|
Brookdale Senior Living
|
|
7%
|
|
7%
|
|
7%
|
|
7%
|
|
7%
|
|
Revera
(2)
|
|
6%
|
|
6%
|
|
6%
|
|
7%
|
|
7%
|
|
Benchmark Senior Living
|
|
4%
|
|
4%
|
|
4%
|
|
4%
|
|
4%
|
|
Remaining relationships
|
|
53%
|
|
53%
|
|
55%
|
|
56%
|
|
59%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic mix:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
California
|
|
10%
|
|
10%
|
|
10%
|
|
12%
|
|
13%
|
|
United Kingdom
|
|
8%
|
|
8%
|
|
7%
|
|
7%
|
|
9%
|
|
Canada
|
|
7%
|
|
7%
|
|
7%
|
|
8%
|
|
8%
|
|
New Jersey
|
|
8%
|
|
8%
|
|
8%
|
|
8%
|
|
7%
|
|
Texas
|
|
6%
|
|
6%
|
|
7%
|
|
7%
|
|
7%
|
|
Remaining geographic areas
|
|
61%
|
|
61%
|
|
61%
|
|
58%
|
|
56%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Excludes our share of investments in unconsolidated
entities. Entities in which the company has a joint venture with a minority
partner are shown at 100% of the joint venture amount.
|
(2) Revera owns a controlling interest in Sunrise Senior Living.
|
Lease
Expirations.
The following table sets forth information regarding
lease expirations for certain portions of our portfolio as of March 31, 2017
(dollars in thousands):
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
|
|
|
|
|
Expiration Year
|
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
|
|
2025
|
|
|
2026
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Triple-net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Properties
|
|
|
-
|
|
|
51
|
|
|
-
|
|
|
14
|
|
|
12
|
|
|
8
|
|
|
4
|
|
|
5
|
|
|
61
|
|
|
32
|
|
|
406
|
|
|
|
Base rent
(1)
|
|
$
|
-
|
|
$
|
37,120
|
|
$
|
-
|
|
$
|
17,740
|
|
$
|
25,239
|
|
$
|
8,784
|
|
$
|
4,175
|
|
$
|
11,076
|
|
$
|
73,478
|
|
$
|
64,327
|
|
$
|
701,046
|
|
|
|
% of base rent
|
|
|
0.0%
|
|
|
3.9%
|
|
|
0.0%
|
|
|
1.9%
|
|
|
2.7%
|
|
|
0.9%
|
|
|
0.4%
|
|
|
1.2%
|
|
|
7.8%
|
|
|
6.8%
|
|
|
74.3%
|
|
|
|
Units/beds
|
|
|
-
|
|
|
3,151
|
|
|
-
|
|
|
1,225
|
|
|
2,289
|
|
|
810
|
|
|
317
|
|
|
762
|
|
|
4,538
|
|
|
3,724
|
|
|
41,529
|
|
|
|
% of Units/beds
|
|
|
0.0%
|
|
|
5.4%
|
|
|
0.0%
|
|
|
2.1%
|
|
|
3.9%
|
|
|
1.4%
|
|
|
0.5%
|
|
|
1.3%
|
|
|
7.8%
|
|
|
6.4%
|
|
|
71.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outpatient medical:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Square feet
|
|
|
899,397
|
|
|
999,677
|
|
|
1,189,481
|
|
|
1,205,331
|
|
|
1,465,953
|
|
|
2,381,966
|
|
|
1,197,716
|
|
|
1,392,959
|
|
|
690,769
|
|
|
1,063,903
|
|
|
3,979,627
|
|
|
|
Base rent
(1)
|
|
$
|
22,866
|
|
$
|
25,911
|
|
$
|
31,568
|
|
$
|
31,876
|
|
$
|
39,422
|
|
$
|
51,176
|
|
$
|
30,197
|
|
$
|
38,992
|
|
$
|
19,586
|
|
$
|
27,377
|
|
$
|
90,952
|
|
|
|
% of base rent
|
|
|
5.6%
|
|
|
6.3%
|
|
|
7.7%
|
|
|
7.8%
|
|
|
9.6%
|
|
|
12.5%
|
|
|
7.4%
|
|
|
9.5%
|
|
|
4.8%
|
|
|
6.7%
|
|
|
22.1%
|
|
|
|
Leases
|
|
|
242
|
|
|
275
|
|
|
305
|
|
|
276
|
|
|
264
|
|
|
252
|
|
|
177
|
|
|
109
|
|
|
96
|
|
|
118
|
|
|
151
|
|
|
|
% of Leases
|
|
|
10.7%
|
|
|
12.1%
|
|
|
13.5%
|
|
|
12.2%
|
|
|
11.7%
|
|
|
11.1%
|
|
|
7.8%
|
|
|
4.8%
|
|
|
4.2%
|
|
|
5.2%
|
|
|
6.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The most recent monthly base rent including straight line
for leases with fixed escalators or annual cash rents for leases with
contingent escalators. Base rent does not include tenant recoveries or
amortization of above and below market lease intangibles.
|
We evaluate our key performance
indicators in conjunction with current expectations to determine if historical
trends are indicative of future results. Our expected results may not be
achieved and actual results may differ materially from our expectations.
Factors that may cause actual results to differ from expected results are
described in more detail in “Cautionary Statement Regarding Forward-Looking
Statements” and other sections of this Quarterly Report on Form 10-Q.
Management regularly monitors economic and other factors to develop strategic
and tactical plans designed to improve performance and maximize our competitive
position. Our ability to achieve our financial objectives is dependent upon our
ability to effectively execute these plans and to appropriately respond to
emerging economic and company-specific trends. Please refer to our Annual
Report on Form 10-K for the year ended December 31, 2016, under the headings
“Business,” “Risk Factors” and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” for further discussion of these
risk factors.
Corporate
Governance
Maintaining
investor confidence and trust is important in today’s business environment. Our
Board of Directors and management are strongly committed to policies and
procedures that reflect the highest level of ethical business practices. Our
corporate governance guidelines provide the framework for our business
operations and emphasize our commitment to increase stockholder value while
meeting all applicable legal requirements. These guidelines meet the listing
standards adopted by the New York Stock Exchange and are available on the
Internet at www.welltower.com/investors/governance. The information on our
website is not incorporated by reference in this Quarterly Report on Form 10-Q,
and our web address is included as an inactive textual reference only.
Liquidity and Capital Resources
Sources and Uses
of Cash
Our
primary sources of cash include rent and interest receipts, resident fees and
services, borrowings under our primary unsecured credit facility, public
issuances of debt and equity securities, proceeds from investment dispositions
and principal payments on loans receivable. Our primary uses of cash include
dividend distributions, debt service payments (including principal and
interest), real property investments (including acquisitions, capital
expenditures, construction advances and transaction costs), loan advances,
property operating expenses, and general and administrative expenses. These
sources and uses of cash are reflected in our Consolidated Statements of Cash
Flows and are discussed in further detail below. The following is a summary of
our sources and uses of cash flows (dollars in thousands):
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
|
|
|
Three Months Ended
|
|
|
Change
|
|
|
|
March 31, 2017
|
|
March 31, 2016
|
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
$
|
419,378
|
|
$
|
360,908
|
|
|
$
|
58,470
|
|
16%
|
Cash provided from (used in) operating activities
|
|
|
385,526
|
|
|
380,609
|
|
|
|
4,917
|
|
1%
|
Cash provided from (used in) investing activities
|
|
|
1,065,239
|
|
|
(241,964)
|
|
|
|
1,307,203
|
|
n/a
|
Cash provided from (used in) financing activities
|
|
|
(1,492,626)
|
|
|
(143,927)
|
|
|
|
(1,348,699)
|
|
937%
|
Effect of foreign currency translation
|
|
|
2,843
|
|
|
323
|
|
|
|
2,520
|
|
780%
|
Cash and cash equivalents at end of period
|
|
$
|
380,360
|
|
$
|
355,949
|
|
|
$
|
24,411
|
|
7%
|
Operating Activities
. The
change in net cash provided from operating activities was immaterial. Please
see “Results of Operations” for discussion of net income fluctuations. For the
three months ended March 31, 2017 and 2016, cash flow provided from operations
exceeded cash distributions to stockholders.
Investing Activities
.
The changes in net cash used in investing activities are primarily attributable
to an increase in dispositions, which are summarized above in “Key Transactions
in 2017” and Notes 5 and 6 of our unaudited consolidated financial statements.
The following is a summary of cash used in non-acquisition capital improvement
activities (dollars in thousands):
|
|
Three Months Ended
|
|
Change
|
|
|
March 31,
|
|
March 31,
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$
|
|
%
|
New development
|
|
$
|
69,334
|
|
$
|
66,739
|
|
$
|
2,595
|
|
4%
|
Recurring capital expenditures, tenant improvements and lease
commissions
|
|
|
13,834
|
|
|
12,265
|
|
|
1,569
|
|
13%
|
Renovations, redevelopments and other capital improvements
|
|
|
28,281
|
|
|
22,760
|
|
|
5,521
|
|
24%
|
Total
|
|
$
|
111,449
|
|
$
|
101,764
|
|
$
|
9,685
|
|
10%
|
The change in new
development is primarily due to the number and size of construction projects
on-going during the relevant periods. Renovations, redevelopments and other
capital improvements include expenditures to maximize property value, increase
net operating income, maintain a market-competitive position and/or achieve
property stabilization. Generally, these expenditures have increased as a
result of acquisitions, primarily in our seniors housing operating segment.
Financing Activities
. The changes in
net cash provided from financing activities are primarily attributable to
changes related to our long-term debt arrangements, the issuance/redemption of
common and preferred stock and dividend payments. Please refer to Notes 9, 10
and 13 of our unaudited consolidated financial statements for additional
information.
Off-Balance Sheet Arrangements
At March 31, 2017, we had
investments in unconsolidated entities with our ownership ranging from 10% to
50%. Please see Note 7 to our unaudited consolidated financial statements for
additional information. We use financial derivative instruments to hedge
interest rate and foreign currency exchange rate exposure. Please see Note 11
to our unaudited consolidated financial statements for additional information.
