EXECUTIVE SUMMARY Company Overview 26 Business Strategy 26 Key Transactions 28 Key Performance Indicators, Trends and Uncertainties 28 Corporate Governance 31 LIQUIDITY AND CAPITAL RESOURCES Sources and Uses of Cash 31 Off-Balance Sheet Arrangements 32 Contractual Obligations 32 Capital Structure 32 RESULTS OF OPERATIONS Summary 33 Seniors Housing Operating 33 Triple-net 35 Outpatient Medical 37 Non-Segment/Corporate 39 OTHER Non-GAAP Financial Measures 40 Critical Accounting Policies 45 Cautionary Statement Regarding Forward-Looking Statements 46 25
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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 ofWelltower 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 endedDecember 31, 2019 , including factors identified under the headings "Business," "Risk Factors," and "Management's Discussion and Analysis of Financial Condition and Results of Operations." References herein to "we," "us," "our," or the "Company" refer toWelltower Inc. and its subsidiaries unless specifically noted otherwise. Executive Summary Company OverviewWelltower Inc. (NYSE:WELL), an S&P 500 company headquartered inToledo, 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 inthe United States (U.S. ),Canada and theUnited Kingdom (U.K. ), consisting of seniors housing and post-acute communities and outpatient medical properties. The following table summarizes our consolidated portfolio for the three months endedMarch 31, 2020 (dollars in thousands):
Percentage of Number of
Type of Property NOI (1) NOI Properties Seniors Housing Operating $ 243,257 42.2 % 539 Triple-net 194,427 33.7 % 653 Outpatient Medical 138,721 24.1 % 371 Totals $ 576,405 100.0 % 1,563 (1) Represents consolidated NOI and excludes our share of investments in unconsolidated entities. Entities in which we have a joint venture with a minority partner are shown at 100% of the joint venture amount. See Non-GAAP Financial Measures for additional information and reconciliation. The extent to which the COVID-19 pandemic impacts our operations and those of our operators and tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic effects of the pandemic and containment measures, among others. The COVID-19 pandemic could have material and adverse effects on our financial condition, results of operations and cash flows in the future. Our Seniors Housing Operating revenues are dependent on occupancy. Declines in occupancy are expected due to increases in mortality rates and decreases in move-in rates as the pandemic has prevented prospective occupants and their families from visiting our facilities and limited the ability of new occupants to move into our facilities due to heightened move-in criteria and screening. Occupancy rates remained relatively steady throughMarch 31, 2020 but trended downward inApril 2020 . We have incurred increased operational costs as a result of the introduction of public health measures and other regulations affecting our properties, as well as additional health and safety measures adopted by us and our operators related to the COVID-19 pandemic, including increases in labor and property cleaning expenses and expenditures related to our efforts to procure PPE and supplies. These increased expenses are expected to continue through the pandemic and potentially beyond as these additional health and safety measures become standard practice. Our Triple-net operators are experiencing similar impacts on occupancy and operating costs as described above with respect to our Seniors Housing Operating properties which may impact the ability of our Triple-net operators to make contractual rent payments to us in the future. Our Outpatient Medical tenants are experiencing temporary medical practice closures or decreases in revenue due to government imposed restrictions on elective medical procedures, stay at home orders or decisions by patients to delay treatments which may adversely effect their ability to make contractual rent payments. Accordingly, our medical office building tenants' ability to pay rent may be impacted. These factors may cause operators or tenants to seek modifications of such obligations, resulting in reductions in revenue and increases in uncollectible receivables. We will evaluate each request on a case-by-case basis and determine if a form of rent relief is warranted following an examination of the tenant's financial health, rent coverage, current operating situation and other factors. 26
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
As a result of uncertainty regarding the length and severity of the COVID-19 pandemic and the impact of the pandemic on our business and related industries, our investments in and acquisitions of senior housing and health care properties, as well as our ability to transition or sell properties with profitable results, may be limited. DuringApril 2020 , a planned disposition of a portfolio of 11 Seniors Housing Operating properties was not consummated as a result of the uncertainty of the COVID-19 pandemic on our business and industry. We have a significant development portfolio and as ofMarch 31, 2020 , have not experience significant delays or disruptions, but may in the future. Such disruptions to acquisition, disposition and development activity may negatively impact our long-term competitive position. Business Strategy Our primary objectives are to protect stockholder capital and enhance stockholder value. We seek to pay consistent cash dividends to stockholders and create opportunities to increase dividend payments to stockholders as a result of annual increases in NOI and portfolio growth. To meet these objectives, we invest across the full spectrum of seniors housing and health care real estate and diversify our investment portfolio by property type, relationship and geographic location. Substantially all of our revenues are derived from operating lease rentals, resident fees and services and interest earned on outstanding loans receivable. These items represent our primary sources of liquidity to fund distributions and depend upon the continued ability of our obligors to make contractual rent and interest payments to us and the profitability of our operating properties. To the extent that our obligors/partners experience operating difficulties and become unable to generate sufficient cash to make payments or operating distributions to us, there could be a material adverse impact on our consolidated results of operations, liquidity and/or financial condition. To mitigate this risk, we monitor our investments through a variety of methods determined by the type of property. Our asset management process for seniors housing properties generally includes review of monthly financial statements and other operating data for each property, review of obligor/partner creditworthiness, property inspections and review of covenant compliance relating to licensure, real estate taxes, letters of credit and other collateral. Our internal property management division manages and monitors the outpatient medical portfolio with a comprehensive process including review of tenant relations, lease expirations, the mix of health service providers, hospital/health system relationships, property performance, capital improvement needs and market conditions among other things. We evaluate the operating environment in each property's market to determine the likely trend in operating performance of the facility. When we identify unacceptable trends, we seek to mitigate, eliminate or transfer the risk. Through these efforts, we generally aim to intervene at an early stage to address any negative trends, and in so doing, support both the collectability of revenue and the value of our investment. In addition to our asset management and research efforts, we also aim to structure our relevant investments to mitigate payment risk. Operating leases and loans are normally credit enhanced by guarantees and/or letters of credit. In addition, operating leases are typically structured as master leases and loans are generally cross-defaulted and cross-collateralized with other real estate loans, operating leases or agreements between us and the obligor and its affiliates. For the three months endedMarch 31, 2020 , resident fees and services and rental income represented 68% and 31%, respectively, of total revenues. Substantially all of our operating leases are designed with escalating rent structures. Leases with fixed annual rental escalators are generally recognized on a straight-line basis over the initial lease period, subject to a collectability assessment. Rental income related to leases with contingent rental escalators is generally recorded based on the contractual cash rental payments due for the period. Our yield on loans receivable depends upon a number of factors, including the stated interest rate, the average principal amount outstanding during the term of the loan and any interest rate adjustments. Our primary sources of cash include resident fees and services, rent and interest receipts, borrowings under our unsecured revolving credit facility and commercial paper program, public issuances of debt and equity securities, proceeds from investment dispositions and principal payments on loans receivable. Our primary uses of cash include dividend distributions, debt service payments (including principal and interest), real property investments (including acquisitions, capital expenditures, construction advances and transaction costs), loan advances, property operating expenses and general and administrative expenses. Depending upon the availability and cost of external capital, we believe our liquidity is sufficient to fund these uses of cash. We also continuously evaluate opportunities to finance future investments. New investments are generally funded from temporary borrowings under our unsecured revolving credit facility and commercial paper program, internally generated cash and the proceeds from investment dispositions. Our investments generate cash from NOI and principal payments on loans receivable. Permanent financing for future investments, which replaces funds drawn under our unsecured revolving credit facility and commercial paper program, has historically been provided through a combination of the issuance of public debt and equity securities and the incurrence or assumption of secured debt. Depending upon market conditions, we believe that new investments will be available in the future with spreads over our cost of capital that will generate appropriate returns to our stockholders. It is also likely that investment dispositions may occur in the future. To the extent that investment dispositions exceed new investments, our revenues and cash flows from operations could be adversely affected. We expect to reinvest the proceeds from any investment dispositions in new investments. To the extent that 27
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
new investment requirements exceed our available cash on-hand, we expect to borrow under our unsecured revolving credit facility and commercial paper program. AtMarch 31, 2020 , we had$303,423,000 of cash and cash equivalents,$89,643,000 of restricted cash and$2,155,000,000 of available borrowing capacity under our unsecured revolving credit facility. Key Transactions Capital The following summarizes key capital transaction that occurred during the three months endedMarch 31, 2020 and subsequent events: • During the three months endedMarch 31, 2020 , we extinguished$16,040,000
of secured debt at a blended average interest rate of 4.51%.
