WELLTOWER INC.
Company Overview 29
Business Strategy 30
Key Transactions 31
Key Performance Indicators, Trends and Uncertainties 32
Corporate Governance 34
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash 34
Off-Balance Sheet Arrangements 35
Contractual Obligations 35
Capital Structure 36
RESULTS OF OPERATIONS
Summary 36
Seniors Housing Operating 36
Triple-net 38
Outpatient Medical 40
Non-Segment/Corporate 42
OTHER
Non-GAAP Financial Measures 43
Critical Accounting Policies 50
Cautionary Statement Regarding Forward-Looking Statements 51
28-------------------------------------------------------------------------------- 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 endedJune 30, 2020 (dollars in thousands): Percentage of Number of Type of Property NOI (1) NOI Properties Seniors Housing Operating$ 178,137 33.8 % 526 Triple-net 220,056 41.7 % 653 Outpatient Medical 129,143 24.5 % 347 Totals$ 527,336 100.0 % 1,526
(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. While
admission bans were lifted across our portfolio during the second quarter and in
July, move-out activity continued to outpace move-ins, resulting in occupancy
losses throughout the period. Further occupancy losses are expected in the third
quarter as move-out activity continues to exceed move-ins, but to a lesser
degree than experienced in the second quarter.
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. We
expect total Seniors Housing Operating expenses to remain elevated during the
pandemic and potentially beyond as these additional health and safety measures
become standard practice.
Our Triple-net operators are experiencing similar occupancy declines and
operating costs as described above with respect to our Seniors Housing Operating
properties. However, long-term/post-acute care facilities are generally
experiencing a higher degree of occupancy declines. These factors may continue
to impact the ability of our Triple-net operators to make contractual rent
payments to us in the future. Many of our Triple-net operators received funds
under the Coronavirus Aid Relief, and Economic Security Act ("CARES Act") and
operators of long-term/post-acute care facilities have also received funds under
the CARES Act Provider Relief Fund . Accordingly, collection of Triple-net rent
due during the COVID-19 pandemic to date (from March to July) has been
consistent with historical collection rates and no significant rent concessions
or deferrals have been made.
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 continue to adversely affect their ability to make
contractual rent payments. These factors have and may continue to 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.
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WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
We have either collected or approved short term deferrals for over 99% of
Outpatient Medical rent due in the second quarter, consisting of 87% cash
collections and 12% of short term deferrals. In most cases, the deferred rent
respresents two months of rent with expected repayment by the end of the year.
Approximately 98% of Outpatient Medical rent due in July was either collected or
aproved for short term deferral, with cash collections accelerating to
approximately 95%. Short term deferrals of July rent decreased to 3%, which
primarily relates to tenants in local jurisdictions for which relief was
mandated. Furthermore, collections of deferred rent due in June and July under
executed deferrals were 96%. To the extent that deferred rent is not repaid as
expected, or the prolonged impact of the COVID-19 pandemic causes operators or
tenants to seek further modifications of their lease agreements, we may
recognize reductions in revenue and increases in uncollectible receivables.
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. We have a significant development portfolio
as of June 30, 2020 . To date we have only experienced minor construction and
licensing delays with respect to our development portfolio, but may experience
more significant delays 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 six months ended June 30, 2020 , resident fees and services and rental
income represented 66% and 32%, 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.
30
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
We also continuously evaluate opportunities to finance future investments. New
investments are generally funded from temporary borrowings under our unsecured
revolving credit facility and commercial paper program, internally generated
cash and the proceeds from investment dispositions. Our investments generate
cash from NOI and principal payments on loans receivable. Permanent financing
for future investments, which replaces funds drawn under our unsecured revolving
credit facility and commercial paper program, has historically been provided
through a combination of the issuance of public debt and equity securities and
the incurrence or assumption of secured debt.
Depending upon market conditions, we believe that new investments will be
available in the future with spreads over our cost of capital that will generate
appropriate returns to our stockholders. It is also likely that investment
dispositions may occur in the future. To the extent that investment dispositions
exceed new investments, our revenues and cash flows from operations could be
adversely affected. We expect to reinvest the proceeds from any investment
dispositions in new investments. To the extent that new investment requirements
exceed our available cash on-hand, we expect to borrow under our unsecured
revolving credit facility and commercial paper program. At June 30, 2020 , we had
$1,678,770,000 of cash and cash equivalents, $147,473,000 of restricted cash and
$3,000,000,000 of available borrowing capacity under our unsecured revolving
credit facility.
Key Transactions
Capital The following summarizes key capital transaction that occurred during
the six months ended June 30, 2020 and subsequent events:
•During the six months ended June 30, 2020 , we extinguished $314,631,000 of
secured debt at a blended average interest rate of 2.94%.
•During the six months ended June 30, 2020 , we sold 2,128,000 shares of common
stock under our ATM and DRIP programs, via both cash settle and forward sale
agreements, generating gross proceeds of approximately $175,484,000 . The sale of
these shares and settlement of previously outstanding forward sales resulted in
gross proceeds of approximately $607,177,000 which were used to reduce
borrowings under our unsecured revolving credit facility.
•In April, we closed on our previously announced $1.0 billion two-year unsecured
term loan. The term loan bears interest at a rate of 1-month LIBOR + 1.20%,
based on our credit rating.
•On June 30, 2020 , we completed the issuance of $600 million senior unsecured
notes bearing interest at 2.75% with a maturity date of January 2031 . Net
proceeds were used to fund tender offers for $426,000,000 of our 3.75% senior
unsecured notes due 2023 and our 3.95% senior unsecured notes due 2023 which
settled on July 1, 2020 . The remaining proceeds were used to reduce borrowings
under our term loan by $140 million .