At March 31, 2017, we had 14 outstanding letter of credit obligations. Please
see Note 12 to our unaudited consolidated financial statements for additional
information.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Contractual Obligations
The following table
summarizes our payment requirements under contractual obligations as of March
31, 2017 (in thousands):
|
|
Payments Due by Period
|
Contractual Obligations
|
|
Total
|
|
2017
|
|
2018-2019
|
|
2020-2021
|
|
Thereafter
|
Unsecured revolving credit facility
(1)
|
|
$
|
522,000
|
|
$
|
-
|
|
$
|
-
|
|
$
|
522,000
|
|
$
|
-
|
Senior unsecured notes and term credit facilities:
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Dollar senior unsecured notes
|
|
|
6,050,000
|
|
|
-
|
|
|
1,050,000
|
|
|
900,000
|
|
|
4,100,000
|
Canadian Dollar senior unsecured notes
(3)
|
|
|
225,208
|
|
|
-
|
|
|
-
|
|
|
225,208
|
|
|
-
|
Pounds Sterling senior unsecured notes
(3)
|
|
|
1,316,385
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,316,385
|
U.S. Dollar term credit facility
|
|
|
505,000
|
|
|
-
|
|
|
5,000
|
|
|
500,000
|
|
|
-
|
Canadian Dollar term credit facility
(3)
|
|
|
187,674
|
|
|
-
|
|
|
-
|
|
|
187,674
|
|
|
-
|
Secured debt:
(2,3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
2,665,477
|
|
|
284,879
|
|
|
921,646
|
|
|
378,881
|
|
|
1,080,071
|
Unconsolidated
|
|
|
683,574
|
|
|
21,195
|
|
|
156,839
|
|
|
45,426
|
|
|
460,114
|
Contractual interest obligations:
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured revolving credit facility
|
|
|
49,683
|
|
|
7,845
|
|
|
20,919
|
|
|
20,919
|
|
|
-
|
Senior unsecured notes and term loans
(3)
|
|
|
3,330,186
|
|
|
281,365
|
|
|
689,321
|
|
|
580,751
|
|
|
1,778,749
|
Consolidated secured debt
(3)
|
|
|
526,087
|
|
|
73,890
|
|
|
159,552
|
|
|
110,453
|
|
|
182,192
|
Unconsolidated secured debt
(3)
|
|
|
161,651
|
|
|
19,443
|
|
|
50,734
|
|
|
34,700
|
|
|
56,774
|
Capital lease obligations
(5)
|
|
|
93,697
|
|
|
4,592
|
|
|
9,012
|
|
|
8,346
|
|
|
71,747
|
Operating lease obligations
(5)
|
|
|
1,092,169
|
|
|
12,818
|
|
|
34,485
|
|
|
33,629
|
|
|
1,011,237
|
Purchase obligations
(5)
|
|
|
483,089
|
|
|
360,773
|
|
|
122,316
|
|
|
-
|
|
|
-
|
Other long-term liabilities
(6)
|
|
|
3,810
|
|
|
1,106
|
|
|
2,704
|
|
|
-
|
|
|
-
|
Total contractual obligations
|
|
$
|
17,895,690
|
|
$
|
1,067,906
|
|
$
|
3,222,528
|
|
$
|
3,547,987
|
|
$
|
10,057,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Relates to unsecured revolving credit facility with an
aggregate commitment of $3,000,000,000. See Note 9 to our unaudited
consolidated financial statements for additional information.
|
(2) Amounts represent principal amounts due and do not reflect
unamortized premiums/discounts or other fair value adjustments as reflected
on the balance sheet.
|
(3) Based on foreign currency exchange rates in effect as of
balance sheet date.
|
(4) Based on variable interest rates in effect as of balance
sheet date.
|
(5) See Note 12 to our unaudited consolidated financial
statements for additional information.
|
(6) Primarily relates to payments to be made under our
Supplemental Executive Retirement Plan.
|
Capital Structure
Please refer to “Credit
Strength” above for a discussion of our leverage and coverage ratio trends.
Our debt agreements contain various covenants, restrictions and events of
default. Certain agreements require us to maintain financial ratios and minimum
net worth and impose certain limits on our ability to incur indebtedness,
create liens and make investments or acquisitions. As of March 31, 2017, we
were in compliance with all of the covenants under our debt agreements. None of
our debt agreements contain provisions for acceleration which could be
triggered by our debt ratings. However, under our primary unsecured credit
facility, the ratings on our senior unsecured notes are used to determine the
fees and interest charged.
We plan to manage the company to maintain
compliance with our debt covenants and with a capital structure consistent with
our current profile. Any downgrades in terms of ratings or outlook by any or
all of the rating agencies could have a material adverse impact on our cost and
availability of capital, which could in turn have a material adverse impact on
our consolidated results of operations, liquidity and/or financial condition.
On May 1, 2015, we filed
with the Securities and Exchange Commission (1) an open-ended automatic or
“universal” shelf registration statement covering an indeterminate amount of
future offerings of debt securities, common stock, preferred stock, depositary
shares, warrants and units and (2) a registration statement in connection with
our enhanced dividend reinvestment plan (“DRIP”) under which we may issue up to
15,000,000 shares of common stock. As of April 28, 2017, 5,893,662 shares of
common stock remained available for issuance under the DRIP registration
statement. We have entered into separate Equity Distribution Agreements with
each of Morgan Stanley & Co. LLC, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Goldman, Sachs & Co., UBS Securities LLC and Wells Fargo
Securities, LLC relating to the offer and sale from time to time of up to
$1,000,000,000 aggregate amount of our common stock (“Equity Shelf Program”).
As of April 28, 2017, we had $903,411,000 of remaining capacity
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
under the Equity Shelf Program. Depending upon market
conditions, we anticipate issuing securities under our registration statements
to invest in additional properties and to repay borrowings under our primary
unsecured credit facility.
Results of Operations
Summary
Our primary
sources of revenue include rent and resident fees and services. Our primary expenses
include interest expense, depreciation and amortization, property operating
expenses, and general and administrative expenses. We evaluate our business and
make resource allocations on our three business segments: triple-net, seniors
housing operating and outpatient medical. The primary performance measures for
our properties are NOICO and SSNOI, which are discussed below. Please see Note
17 to our unaudited consolidated financial statements for additional
information.
The following is a summary of our results of
operations (dollars in thousands, except per share amounts):
|
|
|
Three Months Ended
|
|
Change
|
|
|
|
March 31,
|
|
March 31,
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Amount
|
|
%
|
Net income (loss) attributable to common stockholders
|
|
$
|
312,639
|
|
$
|
148,969
|
|
$
|
163,670
|
|
110%
|
Funds from operations attributable to common stockholders
|
|
|
306,231
|
|
|
391,264
|
|
|
(85,033)
|
|
-22%
|
EBITDA
|
|
|
686,728
|
|
|
525,405
|
|
|
161,323
|
|
31%
|
Net operating income from continuing operations (NOICO)
|
|
|
552,129
|
|
|
597,414
|
|
|
(45,285)
|
|
-8%
|
Same store NOI
|
|
|
468,590
|
|
|
469,784
|
|
|
(1,194)
|
|
0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data (fully diluted):
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
0.86
|
|
$
|
0.42
|
|
$
|
0.44
|
|
105%
|
Funds from operations attributable to common stockholders
|
|
$
|
0.84
|
|
$
|
1.10
|
|
$
|
(0.26)
|
|
-24%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest coverage ratio
|
|
|
5.67x
|
|
|
3.85x
|
|
|
1.82x
|
|
47%
|
Fixed charge coverage ratio
|
|
|
4.53x
|
|
|
3.06x
|
|
|
1.47x
|
|
48%
|
Triple-net
The
following is a summary of our NOICO and SSNOI for the triple-net segment
(dollars in thousands):
|
|
|
Three Months Ended
|
|
Change
|
|
|
|
|
March 31,
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$
|
|
%
|
NOICO
|
|
$
|
249,735
|
|
$
|
308,168
|
|
$
|
(58,433)
|
|
-19%
|
Non SSNOI attributable to same store properties
|
|
|
(13,253)
|
|
|
(16,181)
|
|
|
2,928
|
|
-18%
|
NOICO attributable to non same store properties
(1)
|
|
|
(46,995)
|
|
|
(105,327)
|
|
|
58,332
|
|
-55%
|
SSNOI
(2)
|
|
$
|
189,487
|
|
$
|
186,660
|
|
$
|
2,827
|
|
2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Change is primarily due to the acquisition of 14 properties
and the conversion of 23 construction projects into revenue-generating
properties subsequent to January 1, 2016 and 211 properties disposed or held
for sale.
|
(2) Relates to 538 same store properties.
|
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The following is a
summary of our results of operations for the triple-net segment (dollars in
thousands):
|
|
|
|
Three Months Ended
|
|
Change
|
|
|
|
|
March 31,
|
|
March 31,
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$
|
|
%
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
227,290
|
|
$
|
283,825
|
|
$
|
(56,535)
|
|
-20%
|
|
Interest income
|
|
|
20,679
|
|
|
22,853
|
|
|
(2,174)
|
|
-10%
|
|
Other income
|
|
|
1,766
|
|
|
1,490
|
|
|
276
|
|
19%
|
|
|
Total revenues
|
|
|
249,735
|
|
|
308,168
|
|
|
(58,433)
|
|
-19%
|
|
|
Net operating income from continuing operations (NOICO)
(1)
|
|
|
249,735
|
|
|
308,168
|
|
|
(58,433)
|
|
-19%
|
Other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
5,511
|
|
|
6,364
|
|
|
(853)
|
|
-13%
|
|
Loss (gain) on derivatives, net
|
|
|
1,224
|
|
|
-
|
|
|
1,224
|
|
n/a
|
|
Depreciation and amortization
|
|
|
59,608
|
|
|
79,800
|
|
|
(20,192)
|
|
-25%
|
|
Transaction costs
(2)
|
|
|
-
|
|
|
2,852
|
|
|
(2,852)
|
|
-100%
|
|
Loss (gain) on extinguishment of debt, net
|
|
|
29,084
|
|
|
(24)
|
|
|
29,108
|
|
n/a
|
|
Impairment of assets
|
|
|
-
|
|
|
14,314
|
|
|
(14,314)
|
|
-100%
|
|
Other expenses
(2)
|
|
|
5,010
|
|
|
-
|
|
|
5,010
|
|
n/a
|
|
|
Total other expenses
|
|
|
100,437
|
|
|
103,306
|
|
|
(2,869)
|
|
-3%
|
Income from continuing operations before income taxes and income
(loss) from unconsolidated entities
|
|
|
149,298
|
|
|
204,862
|
|
|
(55,564)
|
|
-27%
|
Income tax benefit (expense)
|
|
|
(800)
|
|
|
(317)
|
|
|
(483)
|
|
152%
|
Income (loss) from unconsolidated entities
|
|
|
5,638
|
|
|
3,081
|
|
|
2,557
|
|
83%
|
Income from continuing operations
|
|
|
154,136
|
|
|
207,626
|
|
|
(53,490)
|
|
-26%
|
Gain (loss) on real estate dispositions, net
(3)
|
|
|
231,081
|
|
|
-
|
|
|
231,081
|
|
n/a
|
Net income
|
|
|
385,217
|
|
|
207,626
|
|
|
177,591
|
|
86%
|
Less: Net income (loss) attributable to noncontrolling interests
|
|
|
603
|
|
|
(342)
|
|
|
945
|
|
n/a
|
Net income attributable to common stockholders
|
|
$
|
384,614
|
|
$
|
207,968
|
|
$
|
176,646
|
|
85%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) See Note 17 to our unaudited consolidated financial
statements.