• During the three months ended
common stock under our ATM and DRIP programs, via both cash settle and forward sale agreements, generating gross proceeds of approximately$171,183,000 . The sale of these shares and settlement of previously
outstanding forward sales resulted in gross proceeds of approximately
revolving credit facility. • OnApril 1, 2020 , we closed on a previously announced$1.0 billion two-year unsecured term loan. The term loan carries a 60-day delayed draw and bears interest at a rate of 1-month LIBOR + 1.20%, based on our credit rating. Investments The following summarizes our property acquisitions and joint venture investments completed during the three months endedMarch 31, 2020 (dollars in thousands): Investment Amount Properties (1) Capitalization Rates (2) Book Amount (3) Seniors Housing 5 4.8 % Operating $ 162,524 $ 159,048 Triple-net (4) - - - % 765 Outpatient Medical 16 235,387 6.1 % 236,127 Totals 21 $ 397,911 5.6 % $ 395,940 (1) Represents stated pro rata purchase price including cash and any assumed debt but excludes fair value adjustments pursuant toU.S. GAAP. (2) Represents annualized contractual or projected net operating income to be received in cash divided by investment amounts. (3) Represents amounts recorded in net real estate investments including fair value adjustments pursuant toU.S. GAAP. See Note 3 to our unaudited consolidated financial statements for additional information. (4) Represents the acquisition of a condo unit at a previously acquired property.
Dispositions The following summarizes property dispositions completed during
the three months ended
Properties Proceeds (1) Capitalization Rates (2) Book Amount (3) Triple-net 5$ 70,439 5.0 % $ 33,445 Outpatient Medical 31 637,770 5.4 % 495,003 Totals 36$ 708,209 5.4 % $ 528,448 (1) Represents pro rata proceeds received upon disposition including any seller financing. (2) Represents annualized contractual income that was being received in cash at date of disposition divided by disposition proceeds. (3) Represents carrying value of net real estate assets at time of disposition. See Note 5 to our unaudited consolidated financial statements for additional information.
Dividends Our Board of Directors declared a cash dividend for the quarter ended
Key Performance Indicators, Trends and Uncertainties We utilize several key performance indicators to evaluate the various aspects of our business. These indicators are discussed below and relate to operating performance, credit strength and concentration risk. Management uses these key performance indicators to facilitate internal and external comparisons to our historical operating results, in making operating decisions and for budget planning purposes. 28
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Operating Performance We believe that net income and net income attributable to common stockholders ("NICS") per the Consolidated Statements of Comprehensive Income are the most appropriate earnings measures. Other useful supplemental measures of our operating performance include funds from operations attributable to common stockholders ("FFO") and consolidated net operating income ("NOI"); however, these supplemental measures are not defined byU.S. generally accepted accounting principles ("U.S. GAAP"). Please refer to the section entitled "Non-GAAP Financial Measures" for further discussion and reconciliations. These earnings measures are widely used by investors and analysts in the valuation, comparison and investment recommendations of companies. The following table reflects the recent historical trends of our operating performance measures for the periods presented (in thousands): Three Months Ended March 31, December 31, September 30, June 30, March 31, 2020 2019 2019 2019 2019 Net income (loss)$ 329,380 $ 240,136 $ 647,932 $ 150,040 $ 292,302 NICS 310,284 224,324 589,876 137,762 280,470 FFO 356,124 476,298 352,378 390,021 358,383 NOI 576,821 600,302 610,545 618,979 601,438 Credit Strength We measure our credit strength both in terms of leverage ratios and coverage ratios. The leverage ratios indicate how much of our balance sheet capitalization is related to long-term debt, net of cash and Internal Revenue Code section 1031 deposits. The coverage ratios indicate our ability to service interest and fixed charges (interest, secured debt principal amortization and preferred dividends). We expect to maintain capitalization ratios and coverage ratios sufficient to maintain a capital structure consistent with our current profile. The coverage ratios are based on earnings before interest, taxes, depreciation and amortization ("EBITDA"). Please refer to the section entitled "Non-GAAP Financial Measures" for further discussion and reconciliation of these measures. Leverage ratios and coverage ratios are widely used by investors, analysts and rating agencies in the valuation, comparison, investment recommendations and rating of companies. The following table reflects the recent historical trends for our credit strength measures for the periods presented: Three Months Ended March 31, December 31, September 30, June 30, March 31, 2020 2019 2019 2019 2019 Net debt to book capitalization ratio 44% 46% 45% 48% 43% Net debt to undepreciated book capitalization ratio 37% 39% 38% 41% 36% Net debt to market capitalization ratio 40% 30% 26% 30% 28% Interest coverage ratio 5.42x 4.64x 7.61x 3.74x 4.80x Fixed charge coverage ratio 4.88x 4.20x 6.96x 3.42x 4.38x Concentration Risk We evaluate our concentration risk in terms of NOI by property mix, relationship mix and geographic mix. Concentration risk is a valuable measure in understanding what portion of our NOI could be at risk if certain sectors were to experience downturns. Property mix measures the portion of our NOI that relates to our various property types. Relationship mix measures the portion of our NOI that relates to our current top five relationships. Geographic mix measures the portion of our NOI that relates to our current top five states (or international equivalents). The following table reflects our recent historical trends of concentration risk by NOI for the periods indicated below: 29
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended December September March 31, 31, 30, June 30, March 31, 2020 2019 2019 2019 2019 Property mix:(1) Seniors Housing Operating 42% 40% 42% 45% 44% Triple-net 34% 38% 38% 37% 39% Outpatient Medical 24% 22% 20% 18% 17% Relationship mix: (1) Sunrise Senior Living (2) 14% 14% 14% 14% 15% ProMedica 9% 9% 9% 9% 9% Revera (2) 6% 6% 6% 6% 6% Genesis Healthcare 5% 5% 5% 5% 5% Belmont Village 3% 3% 4% 3% 3% Remaining relationships 63% 63% 62% 63% 62% Geographic mix:(1) California 15% 13% 14% 13% 13% United Kingdom 9% 9% 8% 8% 9% New Jersey 8% 8% 7% 7% 7% Canada 7% 7% 7% 7% 7% Texas 7% 9% 8% 8% 8% Remaining geographic areas 54% 54% 56% 57% 56% (1) Excludes our share of investments in unconsolidated entities and non-segment/corporate NOI. Entities in which we have a joint venture with a minority partner are shown at 100% of the joint venture amount. (2) Revera owns a controlling interest in Sunrise Senior Living. Lease Expirations The following table sets forth information regarding lease expirations for certain portions of our portfolio as ofMarch 31, 2020 (dollars in thousands): Expiration Year (1) 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Thereafter Triple-net: Properties 8 7 11 1 4 48 76 18 15 15 430 Base rent (2) $ 3,098$ 12,511 $ 10,442 $ 840$ 11,262 $ 53,997 $ 103,210 $ 35,381 $ 22,324 $ 33,042 $ 484,385 % of base rent 0.4 % 1.6 % 1.4 % 0.1 % 1.5 % 7.0 % 13.4 % 4.6 % 2.9 % 4.3 % 62.8 % Units/beds 618 1,453 1,182 1,185 692 3,033 6,078 2,350 1,633 1,429 44,716 % of Units/beds 1.0 % 2.3 % 1.8 % 1.8 % 1.1 % 4.7 % 9.4 % 3.7 % 2.5 % 2.2 % 69.5 % Outpatient Medical: Square feet 1,750,908 1,705,507 2,009,981 2,048,945 2,076,707 1,149,292 1,320,925 1,039,589 1,086,659 951,687 6,015,269 Base rent (2)$ 45,383 $ 50,113 $ 56,393 $ 55,851 $ 61,655 $ 31,499 $ 36,434 $ 26,554 $ 28,463 $ 25,480 $ 140,354 % of base rent 8.1 % 9.0 % 10.1 % 10.0 % 11.0 % 5.6 % 6.5 % 4.8 % 5.1 % 4.6 % 25.2 % Leases 464 391 405 416 342 219 157 141 127 109 220 % of Leases 15.5 % 13.1 % 13.5 % 13.9 % 11.4 % 7.3 % 5.2 % 4.7 % 4.2 % 3.6 % 7.6 %
(1) Excludes investments in unconsolidated entities, developments, land parcels, loans receivable and sub-leases. Investments classified as held for sale are included in the current year. (2) The most recent monthly cash base rent annualized. Base rent does not include tenant recoveries or amortization of above and below market lease intangibles or other non-cash income.