Investments The following summarizes our property acquisitions and joint venture
investments completed during the six months ended June 30, 2020 (dollars in
thousands):
Investment Amount
Properties (1) Capitalization Rates (2) Book Amount (3)Seniors Housing Operating 6$ 168,725 4.9 %$ 159,048 Triple-net (4) - - - % 765 Outpatient Medical 16 235,387 6.1 % 236,127 Totals 22$ 404,112 5.6 %$ 395,940
(1) Represents stated pro rata purchase price including cash and any assumed debt but excludes fair value adjustments pursuant to
Dispositions The following summarizes property dispositions completed during the
six months ended
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Properties Proceeds (1) Capitalization Rates (2) Book Amount (3)
Seniors Housing Operating 13 $ 498,510 5.6 % $ 706,964
Triple-net 5 70,439 5.0 % 33,445
Outpatient Medical 55 1,088,250 5.6 % 808,992
Totals 73 $ 1,657,199 5.5 % $ 1,549,401 (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.
Operating Performance We believe that net income and net income attributable to
common stockholders ("NICS") per the Consolidated Statements of Comprehensive
Income are the most appropriate earnings measures. Other useful supplemental
measures of our operating performance include funds from operations attributable
to common stockholders ("FFO") and consolidated net operating income ("NOI");
however, these supplemental measures are not defined by U.S. generally accepted
accounting principles ("U.S. GAAP"). Please refer to the section entitled
"Non-GAAP Financial Measures" for further discussion and reconciliations. These
earnings measures are widely used by investors and analysts in the valuation,
comparison and investment recommendations of companies. The following table
reflects the recent historical trends of our operating performance measures for
the periods presented (in thousands):
Three Months Ended
June 30, March 31, December 31, September 30, June 30, March 31,
2020 2020 2019 2019 2019 2019
Net income (loss) $ 159,216 $ 329,380 $ 240,136 $ 647,932 $ 150,040 $ 292,302
NICS 179,246 310,284 224,324 589,876 137,762 280,470
FFO 335,597 356,124 476,298 352,378 390,021 358,383
NOI 527,711 576,821 600,302 610,545 618,979 601,438
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
June 30, March 31, December 31, September 30, June 30, March 31,
2020 2020 2019 2019 2019 2019
Net debt to book capitalization ratio 43% 44% 46% 45% 48% 43%
Net debt to undepreciated book
capitalization ratio 35% 37% 39% 38% 41% 36%
Net debt to market capitalization
ratio 36% 40% 30% 26% 30% 28%
Interest coverage ratio 4.29x 5.42x 4.64x 7.61x 3.74x 4.80x
Fixed charge coverage ratio 3.84x 4.88x 4.20x 6.96x 3.42x 4.38x
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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:
Three Months Ended
June 30, March 31, December 31, September 30, June 30, March 31,
2020 2020 2019 2019 2019 2019
Property mix:(1)
Seniors Housing Operating 34% 42% 40% 42% 45% 44%
Triple-net 42% 34% 38% 38% 37% 39%
Outpatient Medical 24% 24% 22% 20% 18% 17%
Relationship mix: (1)
Sunrise Senior Living (2) 10% 14% 14% 14% 14% 15%
ProMedica 10% 9% 9% 9% 9% 9%
Genesis Healthcare 6% 5% 5% 5% 5% 5%
Revera (2) 5% 6% 6% 6% 6% 6%
Avery Healthcare 3% 3% 3% 3% 3% 3%
Remaining relationships 66% 63% 63% 63% 63% 62%
Geographic mix:(1)
California 14% 15% 13% 14% 13% 13%
Texas 10% 7% 9% 8% 8% 8%
United Kingdom 8% 9% 9% 8% 8% 9%
New Jersey 7% 8% 8% 7% 7% 7%
Pennsylvania 6% 6% 6% 6% 6% 6%
Remaining geographic areas 55% 55% 55% 57% 58% 57%
(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 ofJune 30, 2020 (dollars in thousands): Expiration Year (1) 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Thereafter Triple-net: Properties 3 7 6 2 4 48 76 18 15 15 440 Base rent (2)$ 52 $ 12,511 $ 6,407 $ 840 $ 11,262 $ 54,270 $ 104,023 $ 35,406 $ 22,446 $ 30,479 $ 495,098 % of base rent - % 1.6 % 0.8 % 0.1 % 1.5 % 7.0 % 13.5 % 4.6 % 2.9 % 3.9 % 64.1 % Units/beds 220 1,316 757 1,337 692 3,033 6,078 2,350 1,633 1,429 45,632 % of Units/beds 0.3 % 2.0 % 1.2 % 2.1 % 1.1 % 4.7 % 9.4 % 3.6 % 2.5 % 2.2 % 70.9 % Outpatient Medical: Square feet 1,454,125 1,562,375 1,975,098 2,018,860 2,059,566 1,180,994 1,147,542 1,069,560 907,508 807,202 5,700,539 Base rent (2)$ 39,595 $ 45,979 $ 55,886 $ 54,605 $ 61,819 $ 32,382 $ 32,063 $ 27,593 $ 24,511 $ 22,241 $ 133,024 % of base rent 7.5 % 8.7 % 10.6 % 10.3 % 11.7 % 6.1 % 6.1 % 5.2 % 4.6 % 4.2 % 25.0 % Leases 318 377 399 411 341 235 155 144 114 88 199 % of Leases 11.4 % 13.6 % 14.3 % 14.8 % 12.3 % 8.5 % 5.6 % 5.2 % 4.1 % 3.2 % 7.0 %
(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-
33
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
regularly monitors economic and other factors to develop strategic and tactical
plans designed to improve performance and maximize our competitive position. Our
ability to achieve our financial objectives is dependent upon our ability to
effectively execute these plans and to appropriately respond to emerging
economic and company-specific trends. Please refer to our Annual Report on Form
10-K for the year ended December 31, 2019 , under the headings "Business," "Risk
Factors" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for further discussion of these risk factors.
Corporate Governance
Maintaining investor confidence and trust is important in today's business
environment. Our Board of Directors and management are strongly committed to
policies and procedures that reflect the highest level of ethical business
practices. Our corporate governance guidelines provide the framework for our
business operations and emphasize our commitment to increase stockholder value
while meeting all applicable legal requirements. These guidelines meet the
listing standards adopted by the New York Stock Exchange and are available on
the Internet at www.welltower.com/investors/governance. The information on our
website is not incorporated by reference in this Quarterly Report on Form 10-Q,
and our web address is included as an inactive textual reference only.