|
(2) See Note 2 to our unaudited consolidated financial
statements.
|
(3) See Note 5 to our unaudited consolidated financial
statements.
|
The decrease in rental
income is attributable to the disposition of properties exceeding new
acquisitions. Certain of our leases contain annual rental escalators that are
contingent upon changes in the Consumer Price Index and/or changes in the gross
operating revenues of the tenant’s properties. These escalators are not fixed,
so no straight-line rent is recorded; however, rental income is recorded based
on the contractual cash rental payments due for the period. If gross operating
revenues at our facilities and/or the Consumer Price Index do not increase, a
portion of our revenues may not continue to increase For the three months
ended March 31, 2017, we had one lease renewal and 25 leases with rental rate
increasers ranging from 0.13% to 0.41% in our triple-net portfolio. The
decrease in interest income is directly related to the volume of loan payoffs during
2016 and 2017.
Depreciation
and amortization decreased as a result of the disposition of triple-net
properties. To the extent that we acquire or dispose of additional properties
in the future, our provision for depreciation and amortization will change
accordingly.
During the three months ended March 31, 2016, we
recorded impairment charges on certain held-for-sale triple-net properties as
the fair values less estimated costs to sell exceeded our carrying values.
Changes in the gain on sales of properties are related to the volume of
property sales and the sales prices.
During the three months
ended March 31, 2017, we completed five triple-net construction projects
totaling $157,460,000 or $257,290 per bed/unit. The following is a summary of
triple-net construction projects pending as of March 31, 2017 (dollars in
thousands):
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Location
|
|
Units/Beds
|
|
|
Commitment
|
|
|
Balance
|
|
Est. Completion
|
Raleigh, NC
|
|
60
|
|
$
|
23,925
|
|
$
|
16,415
|
|
2Q17
|
Livingston, NJ
|
|
120
|
|
|
53,440
|
|
|
46,048
|
|
2Q17
|
Piscataway, NJ
|
|
124
|
|
|
40,800
|
|
|
38,190
|
|
2Q17
|
Bracknell, UK
|
|
64
|
|
|
15,825
|
|
|
12,213
|
|
2Q17
|
Alexandria, VA
|
|
116
|
|
|
60,156
|
|
|
23,549
|
|
2Q18
|
Exton, PA
|
|
120
|
|
|
34,175
|
|
|
5,939
|
|
2Q18
|
|
|
604
|
|
$
|
228,321
|
|
$
|
142,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense for the three months ended March 31, 2017
and 2016 represents secured debt interest expense and related fees.
The
change in interest expense is due to the net effect and timing of assumptions,
segment transitions, fluctuations in foreign currency rates, extinguishments
and principal amortizations.
The fluctuation in
losses/gains on debt extinguishment is attributable to the large volume of
extinguishments in the first quarter of 2017.
The following is a summary
of our triple-net secured debt principal activity (dollars in thousands):
|
|
Three Months Ended
|
|
|
March 31, 2017
|
|
March 31, 2016
|
|
|
|
|
|
Wtd. Avg.
|
|
|
|
|
Wtd. Avg.
|
|
|
Amount
|
|
Interest Rate
|
|
Amount
|
|
Interest Rate
|
Beginning balance
|
|
$
|
594,199
|
|
4.580%
|
|
$
|
554,014
|
|
5.488%
|
Debt extinguished
|
|
|
(255,553)
|
|
5.923%
|
|
|
(33,919)
|
|
5.895%
|
Foreign currency
|
|
|
3,155
|
|
2.751%
|
|
|
5,291
|
|
5.315%
|
Principal payments
|
|
|
(2,531)
|
|
5.790%
|
|
|
(2,987)
|
|
5.587%
|
Ending balance
|
|
$
|
339,270
|
|
3.549%
|
|
$
|
522,399
|
|
5.467%
|
|
|
|
|
|
|
|
|
|
|
|
Monthly averages
|
|
$
|
531,647
|
|
4.441%
|
|
$
|
540,554
|
|
5.482%
|
|
|
|
|
|
|
|
|
|
|
|
A portion of our triple-net properties were formed
through partnerships. Income or loss from unconsolidated entities represents
our share of net income or losses from partnerships where we are the
noncontrolling partner. Net income attributable to noncontrolling interest
represents our partners’ share of net income relating to those partnerships
where we are the controlling partner.
Seniors
Housing Operating
The following is a summary of our NOICO and SSNOI for the
seniors housing operating segment (dollars in thousands):
|
|
|
Three Months Ended
|
|
Change
|
|
|
|
|
March 31,
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$
|
|
%
|
NOICO
|
|
$
|
209,442
|
|
$
|
196,475
|
|
$
|
12,967
|
|
7%
|
Non SSNOI attributable to same store properties
|
|
|
231
|
|
|
248
|
|
|
(17)
|
|
-7%
|
NOICO attributable to non same store properties
(1)
|
|
|
(17,109)
|
|
|
99
|
|
|
(17,208)
|
|
-17382%
|
SSNOI
(2)
|
|
$
|
192,564
|
|
$
|
196,822
|
|
$
|
(4,258)
|
|
-2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Change is primarily due to the acquisition of 41 properties
subsequent to January 1, 2016.
|
(2) Relates to 376 same store properties.
|
The
following is a summary of our seniors housing operating results of operations
(dollars in thousands):
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
|
|
|
|
Three Months Ended
|
|
Change
|
|
|
|
|
March 31,
|
|
March 31,
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$
|
|
%
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Resident fees and services
|
|
$
|
670,337
|
|
$
|
602,149
|
|
$
|
68,188
|
|
11%
|
|
Interest income
|
|
|
69
|
|
|
1,031
|
|
|
(962)
|
|
-93%
|
|
Other income
|
|
|
1,461
|
|
|
2,189
|
|
|
(728)
|
|
-33%
|
|
|
Total revenues
|
|
|
671,867
|
|
|
605,369
|
|
|
66,498
|
|
11%
|
Property operating expenses
|
|
|
462,425
|
|
|
408,894
|
|
|
53,531
|
|
13%
|
|
Net operating income from continuing operations (NOICO)
(1)
|
|
|
209,442
|
|
|
196,475
|
|
|
12,967
|
|
7%
|
Other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
15,816
|
|
|
20,523
|
|
|
(4,707)
|
|
-23%
|
|
Depreciation and amortization
|
|
|
119,737
|
|
|
101,832
|
|
|
17,905
|
|
18%
|
|
Transaction costs
(2)
|
|
|
-
|
|
|
3,933
|
|
|
(3,933)
|
|
-100%
|
|
Loss (gain) on extinguishment of debt, net
|
|
|
890
|
|
|
-
|
|
|
890
|
|
n/a
|
|
Impairment of assets
|
|
|
5,406
|
|
|
-
|
|
|
5,406
|
|
n/a
|
|
Other expenses
(2)
|
|
|
1,778
|
|
|
-
|
|
|
1,778
|
|
n/a
|
|
|
Total other expenses
|
|
|
143,627
|
|
|
126,288
|
|
|
17,339
|
|
14%
|
Income (loss) from continuing operations before income taxes and
income (loss) from unconsolidated entities
|
|
|
65,815
|
|
|
70,187
|
|
|
(4,372)
|
|
-6%
|
Income tax benefit (expense)
|
|
|
(1,087)
|
|
|
2,767
|
|
|
(3,854)
|
|
n/a
|
Income (loss) from unconsolidated entities
|
|
|
(29,191)
|
|
|
(6,935)
|
|
|
(22,256)
|
|
321%
|
Income from continuing operations
|
|
|
35,537
|
|
|
66,019
|
|
|
(30,482)
|
|
-46%
|
Gain (loss) on real estate dispositions, net
(3)
|
|
|
13,011
|
|
|
-
|
|
|
13,011
|
|
n/a
|
Net income (loss)
|
|
|
48,548
|
|
|
66,019
|
|
|
(17,471)
|
|
-26%
|
Less: Net income (loss) attributable to noncontrolling interests
|
|
|
(590)
|
|
|
360
|
|
|
(950)
|
|
n/a
|
Net income (loss) attributable to common stockholders
|
|
$
|
49,138
|
|
$
|
65,659
|
|
$
|
(16,521)
|
|
-25%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) See Note 17 to our unaudited consolidated financial
statements.
|
(2) See Note 2 to our unaudited consolidated financial
statements.
|
(3) See Note 5 to our unaudited consolidated financial
statements.
|
Fluctuations
in revenues and property operating expenses are primarily a result of
acquisitions and the movement of U.S. and foreign currency exchange rates. The
fluctuations in depreciation and amortization are due to acquisitions and
variations in amortization of short-lived intangible assets. To the extent that
we acquire or dispose of additional properties in the future, these amounts
will change accordingly.
During the
three month period ended March 31, 2017, we recorded an impairment charge
related to one held-for-sale property for which the fair value less costs to
sell exceeded our carrying value. During the three month period ended March
31, 2017, we recorded a gain on sale related to the sale of one property
previously classified as held-for-sale.