We evaluate our key performance indicators in conjunction with current expectations to determine if historical trends are indicative of future results. Our expected results may not be achieved and actual results may differ materially from our expectations. Factors that may cause actual results to differ from expected results are described in more detail in "Cautionary Statement Regarding Forward-Looking Statements" and other sections of this Quarterly Report on Form 10-Q. Management regularly monitors economic and other factors to develop strategic and tactical plans designed to improve performance and maximize our competitive position. Our ability to achieve our financial objectives is dependent upon our ability to effectively execute these plans and to appropriately respond to emerging economic and company-specific trends. Please refer to our Annual Report on Form 10-K for the year endedDecember 31, 2019 , under the headings "Business," "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion of these risk factors. 30
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Corporate Governance Maintaining investor confidence and trust is important in today's business environment. Our Board of Directors and management are strongly committed to policies and procedures that reflect the highest level of ethical business practices. Our corporate governance guidelines provide the framework for our business operations and emphasize our commitment to increase stockholder value while meeting all applicable legal requirements. These guidelines meet the listing standards adopted by theNew York Stock Exchange and are available on the Internet at www.welltower.com/investors/governance. The information on our website is not incorporated by reference in this Quarterly Report on Form 10-Q, and our web address is included as an inactive textual reference only. Liquidity and Capital Resources Sources and Uses of Cash Our primary sources of cash include resident fees and services, rent and interest receipts, borrowings under our unsecured revolving credit facility and commercial paper program, public issuances of debt and equity securities, proceeds from investment dispositions and principal payments on loans receivable. Our primary uses of cash include dividend distributions, debt service payments (including principal and interest), real property investments (including acquisitions, capital expenditures, construction advances and transaction costs), loan advances, property operating expenses and general and administrative expenses. These sources and uses of cash are reflected in our Consolidated Statements of Cash Flows and are discussed in further detail below. The following is a summary of our sources and uses of cash flows for the periods presented (dollars in thousands): Three Months Ended
Change
March 31, 2020 March 31, 2019 $ % Cash, cash equivalents and restricted cash at beginning of period$ 385,766 $ 316,129 $ 69,637 22 % Cash provided from (used in) operating activities 411,857 343,895 67,962 20 % Cash provided from (used in) investing activities 149,748 197,268 (47,520 ) -24 % Cash provided from (used in) financing activities (544,295 ) (452,205 ) (92,090 ) -20 % Effect of foreign currency translation (10,010 ) 2,352 (12,362 ) -526 % Cash, cash equivalents and restricted cash at end of period$ 393,066 $ 407,439 $ (14,373 ) -4 % Operating Activities The changes in net cash provided from operating activities are primarily attributable to improvements in net working capital. Please see "Results of Operations" for discussion of net income fluctuations. For the three months endedMarch 31, 2020 and 2019, cash flows provided from operations exceeded cash distributions to stockholders. Investing Activities The changes in net cash provided from/used in investing activities are primarily attributable to net changes in real property investments and dispositions, loans receivable and investments in unconsolidated entities, which are summarized above in "Key Transactions" and Notes 3 and 5 of our unaudited consolidated financial statements. The following is a summary of cash used in non-acquisition capital improvement activities for the periods presented (dollars in thousands): Three Months Ended Change March 31, 2020 March 31, 2019 $ % New development $ 48,775 $ 55,391$ (6,616 ) -12 % Recurring capital expenditures, tenant improvements and lease commissions 22,566 21,898 668 3 % Renovations, redevelopments and other capital improvements 46,816 35,037 11,779 34 % Total$ 118,157 $ 112,326 $ 5,831 5 % The change in new development is primarily due to the number and size of construction projects on-going during the relevant periods. Renovations, redevelopments and other capital improvements include expenditures to maximize property value, increase net operating income, maintain a market-competitive position and/or achieve property stabilization. Financing Activities The changes in net cash provided from/used in financing activities are primarily attributable to changes related to our long-term debt arrangements, the issuances of common stock and dividend payments which are summarized above 31
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
in "Key Transactions". Please refer to Notes 10, 11 and 14 of our unaudited consolidated financial statements for additional information. OnApril 1, 2020 , in response to uncertain financial market conditions arising from the COVID-19 pandemic, we undertook steps to strengthen our balance sheet and to enhance our liquidity by entering into a$1.0 billion two-year unsecured term loan. After consideration of this unsecured term loan, we have total near-term available liquidity of approximately$3.5 billion . However, we are unable to accurately predict the full impact that the pandemic will have on our results from operations, financial condition, liquidity and cash flows due to numerous factors discussed in Part II Item 1A. Risk Factors. Off-Balance Sheet Arrangements AtMarch 31, 2020 , we had investments in unconsolidated entities with our ownership generally ranging from 10% to 50%. We use financial derivative instruments to hedge interest rate and foreign currency exchange rate exposure. AtMarch 31, 2020 , we had 12 outstanding letter of credit obligations. Please see Notes 8, 12 and 13 to our unaudited consolidated financial statements for additional information. Contractual Obligations The following table summarizes our payment requirements under contractual obligations as ofMarch 31, 2020 (in thousands): Payments Due by Period Contractual Obligations Total 2020 2021-2022 2023-2024 Thereafter Unsecured credit facility and commercial paper (1,2)$ 845,000 $ 50,000 $ -$ 795,000 $ - Senior unsecured notes and term credit facilities:(2) U.S. Dollar senior unsecured notes 8,100,000 - - 2,450,0005,650,000 Canadian Dollar senior unsecured notes (3) 212,465 - - -212,465 Pounds Sterling senior unsecured notes (3) 1,307,354 - - -1,307,354 U.S. Dollar term credit facility 510,000 - 10,000 500,000 - Canadian Dollar term credit facility (3) 177,054 - - 177,054 - Secured debt: (2,3) Consolidated 2,904,638 275,279 874,852 769,278 985,229 Unconsolidated 874,113 18,019 80,948 114,264 660,882 Contractual interest obligations: (4) Unsecured credit facility and commercial paper 42,616 9,904 26,170 6,542 - Senior unsecured notes and term loans (3) 3,959,479 294,616 811,318 721,169 2,132,376 Consolidated secured debt (3) 410,097 68,573
143,500 86,356 111,668 Unconsolidated secured debt (3) 203,363 23,464 57,187 52,291
70,421 Financing lease liabilities (5) 183,556 6,756 16,521 70,601 89,678
Operating lease liabilities (5) 1,160,976 17,256 44,524 42,455 1,056,741 Purchase obligations (6)
645,682 382,054 201,469 47,531 14,628
Total contractual obligations
(1) Relates to our unsecured credit facility and commercial paper with an aggregate commitment of$3,000,000,000 . See Note 10 to our unaudited consolidated financial statements for additional information. (2) Amounts represent principal amounts due and do not reflect unamortized premiums/discounts or other fair value adjustments as reflected on the balance sheet. (3) Based on foreign currency exchange rates in effect as of balance sheet date. (4) Based on variable interest rates in effect as of balance sheet date. (5) See Note 6 to our unaudited consolidated financial statements for additional information. (6) See Note 13 to our unaudited consolidated financial statements for additional information. Capital Structure Please refer to "Credit Strength" above for a discussion of our leverage and coverage ratio trends. Our debt agreements contain various covenants, restrictions and events of default. Certain agreements require us to maintain financial ratios and minimum net worth and impose certain limits on our ability to incur indebtedness, create liens and make investments or acquisitions. As ofMarch 31, 2020 , we were in compliance with all of the covenants under our debt agreements. None of our debt agreements contain provisions for acceleration which could be triggered by our debt ratings. However, under our primary unsecured credit facility, the ratings on our senior unsecured notes are used to determine the fees and interest charged. We plan to manage the company to maintain compliance with our debt covenants and with a capital structure consistent with our current profile. Any downgrades in 32
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