Liquidity and Capital Resources
Sources and Uses of Cash
Our primary sources of cash include resident fees and services, rent and
interest receipts, borrowings under our unsecured revolving credit facility and
commercial paper program, public issuances of debt and equity securities,
proceeds from investment dispositions and principal payments on loans
receivable. Our primary uses of cash include dividend distributions, debt
service payments (including principal and interest), real property investments
(including acquisitions, capital expenditures, construction advances and
transaction costs), loan advances, property operating expenses and general and
administrative expenses. These sources and uses of cash are reflected in our
Consolidated Statements of Cash Flows and are discussed in further detail
below. The following is a summary of our sources and uses of cash flows for the
periods presented (dollars in thousands):
Six Months Ended Change
June 30, 2020 June 30, 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 811,616 854,482 (42,866) -5 %
Cash provided from (used in) investing
activities 1,142,180 (2,531,364) 3,673,544 145 %
Cash provided from (used in) financing
activities (504,309) 1,720,804 (2,225,113) -129 %
Effect of foreign currency translation (9,010) (333) (8,677) -2,606 %
Cash, cash equivalents and restricted
cash at end of period $ 1,826,243 $ 359,718 $ 1,466,525 408 %
Operating Activities The changes in net cash provided from operating activities
are primarily attributable to declines in revenue and increases in property
operating expenses, as well as the impact of short-term rent deferrals granted
as a result of the COVID-19 pandemic in 2020. Please see "Results of Operations"
for discussion of net income fluctuations. For the six months ended June 30,
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):
Six Months Ended Change
June 30, 2020 June 30, 2019 $
New development $ 93,031 $ 155,409 $ (62,378)
Recurring capital expenditures, tenant
improvements and lease commissions 40,939 49,925 (8,986)
Renovations, redevelopments and other capital
improvements 81,164 74,251 6,913
Total $ 215,134 $ 279,585 $ (64,451)
34-------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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. Additionally, onJune 30, 2020 , we completed the issuance of$600 million senior unsecured notes with a maturity date ofJanuary 2031 . Net proceeds were used to fund tender offers for$426 million of our 3.75% senior unsecured notes due 2023 and our 3.95% senior unsecured notes due 2023, which settled onJuly 1, 2020 . The remaining proceeds were used to reduce borrowings under the term loan by$140 million . After consideration of these transactions, we have total near-term available liquidity of approximately$4.2 billion atJuly 2, 2020 . 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 AtJune 30, 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. AtJune 30, 2020 , we had 8 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 ofJune 30, 2020 (in thousands): Payments Due by Period Contractual Obligations Total 2020 2021-2022 2023-2024 Thereafter Unsecured credit facility and commercial paper (1,2) $ - $ - $ - $ - $ - Senior unsecured notes and term credit facilities:(2) U.S. Dollar senior unsecured notes 8,700,000 - - 2,450,0006,250,000 Canadian Dollar senior unsecured notes (3) 220,345 - - -220,345 Pounds Sterling senior unsecured notes (3) 1,298,745 - - -1,298,745 U.S. Dollar term credit facility 1,510,000 - 1,010,000 500,000 - Canadian Dollar term credit facility (3) 183,621 - - 183,621 - Secured debt: (2,3) Consolidated 2,627,989 257,139 872,088 503,754 995,008 Unconsolidated 929,033 33,470 83,834 111,479 700,250 Contractual interest obligations: (4) Unsecured credit facility and commercial paper - - - - - Senior unsecured notes and term loans (3) 4,092,526 242,199 859,915 752,916 2,237,496 Consolidated secured debt (3) 354,990 39,429 127,559 74,731 113,271 Unconsolidated secured debt (3) 204,105 15,786 59,337 54,025 74,957 Financing lease liabilities (5) 199,117 4,602 17,076 70,802 106,637 Operating lease liabilities (5) 1,067,950 11,097 43,018 40,915 972,920 Purchase obligations (6) 563,822 289,239 210,622 50,413 13,548 Total contractual obligations$ 21,952,243 $ 892,961 $ 3,283,449 $ 4,792,656 $ 12,983,177 (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. 35
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 ofJune 30, 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 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 ofJuly 31, 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 ofJuly 31, 2020 , we had$499,341,000 of remaining capacity under the Equity Shelf Program and there were no outstanding forward sales agreements. Depending upon market conditions, we anticipate issuing securities under our registration statements to invest in additional properties and to repay borrowings under our unsecured revolving credit facility and commercial paper program. Results of Operations Summary Our primary sources of revenue include resident fees and services, rent and interest income. Our primary expenses include property operating expenses, depreciation and amortization, interest expense, general and administrative expenses and other expenses. We evaluate our business and make resource allocations on our three business segments: Seniors Housing Operating, Triple-net and Outpatient Medical. The primary performance measures for our properties are NOI and same store NOI ("SSNOI"), and other supplemental measures include FFO and Adjusted EBITDA, which are further discussed below. Please see Non-GAAP Financial Measures for additional information and reconciliations. The following is a summary of our results of operations (dollars in thousands, except per share amounts): Three Months Ended Change Six Months Ended Change June 30, June 30, June 30, June 30, 2020 2019 Amount % 2020 2019 Amount % Net income$ 159,216 $ 150,040 $ 9,176 6 %$ 488,596 $ 442,342 $ 46,254 10 % NICS 179,246 137,762 41,484 30 % 489,530 418,232 71,298 17 % FFO 335,597 390,021 (54,424) -14 % 691,721 748,404 (56,683) -8 % EBITDA 553,177 541,027 12,150 2 % 1,304,807 1,224,715 80,092 7 % NOI 527,711 618,979 (91,268) -15 % 1,104,532 1,220,417 (115,885) -9 % SSNOI 414,280 464,556 (50,276) -11 % 832,325 886,723 (54,398) -6 % Per share data (fully diluted): NICS$ 0.42 $ 0.34 $ 0.08 24 %$ 1.17 $ 1.05 $ 0.13 12 % FFO$ 0.80 $ 0.96 $ (0.16) -17 %$ 1.66 $ 1.87 $ (0.21) -11 % Interest coverage ratio 4.29 x 3.74 x 0.55 x 15 % 4.88 x 4.27 x 0.61 x 14 % Fixed charge coverage ratio 3.84 x 3.42 x 0.42 x 12 % 4.37 x 3.90 x 0.47 x 12 % Seniors Housing Operating The following is a summary of our SSNOI atWelltower's Share for the Seniors Housing Operating segment (dollars in thousands): 36
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
QTD Pool YTD Pool
Three Months Ended Change Six Months Ended Change
June 30, 2020 June 30, 2019 $ % June 30, 2020 June 30, 2019 $ %
SSNOI (1) $ 163,922 $ 217,562
-16.1 %
(1) For the three and six months ended June 30, 2020 and 2019, amounts relate to
497 and 416 same store properties, respectively. Please see Non-GAAP Financial
Measures for additional information and reconciliations.