During the
three month period ended March 31, 2017, we completed one seniors housing
construction project representing $3,634,000 or $302,833 per unit. The
following is a summary of our seniors housing operating construction projects,
excluding expansions, pending as of March 31, 2017 (dollars in thousands):
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Location
|
|
Units
|
|
|
Commitment
|
|
|
Balance
|
|
Est. Completion
|
Chertsey, UK
|
|
94
|
|
$
|
39,115
|
|
$
|
22,504
|
|
1Q18
|
Bushey, UK
|
|
95
|
|
|
51,088
|
|
|
19,851
|
|
2Q18
|
|
|
189
|
|
$
|
90,203
|
|
|
42,355
|
|
|
New York, NY
|
|
Project in planning stage
|
|
|
129,327
|
|
|
Total
|
|
|
|
|
|
|
$
|
171,682
|
|
|
Interest expense represents secured debt interest expense.
The change in secured
debt interest expense is primarily due to the net effect and timing of
assumptions, extinguishments and principal amortizations.
The following is a summary of our seniors housing
operating property secured debt principal activity (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31, 2017
|
|
March 31, 2016
|
|
|
|
|
|
Weighted Avg.
|
|
|
|
|
Weighted Avg.
|
|
|
Amount
|
|
Interest Rate
|
|
Amount
|
|
Interest Rate
|
Beginning balance
|
|
$
|
2,463,249
|
|
3.936%
|
|
$
|
2,290,552
|
|
3.958%
|
Debt issued
|
|
|
12,536
|
|
2.340%
|
|
|
75,136
|
|
3.063%
|
Debt extinguished
|
|
|
(438,532)
|
|
5.301%
|
|
|
(58,533)
|
|
3.037%
|
Foreign currency
|
|
|
7,158
|
|
3.488%
|
|
|
60,197
|
|
3.524%
|
Principal payments
|
|
|
(11,259)
|
|
3.733%
|
|
|
(12,170)
|
|
3.959%
|
Ending balance
|
|
$
|
2,033,152
|
|
3.663%
|
|
$
|
2,355,182
|
|
3.980%
|
|
|
|
|
|
|
|
|
|
|
|
Monthly averages
|
|
$
|
2,162,185
|
|
3.729%
|
|
$
|
2,306,203
|
|
3.976%
|
The
majority of our seniors housing operating properties are formed through
partnership interests. Net income attributable to noncontrolling interests
represents our partners’ share of net income (loss) related to joint ventures.
The fluctuations in income (loss) from unconsolidated entities is
primarily due to the recognition of goodwill and intangible asset impairments
as well as non-recurring income tax expense adjustments related to our investments
in unconsolidated
entities during the three month period ended March 31,
2017.
Outpatient
Medical
The following is a summary of our NOICO and SSNOI for the outpatient medical
segment (dollars in thousands):
|
|
|
Three Months Ended
|
|
Change
|
|
|
|
|
March 31,
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$
|
|
%
|
NOICO
|
|
$
|
92,719
|
|
$
|
92,713
|
|
$
|
6
|
|
0%
|
Non SSNOI on same store properties
|
|
|
(2,214)
|
|
|
(2,373)
|
|
|
159
|
|
-7%
|
NOICO attributable to non same store properties
(1)
|
|
|
(3,966)
|
|
|
(4,038)
|
|
|
72
|
|
-2%
|
SSNOI
(2)
|
|
$
|
86,539
|
|
$
|
86,302
|
|
$
|
237
|
|
0%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Change is primarily due to acquisitions of five properties
and conversions of construction projects into seven revenue-generating
properties subsequent to January 1, 2016.
|
(2) Relates to 235 same store properties.
|
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The following is a summary of our
results of operations for the outpatient medical segment (dollars in
thousands):
|
|
|
|
Three Months Ended
|
|
Change
|
|
|
|
|
March 31,
|
|
March 31,
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$
|
|
%
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
139,851
|
|
$
|
131,838
|
|
$
|
8,013
|
|
6%
|
|
Interest income
|
|
|
-
|
|
|
1,304
|
|
|
(1,304)
|
|
-100%
|
|
Other income
|
|
|
612
|
|
|
313
|
|
|
299
|
|
96%
|
|
|
Total revenues
|
|
|
140,463
|
|
|
133,455
|
|
|
7,008
|
|
5%
|
Property operating expenses
|
|
|
47,744
|
|
|
40,742
|
|
|
7,002
|
|
17%
|
|
Net operating income from continuing operations (NOICO)
(1)
|
|
|
92,719
|
|
|
92,713
|
|
|
6
|
|
0%
|
Other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
2,291
|
|
|
5,744
|
|
|
(3,453)
|
|
-60%
|
|
Depreciation and amortization
|
|
|
48,931
|
|
|
47,064
|
|
|
1,867
|
|
4%
|
|
Transaction costs
(2)
|
|
|
-
|
|
|
1,423
|
|
|
(1,423)
|
|
-100%
|
|
Impairment of assets
|
|
|
5,625
|
|
|
-
|
|
|
5,625
|
|
n/a
|
|
Loss (gain) on extinguishment of debt, net
|
|
|
1,382
|
|
|
-
|
|
|
1,382
|
|
n/a
|
|
Other expenses
(2)
|
|
|
360
|
|
|
-
|
|
|
360
|
|
n/a
|
|
|
Total other expenses
|
|
|
58,589
|
|
|
54,231
|
|
|
4,358
|
|
8%
|
Income from continuing operations before income taxes and income
from unconsolidated entities
|
|
|
34,130
|
|
|
38,482
|
|
|
(4,352)
|
|
-11%
|
Income tax (expense) benefit
|
|
|
(335)
|
|
|
(228)
|
|
|
(107)
|
|
47%
|
Income from unconsolidated entities
|
|
|
447
|
|
|
34
|
|
|
413
|
|
1215%
|
Net income (loss)
|
|
|
34,242
|
|
|
38,288
|
|
|
(4,046)
|
|
-11%
|
Less: Net income (loss) attributable to noncontrolling interests
|
|
|
810
|
|
|
135
|
|
|
675
|
|
500%
|
Net income (loss) attributable to common stockholders
|
|
$
|
33,432
|
|
$
|
38,153
|
|
$
|
(4,721)
|
|
-12%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) See Note 17 to our unaudited consolidated financial
statements.
|
(2) See Note 2 to our unaudited consolidated financial
statements.
|
The increase
in rental income is primarily attributable to the acquisitions of new
properties and the conversion of newly constructed outpatient medical
properties from which we receive rent. Certain of our leases contain annual
rental escalators that are contingent upon changes in the Consumer Price Index.
These escalators are not fixed, so no straight-line rent is recorded; however,
rental income is recorded based on the contractual cash rental payments due for
the period. If the Consumer Price Index does not increase, a portion of our
revenues may not continue to increase. Sales of real property would offset
revenue increases and, to the extent that they exceed new acquisitions, could
result in decreased revenues. Our leases could renew above or below current
rent rates, resulting in an increase or decrease in rental income. For the
three months ended March 31, 2017, our consolidated outpatient medical
portfolio signed 93,623 square feet of new leases and 163,472 square feet of
renewals. The weighted-average term of these leases was six years, with a
rate of $36.86 per square foot and tenant improvement and lease commission
costs of $21.36 per square foot. Substantially all of these leases during
the referenced quarter contain an annual fixed or contingent escalation rent
structure ranging from 0% to 5%.
The
fluctuation in property operating expenses is primarily attributable to
acquisitions and construction conversions of new outpatient medical facilities
for which we incur certain property operating expenses.
The fluctuations in depreciation and amortization are
due to acquisitions and variations in amortization of short-lived intangible
assets. To the extent that we acquire or dispose of additional properties in
the future, these amounts will change accordingly.
During the
three months ended March 31, 2017, we recorded impairment charges related to
certain held-for-sale properties for which the fair values less estimated costs
to sell exceeded our carrying values.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
During the three months ended March 31, 2017, we
completed two outpatient medical construction projects representing $25,910,000
or $259 per square foot. The following is a summary of the outpatient medical
construction projects, excluding expansions, pending as of March 31, 2017
(dollars in thousands):
Location
|
|
Square Feet
|
|
|
Commitment
|
|
|
Balance
|
|
Est. Completion
|
Timmonium, MD
|
|
46,000
|
|
|
20,996
|
|
|
13,118
|
|
3Q17
|
Howell, MI
|
|
56,211
|
|
|
15,509
|
|
|
10,827
|
|
3Q17
|
Brooklyn, NY
|
|
140,955
|
|
|
103,624
|
|
|
43,236
|
|
2Q18
|
Total
|
|
243,166
|
|
$
|
140,129
|
|
$
|
67,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
represents secured debt interest expense. The change in secured debt interest
expense is primarily due to the net effect and timing of assumptions,
extinguishments and principal amortizations.
The
fluctuation in losses/gains on debt extinguishment is attributable to the large
volume of extinguishments in the first quarter of 2017.
The
following is a summary of our outpatient medical secured debt principal
activity (dollars in thousands):
|
|
Three Months Ended
|
|
|
March 31, 2017
|
|
March 31, 2016
|
|
|
|
|
|
Weighted Avg.
|
|
|
|
|
Weighted Avg.