terms of ratings or outlook by any or all of the rating agencies could have a material adverse impact on our cost and availability of capital, which could have a material adverse impact on our consolidated results of operations, liquidity and/or financial condition. OnMay 17, 2018 , we filed with theSecurities 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 ofMay 1, 2020 , 2,541,750 shares of common stock remained available for issuance under the DRIP registration statement. OnFebruary 25, 2019 , we entered into separate amended and restated equity distribution agreements with each ofBarclays Capital Inc. ,Citigroup Global Markets Inc. ,Credit Agricole Securities (USA) Inc. ,Deutsche Bank Securities Inc. ,Goldman Sachs & Co. LLC ,J.P. Morgan Securities LLC ,KeyBanc Capital Markets Inc. ,Merrill Lynch, Pierce, Fenner & Smith Incorporated ,Morgan Stanley & Co. LLC ,MUFG Securities Americas Inc. ,RBC Capital Markets, LLC ,UBS Securities LLC andWells Fargo Securities, LLC relating to the offer and sale from time to time of up to$1,500,000,000 aggregate amount of our common stock ("Equity Shelf Program"). The Equity Shelf Program also allows us to enter into forward sale agreements. As ofMay 1, 2020 , we had$499,341,000 of remaining capacity under the Equity Shelf Program and there were no outstanding forward sales agreements. Depending upon market conditions, we anticipate issuing securities under our registration statements to invest in additional properties and to repay borrowings under our unsecured revolving credit facility and commercial paper program. Results of Operations Summary Our primary sources of revenue include resident fees and services, rent and interest income. Our primary expenses include property operating expenses, depreciation and amortization, interest expense, general and administrative expenses and other expenses. We evaluate our business and make resource allocations on our three business segments: Seniors Housing Operating, Triple-net and Outpatient Medical. The primary performance measures for our properties are NOI and same store NOI ("SSNOI"), and other supplemental measures include FFO and Adjusted EBITDA, which are further discussed below. Please see Non-GAAP Financial Measures for additional information and reconciliations. The following is a summary of our results of operations (dollars in thousands, except per share amounts): Three Months Ended Change March 31, March 31, 2020 2019 Amount % Net income$ 329,380 $ 292,302 $ 37,078 13 % NICS 310,284 280,470 29,814 11 % FFO 356,124 358,383 (2,259 ) -1 % EBITDA 751,630 683,688 67,942 10 % NOI 576,821 601,438 (24,617 ) -4 % SSNOI 455,205 458,647 (3,442 ) -1 % Per share data (fully diluted): NICS$ 0.75 $ 0.71 $ 0.04 6 % FFO$ 0.86 $ 0.91 $ (0.05 ) -5 % Interest coverage ratio 4.64 x 4.80 x (0.16 )x -3 % Fixed charge coverage ratio 4.20 x 4.38 x (0.18 )x -4 % Seniors Housing Operating The following is a summary of our SSNOI atWelltower's Share for the Seniors Housing Operating segment (dollars in thousands): Three Months Ended Change March 31, 2020 March 31, 2019 $ % SSNOI (1)$ 199,831 $ 210,753 $ (10,922 ) -5.2 % (1) For the three months endedMarch 31, 2020 and 2019, amounts relate to 425 same store properties. The same store property pools exclude 73 properties that have undergone operator transitions or segment transitions during the relevant period. Please see Non-GAAP Financial Measures for additional information and reconciliations. 33
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following is a summary of our results of operations for the Seniors Housing Operating segment (dollars in thousands):
Three Months Ended Change March 31, March 31, 2020 2019 $ % Revenues: Resident fees and services$ 849,972 $ 868,285 $ (18,313 ) -2 % Interest income 104 - 104 n/a Other income 1,052 4,101 (3,049 ) -74 % Total revenues 851,128 872,386 (21,258 ) -2 % Property operating expenses 607,871 607,686 185 - % NOI (1) 243,257 264,700 (21,443 ) -8 % Other expenses: Depreciation and amortization 146,774 131,575 15,199 12 % Interest expense 16,434 18,251 (1,817 ) -10 % Impairment of assets 3,495 - 3,495 n/a Other expenses 2,989 2,946 43 1 % 169,692 152,772 16,920 11 % Income (loss) from continuing operations before income taxes and other items 73,565 111,928 (38,363 ) -34 % Income (loss) from unconsolidated entities (11,024 ) (16,580 ) 5,556 34 % Gain (loss) on real estate dispositions, net (149 ) (160 ) 11 7 % Income from continuing operations 62,392 95,188 (32,796 ) -34 % Net income (loss) 62,392 95,188 (32,796 ) -34 % Less: Net income (loss) attributable to noncontrolling interests (1,932 ) 1,741 (3,673 ) -211 % Net income (loss) attributable to common stockholders$ 64,324 $ 93,447 $
(29,123 ) -31 %
(1) See Non-GAAP Financial Measures below.
Fluctuations in resident fees and services and property operating expenses are primarily a result of acquisitions, segment transitions, offset by dispositions, and the movement ofU.S. and foreign currency exchange rates. Despite the COVID-19 pandemic, occupancy rates remained relatively steady throughMarch 31, 2020 , however, we incurred increased operational costs of$7,294,000 included in property operating expenses as a result of the introduction of public health measures and other regulations affecting our properties, as well as additional health and safety measures adopted by us and our operators related to the COVID-19 pandemic, including increases in labor and property cleaning expenses and expenditures related to our efforts to procure PPE and supplies. The fluctuations in depreciation and amortization are due to acquisitions and dispositions and variations in amortization of short-lived intangible assets. To the extent that we acquire or dispose of additional properties in the future, these amounts will change accordingly. During the three months endedMarch 31, 2020 , we recorded impairment charges on one held for use property as the carrying values exceeded the estimated fair value. Transaction costs related to asset acquisitions are capitalized as a component of the purchase price. The increase in other expenses is primarily due to additional noncapitalizable transaction costs associated with acquisitions and operator transitions. During the three months endedMarch 31, 2020 , we completed threeSeniors Housing Operating construction projects representing$93,188,000 or$300,606 per unit. The following is a summary of our Seniors Housing Operating construction projects, excluding expansions, pending as ofMarch 31, 2020 (dollars in thousands): 34
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Location Units Commitment Balance Est. Completion Potomac, MD 120$ 56,720 $ 30,043 4Q20 Beckenham, UK 100 58,644 28,808 3Q21 Hendon, UK 102 69,477 34,519 4Q21 Barnet, UK 100 64,123 28,222 4Q21 422$ 248,964 121,592 Toronto, ON Project in planning stage 40,918 Washington, DC Project in planning stage 20,165 Brookline, MA Project in planning stage 17,477$ 200,152 Interest expense represents secured debt interest expense which fluctuates based on the net effect and timing of assumptions, segment transitions, fluctuations in foreign currency rates, extinguishments and principal amortizations. The following is a summary of our Seniors Housing Operating segment property secured debt principal activity (dollars in thousands): Three Months Ended March 31, 2020 March 31, 2019 Wtd. Avg. Wtd. Avg. Amount Interest Rate Amount Interest Rate Beginning balance$ 2,115,037 3.54 %$ 1,810,587 3.87 % Debt issued 44,921 2.58 % 247,163 3.68 % Debt assumed - - % 42,000 4.62 % Debt extinguished (16,040 ) 4.51 % (114,570 ) 4.96 % Principal payments (12,174 ) 3.49 % (11,205 ) 3.58 % Foreign currency (86,818 ) 3.25 % 21,368 3.34 % Ending balance$ 2,044,926 3.56 %$ 1,995,343 3.79 % Monthly averages$ 2,080,448 3.54 %$ 1,915,650 3.84 % The majority of our Seniors Housing Operating properties are formed through partnership interests. Losses from unconsolidated entities are largely attributable to depreciation and amortization of short-lived intangible assets related to certain investments in unconsolidated joint ventures. Net income attributable to noncontrolling interests represents our partners' share of net income (loss) related to joint ventures. Triple-net The following is a summary of our SSNOI atWelltower's Share for the Triple-net segment (dollars in thousands): Three Months Ended Change March 31, 2020 March 31, 2019 $ % SSNOI (1)$ 171,716 $ 166,415 $ 5,301 3.2 % (1) For the three months endedMarch 31, 2020 and 2019, amounts relate to 632 same store properties. The same store property pools exclude 19 properties that have undergone operator transitions or segment transitions during the relevant period. Please see Non-GAAP Financial Measures for additional information and reconciliations. The following is a summary of our results of operations for the Triple-net segment (dollars in thousands): 35
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended Change March 31, March 31, 2020 2019 $ % Revenues: Rental income$ 191,385 $ 232,032 $ (40,647 ) -18 % Interest income 14,671 14,946 (275 ) -2 % Other income 1,673 1,263 410 32 % Total revenues 207,729 248,241 (40,512 ) -16 % Property operating expenses 13,302 14,955 (1,653 ) -11 % NOI (1) 194,427 233,286 (38,859 ) -17 % Other expenses: Depreciation and amortization 57,694 61,348 (3,654 ) -6 % Interest expense 2,852 3,440 (588 ) -17 % Loss (gain) on derivatives and financial instruments, net 7,651 (2,487 ) 10,138 408 % Provision for loan losses 7,072 18,690 (11,618 ) -62 % Impairment of assets 24,332 - 24,332 n/a Other expenses 513 3,029 (2,516 ) -83 % 100,114 84,020 16,094 19 % Income (loss) from continuing operations before income taxes and other items 94,313 149,266 (54,953 ) -37 % Income (loss) from unconsolidated entities 5,796 5,658 138 2 % Gain (loss) on real estate dispositions, net 49,637 167,574 (117,937 ) -70 % Income from continuing operations 149,746 322,498 (172,752 ) -54 % Net income 149,746 322,498 (172,752 ) -54 % Less: Net income (loss) attributable to noncontrolling interests 18,575 9,096 9,479 104 % Net income attributable to common stockholders$ 131,171 $ 313,402 $
(182,231 ) -58 %
(1) See Non-GAAP Financial Measures below.