The following is a summary of our results of operations for the Seniors Housing Operating segment (dollars in thousands):
Three Months Ended Change Six Months Ended Change
June 30, June 30, June 30, June 30,
2020 2019 $ % 2020 2019 $ %
Revenues:
Resident fees and services $ 769,560 $ 914,085 $ (144,525) -16 % $ 1,619,532 $ 1,782,370 $ (162,838) -9 %
Interest income 88 - 88 n/a 192 - 192 n/a
Other income 4,002 1,444 2,558 177 % 5,054 5,545 (491) -9 %
Total revenues 773,650 915,529 (141,879) -15 % 1,624,778 1,787,915 (163,137) -9 %
Property operating expenses 595,513 637,317 (41,804) -7 % 1,203,384 1,245,003 (41,619) -3 %
NOI (1) 178,137 278,212 (100,075) -36 % 421,394 542,912 (121,518) -22 %
Other expenses:
Depreciation and amortization 139,163 136,551 2,612 2 % 285,937 268,126 17,811 7 %
Interest expense 14,029 17,572 (3,543) -20 % 30,463 35,823 (5,360) -15 %
Loss (gain) on extinguishment of debt, net (492) - (492) n/a (492) - (492) n/a
Impairment of assets 75,151 - 75,151 n/a 78,646 - 78,646 n/a
Other expenses 5,251 11,857 (6,606) -56 % 8,240 14,803 (6,563) -44 %
233,102 165,980 67,122 40 % 402,794 318,752 84,042 26 %
Income (loss) from continuing operations
before income taxes and other items (54,965) 112,232 (167,197) -149 % 18,600 224,160 (205,560) -92 %
Income (loss) from unconsolidated entities (6,787) (17,453) 10,666 61 % (17,811) (34,033) 16,222 48 %
Gain (loss) on real estate dispositions, net 14,465 (550) 15,015 n/a 14,316 (710) 15,026 n/a
Income from continuing operations (47,287) 94,229 (141,516) -150 % 15,105 189,417 (174,312) -92 %
Net income (loss) (47,287) 94,229 (141,516) -150 % 15,105 189,417 (174,312) -92 %
Less: Net income (loss) attributable to
noncontrolling interests (26,156) 2,236 (28,392) n/a (28,088) 3,977 (32,065) n/a
Net income (loss) attributable to common
stockholders $ (21,131) $
91,993
(1) See Non-GAAP Financial Measures below.
Decreases in resident fees and services and property operating expenses are primarily a result of dispositions and decreases in occupancy across the portfolio due to the COVID-19 pandemic. Occupancy within our Seniors Housing Operating portfolio has declined as follows:
February March April May June July
Spot occupancy (1) 85.8 % 85.0 % 82.8 % 81.0 % 80.1 % 79.4 %
Sequential occupancy change (0.8) % (2.2) % (1.8) % (0.9) % (0.7) %
(1) Spot occupancy represents approximate month end occupancy for properties in operation as ofFebruary 2020 , including unconsolidated properties but excluding acquisitions, dispositions and development conversions since the start of the COVID-19 pandemic. In addition, we have experienced increased operational costs of$43,058,000 and$50,352,000 during the three and six months endedJune 30, 2020 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, net of reimbursements. 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. 37 -------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations During the three months endedMarch 31, 2020 , we recorded impairment charges on one held for use property as the carrying value exceeded the estimated fair value. During the three months endedJune 30, 2020 , we entered into and subsequently closed a definitive purchase and sale agreement to sell six properties. In conjunction with this transaction, an impairment charge of$56,371,000 was recognized. During the three months endedJune 30, 2020 , we agreed to terms including pricing for the sale of a portfolio of six properties previously classified as held for sale resulting in an impairment charge of$18,780,000 . Transaction costs related to asset acquisitions are capitalized as a component of the purchase price. Changes in the gain on sales of properties are related to the volume and timing of property sales and the sales prices. The decrease in other expenses is primarily due to the decrease of noncapitalizable transaction costs associated with acquisitions and operator transitions. During the six months endedJune 30, 2020 , we completed threeSeniors Housing Operating construction projects representing$93,188,000 or$300,606 per unit. The following is a summary of our Seniors Housing Operating construction projects, excluding expansions, pending as ofJune 30, 2020 (dollars in thousands): Location Units Commitment Balance Est. Completion Potomac, MD 120$ 56,720 $ 38,794 4Q20 Beckenham, UK 100 58,258 31,054 3Q21 Barnet, UK 100 63,700 30,839 4Q21 Hendon, UK 102 69,019 36,298 1Q22 422$ 247,697 136,985 Toronto, ON Project in planning stage 42,866 Brookline, MA Project in planning stage 21,011 Washington, DC Project in planning stage 20,803$ 221,665 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 Six Months EndedJune 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019 Wtd. Avg. Wtd. Avg. Wtd. Avg. Wtd. Avg. Amount Interest Rate Amount Interest Rate Amount Interest Rate Amount Interest Rate Beginning balance$ 2,044,926 3.56 %$ 1,995,343 3.79 %$ 2,115,037 3.54 %$ 1,810,587 3.87 % Debt issued - - % 48,806 2.94 % 44,921 2.58 % 295,969 3.52 % Debt assumed - - % - - % - - % 42,000 4.62 % Debt extinguished (290,198) 2.81 % (36,903) 2.74 % (306,238) 2.90 % (151,473) 4.42 % Principal payments (11,603) 3.17 % (11,225) 3.49 % (23,776) 3.18 % (22,430) 3.44 % Foreign currency 36,500 3.01 % 22,159 3.31 % (50,319) 3.19 % 43,527 3.33 % Ending balance$ 1,779,625 2.91 %$ 2,018,180 3.80 %$ 1,779,625 2.91 %$ 2,018,180 3.80 % Monthly averages$ 2,009,523 3.17 %$ 1,996,642 