|
|
|
Amount
|
|
Interest Rate
|
|
Amount
|
|
Interest Rate
|
Beginning balance
|
|
$
|
404,079
|
|
4.846%
|
|
$
|
627,689
|
|
5.177%
|
Debt extinguished
|
|
|
(112,104)
|
|
5.889%
|
|
|
(19,187)
|
|
6.196%
|
Principal payments
|
|
|
(2,151)
|
|
6.491%
|
|
|
(3,142)
|
|
5.671%
|
Ending balance
|
|
$
|
289,824
|
|
4.509%
|
|
$
|
605,360
|
|
5.218%
|
|
|
|
|
|
|
|
|
|
|
|
Monthly averages
|
|
$
|
332,085
|
|
4.664%
|
|
$
|
619,350
|
|
5.237%
|
A portion
of our outpatient medical properties were formed through partnerships. Income or
loss from unconsolidated entities represents our share of net income or losses
related to certain unconsolidated property investments. Net income attributable
to noncontrolling interests represents our partners’ share of net income
relating to those partnerships where we are the controlling partner.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Non-Segment/Corporate
The following is a summary of our
results of operations for the non-segment/corporate activities (dollars in
thousands):
|
|
|
|
Three Months Ended
|
|
Change
|
|
|
|
|
March 31,
|
|
March 31,
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$
|
|
%
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
$
|
233
|
|
$
|
58
|
|
$
|
175
|
|
302%
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
94,979
|
|
|
100,329
|
|
|
(5,350)
|
|
-5%
|
|
|
General and administrative
|
|
|
31,101
|
|
|
45,691
|
|
|
(14,590)
|
|
-32%
|
|
|
Other expenses
|
|
|
4,527
|
|
|
-
|
|
|
4,527
|
|
n/a
|
|
|
Total expenses
|
|
|
130,607
|
|
|
146,020
|
|
|
(15,413)
|
|
-11%
|
Loss from continuing operations before income taxes
|
|
|
(130,374)
|
|
|
(145,962)
|
|
|
15,588
|
|
-11%
|
Income tax (expense) benefit
|
|
|
(23)
|
|
|
(497)
|
|
|
474
|
|
-95%
|
Loss from continuing operations
|
|
|
(130,397)
|
|
|
(146,459)
|
|
|
16,062
|
|
-11%
|
Less: Preferred stock dividends
|
|
|
14,379
|
|
|
16,352
|
|
|
(1,973)
|
|
-12%
|
Less: Preferred stock redemption charge
|
|
|
9,769
|
|
|
-
|
|
|
9,769
|
|
n/a
|
Net loss attributable to common stockholders
|
|
$
|
(154,545)
|
|
$
|
(162,811)
|
|
$
|
8,266
|
|
-5%
|
The following is a summary of our
non-segment/corporate interest expense (dollars in thousands):
|
|
Three Months Ended
|
|
Change
|
|
|
March 31,
|
|
March 31,
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$
|
|
%
|
Senior unsecured notes
|
|
$
|
86,591
|
|
$
|
93,534
|
|
$
|
(6,943)
|
|
-7%
|
Secured debt
|
|
|
60
|
|
|
97
|
|
|
(37)
|
|
-38%
|
Primary unsecured credit facility
|
|
|
5,037
|
|
|
3,709
|
|
|
1,328
|
|
36%
|
Loan expense
|
|
|
3,291
|
|
|
2,989
|
|
|
302
|
|
10%
|
Totals
|
|
$
|
94,979
|
|
$
|
100,329
|
|
$
|
(5,350)
|
|
-5%
|
The change
in interest expense on senior unsecured notes is due to the net effect of
issuances and extinguishments. The decrease in interest expense is attributed
primarily to the $450,000,000 of 4.70% senior unsecured notes extinguished in
December 2016. Please refer to Note 10 to our unaudited consolidated financial
statements for additional information. Loan expense represents the
amortization of deferred loan costs incurred in connection with the issuance
and amendments of debt. Loan expense changes are due to amortization of charges
for costs incurred in connection with senior unsecured note issuances. The
change in interest expense on the primary unsecured credit facility is due
primarily to the net effect and timing of draws, paydowns and variable interest
rate changes. Please refer to Note 9 of our unaudited consolidated financial
statements for additional information regarding our primary unsecured credit
facility.
General and administrative expenses as a percentage of
consolidated revenues for the three months ended March 31, 2017 and 2016 were 2.93%
and 4.36%, respectively. The decrease in general and administrative expenses
for the three months ended March 31, 2017 is primarily related to a reduction
in professional service fees for tax and legal consulting and compensation
costs as a result of execution of our strategic initiatives. Other expenses for
the three months ended March 31, 2017 included costs associated with the
departure of certain executive officers and key employees.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Other
Non-GAAP Financial Measures
We
believe that net operating income from continuing operations (“NOICO”), net
income and net income attributable to common stockholders (“NICS”), as defined
by U.S. GAAP, are the most appropriate earnings measurements. However, we consider
FFO, SSNOI, EBITDA and Adjusted EBITDA to be useful supplemental measures of
our operating performance. Historical cost accounting for real estate assets in
accordance with U.S. GAAP implicitly assumes that the value of real estate
assets diminishes predictably over time as evidenced by the provision for
depreciation. However, since real estate values have historically risen or
fallen with market conditions, many industry investors and analysts have
considered presentations of operating results for real estate companies that
use historical cost accounting to be insufficient. In response, the National
Association of Real Estate Investment Trusts (“NAREIT”) created funds from
operations attributable to common stockholders (“FFO”) as a supplemental
measure of operating performance for REITs that excludes historical cost
depreciation from net income. FFO, as defined by NAREIT, means NICS, computed
in accordance with U.S. GAAP, excluding gains (or losses) from sales of real
estate and impairment of depreciable assets, plus depreciation and
amortization, and after adjustments for unconsolidated entities and
noncontrolling interests.
As
discussed in Note 17 to our unaudited consolidated financial statements, NOICO is
used to evaluate the operating performance of our properties. We define NOICO
as total revenues, including tenant reimbursements, less property operating expenses.
Property operating expenses represent costs associated with managing,
maintaining and servicing tenants for our seniors housing operating and medical
facility properties. These expenses include, but are not limited to,
property-related payroll and benefits, property management fees, marketing,
housekeeping, food service, maintenance, utilities, property taxes and
insurance. General and administrative expenses represent costs unrelated to
property operations or transaction costs. These expenses include, but are not
limited to, payroll and benefits, professional services, office expenses and
depreciation of corporate fixed assets. Same store NOI (“SSNOI”) is used to
evaluate the operating performance of our properties under a consistent
population which eliminates changes in the composition of our portfolio. As
used herein, same store is generally defined as those revenue-generating
properties in the portfolio for the reporting period subsequent to January 1,
2016. Land parcels, loans and sub-leases as well as any properties acquired,
developed/redeveloped, transitioned, sold or classified as held for sale during
that period are excluded from the same store amounts. We believe NOICO and SSNOI
provide investors relevant and useful information because they measure the
operating performance of our properties at the property level on an unleveraged
basis. We use NOICO and SSNOI to make decisions about resource allocations and
to assess the property level performance of our properties.
EBITDA stands for earnings (net income) before interest, taxes, depreciation
and amortization. We believe that EBITDA, along with net income and cash flow
provided from operating activities, is an important supplemental measure
because it provides additional information to assess and evaluate the
performance of our operations. We primarily utilize EBITDA to measure our
interest coverage ratio, which represents EBITDA divided by total interest, and
our fixed charge coverage ratio, which represents EBITDA divided by fixed
charges. Fixed charges include total interest, secured debt principal
amortization and preferred dividends. Covenants in our senior unsecured notes contain
a financial ratios based on a definition of EBITDA that is specific to those agreements.
Failure to satisfy these covenants could result in an event of default that
could have a material adverse impact on our cost and availability of capital,
which could in turn have a material adverse impact on our consolidated results
of operations, liquidity and/or financial condition. Due to the materiality of
these debt agreements and the financial covenants, we have disclosed Adjusted
EBITDA, which represents EBITDA as defined above excluding unconsolidated
entities and adjusted for items per our covenant. We use Adjusted EBITDA to
measure our adjusted fixed charge coverage ratio, which represents Adjusted
EBITDA divided by fixed charges on a trailing twelve months basis. Fixed
charges include total interest (excluding capitalized interest and non-cash
interest expenses), secured debt principal amortization and preferred
dividends. Our covenant requires an adjusted fixed charge coverage ratio of at
least 1.50 times.
Our
supplemental reporting measures and similarly entitled financial measures are
widely used by investors, equity and debt analysts and rating agencies in the
valuation, comparison, rating and investment recommendations of companies.
Management uses these financial measures to facilitate internal and external
comparisons to our historical operating results and in making operating
decisions. Additionally, these measures are utilized by the Board of Directors
to evaluate management. None of our supplemental measures represent net income
or cash flow provided from operating activities as determined in accordance
with U.S. GAAP and should not be considered as alternative measures of
profitability or liquidity. Finally, the supplemental measures, as defined by
us, may not be comparable to similarly entitled items reported by other real
estate investment trusts or other companies.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The following table reflects the
reconciliation of SSNOI to NOICO, the most directly comparable U.S. GAAP
measure, for the periods presented. Dollars are in thousands.
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
March 31,
|
SSNOI Reconciliations:
|
|
2016
|
|
2016
|
|
2016
|
|
2016
|
|
2017
|
NOICO:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Triple-net
|
|
|
|
$
|
308,168
|
|
$
|
310,311
|
|
$
|
310,864
|
|
$
|
279,516
|
|
$
|
249,735
|
|
Seniors housing operating
|
|
|
|
|
196,475
|
|
|
207,255
|
|
|
199,495
|
|
|
210,895
|
|
|
209,442
|
|
Outpatient medical
|
|
|
|
|
92,713
|
|
|
99,805
|
|
|
94,905
|
|
|
92,841
|
|
|
92,719
|
|
|
|
Total
|
|
|
|
|
597,356
|
|
|
617,371
|
|
|
605,264
|
|
|
583,252
|
|
|
551,896
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Triple-net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non SSNOI on same store properties
|
|
|
(16,181)
|
|
|
(14,399)
|
|
|
(14,251)
|
|
|
(14,138)
|
|
|
(13,253)
|
|
|
NOICO attributable to non same store properties
|
|
|
(105,327)
|
|
|
(106,242)
|
|
|
(107,491)
|
|
|
(76,528)
|
|
|
(46,995)
|
|
|
|
Subtotal
|
|
|
|
|
(121,508)
|
|
|
(120,641)
|
|
|
(121,742)
|
|
|
(90,666)
|
|
|
(60,248)
|
|
Seniors housing operating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non SSNOI on same store properties
|
|
|
248
|
|
|
242
|
|
|
1,269
|
|
|
231
|
|
|
231
|
|
|
NOICO attributable to non same store properties
|
|
|
99
|
|
|
71
|
|
|
(4,532)
|
|
|
(17,908)
|
|
|
(17,109)
|
|
|
|
Subtotal
|
|
|
|
|
347
|
|
|
313
|
|
|
(3,263)
|
|
|
(17,677)
|
|
|
(16,878)
|
|
Outpatient medical:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non SSNOI on same store properties
|
|
|
(2,373)
|
|
|
(2,611)
|
|
|
(2,636)
|
|
|
(1,974)
|
|
|
(2,214)
|
|
|
NOICO attributable to non same store properties
|
|
|
(4,038)
|
|
|
(9,341)
|
|
|
(5,276)
|
|
|
(3,007)
|
|
|
(3,966)
|
|
|
|
Subtotal
|
|
|
|
|
(6,411)
|
|
|
(11,952)
|
|
|
(7,912)
|
|
|
(4,981)
|
|
|
(6,180)
|
SSNOI:
|
|
Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Triple-net
|
|
538
|
|
|
186,660
|
|
|
189,670
|
|
|
189,122
|
|
|
188,850
|
|
|
189,487
|
|
Seniors housing operating
|
|
376
|
|
|
196,822
|
|
|
207,568
|
|
|
196,232
|
|
|
193,218
|
|
|
192,564
|
|
Outpatient medical
|
|
235
|
|
|
86,302
|
|
|
87,853
|
|
|
86,993
|
|
|
87,860
|
|
|
86,539
|
|
|
|
Total
|
|
1,149
|
|
$
|
469,784
|
|
$
|
485,091
|
|
$
|
472,347
|
|
$
|
469,928
|
|
$
|
468,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SSNOI Property Reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total properties
|
|
1,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
(60)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developments
|
|
(34)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-for-sale
|
|
(24)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment transitions
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(1)
|
|
(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same store properties
|
|
1,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes eight land parcels.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The table below reflects
the reconciliation of FFO to NICS, the most directly comparable U.S. GAAP
measure, for the periods presented. Noncontrolling interest and unconsolidated
entity amounts represent adjustments to reflect our share of depreciation and
amortization. Amounts are in thousands except for per share data.