The decrease in rental income is primarily attributable to the write off of straight-line rent receivables of$32,268,000 recognized during the quarter endedMarch 31, 2020 in conjunction with a lease amendment, as well as property dispositions. Certain of our leases contain annual rental escalators that are contingent upon changes in the Consumer Price Index and/or changes in the gross operating revenues of the tenant's properties. These escalators are not fixed, so no straight-line rent is recorded; however, rental income is recorded based on the contractual cash rental payments due for the period. If gross operating revenues at our facilities and/or the Consumer Price Index do not increase, a portion of our revenues may not continue to increase. For the three months endedMarch 31, 2020 , we had 17 leases with rental rate increases ranging from 0.13% to 1.07% in our Triple-net portfolio. Our Triple-net operators are experiencing similar impacts on occupancy and operating costs as described above with respect to our Seniors Housing Operating properties which may impact the ability of our Triple-net operators to make contractual rent payments to us in the future. However, rent collections for the three months endedMarch 31, 2020 were consistent with prior periods. Depreciation and amortization fluctuates as a result of the acquisitions, dispositions and transitions of triple-net properties. To the extent we acquire or dispose of additional properties in the future, our provision for depreciation and amortization will change accordingly. InMarch 2019 , we recognized a provision for loan losses of$18,690,000 to fully reserve for certain real estate loans receivable that are no longer deemed collectible. InMarch 2020 , we recognized a provision for loan losses of$6,898,000 to fully reserve for a non-real estate loan receivable that was no longer deemed collectible. During the three months endedMarch 31, 2020 , we recorded impairment charges on certain held for use properties as the carrying values exceeded the estimated fair values. Changes in the gain on sales of properties are related to the volume and timing of property sales and the sales prices. Transaction costs related to asset acquisitions are capitalized as a component of purchase price. The fluctuation in other expenses is primarily due to noncapitalizable transaction costs from acquisitions and segment transitions. The following is a summary of Triple-net construction projects, excluding expansions, pending as ofMarch 31, 2020 (dollars in thousands): 36
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Location Units/Beds Commitment Balance Est. Completion Union, KY 162$ 34,600 $ 28,823 2Q20 Westerville, OH 102 27,200 23,806 2Q20 Droitwich, UK 70 15,769 12,626 2Q20 Thousand Oaks, CA 82 24,763 12,100 4Q20 Redhill, UK 76 19,797 8,477 1Q21 Wombourne, UK 66 14,941 3,330 4Q21 Leicester, UK 60 13,945 3,320 4Q21 618$ 151,015 $ 92,482 Interest expense represents secured debt interest expense and related fees. The change in secured debt interest expense is due to the net effect and timing of assumptions, segment transitions, fluctuations in foreign currency rates, extinguishments and principal amortizations. The fluctuation in loss (gain) on derivatives and financial instruments, net is primarily attributable to the mark-to-market adjustment recorded on our Genesis Healthcare, Inc. available-for-sale investment. The following is a summary of our Triple-net secured debt principal activity for the periods presented (dollars in thousands): Three Months Ended March 31, 2020 March 31, 2019 Wtd. Avg. Wtd. Avg. Amount Interest Rate Amount Interest Rate Beginning balance$ 306,038 3.60 %$ 288,386 3.63 % Principal payments (1,059 ) 5.17 % (957 ) 5.24 % Foreign currency (15,240 ) 3.40 % 4,829 3.30 % Ending balance$ 289,739 3.55 %$ 292,258 3.62 % Monthly averages$ 299,111 3.59 %$ 293,113 3.62 % A portion of our Triple-net properties were formed through partnerships. Income or loss from unconsolidated entities represents our share of net income or losses from partnerships where we are the noncontrolling partner. Net income attributable to noncontrolling interests represents our partners' share of net income relating to those partnerships where we are the controlling partner. Outpatient Medical The following is a summary of our SSNOI at Welltower Share for the Outpatient Medical segment (dollars in thousands): Three Months Ended Change March 31, 2020 March 31, 2019 $ % SSNOI (1) $ 83,658$ 81,479 $ 2,179 2.7 % (1) For the three months endedMarch 31, 2020 and 2019, amounts relate to 261 same store properties, respectively. Please see Non-GAAP Financial Measures for additional information and reconciliations. 37
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following is a summary of our results of operations for the Outpatient Medical segment for the periods presented (dollars in thousands):
Three Months Ended Change March 31, March 31, 2020 2019 $ % Revenues: Rental income$ 198,575 $ 149,052 $ 49,523 33 % Interest income 466 173 293 169 % Other income 288 236 52 22 % Total revenues 199,329 149,461 49,868 33 % Property operating expenses 60,608 48,166 12,442 26 % NOI (1) 138,721 101,295 37,426 37 % Other expenses: Depreciation and amortization 70,333 51,009 19,324 38 % Interest expense 4,808 3,348 1,460 44 % Other expenses 1,007 754 253 34 % 76,148 55,111 21,037 38 % Income (loss) from continuing operations before income taxes and other items 62,573 46,184 16,389 35 % Income (loss) from unconsolidated entities 1,536 1,723 (187 ) -11 % Gain (loss) on real estate dispositions, net 213,336 (5 ) 213,341 n/a Income from continuing operations 277,445 47,902 229,543 479 % Net income (loss) 277,445 47,902 229,543 479 % Less: Net income (loss) attributable to noncontrolling interests 2,453 995 1,458 147 % Net income (loss) attributable to common stockholders$ 274,992 $ 46,907 $
228,085 486 %
(1) See Non-GAAP Financial Measures.
The increases in rental income are primarily attributable to acquisitions of new properties and the conversion of newly constructed outpatient medical properties, particularly the$1.25 billion CNL Healthcare Properties portfolio acquisition that closed inMay 2019 , partially offset by dispositions. Certain of our leases contain annual rental escalators that are contingent upon changes in the Consumer Price Index. These escalators are not fixed, so no straight-line rent is recorded; however, rental income is recorded based on the contractual cash rental payments due for the period. If the Consumer Price Index does not increase, a portion of our revenues may not continue to increase. Our leases could renew above or below current rental rates, resulting in an increase or decrease in rental income. For the three months endedMarch 31, 2020 , our consolidated outpatient medical portfolio signed 144,185 square feet of new leases and 210,308 square feet of renewals. The weighted-average term of these leases was seven years, with a rate of$36.71 per square foot and tenant improvement and lease commission costs of$27.89 per square foot. Substantially all of these leases contain an annual fixed or contingent escalation rent structure ranging from 1.5% to 4.0%. In addition, our Outpatient Medical tenants are experiencing temporary medical practice closures or decreases in revenue due to government imposed restrictions on elective medical procedures or decisions by patients to delay treatments which may adversely effect their ability to make contractual rent payments. However, rent collections for the three months endedMarch 31, 2020 were consistent with prior periods. The fluctuation in property operating expenses and depreciation and amortization are primarily attributable to acquisitions and construction conversions of outpatient medical facilities, offset by dispositions. To the extent that we acquire or dispose of additional properties in the future, these amounts will change accordingly. Changes in gains/losses on sales of properties are related to volume of property sales and the sales prices. During the three months endedMarch 31, 2020 , we completed one Outpatient Medical construction project representing$19,369,000 or$352 per square foot. The following is a summary of the Outpatient Medical construction projects, excluding expansions, pending as ofMarch 31, 2020 (dollars in thousands): Location Square Feet Commitment Balance Est. Completion Lowell, MA 50,668$ 12,300 $ 11,684 2Q20 Katy, TX 36,500 12,028 6,063 2Q20 Brooklyn, NY 140,955 105,306 86,990 3Q20 Total 228,123$ 129,634 $ 104,737 38