3.80 %$ 2,044,995 3.33 %$ 1,950,546 3.82 % 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, as well as the disposal of an investment in an unconsolidated entity during the quarter endedJune 30, 2019 . Net income attributable to noncontrolling interests represents our partners' share of net income (loss) related to joint ventures. The decrease during the three months endedJune 30, 2020 relates primarily to our partners' share of impairment charges recognized, offset by our partners' share of gains on dispositions. Triple-net The following is a summary of our SSNOI atWelltower's Share for the Triple-net segment (dollars in thousands): QTD Pool YTD Pool Three Months Ended Change Six Months Ended Change June 30, 2020 June 30, 2019 $ % June 30, 2020 June 30, 2019 $ % SSNOI (1)$ 170,783 $ 169,784 $ 999 0.6 %$ 340,770 $ 334,928 $ 5,842 1.7 % 38
-------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (1) For the three and six months endedJune 30, 2020 and 2019, amounts relate to 641 and 635 same store properties, respectively. 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): Three Months Ended Change Six Months Ended Change June 30, June 30, June 30, June 30, 2020 2019 $ % 2020 2019 $ % Revenues: Rental income$ 217,492 $ 222,362 $ (4,870) -2 %$ 408,877 $ 454,394 $ (45,517) -10 % Interest income 15,520 17,118 (1,598) -9 % 30,191 32,064 (1,873) -6 % Other income 607 1,278 (671) -53 % 2,280 2,541 (261) -10 % Total revenues 233,619 240,758 (7,139) -3 % 441,348 488,999 (47,651) -10 % Property operating expenses 13,563 12,823 740 6 % 26,865 27,778 (913) -3 % NOI (1) 220,056 227,935 (7,879) -3 % 414,483 461,221 (46,738) -10 % Other expenses: Depreciation and amortization 58,138 56,056 2,082 4 % 115,832 117,404 (1,572) -1 % Interest expense 2,746 3,225 (479) -15 % 5,598 6,665 (1,067) -16 % Loss (gain) on derivatives and financial instruments, net 1,434 1,913 (479) -25 % 9,085 (574) 9,659 n/a Provision for loan losses 1,451 - 1,451 n/a 8,523 18,690 (10,167) -54 % Impairment of assets - (940) 940 100 24,332 (940) 25,272 n/a Other expenses 3,500 5,560 (2,060) -37 % 4,013 8,589 (4,576) -53 % 67,269 65,814 1,455 2 % 167,383 149,834 17,549 12 % Income (loss) from continuing operations before income taxes and other items 152,787 162,121 (9,334) -6 % 247,100 311,387
(64,287) -21 %
Income (loss) from unconsolidated entities 6,403 6,578 (175) -3 % 12,199 12,236 (37) - % Gain (loss) on real estate dispositions, net 2,148 (1,130) 3,278 290 % 51,785 166,444 (114,659) -69 % Income from continuing operations 161,338 167,569 (6,231) -4 % 311,084 490,067 (178,983) -37 % Net income 161,338 167,569 (6,231) -4 % 311,084 490,067 (178,983) -37 % Less: Net income (loss) attributable to noncontrolling interests 9,103 9,230 (127) -1 % 27,678 18,326 9,352 51 % Net income attributable to common stockholders$ 152,235 $ 158,339 $ (6,104) -4 %$ 283,406 $ 471,741
(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, the establishment of a reserve for straight-line rent receivable deemed uncollectible of$1,842,000 during the quarter endedJune 30, 2020 , as well as property dispositions during 2019 and 2020. 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 endedJune 30, 2020 , we had 9 leases with rental rate increases ranging from 0.16% to 0.36% in our Triple-net portfolio. Our Triple-net operators are experiencing similar impacts on occupancy and operating costs due to the COVID-19 pandemic as described above with respect to our Seniors Housing Operating properties. However, long-term/post-acute facilities are generally experiencing a higher degree of occupancy declines which may impact the ability of our Triple-net operators to make contractual rent payments to us in the future. Many of our Triple-net operators received funds under the CARES Act and operators of long-term/post-acute facilities have also received funds under theCARES Act Provider Relief Fund . Accordingly, collection of rent due during the COVID-19 pandemic to date (from March to July) have been consistent with historical collection rates and no significant rent concessions or deferrals have been made to date. 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 were no longer deemed collectible. During the three months endedMarch 31, 2020 , we recognized a provision for loan losses of$6,898,000 to fully reserve for one non-real estate loan receivable that was no longer deemed collectible. During the three months endedJune 30, 2020 , we recognized a provision for loan losses of$1,303,00 to fully reserve for one 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 39 -------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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. During the six months endedJune 30, 2020 , we completed one Triple-net construction project representing$33,627,000 or$207,574 per unit. The following is a summary of Triple-net construction projects, excluding expansions, pending as ofJune 30, 2020 (dollars in thousands): Location Units/Beds Commitment Balance Est. Completion Westerville, OH 102$ 27,200 $ 25,092 3Q20 Thousand Oaks, CA 82 24,763 15,281 4Q20 Droitwich, UK 70 15,665 13,360 4Q20 Redhill, UK 76 19,667 9,428 2Q21 Wombourne, UK 66 14,843 3,341 2Q22 Leicester, UK 60 13,853 3,692 2Q22 456$ 115,991 $ 70,194 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. 