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
March 31,
|
FFO Reconciliations:
|
|
2016
|
|
2016
|
|
2016
|
|
2016
|
|
2017
|
NICS
|
|
$
|
148,969
|
|
$
|
195,474
|
|
$
|
334,910
|
|
$
|
333,042
|
|
$
|
312,639
|
Depreciation and amortization
|
|
|
228,696
|
|
|
226,569
|
|
|
218,061
|
|
|
227,916
|
|
|
228,276
|
Impairment of assets
|
|
|
14,314
|
|
|
-
|
|
|
9,705
|
|
|
13,187
|
|
|
11,031
|
Loss (gain) on sales of properties, net
|
|
|
-
|
|
|
(1,530)
|
|
|
(162,351)
|
|
|
(200,165)
|
|
|
(244,092)
|
Noncontrolling interests
|
|
|
(17,319)
|
|
|
(20,616)
|
|
|
(15,695)
|
|
|
(17,897)
|
|
|
(18,107)
|
Unconsolidated entities
|
|
|
16,604
|
|
|
17,077
|
|
|
17,240
|
|
|
16,746
|
|
|
16,484
|
FFO
|
|
$
|
391,264
|
|
$
|
416,974
|
|
$
|
401,870
|
|
$
|
372,829
|
|
$
|
306,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
355,076
|
|
|
356,646
|
|
|
358,932
|
|
|
362,088
|
|
|
362,534
|
|
Diluted
|
|
|
356,051
|
|
|
358,891
|
|
|
361,237
|
|
|
364,369
|
|
|
364,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NICS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.42
|
|
$
|
0.55
|
|
$
|
0.93
|
|
$
|
0.92
|
|
$
|
0.86
|
|
Diluted
|
|
|
0.42
|
|
|
0.54
|
|
|
0.93
|
|
|
0.91
|
|
|
0.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.10
|
|
$
|
1.17
|
|
$
|
1.12
|
|
$
|
1.03
|
|
$
|
0.84
|
|
Diluted
|
|
|
1.10
|
|
|
1.16
|
|
|
1.11
|
|
|
1.02
|
|
|
0.84
|
The table below reflects the
reconciliation of EBITDA to net income, the most directly comparable U.S. GAAP
measure, for the periods presented. Dollars are in thousands.
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
March 31,
|
EBITDA Reconciliations:
|
|
2016
|
|
2016
|
|
2016
|
|
2016
|
|
2017
|
Net income
|
|
$
|
165,474
|
|
$
|
210,749
|
|
$
|
354,741
|
|
$
|
351,108
|
|
$
|
337,610
|
Interest expense
|
|
|
132,960
|
|
|
132,326
|
|
|
129,699
|
|
|
126,360
|
|
|
118,597
|
Income tax expense (benefit)
|
|
|
(1,725)
|
|
|
(513)
|
|
|
(305)
|
|
|
(16,585)
|
|
|
2,245
|
Depreciation and amortization
|
|
|
228,696
|
|
|
226,569
|
|
|
218,061
|
|
|
227,916
|
|
|
228,276
|
EBITDA
|
|
$
|
525,405
|
|
$
|
569,131
|
|
$
|
702,196
|
|
$
|
688,799
|
|
$
|
686,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Coverage Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
132,960
|
|
$
|
132,326
|
|
$
|
129,699
|
|
$
|
126,360
|
|
$
|
118,597
|
Non-cash interest expense
|
|
|
599
|
|
|
(1,519)
|
|
|
(543)
|
|
|
(216)
|
|
|
(1,679)
|
Capitalized interest
|
|
|
3,037
|
|
|
4,306
|
|
|
4,766
|
|
|
4,834
|
|
|
4,129
|
|
Total interest
|
|
|
136,596
|
|
|
135,113
|
|
|
133,922
|
|
|
130,978
|
|
|
121,047
|
EBITDA
|
|
$
|
525,405
|
|
$
|
569,131
|
|
$
|
702,196
|
|
$
|
688,799
|
|
$
|
686,728
|
|
Interest coverage ratio
|
|
|
3.85x
|
|
|
4.21x
|
|
|
5.24x
|
|
|
5.26x
|
|
|
5.67x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Charge Coverage Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest
|
|
$
|
136,596
|
|
$
|
135,113
|
|
$
|
133,922
|
|
$
|
130,978
|
|
$
|
121,047
|
Secured debt principal payments
|
|
|
18,642
|
|
|
19,096
|
|
|
18,151
|
|
|
18,577
|
|
|
16,249
|
Preferred dividends
|
|
|
16,352
|
|
|
16,352
|
|
|
16,352
|
|
|
16,352
|
|
|
14,379
|
|
Total fixed charges
|
|
|
171,590
|
|
|
170,561
|
|
|
168,425
|
|
|
165,907
|
|
|
151,675
|
EBITDA
|
|
$
|
525,405
|
|
$
|
569,131
|
|
$
|
702,196
|
|
$
|
688,799
|
|
$
|
686,728
|
|
Fixed charge coverage ratio
|
|
|
3.06x
|
|
|
3.34x
|
|
|
4.17x
|
|
|
4.15x
|
|
|
4.53x
|
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The
table below reflects the reconciliation of Adjusted EBITDA to net income, the
most directly comparable U.S. GAAP measure, for the periods presented. Dollars
are in thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
Adjusted EBITDA
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
March 31,
|
Reconciliations:
|
|
2016
|
|
2016
|
|
2016
|
|
2016
|
|
2017
|
Net income
|
|
$
|
844,606
|
|
$
|
724,894
|
|
$
|
880,380
|
|
$
|
1,082,070
|
|
$
|
1,254,208
|
Interest expense
|
|
|
504,048
|
|
|
517,512
|
|
|
526,082
|
|
|
521,345
|
|
|
506,982
|
Income tax expense (benefit)
|
|
|
5,030
|
|
|
(2,899)
|
|
|
139
|
|
|
(19,128)
|
|
|
(15,158)
|
Depreciation and amortization
|
|
|
866,106
|
|
|
883,873
|
|
|
896,135
|
|
|
901,242
|
|
|
900,822
|
|
EBITDA
|
|
|
2,219,790
|
|
|
2,123,380
|
|
|
2,302,736
|
|
|
2,485,529
|
|
|
2,646,854
|
Loss (income) from unconsolidated entities
|
|
|
12,676
|
|
|
11,682
|
|
|
10,801
|
|
|
10,357
|
|
|
29,643
|
Transaction costs
|
|
|
70,579
|
|
|
63,245
|
|
|
73,754
|
|
|
42,910
|
|
|
34,702
|
Stock-based compensation expense
|
|
|
29,976
|
|
|
25,883
|
|
|
25,807
|
|
|
28,869
|
|
|
25,588
|
Loss (gain) on extinguishment of debt, net
|
|
|
19,252
|
|
|
398
|
|
|
(186)
|
|
|
17,214
|
|
|
48,593
|
Losses/impairments (gain) on sale of properties, net
|
|
|
(209,228)
|
|
|
(20,647)
|
|
|
(171,246)
|
|
|
(326,839)
|
|
|
(574,216)
|
Provision for loan losses
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
10,215
|
|
|
10,215
|
Loss (gain) on derivatives, net
|
|
|
-
|
|
|
-
|
|
|
(2,516)
|
|
|
(2,448)
|
|
|
(1,225)
|
Other expenses
|
|
|
40,636
|
|
|
37,386
|
|
|
37,386
|
|
|
7,721
|
|
|
19,396
|
Additional other income
|
|
|
(2,144)
|
|
|
(13,955)
|
|
|
(11,811)
|
|
|
(16,664)
|
|
|
(16,664)
|
Adjusted EBITDA
|
|
$
|
2,181,537
|
|
$
|
2,227,372
|
|
$
|
2,264,725
|
|
$
|
2,256,864
|
|
$
|
2,222,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Fixed Charge Coverage Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
504,048
|
|
$
|
517,512
|
|
$
|
526,082
|
|
$
|
521,345
|
|
$
|
506,982
|
Capitalized interest
|
|
|
9,320
|
|
|
11,566
|
|
|
14,467
|
|
|
16,943
|
|
|
18,035
|
Non-cash interest expense
|
|
|
(1,868)
|
|
|
(7,589)
|
|
|
(4,341)
|
|
|
(1,681)
|
|
|
(3,958)
|
|
Total interest
|
|
|
511,500
|
|
|
521,489
|
|
|
536,208
|
|
|
536,607
|
|
|
521,059
|
Adjusted EBITDA
|
|
$
|
2,181,537
|
|
$
|
2,227,372
|
|
$
|
2,264,725
|
|
$
|
2,256,864
|
|
$
|
2,222,886
|
|
Adjusted interest coverage ratio
|
|
|
4.26x
|
|
|
4.27x
|
|
|
4.22x
|
|
|
4.21x
|
|
|
4.27x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest
|
|
$
|
511,500
|
|
$
|
521,489
|
|
$
|
536,208
|
|
$
|
536,607
|
|
$
|
521,059
|
Secured debt principal payments
|
|
|
70,076
|
|
|
71,836
|
|
|
74,170
|
|
|
74,466
|
|
|
72,073
|
Preferred dividends
|
|
|
65,408
|
|
|
65,408
|
|
|
65,407
|
|
|
65,406
|
|
|
63,434
|
|
Total fixed charges
|
|
|
646,984
|
|
|
658,733
|
|
|
675,785
|
|
|
676,479
|
|
|
656,566
|
Adjusted EBITDA
|
|
$
|
2,181,537
|
|
$
|
2,227,372
|
|
$
|
2,264,725
|
|
$
|
2,256,864
|
|
$
|
2,222,886
|
|
Adjusted fixed charge coverage ratio
|
|
|
3.37x
|
|
|
3.38x
|
|
|
3.35x
|
|
|
3.34x
|
|
|
3.39x
|
Our leverage
ratios include book capitalization, undepreciated book capitalization and
market capitalization. Book capitalization represents the sum of net debt
(defined as total long-term debt less cash and cash equivalents and any IRC
section 1031 deposits), total equity and redeemable noncontrolling interests.