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Total interest expense represents secured debt interest expense. The change in secured debt interest expense is primarily due to the net effect and timing of assumptions, extinguishments and principal amortizations. The following is a summary of our outpatient medical secured debt principal activity (dollars in thousands): Three Months Ended March 31, 2020 March 31, 2019 Wtd. Ave Wtd. Ave Amount Interest Rate Amount Interest Rate Beginning balance$ 572,267 3.97 %$ 386,738 4.20 % Principal payments (2,293 ) 4.65 % (1,381 ) 5.11 % Ending balance$ 569,974 3.94 %$ 385,357 4.25 % Monthly averages$ 571,200 3.97 %$ 386,088 4.24 % A portion of our Outpatient Medical properties were formed through partnerships. Income or loss from unconsolidated entities represents our share of net income or losses from partnerships where we are the noncontrolling partner. Net income attributable to noncontrolling interests represents our partners' share of net income or loss relating to those partnerships where we are the controlling partner. Non-Segment/Corporate The following is a summary of our results of operations for the Non-Segment/Corporate activities for the periods presented (dollars in thousands): Three Months Ended Change March 31, March 31, 2020 2019 $ % Revenues: Other income$ 416 $ 2,157 $ (1,741 ) -81 % Total revenue 416 2,157 (1,741 ) -81 % Expenses: Interest expense 117,913 120,193 (2,280 ) -2 % General and administrative expenses 35,481 35,282 199 1 % Loss (gain) on extinguishment of debt, net - 15,719 (15,719 ) -100 % Other expenses 1,783 2,027 (244 ) -12 % 155,177 173,221 (18,044 ) -10 % Loss from continuing operations before income taxes and other items (154,761 ) (171,064 ) 16,303 10 % Income tax (expense) benefit (5,442 ) (2,222 ) (3,220 ) -145 % Loss from continuing operations (160,203 ) (173,286 ) 13,083 8 % Net loss attributable to common stockholders$ (160,203 ) $ (173,286 )
The following is a summary of our Non-Segment/Corporate interest expense or the periods presented (dollars in thousands):
Three Months Ended Change March 31, March 31, 2020 2019 $ % Senior unsecured notes$ 103,533 $ 108,755 $ (5,222 ) -5 % Unsecured credit facility and commercial paper program 10,169 7,520 2,649 35 % Loan expense 4,211 3,918 293 7 % Totals$ 117,913 $ 120,193 $ (2,280 ) -2 % The change in interest expense on senior unsecured notes is due to the net effect of issuances and extinguishments, as well as the movement in foreign exchange rates and related hedge activity. Please refer to Note 11 for additional information. The change in interest expense on our unsecured revolving credit facility and commercial paper program is due primarily to the net effect and timing of draws, paydowns and variable interest rate changes. Please refer to Note 10 for additional information regarding our unsecured revolving credit facility and commercial paper program. The loss on extinguishment recognized during the three months 39
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
endedMarch 31, 2019 is due to the early extinguishment of the$600,000,000 of 4.125% senior unsecured notes due 2019 and the$450,000,000 of 6.125% senior unsecured notes due 2020. General and administrative expenses as a percentage of consolidated revenues for the three months endedMarch 31, 2020 and 2019 were 2.82% and 2.77%, respectively. The provision for income taxes primarily relates to state taxes, foreign taxes and taxes based on income generated by entities that are structured as TRSs. Non-GAAP Financial Measures We believe that net income and net income attributable to common stockholders ("NICS"), as defined byU.S. GAAP, are the most appropriate earnings measurements. However, we consider FFO, NOI, SSNOI, EBITDA and Adjusted EBITDA to be useful supplemental measures of our operating performance. Historical cost accounting for real estate assets in accordance withU.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, theNational 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 withU.S. GAAP, excluding gains (or losses) from sales of real estate and impairment of depreciable assets, plus depreciation and amortization, and after adjustments for unconsolidated entities and noncontrolling interests. Consolidated net operating income ("NOI") is used to evaluate the operating performance of our properties. We define NOI as total revenues, including tenant reimbursements, less property operating expenses. Property operating expenses represent costs associated with managing, maintaining and servicing tenants for our properties. These expenses include, but are not limited to, property-related payroll and benefits, property management fees paid to operators, marketing, housekeeping, food service, maintenance, utilities, property taxes and insurance. General and administrative expenses represent costs unrelated to property operations. These expenses include, but are not limited to, payroll and benefits, professional services, office expenses and depreciation of corporate fixed assets. Same store NOI ("SSNOI") is used to evaluate the operating performance of our properties using a consistent population which controls for changes in the composition of our portfolio. We believe the drivers of property level NOI for both consolidated properties and unconsolidated properties are generally the same and therefore, we evaluate SSNOI based on our ownership interest in each property ("Welltower Share"). To arrive atWelltower's Share, NOI is adjusted by adding our minority ownership share related to unconsolidated properties and by subtracting the minority partners' noncontrolling ownership interests for consolidated properties. We do not control investments in unconsolidated properties and while we consider disclosures at Welltower Share to be useful, they may not accurately depict the legal and economic implications of our joint venture arrangements and should be used with caution. As used herein, same store is generally defined as those revenue-generating properties in the portfolio for the relevant year-over-year reporting periods. Acquisitions and development conversions are included in SSNOI five full quarters after acquisition or being placed into service for theQTD Pool . Land parcels, loans and sub-leases, as well as any properties sold or classified as held for sale during the respective periods are excluded from SSNOI. Redeveloped properties (including major refurbishments of a Seniors Housing Operating property where 20% or more of units are simultaneously taken out of commission for 30 days or more or Outpatient Medical properties undergoing a change in intended use) are excluded from SSNOI until five full quarters post completion of the redevelopment for theQTD Pool . Properties undergoing operator transitions and/or segment transitions are also excluded from SSNOI until five full quarters post completion of the transition for theQTD Pool . In addition, properties significantly impacted by force majeure, acts of God, or other extraordinary adverse events are excluded from SSNOI until five full quarters after the properties are placed back into service for theQTD Pool . SSNOI excludes non-cash NOI and includes adjustments to present consistent ownership percentages and to translate Canadian properties andUK properties using a consistent exchange rate. We believe NOI and SSNOI provide investors relevant and useful information because they measure the operating performance of our properties at the property level on an unleveraged basis. We use NOI and SSNOI to make decisions about resource allocations and to assess the property level performance of our properties. EBITDA stands for earnings (net income) before interest, taxes, depreciation and amortization. We believe that EBITDA, along with net income and cash flow provided from operating activities, is an important supplemental measure because it provides additional information to assess and evaluate the performance of our operations. We primarily utilize EBITDA to measure our interest coverage ratio, which represents EBITDA divided by total interest, and our fixed charge coverage ratio, which represents EBITDA divided by fixed charges. Fixed charges include total interest and secured debt principal amortization. Covenants in our senior unsecured notes and primary unsecured credit facility contain financial ratios based on a definition of EBITDA that is specific to those agreements. Failure to satisfy these covenants could result in an event of default that could have a material adverse impact on our cost and availability of capital, which could in turn, have a material adverse impact on our consolidated results of operations, liquidity and/or financial condition. Due to the materiality of these debt agreements and the financial covenants, we have disclosed Adjusted EBITDA, which represents EBITDA as defined above excluding unconsolidated entities and adjusted for items per our covenant. We use Adjusted EBITDA to measure our adjusted fixed charge coverage ratio, which represents 40