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 following is a summary of our Triple-net secured debt principal activity for the periods presented (dollars in thousands): Three Months Ended Six Months EndedJune 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019 Wtd. Avg. Wtd. Avg. Wtd. Avg. Wtd. Avg. Amount Interest Rate Amount Interest Rate Amount Interest Rate Amount Interest Rate Beginning balance$ 289,739 3.55 %$ 292,258 3.62 %$ 306,038 3.60 %$ 288,386 3.63 % Principal payments (1,042) 5.16 % (952) 5.25 % (2,102) 5.16 % (1,909) 5.25 % Foreign currency 624 4.12 % (3,354) 3.21 % (14,615) 2.90 % 1,475 4.77 % Ending balance$ 289,321 3.27 %$ 287,952 3.63 %$ 289,321 3.27 %$ 287,952 3.63 % 0.0355003165979432 Monthly averages$ 286,599 3.36 %$ 289,328 3.62 %$ 293,300 3.47 %$ 291,073 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. The increase during the three months endedMarch 31, 2020 , relates primarily to our partner's share of gains on disposal of properties. Outpatient Medical The following is a summary of our SSNOI at Welltower Share for the Outpatient Medical segment (dollars in thousands): QTD Pool YTD Pool Three Months Ended Change Six Months Ended Change June 30, 2020 June 30, 2019 $ % June 30, 2020 June 30, 2019 $ % SSNOI (1)$ 79,575 $ 77,210 $ 2,365 3.1 %$ 154,897 $ 150,654 $ 4,243 2.8 % (1) For the three and six months endedJune 30, 2020 and 2019, amounts relate to 246 and 237 same store properties, respectively. Please see Non-GAAP Financial Measures for additional information and reconciliations. 40 -------------------------------------------------------------------------------- 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 Six Months Ended Change June 30, June 30, June 30, June 30, 2020 2019 $ % 2020 2019 $ % Revenues: Rental income$ 178,813 $ 163,224 $ 15,589 10 %$ 377,388 $ 312,276 $ 65,112 21 % Interest income 461 238 223 94 % 927 411 516 126 % Other income 1,557 (97) 1,654 n/a 1,845 139 1,706 n/a Total revenues 180,831 163,365 17,466 11 % 380,160 312,826 67,334 22 % Property operating expenses 51,688 50,987 701 1 % 112,296 99,153 13,143 13 % NOI (1) 129,143 112,378 16,765 15 % 267,864 213,673 54,191 25 % Other expenses: Depreciation and amortization 68,070 55,445 12,625 23 % 138,403 106,454 31,949 30 % Interest expense 4,326 3,386 940 28 % 9,134 6,734 2,400 36 % Loss (gain) on extinguishment of debt, net 741 - 741 n/a 741 - 741 n/a Provision for loan losses (29) - (29) n/a (29) - (29) n/a Impairment of assets - 10,879 (10,879) -100 % - 10,879 (10,879) -100 % Other expenses 6,456 (4) 6,460 n/a 7,463 750 6,713 n/a 79,564 69,706 9,858 14 % 155,712 124,817 30,895 25 % Income (loss) from continuing operations before income taxes and other items 49,579 42,672 6,907 16 % 112,152 88,856 23,296 26 % Income (loss) from unconsolidated entities 1,716 1,826 (110) -6 % 3,252 3,549 (297) -8 % Gain (loss) on real estate dispositions, net 139,250 (2) 139,252 n/a 352,586 (7) 352,593 n/a Income from continuing operations 190,545 44,496 146,049 328 % 467,990 92,398 375,592 406 % Net income (loss) 190,545 44,496 146,049 328 % 467,990 92,398 375,592 406 % Less: Net income (loss) attributable to noncontrolling interests (2,977) 812 (3,789) -467 % (524) 1,807 (2,331) -129 % Net income (loss) attributable to common stockholders$ 193,522 $ 43,684 $ 149,838 343 %$ 468,514 $ 90,591 $ 377,923 417 %
(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 endedJune 30, 2020 , our consolidated outpatient medical portfolio signed 121,150 square feet of new leases and 353,185 square feet of renewals. The weighted-average term of these leases was six years, with a rate of$36.45 per square foot and tenant improvement and lease commission costs of$17.48 per square foot. Substantially all of these leases contain an annual fixed or contingent escalation rent structure ranging from 1.5% to 5.0%. 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. We have either collected or approved short term deferrals for over 99% of rent due in the second quarter, consisting of 87% cash collections and 12% of short term deferrals. In most cases, the deferred rent respresents two months of rent with expected repayment by the end of the year. Approximately 98% of rent due in July was either collected or aproved for short term deferral, with cash collections accelerating to approximately 95%. Short term deferrals of July rent decreased to 3%, which primarily relates to tenants in local jurisdictions for which relief was mandated. Furthermore, collections of deferred rent due in June and July under executed deferrals were 96%. 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. During the six months endedJune 30, 2019 , we recognized impairment charges related to certain held for sale properties as the carrying values exceeded the estimated fair values less costs to sell. Changes in gains/losses on sales of properties are related to volume of property sales and the sales prices. The increase in other expense during the three months endedJune 30, 2020 is primarily due to noncapitalizable transaction costs from acquisitions no longer expected to be consummated. 