Undepreciated book capitalization represents book capitalization adjusted for
accumulated depreciation and amortization. Market capitalization represents
book capitalization adjusted for the fair market value of our common stock. Our
leverage ratios are defined as the proportion of net debt to total
capitalization. The table below reflects the reconciliation of our leverage
ratios to our balance sheets for the periods presented. Dollars are in
thousands.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
|
|
|
|
|
As of
|
|
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
March 31,
|
|
|
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
|
2017
|
Book capitalization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under primary unsecured credit facility
|
|
$
|
645,000
|
|
$
|
745,000
|
|
$
|
1,350,000
|
|
$
|
645,000
|
|
$
|
522,000
|
Long-term debt obligations
(1)
|
|
|
12,418,198
|
|
|
12,228,727
|
|
|
12,080,888
|
|
|
11,713,245
|
|
|
10,932,185
|
Cash & cash equivalents
(2)
|
|
|
(355,949)
|
|
|
(466,585)
|
|
|
(456,420)
|
|
|
(557,659)
|
|
|
(380,360)
|
Total net debt
|
|
|
12,707,249
|
|
|
12,507,142
|
|
|
12,974,468
|
|
|
11,800,586
|
|
|
11,073,825
|
Total equity
|
|
|
14,999,794
|
|
|
14,868,568
|
|
|
15,264,238
|
|
|
15,281,472
|
|
|
15,110,263
|
Redeemable noncontrolling interest
|
|
|
359,656
|
|
|
394,126
|
|
|
393,530
|
|
|
398,433
|
|
|
385,418
|
Book capitalization
|
|
$
|
28,066,699
|
|
$
|
27,769,836
|
|
$
|
28,632,236
|
|
$
|
27,480,491
|
|
$
|
26,569,506
|
|
Net debt to book capitalization ratio
|
|
|
45%
|
|
|
45%
|
|
|
45%
|
|
|
43%
|
|
|
42%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undepreciated book capitalization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net debt
|
|
$
|
12,707,249
|
|
$
|
12,507,142
|
|
$
|
12,974,468
|
|
$
|
11,800,586
|
|
$
|
11,073,825
|
Accumulated depreciation and amortization
|
|
|
4,032,726
|
|
|
4,109,585
|
|
|
4,243,038
|
|
|
4,093,494
|
|
|
4,335,160
|
Total equity
|
|
|
14,999,794
|
|
|
14,868,568
|
|
|
15,264,238
|
|
|
15,281,472
|
|
|
15,110,263
|
Redeemable noncontrolling interest
|
|
|
359,656
|
|
|
394,126
|
|
|
393,530
|
|
|
398,433
|
|
|
385,418
|
Undepreciated book capitalization
|
|
$
|
32,099,425
|
|
$
|
31,879,421
|
|
$
|
32,875,274
|
|
$
|
31,573,985
|
|
$
|
30,904,666
|
|
Net debt to undepreciated book capitalization ratio
|
|
|
40%
|
|
|
39%
|
|
|
39%
|
|
|
37%
|
|
|
36%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market capitalization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net debt
|
|
$
|
12,707,249
|
|
$
|
12,507,142
|
|
$
|
12,974,468
|
|
$
|
11,800,586
|
|
$
|
11,073,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding
|
|
|
356,773
|
|
|
357,690
|
|
|
362,425
|
|
|
362,602
|
|
|
364,564
|
Period end share price
|
|
$
|
69.34
|
|
$
|
76.17
|
|
$
|
74.77
|
|
$
|
66.93
|
|
$
|
70.82
|
Common equity market capitalization
|
|
|
24,738,620
|
|
|
27,245,247
|
|
|
27,098,517
|
|
|
24,268,952
|
|
|
25,818,422
|
Noncontrolling interests
|
|
|
839,856
|
|
|
869,320
|
|
|
867,923
|
|
|
873,512
|
|
|
859,478
|
Preferred stock
|
|
|
1,006,250
|
|
|
1,006,250
|
|
|
1,006,250
|
|
|
1,006,250
|
|
|
718,750
|
Enterprise value
|
|
$
|
39,291,975
|
|
$
|
41,627,959
|
|
$
|
41,947,158
|
|
$
|
37,949,300
|
|
$
|
38,470,475
|
|
Net debt to market capitalization ratio
|
|
|
32%
|
|
|
30%
|
|
|
31%
|
|
|
31%
|
|
|
29%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Amounts include senior unsecured notes, secured debt and
capital lease obligations as reflected on our consolidated balance sheet.
|
(2) Inclusive of IRC section 1031 deposits, if any.
|
Critical Accounting Policies
Our unaudited consolidated
financial statements are prepared in accordance with U.S. GAAP, which requires
us to make estimates and assumptions. Management considers an accounting
estimate or assumption critical if:
·
the nature of the estimates or assumptions is material due to the
levels of subjectivity and judgment necessary to account for highly uncertain
matters or the susceptibility of such matters to change; and
·
the impact of the estimates and assumptions on financial condition
or operating performance is material.
Management has discussed the
development and selection of its critical accounting policies with the Audit
Committee of the Board of Directors. Management believes the current
assumptions and other considerations used to estimate amounts reflected in our unaudited
consolidated financial statements are appropriate and are not reasonably likely
to change in the future. However, since these estimates require assumptions to
be made that were uncertain at the time the estimate was made, they bear the
risk of change. If actual experience differs from the assumptions and other
considerations used in estimating amounts reflected in our unaudited consolidated
financial statements, the resulting changes could have a material adverse
effect on our consolidated results of operations, liquidity and/or financial
condition. Please refer to Note 2 to the financial statements included in our Annual
Report on Form 10-K for the year ended December 31, 2016 for further
information regarding significant accounting policies that impact us. There
have been no material changes to these policies in 2017.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly
Report on Form 10-Q may contain “forward-looking” statements as defined in the
Private Securities Litigation Reform Act of 1995. When the company uses words
such as “may,” “will,” “intend,” “should,” “believe,” “expect,” “anticipate,”
“project,” “estimate” or similar expressions that do not relate solely to
historical matters, it is making forward-looking statements. In particular,
these forward-looking statements include, but are not limited to, those
relating to the company’s opportunities to acquire, develop or sell properties;
the company’s ability to close its anticipated acquisitions, investments or
dispositions on currently anticipated terms, or within currently anticipated
timeframes; the expected performance of the company’s operators/tenants and
properties; the company’s expected occupancy rates; the company’s ability to
declare and to make distributions to shareholders; the company’s investment and
financing opportunities and plans; the company’s continued qualification as a
real estate investment trust (“REIT”); the company’s ability to access capital
markets or other sources of funds; and the company’s ability to meet its
earnings guidance. Forward-looking statements are not guarantees of future
performance and involve risks and uncertainties that may cause the company’s
actual results to differ materially from the company’s expectations discussed
in the forward-looking statements. This may be a result of various factors,
including, but not limited to: the status of the economy; the status of capital
markets, including availability and cost of capital; issues facing the health
care industry, including compliance with, and changes to, regulations and
payment policies, responding to government investigations and punitive
settlements and operators’/tenants’ difficulty in cost-effectively obtaining
and maintaining adequate liability and other insurance; changes in financing
terms; competition within the health care and seniors housing industries;
negative developments in the operating results or financial condition of
operators/tenants, including, but not limited to, their ability to pay rent and
repay loans; the company’s ability to transition or sell properties with
profitable results; the failure to make new investments or acquisitions as and
when anticipated; natural disasters and other acts of God affecting the
company’s properties; the company’s ability to re-lease space at similar rates
as vacancies occur; the company’s ability to timely reinvest sale proceeds at
similar rates to assets sold; operator/tenant or joint venture partner
bankruptcies or insolvencies; the cooperation of joint venture partners; government
regulations affecting Medicare and Medicaid reimbursement rates and operational
requirements; liability or contract claims by or against operators/tenants;
unanticipated difficulties and/or expenditures relating to future investments
or acquisitions; environmental laws affecting the company’s properties; changes
in rules or practices governing the company’s financial reporting; the movement
of U.S. and foreign currency exchange rates; the company’s ability to maintain
its qualification as a REIT; and key management personnel recruitment and
retention. Other important factors are identified in the company’s Annual
Report on Form 10-K for the year ended December 31, 2016, including factors
identified under the headings “Business,” “Risk Factors” and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
Finally, the company undertakes no obligation to update or revise publicly any
forward-looking statements, whether because of new information, future events
or otherwise, or to update the reasons why actual results could differ from
those projected in any forward-looking statements.
Item 3.
Quantitative and Qualitative Disclosures About Market
Risk
We are exposed to various
market risks, including the potential loss arising from adverse changes in
interest rates and foreign currency exchange rates. We seek to mitigate the
underlying
foreign currency exposures with gains and losses on derivative contracts
hedging these exposures.
We seek to mitigate the
effects of fluctuations in interest rates by matching the terms of new
investments with new long-term fixed rate borrowings to the extent possible. We
may or may not elect to use financial derivative instruments to hedge interest
rate exposure. These decisions are principally based on our policy to match our
variable rate investments with comparable borrowings, but are also based on the
general trend in interest rates at the applicable dates and our perception of
the future volatility of interest rates. This section is presented to provide a
discussion of the risks associated with potential fluctuations in interest
rates and foreign currency exchange rates.