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Adjusted EBITDA divided by fixed charges on a trailing twelve months basis. Fixed charges include total interest (excluding capitalized interest and non-cash interest expenses), secured debt principal amortization and preferred dividends. Our covenant requires an adjusted fixed charge coverage ratio of at least 1.50 times. Our supplemental reporting measures and similarly entitled financial measures are widely used by investors, equity and debt analysts and rating agencies in the valuation, comparison, rating and investment recommendations of companies. Management uses these financial measures to facilitate internal and external comparisons to our historical operating results and in making operating decisions. Additionally, these measures are utilized by the Board of Directors to evaluate management. None of our supplemental measures represent net income or cash flow provided from operating activities as determined in accordance withU.S. GAAP and should not be considered as alternative measures of profitability or liquidity. Finally, the supplemental measures, as defined by us, may not be comparable to similarly entitled items reported by other real estate investment trusts or other companies. Three Months Ended March 31, December 31, September 30, June 30, March 31, NOI Reconciliations: 2020 2019 2019 2019 2019 Net income (loss)$ 329,380 $ 240,136 $ 647,932 $ 150,040 $ 292,302 Loss (gain) on real estate dispositions, net (262,824 ) (12,064 ) (570,250 ) 1,682 (167,409 ) Loss (income) from unconsolidated entities 3,692 (57,420 ) (3,262 ) 9,049 9,199 Income tax expense (benefit) 5,442 (4,832 ) 3,968 1,599 2,222 Other expenses 6,292 16,042 6,186 21,628 8,756 Impairment of assets 27,827 98 18,096 9,939 - Provision for loan losses 7,072 - - - 18,690 Loss (gain) on extinguishment of debt, net - 2,612 65,824 - 15,719 Loss (gain) on derivatives and financial instruments, net 7,651 (5,069 ) 1,244 1,913 (2,487 ) General and administrative expenses 35,481 26,507 31,019 33,741 35,282 Depreciation and amortization 274,801 262,644 272,445 248,052 243,932 Interest expense 142,007 131,648 137,343 141,336 145,232 Consolidated net operating income (NOI)$ 576,821 $ 600,302 $
610,545
NOI by segment: Seniors Housing Operating$ 243,257 $ 242,453 $ 254,155 $ 278,212 $ 264,700 Triple-net 194,427 226,837 230,685 227,935 233,286 Outpatient Medical 138,721 130,498 124,864 112,378 101,295 Non-segment/corporate 416 514 841 454 2,157 Total NOI$ 576,821 $ 600,302 $ 610,545 $ 618,979 $ 601,438 41
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended SSNOI Reconciliations: March 31, 2020 March 31, 2019 Seniors Housing Operating: Consolidated NOI $ 243,257 $ 264,700 NOI attributable to unconsolidated investments 14,954 16,439 NOI attributable to noncontrolling interests (18,754 ) (20,118 ) NOI attributable to non-same store properties (40,059 ) (52,927 ) Non-cash NOI attributable to same store properties (839 ) 553 Currency and ownership adjustments (1) 1,272 2,106 SSNOI at Welltower Share 199,831 210,753 Triple-net: Consolidated NOI 194,427 233,286 NOI attributable to unconsolidated investments 5,133 5,078 NOI attributable to noncontrolling interests (14,783 ) (14,592 ) NOI attributable to non-same store properties (25,838 ) (41,648 ) Non-cash NOI attributable to same store properties 12,432 (15,629 ) Currency and ownership adjustments (1) 345 (80 ) SSNOI at Welltower Share 171,716 166,415 Outpatient Medical: Consolidated NOI 138,721 101,295 NOI attributable to unconsolidated investments 1,063 310 NOI attributable to noncontrolling interests (4,358 ) (6,738 ) NOI attributable to non-same store properties (43,599 ) (4,841 ) Non-cash NOI attributable to same store properties (1,974 ) (2,505 ) Currency and ownership adjustments (1) (6,195 ) (6,042 ) SSNOI at Welltower Share 83,658 81,479 SSNOI at Welltower Share: Seniors Housing Operating 199,831 210,753 Triple-net 171,716 166,415 Outpatient Medical 83,658 81,479 Total $ 455,205 $ 458,647 (1) Includes adjustments to reflect consistent property ownership percentages, to translate Canadian properties at a USD/CAD rate of 1.32 and to translateUK properties at a GBP/USD rate of 1.30. QTD Pool Seniors Housing Outpatient SSNOI Property Reconciliations: Operating Triple-net Medical Total Consolidated properties 539 653 371 1,563 Unconsolidated properties 81 39 29 149 Total properties 620 692 400 1,712
Recent acquisitions/development
conversions(1) (69 ) (10 ) (124 ) (203 ) Under development (24 ) (8 ) (3 ) (35 ) Under redevelopment(2) (12 ) - (2 ) (14 ) Current held for sale(3) (7 ) (6 ) (2 ) (15 ) Land parcels, loans and subleases (9 ) (17 ) (8 ) (34 ) Transitions(4) (73 ) (19 ) - (92 ) Other (1 ) - - (1 ) Same store properties 425 632 261 1,318
(1) Acquisitions and development conversions will enter the
certificate of occupancy, respectively.
(2) Redevelopment properties will enter the
completion.
(3) Excludes 11 Seniors Housing Operating properties classified as held for sale which will transition back
into held for use during the quarter ended
(4) Transitioned properties will enter the
in place or under the new structure. 42
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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 comparableU.S. GAAP measure, for the periods presented. Noncontrolling interest and unconsolidated entity amounts represent adjustments to reflect our share of depreciation and amortization, gains/loss on real estate dispositions and impairment of assets. Amounts are in thousands except for per share data. Three Months Ended March 31, December 31, September 30, June 30, March 31, FFO Reconciliation: 2020 2019 2019 2019 2019 Net income attributable to common stockholders$ 310,284 $ 224,324 $ 589,876 $ 137,762 $ 280,470 Depreciation and amortization 274,801 262,644 272,445 248,052 243,932 Impairment of assets 27,827 98 18,096 9,939 - Loss (gain) on real estate dispositions, net (262,824 ) (12,064 ) (570,250 ) 1,682 (167,409 ) Noncontrolling interests (9,409 ) (14,895 ) 31,347 (18,889 ) (17,760 ) Unconsolidated entities 15,445 16,191 10,864 11,475 19,150 FFO$ 356,124 $ 476,298 $ 352,378
Average diluted shares outstanding 412,420 407,904 406,891
406,673 393,452
Per diluted share data: Net income attributable to common stockholders$ 0.75 $ 0.55 $ 1.45$ 0.34 $ 0.71 FFO$ 0.86 $ 1.17 $ 0.87$ 0.96 $ 0.91 The tables below reflects the reconciliation of EBITDA to net income, the most directly comparableU.S. GAAP measure, for the periods presented. Dollars are in thousands. Three Months Ended March 31, December 31, September 30, June 30, March 31, EBITDA Reconciliations: 2020 2019 2019 2019 2019 Net income (loss)$ 329,380 $ 240,136 $ 647,932 $ 150,040 $ 292,302 Interest expense 142,007 131,648 137,343 141,336 145,232 Income tax expense (benefit) 5,442 (4,832 ) 3,968 1,599 2,222 Depreciation and amortization 274,801 262,644 272,445 248,052 243,932 EBITDA$ 751,630 $ 629,596 $ 1,061,688 $ 541,027 $ 683,688 Interest Coverage Ratio: Interest expense$ 142,007 $ 131,648 $ 137,343 $ 141,336 $ 145,232 Non-cash interest expense (8,125 ) (734 ) (1,988 ) (752 ) (5,171 ) Capitalized interest 4,746 4,868 4,148 3,929 2,327 Total interest 138,628 135,782 139,503 144,513 142,388 EBITDA$ 751,630 $ 629,596 $ 1,061,688 $ 541,027 $ 683,688 Interest coverage ratio 5.42 x 4.64 x 7.61 x 3.74 x 4.80 x Fixed Charge Coverage Ratio: Total interest$ 138,628 $ 135,782 $ 139,503 $ 144,513 $ 142,388 Secured debt principal payments 15,526 13,977 13,121 13,684 13,543 Total fixed charges 154,154 149,759 152,624 158,197 155,931 EBITDA$ 751,630 $ 629,596 $ 1,061,688 $ 541,027 $ 683,688 Fixed charge coverage ratio 4.88 x 4.20 x 6.96 x 3.42 x 4.38 x 43
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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
Twelve Months Ended March 31, December 31, September 30, June 30, March 31, Adjusted EBITDA Reconciliations: 2020 2019 2019 2019 2019 Net income$ 1,367,488 $ 1,330,410 $ 1,214,970 $ 651,264 $ 668,497 Interest expense 552,334 555,559 568,280 568,969 549,049 Income tax expense (benefit) 6,177 2,957 9,293 7,066 9,308 Depreciation and amortization 1,057,942 1,027,073 1,007,263 977,967 966,190 EBITDA 2,983,941 2,915,999 2,799,806 2,205,266 2,193,044 Loss (income) from unconsolidated entities (47,941 ) (42,434 ) 14,791 17,709 7,411 Stock-based compensation expense (1) 24,601 25,047 25,347 26,113 23,618 Loss (gain) on extinguishment of debt, net 68,436 84,155 81,596 19,810 20,109 Loss (gain) on real estate dispositions, net (843,456 ) (748,041 ) (777,890 ) (232,363 ) (244,800 ) Impairment of assets 55,960 28,133 104,057 92,701 87,394 Provision for loan losses 7,072 18,690 18,690 18,690 18,690 Loss (gain) on derivatives and financial instruments, net 5,739 (4,399 ) 2,296 10,043 670 Other expenses (1) 48,327 51,052 45,512 126,994 117,942 Other impairment (2) 32,268 - - - - Additional other income - - (4,027 ) (4,027 ) (14,832 ) Adjusted EBITDA$ 2,334,947 $ 2,328,202 $
2,310,178
Adjusted Interest Coverage Ratio: Interest expense$ 552,334 $ 555,559 $ 568,280 $ 568,969 $ 549,049 Capitalized interest 17,691 15,272 11,952 9,725 7,896 Non-cash interest expense (11,599 ) (8,645 ) (11,218 ) (10,888 ) (11,852 ) Total interest 558,426 562,186 569,014 567,806 545,093 Adjusted EBITDA$ 2,334,947 $ 2,328,202 $ 2,310,178 $ 2,280,936 $ 2,209,246 Adjusted interest coverage ratio 4.18 x 4.14 x 4.06 x 4.02 x 4.05 x Adjusted Fixed Charge Coverage Ratio: Total interest$ 558,426 $ 562,186 $ 569,014 $ 567,806 $ 545,093 Secured debt principal payments 56,308 54,325 54,342 55,129 55,584 Preferred dividends - - 11,676 23,352 35,028 Total fixed charges 614,734 616,511 635,032 646,287 635,705 Adjusted EBITDA$ 2,334,947 $ 2,328,202 $ 2,310,178 $ 2,280,936 $ 2,209,246 Adjusted fixed charge coverage ratio 3.80 x 3.78 x
3.64 x 3.53 x 3.48 x
(1) Certain severance-related costs are included in stock-based compensation and excluded from other expenses. (2) Represents a write off of straight-line rent receivables recorded in rental income in conjunction with an amended lease. Our leverage ratios include book capitalization, undepreciated book capitalization and market capitalization. Book capitalization represents the sum of net debt (defined as total long-term debt less cash and cash equivalents and any IRC section 1031 deposits), total equity and redeemable noncontrolling interests. Undepreciated book capitalization represents book capitalization adjusted for accumulated depreciation and amortization. Market capitalization represents book capitalization adjusted for the fair market value of our common stock. Our leverage ratios are defined as the proportion of net debt to total capitalization. The table below reflects the reconciliation of our leverage ratios to our balance sheets for the periods presented. Amounts are in thousands, except share price. 44