41 -------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations During the six months endedJune 30, 2020 , we completed three Outpatient Medical construction projects representing$43,493,000 or$306 per square foot. The following is a summary of the Outpatient Medical construction projects, excluding expansions, pending as ofJune 30, 2020 (dollars in thousands): Location Square Feet Commitment Balance Est. Completion Brooklyn, NY 140,955$ 105,306 $ 93,646 4Q20 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 Six Months EndedJune 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019 Wtd. Ave Wtd. Ave Wtd. Ave Wtd. Ave Amount Interest Rate Amount Interest Rate Amount Interest Rate Amount Interest Rate Beginning balance$ 569,974 3.94 %$ 385,357 4.25 %$ 572,267 3.97 %$ 386,738 4.20 % Debt extinguished (8,393) 4.40 % - - % (8,393) 4.40 % - - % Principal payments (2,538) 4.61 % (1,507) 5.02 % (4,831) 4.63 % (2,888) 5.06 % Ending balance$ 559,043 3.59 %$ 383,850 4.22 %$ 559,043 3.59 %$ 383,850 4.22 % Monthly averages$ 566,608 3.75 %$ 384,603 4.24 %$ 568,751 3.85 %$ 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 Six Months Ended Change June 30, June 30, June 30, June 30, 2020 2019 $ % 2020 2019 $ % Revenues: Other income$ 375 $ 454 $ (79) -17 %$ 791 $ 2,611 $ (1,820) -70 % Total revenue 375 454 (79) -17 % 791 2,611 (1,820) -70 % Expenses: Interest expense 105,256 117,153 (11,897) -10 % 223,169 237,346 (14,177) -6 % General and administrative expenses 34,062 33,741 321 1 % 69,543 69,023 520 1 % Loss (gain) on extinguishment of debt, net - - - n/a - 15,719 (15,719) -100 % Other expenses 4,204 4,215 (11) - % 5,987 6,242 (255) -4 % 143,522 155,109 (11,587) -7 % 298,699 328,330 (29,631) -9 % Loss from continuing operations before income taxes and other items (143,147) (154,655) 11,508 7 % (297,908) (325,719) 27,811 9 % Income tax (expense) benefit (2,233) (1,599) (634) -40 % (7,675) (3,821) (3,854) -101 % Loss from continuing operations (145,380) (156,254) 10,874 7 % (305,583) (329,540) 23,957 7 % Net loss attributable to common stockholders$ (145,380) $ (156,254) $ 10,874 7 %$ (305,583) $ (329,540) $ 23,957 7 %
The following is a summary of our Non-Segment/Corporate interest expense or the periods presented (dollars in thousands):
Three Months Ended Change Six Months Ended Change
June 30, June 30, June 30, June 30,
2020 2019 $ % 2020 2019 $ %
Senior unsecured notes $ 98,141 $ 98,475 $ (334) - % $ 201,675 $ 207,231 $ (5,556) -3 %
Unsecured credit facility
and commercial paper program 2,816 15,160 (12,344) -81 % 12,984 22,678 (9,694) -43 %
Loan expense 4,299 3,518 781 22 % 8,510 7,437 1,073 14 %
Totals $ 105,256 $ 117,153 $ (11,897) -10 % $ 223,169 $ 237,346 $ (14,177) -6 %
42-------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The change in interest expense on senior unsecured notes is due to the net effect of issuances and extinguishments, as well as the movement 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 six months endedJune 30, 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 endedJune 30, 2020 and 2019 were 2.87% and 2.56%, 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 or six full quarters after acquisition or being placed into service for theQTD Pool and theYTD Pool , respectively. 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 or six full quarters post completion of the redevelopment for theQTD Pool andYTD Pool , respectively. Properties undergoing operator transitions and/or segment transitions are also excluded from SSNOI until five full quarters or six full quarters post completion of the transition for theQTD Pool andYTD Pool , respectively. In addition, properties significantly impacted by force majeure, acts of God, or other extraordinary adverse events are excluded from SSNOI until five full quarters or six full quarters after the properties are placed back into service for theQTD Pool andYTD Pool , respectively. 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 43 -------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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 June 30, March 31, December 31, September 30, June 30, March 31, NOI Reconciliations: 2020 2020 2019 2019 2019 2019 Net income (loss)$ 159,216 $ 329,380 $ 240,136 $ 647,932 $ 150,040 $ 292,302 Loss (gain) on real estate dispositions, net (155,863) (262,824) (12,064) (570,250) 1,682 (167,409) Loss (income) from unconsolidated entities (1,332) 3,692 (57,420) (3,262) 9,049 9,199 Income tax expense (benefit) 2,233 5,442 (4,832) 3,968 1,599 2,222 Other expenses 19,411 6,292 16,042 6,186 21,628 8,756 Impairment of assets 75,151 27,827 98 18,096 9,939 - Provision for loan losses 1,422 7,072 - - - 18,690 Loss (gain) on extinguishment of debt, net 249 - 2,612 65,824 - 15,719 Loss (gain) on derivatives and financial instruments, net 1,434 7,651 (5,069) 1,244 1,913 (2,487) General and administrative expenses 34,062 35,481 26,507 31,019 33,741 35,282 Depreciation and amortization 265,371 274,801 262,644 272,445 248,052 243,932 Interest expense 126,357 142,007 131,648 137,343 141,336 145,232 Consolidated net operating income (NOI)$ 527,711 $ 576,821 $ 600,302 $ 610,545 $ 618,979 $ 601,438 NOI by segment: Seniors Housing Operating$ 178,137 $ 243,257 $ 242,453 $ 254,155 $ 278,212 $ 264,700 Triple-net 220,056 194,427 226,837 230,685 227,935 233,286 Outpatient Medical 129,143 138,721 130,498 124,864 112,378 101,295 Non-segment/corporate 375 416 514 841 454 2,157 Total NOI$ 527,711 $ 576,821 $ 600,302 $ 610,545 $ 618,979 $ 601,438 44
--------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Six Months Ended
June 30, 2020 June 30, 2019
NOI Reconciliations:
Net income (loss) $ 488,596 $ 442,342
Loss (gain) on real estate dispositions, net (418,687) (165,727)