We historically
borrow on our primary unsecured credit facility to acquire, construct or make
loans relating to health care and seniors housing properties. Then, as market
conditions dictate, we will issue equity or long-term fixed rate debt to repay
the borrowings under our primary unsecured credit facility. We are subject to
risks associated with debt financing, including the risk that existing
indebtedness may not be refinanced or that the terms of refinancing may not be
as favorable as the terms of current indebtedness. The majority of our
borrowings were completed under indentures or contractual agreements that limit
the amount of indebtedness we may incur. Accordingly, in the event that we are
unable to raise additional equity or borrow money because of these limitations,
our ability to acquire additional properties may be limited.
A change in
interest rates will not affect the interest expense associated with our fixed
rate debt. Interest rate changes, however, will affect the fair value of our
fixed rate debt. Changes in the interest rate environment upon maturity of this
fixed rate debt could have an effect on our future cash flows and earnings,
depending on whether the debt is replaced with other fixed rate debt, variable
rate debt or equity or repaid by the sale of assets. To illustrate the impact
of changes in the interest rate markets, we performed a sensitivity analysis on
our fixed rate debt instruments whereby we modeled the change in net present
values arising from a hypothetical 1% increase in interest rates to determine
the instruments’ change in fair value. The following table summarizes the
analysis performed as of the dates indicated (in
thousands):
|
|
March 31, 2017
|
|
December 31, 2016
|
|
|
Principal
|
|
Change in
|
|
Principal
|
|
Change in
|
|
|
balance
|
|
fair value
|
|
balance
|
|
fair value
|
Senior unsecured notes
|
|
$
|
7,591,593
|
|
$
|
(517,480)
|
|
$
|
7,568,832
|
|
$
|
(521,203)
|
Secured debt
|
|
|
1,731,448
|
|
|
(60,509)
|
|
|
2,489,276
|
|
|
(73,944)
|
Totals
|
|
$
|
9,323,041
|
|
$
|
(577,989)
|
|
$
|
10,058,108
|
|
$
|
(595,147)
|
Our variable rate debt, including our primary
unsecured credit facility, is reflected at fair value. At March 31, 2017, we
had $2,148,703,000 outstanding related to our variable rate debt. Assuming no
changes in outstanding balances, a 1% increase in interest rates would result
in increased annual interest expense of $21,487,000. At December 31, 2016, we
had $2,311,996,000 outstanding under our variable rate debt. Assuming no
changes in outstanding balances, a 1% increase in interest rates would have
resulted in increased annual interest expense of $23,120,000.
We are subject
to currency fluctuations that may, from time to time, affect our financial
condition and results of operations. Increases or decreases in the value of the
Canadian Dollar or Pounds Sterling relative to the U.S. Dollar impact the
amount of net income we earn from our investments in Canada and the United
Kingdom. Based solely on our results for the three months ended March 31, 2017,
including the impact of existing hedging arrangements, if these exchange rates
were to increase or decrease by 10%, our net income from these investments
would increase or decrease, as applicable, by less than $1,500,000. We will
continue to mitigate these underlying foreign currency exposures with non-U.S.
denominated borrowings and gains and losses on derivative contracts. If we
increase our international presence through investments in, or acquisitions or
development of, seniors housing and health care properties outside the U.S., we
may also decide to transact additional business or borrow funds in currencies
other than U.S. Dollars, Canadian Dollars or Pounds Sterling. To illustrate the
impact of changes in foreign currency markets, we performed a sensitivity
analysis on our derivative portfolio whereby we modeled the change in net
present values arising from a hypothetical 1% increase in foreign currency
exchange rates to determine the instruments’ change in fair value. The
following table summarizes the results of the analysis performed, excluding
cross currency hedging activity (dollars in thousands):
|
|
March 31, 2017
|
|
December 31, 2016
|
|
|
Carrying
|
|
Change in
|
|
Carrying
|
|
Change in
|
|
|
Value
|
|
fair value
|
|
Value
|
|
fair value
|
Foreign currency forward contracts
(1)
|
|
$
|
101,116
|
|
$
|
14,491
|
|
$
|
87,962
|
|
$
|
722
|
Debt designated as hedges
|
|
|
1,504,059
|
|
|
15,041
|
|
|
1,481,591
|
|
|
13,000
|
Totals
|
|
$
|
1,605,175
|
|
$
|
29,532
|
|
$
|
1,569,553
|
|
$
|
13,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Amounts exclude cross currency hedge activity.
|
For additional information regarding fair values
of financial instruments, see “Item 2 — Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Critical Accounting Policies”
and Notes 11 and 16 to our unaudited consolidated financial statements.
Item 4.
Controls and Procedures
Our
management, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of our disclosure controls and procedures (as defined in Rule 13a-15(e) of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the
end of the period covered by this Quarterly Report on Form 10-Q. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective in
providing reasonable assurance that information required to be disclosed by us
in the reports we file with or submit to the SEC under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms. No changes in our internal control over financial
reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred
during the fiscal quarter covered by this Quarterly Report on Form 10-Q that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
From time to time, there
are various legal proceedings pending against us that arise in the ordinary
course of our business.
Management does not believe
that the resolution of any of these legal proceedings either individually or in
the aggregate will have a material adverse effect on our business, results of
operations or financial condition. Despite management’s view of the ultimate
resolution of these legal proceedings, we may have significant legal expenses
and costs associated with the defense of such matters. Further, management
cannot predict the outcome of these legal proceedings and if management’s expectation
regarding such matters is not correct, such proceedings could have a material
adverse effect on our business, results of operations or financial condition.
From time to time, we are
party to certain legal proceedings for which third parties, such as tenants,
operators and/or managers, are contractually obligated to indemnify, defend and
hold us harmless. In some of these matters, the indemnitors have insurance for
the potential damages. In other matters, we are being defended by tenants and
other obligated third parties and these indemnitors may not have sufficient
insurance, assets, income or resources to satisfy their defense and
indemnification obligations to us. The unfavorable resolution of such legal
proceedings could, individually or in the aggregate, materially adversely
affect the indemnitors’ ability to satisfy their respective obligations to us,
which, in turn, could have a material adverse effect on our business, results
of operations or financial condition. It is management’s opinion that there
are currently no such legal proceedings pending that will, individually or in
the aggregate, have such a material adverse effect.
Item 1A.
Risk Factors
There
have been no material changes from the risk factors identified under the
heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December
31, 2016.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity
Securities
|
Period
|
|
Total Number of Shares
Purchased
(1)
|
|
Average Price Paid Per Share
|
|
Total Number of Shares
Purchased as Part of Publicly Announced Plans or Programs
(2)
|
|
Maximum Number of Shares
that May Yet Be Purchased Under the Plans or Programs
|
January 1, 2017 through January 31, 2017
|
|
101,340
|
|
$
|
66.51
|
|
|
|
|
February 1, 2017 through February 28, 2017
|
|
11,222
|
|
|
70.38
|
|
|
|
|
March 1 2017 through March 31, 2017
|
|
610
|
|
|
69.14
|
|
|
|
|
Totals
|
|
113,172
|
|
$
|
66.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) During the three months ended March 31, 2017, the company
acquired shares of common stock held by employees who tendered owned shares
to satisfy tax withholding obligations.
|
(2) No shares were purchased as part of publicly announced plans
or programs.
|
Item 5.
Other
Information
None.
Item 6.
Exhibits
10.1 Amended
and Restated Employment Agreement, dated January 3, 2017, between the company
and Thomas J. DeRosa (filed with the Securities and Exchange Commission as
Exhibit 10.4(a) to the company’s Form 10-K filed February 22, 2017 (File No.
001-08923), and incorporated herein by reference thereto).*
10.2 Executive
Retirement Agreement, dated as of February 10, 2017, by and between Jeffrey H.
Miller and the company (filed with the Securities and Exchange Commission as
Exhibit 10.8 to the company’s Form 10-K filed February 22, 2017 (File No.
001-08923), and incorporated herein by reference thereto).*
10.3 Separation
Agreement, dated as of February 6, 2017, by and between Scott M. Brinker and
the company (filed with the Securities and Exchange Commission as Exhibit 10.10
to the company’s Form 10-K filed February 22, 2017 (File No. 001-08923), and
incorporated herein by reference thereto).*
10.4 Welltower
Inc. 2017-2019 Long-Term Incentive Program.*
12 Statement
Regarding Computation of Ratio of Earnings to Fixed Charges and Ratio of
Earnings to Combined Fixed Charges and Preferred Stock Dividends (Unaudited).
31.1 Rule 13a-14(a)/15d-14(a)
Certification of Chief Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a)
Certification of Chief Financial Officer.
32.1 Certification
pursuant to 18 U.S.C. Section 1350 by Chief Executive Officer.
32.2 Certification
pursuant to 18 U.S.C. Section 1350 by Chief Financial Officer.
101.INS XBRL
Instance Document**
101.SCH XBRL
Taxonomy Extension Schema Document**
101.CAL XBRL
Taxonomy Extension Calculation Linkbase Document**
101.LAB XBRL
Taxonomy Extension Label Linkbase Document**
101.PRE XBRL
Taxonomy Extension Presentation Linkbase Document**
101.DEF XBRL
Taxonomy Extension Definition Linkbase Document**
*
**
|
|
Management Contract or
Compensatory Plan or Arrangement
Attached as
Exhibit 101 to this Quarterly Report on Form 10-Q are the following
materials, formatted in XBRL (eXtensible Business Reporting Language):
(i) the Consolidated Balance Sheets at March 31, 2017 and
December 31, 2016, (ii) the Consolidated Statements of
Comprehensive Income for the three months ended March 31, 2017 and 2016,
(iii) the Consolidated Statements of Equity for the three months ended
March 31, 2017 and 2016, (iv) the Consolidated Statements of Cash Flows
for the three months ended March 31, 2017 and 2016 and (v) the Notes to
Unaudited Consolidated Financial Statements.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
|
|
|
WELLTOWER INC.
|
|
Date: May 5, 2017
|
By:
|
/s/
THOMAS J. DEROSA
|
|
|
Thomas J. DeRosa,
|
|
|
Chief Executive Officer
(Principal Executive
Officer)
|
|
|
|
|
|
Date: May 5, 2017
|
By:
|
/s/
SCOTT A. ESTES
|
|
|
Scott A. Estes,
|
|
|
Executive Vice President -
Chief Financial Officer
(Principal Financial
Officer)
|
|
|
|
|
|
Date: May 5, 2017
|
By:
|
/s/ P
AUL D. NUNGESTER, JR.
|
|
|
Paul D. Nungester,
Jr.,
|
|
|
Senior Vice President &
Controller
(Principal Accounting
Officer)
|
|
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