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations As of March 31, December 31, September 30, June 30, March 31, 2020 2019 2019 2019 2019 Book capitalization: Unsecured credit facility and commercial paper$ 844,985 $ 1,587,597 $ 1,334,586 $ 1,869,188 $ 419,293 Long-term debt obligations (1) 13,228,433 13,436,365 12,463,680 13,390,344 12,371,729 Cash and cash equivalents (2) (303,423 ) (284,917 ) (265,788 ) (268,666 ) (249,127 ) Total net debt 13,769,995 14,739,045 13,532,478 14,990,866 12,541,895 Total equity and noncontrolling interests(3) 17,495,696 16,982,504 16,696,070 16,452,806 16,498,376 Book capitalization$ 31,265,691 $ 31,721,549 $ 30,228,548 $ 31,443,672 $ 29,040,271 Net debt to book capitalization ratio 44 % 46 % 45 % 48 % 43 % Undepreciated book capitalization: Total net debt$ 13,769,995 $ 14,739,045 $ 13,532,478 $ 14,990,866 $ 12,541,895 Accumulated depreciation and amortization 5,910,979 5,715,459 5,769,843 5,539,435 5,670,111 Total equity and noncontrolling interests(3) 17,495,696 16,982,504 16,696,070 16,452,806 16,498,376 Undepreciated book capitalization$ 37,176,670 $ 37,437,008 $ 35,998,391 $ 36,983,107 $ 34,710,382 Net debt to undepreciated book capitalization ratio 37 % 39 % 38 % 41 % 36 % Market capitalization: Common shares outstanding 417,391 410,257 405,758 405,254 403,740 Period end share price$ 45.78 $ 81.78 $ 90.65$ 81.53 $ 77.6 Common equity market capitalization$ 19,108,160 $ 33,550,817 $ 36,781,963 $ 33,040,359 $ 31,330,224 Total net debt 13,769,995 14,739,045 13,532,478 14,990,866 12,541,895 Noncontrolling interests(3) 1,362,913 1,442,060 1,430,005 1,458,351 1,419,885 Market capitalization$ 34,241,068 $ 49,731,922 $ 51,744,446 $ 49,489,576 $ 45,292,004 Net debt to market capitalization ratio 40 % 30 % 26 % 30 % 28 %
(1) Amounts include senior unsecured notes, secured debt and lease liabilities related to financing leases, as reflected on our Consolidated Balance Sheet. Operating lease liabilities related to the ASC 842 adoption are excluded. (2) Inclusive of IRC section 1031 deposits, if any. (3) Includes amounts attributable to both redeemable noncontrolling interests and noncontrolling interests as reflected on our Consolidated Balance Sheet.
Critical Accounting Policies Our unaudited consolidated financial statements are prepared in accordance withU.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 endedDecember 31, 2019 for further information regarding significant accounting policies that impact us. There have been no material changes to these policies in 2020, except the adoption of ASC 2016-13. See Notes 2 and 7 to the unaudited consolidated financial statements for details. 45
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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. WhenWelltower uses words such as "may," "will," "intend," "should," "believe," "expect," "anticipate," "project," "pro forma," "estimate" or similar expressions that do not relate solely to historical matters,Welltower is making forward-looking statements. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that may causeWelltower's actual results to differ materially fromWelltower's expectations discussed in the forward-looking statements. This may be a result of various factors, including, but not limited to: the duration and scope of the COVID-19 pandemic; the impact of the COVID-19 pandemic on occupancy rates and on the operations ofWelltower and its operators/tenants; actions governments take in response to the COVID-19 pandemic, including the introduction of public health measures and other regulations affectingWelltower's properties and the operations ofWelltower and its operators/tenants; the effects of health and safety measures adopted byWelltower and its operators/tenants related to the COVID-19 pandemic; increased operational costs as a result of health and safety measures related to COVID-19; the impact of the COVID-19 pandemic on the business and financial condition of operators/tenants and their ability to make payments toWelltower ; disruptions toWelltower's property acquisition and disposition activity due to economic uncertainty caused by COVID-19; general economic uncertainty in key markets as a result of the COVID-19 pandemic and a worsening of global economic conditions or low levels of economic growth; the status of capital markets, including availability and cost of capital; uncertainty from the expected discontinuance of LIBOR and the transition to any other interest rate benchmark; issues facing the health care industry, including compliance with, and changes to, regulations and payment policies, responding to government investigations and punitive settlements and operators'/tenants' difficulty in cost effectively obtaining and maintaining adequate liability and other insurance; changes in financing terms; competition within the health care and seniors housing industries; negative developments in the operating results or financial condition of operators/tenants, including, but not limited to, their ability to pay rent and repay loans;Welltower's ability to transition or sell properties with profitable results; the failure to make new investments or acquisitions as and when anticipated; natural disasters and other acts of God affectingWelltower's properties;Welltower's ability to re-lease space at similar rates as vacancies occur;Welltower's ability to timely reinvest sale proceeds at similar rates to assets sold; operator/tenant or joint venture partner bankruptcies or insolvencies; the cooperation of joint venture partners; government regulations affecting Medicare and Medicaid reimbursement rates and operational requirements; liability or contract claims by or against operators/tenants; unanticipated difficulties and/or expenditures relating to future investments or acquisitions; environmental laws affectingWelltower's properties; changes in rules or practices governingWelltower's financial reporting; the movement ofU.S. and foreign currency exchange rates;Welltower's ability to maintainWelltower's qualification as a REIT; key management personnel recruitment and retention; and other risks described inWelltower's reports filed from time to time with theSEC . Other important factors are identified in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 , including factors identified under the headings "Business," "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Finally, the Company undertakes no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events or otherwise, or to update the reasons why actual results could differ from those projected in any forward-looking statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to various market risks, including the potential loss arising from adverse changes in interest rates and foreign currency exchange rates. We seek to mitigate the underlying foreign currency exposures with gains and losses on derivative contracts hedging these exposures. We seek to mitigate the effects of fluctuations in interest rates by matching the terms of new investments with new long-term fixed rate borrowings to the extent possible. We may or may not elect to use financial derivative instruments to hedge interest rate exposure. These decisions are principally based on our policy to match our variable rate investments with comparable borrowings, but are also based on the general trend in interest rates at the applicable dates and our perception of the future volatility of interest rates. This section is presented to provide a discussion of the risks associated with potential fluctuations in interest rates and foreign currency exchange rates. We historically borrow on our unsecured revolving credit facility and commercial paper program to acquire, construct or make loans relating to health care and seniors housing properties. Then, as market conditions dictate, we will issue equity or long-term fixed rate debt to repay the borrowings under our unsecured revolving credit facility and commercial paper program. We are subject to risks associated with debt financing, including the risk that existing indebtedness may not be refinanced or that the terms of refinancing may not be as favorable as the terms of current indebtedness. The majority of our borrowings were completed under indentures or contractual agreements that limit the amount of indebtedness we may incur. Accordingly, in the event that we are unable to raise additional equity or borrow money because of these limitations, our ability to acquire additional properties may be limited. A change in interest rates will not affect the interest expense associated with our fixed rate debt. Interest rate changes, however, will affect the fair value of our fixed rate debt. Changes in the interest rate environment upon maturity of this fixed rate debt could have an effect on our future cash flows and earnings, depending on whether the debt is replaced with other fixed rate debt, variable 46
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