Loss (income) from unconsolidated entities 2,360 18,248
Income tax expense (benefit) 7,675 3,821
Other expenses 25,703 30,384
Impairment of assets 102,978 9,939
Provision for loan losses 8,494 18,690
Loss (gain) on extinguishment of debt, net 249 15,719
Loss (gain) on derivatives and financial instruments, net 9,085 (574)
General and administrative expenses 69,543 69,023
Depreciation and amortization 540,172 491,984
Interest expense 268,364 286,568
Consolidated net operating income (NOI) $
1,104,532
NOI by segment: Seniors Housing Operating$ 421,394 $ 542,912 Triple-net 414,483 461,221 Outpatient Medical 267,864 213,673 Non-segment/corporate 791 2,611 Total NOI$ 1,104,532 $ 1,220,417 QTD Pool YTD Pool Three Months Ended Six Months Ended SSNOI Reconciliations: June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019 Seniors Housing Operating: Consolidated NOI$ 178,137 $
278,212
14,954 16,439 28,231 32,462
NOI attributable to noncontrolling
interests (13,547) (22,167) (30,624) (41,869)
NOI attributable to non-same store
properties (15,796) (53,994) (79,900) (131,368)
Non-cash NOI attributable to same store
properties (959) (82) (1,834) 457
Currency and ownership adjustments (1) 1,133 (846) (609) (1,453)
SSNOI at Welltower Share 163,922 217,562 336,658 401,141
Triple-net:
Consolidated NOI 220,056 227,935 414,483 461,221
NOI attributable to unconsolidated
investments 5,133 5,078 10,266 10,266
NOI attributable to noncontrolling
interests (14,613) (14,435) (29,396) (29,136)
NOI attributable to non-same store
properties (28,722) (32,954) (56,524) (76,160)
Non-cash NOI attributable to same store
properties (12,132) (16,074) 789 (31,347)
Currency and ownership adjustments (1) 1,061 234 1,152 84
SSNOI at Welltower Share 170,783 169,784 340,770 334,928
Outpatient Medical:
Consolidated NOI 129,143 112,378 267,864 213,673
NOI attributable to unconsolidated
investments 1,063 310 3,524 617
NOI attributable to noncontrolling
interests (2,366) (6,139) (8,366) (13,128)
NOI attributable to non-same store
properties (47,581) (21,077) (97,787) (32,485)
Non-cash NOI attributable to same store
properties (1,057) (1,903) (2,791) (3,892)
Currency and ownership adjustments (1) 373 (6,359) (7,547) (14,131)
SSNOI at Welltower Share 79,575 77,210 154,897 150,654
SSNOI at Welltower Share:
Seniors Housing Operating 163,922 217,562 336,658 401,141
Triple-net 170,783 169,784 340,770 334,928
Outpatient Medical 79,575 77,210 154,897 150,654
Total $ 414,280 $ 464,556 $ 832,325 $ 886,723 (1) Includes adjustments to reflect consistent property ownership percentages, to translate Canadian properties at a USD/CAD rate of
1.32 and to translate
45--------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
QTD Pool YTD Pool
Seniors Housing Outpatient Seniors Housing Outpatient
SSNOI Property Reconciliations: Operating Triple-net Medical Total Operating Triple-net Medical Total
Consolidated properties 526 653 347 1,526 526 653 347 1,526
Unconsolidated properties 86 39 36 161 86 39 36 161
Total properties 612 692 383 1,687 612 692 383 1,687
Recent acquisitions/development
conversions(1) (34) (8) (113) (155) (71) (11) (122) (204)
Under development (23) (6) (1) (30) (23) (6) (1) (30)
Under redevelopment(2) (10) (1) (2) (13) (11) (1) (2) (14)
Current held for sale (7) (3) (13) (23) (7) (3) (13) (23)
Land parcels, loans and subleases (10) (17) (8) (35) (10) (17) (8) (35)
Transitions(3) (31) (16) - (47) (73) (19) - (92)
Other - - - - (1) - - (1)
Same store properties 497 641 246 1,384 416 635 237 1,288
(1) Acquisitions and development conversions will enter the
(3) Transitioned properties will enter the
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 June 30, March 31, December 31, September 30, June 30, March 31, FFO Reconciliation: 2020 2020 2019 2019 2019
2019
Net income attributable to common stockholders$ 179,246 $ 310,284 $ 224,324 $ 589,876 $ 137,762 $ 280,470 Depreciation and amortization 265,371 274,801 262,644 272,445 248,052 243,932 Impairment of assets 75,151 27,827 98 18,096 9,939 - Loss (gain) on real estate dispositions, net (155,863) (262,824) (12,064) (570,250) 1,682 (167,409) Noncontrolling interests (42,539) (9,409) (14,895) 31,347 (18,889) (17,760) Unconsolidated entities 14,231 15,445 16,191 10,864 11,475 19,150 FFO$ 335,597 $ 356,124 $ 476,298 $ 352,378 $ 390,021 $ 358,383 Average diluted shares outstanding 419,121 412,420 407,904 406,891 406,673
393,452
Per diluted share data: Net income attributable to common stockholders(1)$ 0.42 $ 0.75 $ 0.55 $ 1.45 $ 0.34 $ 0.71 FFO$ 0.80 $ 0.86 $ 1.17 $ 0.87 $ 0.96 $ 0.91
(1) Includes adjustment to the numerator for income (loss) attributable to OP unitholders.
46
--------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Six Months Ended
June 30, June 30,
FFO Reconciliations: 2020 2019
Net income attributable to
common stockholders $ 489,530 $ 418,232
Depreciation and amortization 540,172 491,984
Impairment of assets 102,978 9,939
Loss (gain) on real estate
dispositions, net (418,687) (165,727)
Noncontrolling interests (51,948) (36,649)
Unconsolidated entities 29,676 30,625
FFO $ 691,721 $ 748,404
Average diluted common shares
outstanding: 415,775 400,096
Per diluted share data:
Net income attributable to
common stockholders(1) $ 1.17 $ 1.05
FFO $ 1.66 $ 1.87 (1) Includes adjustment to the numerator for income (loss) attributable to OP unitholders.
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 June 30, March 31, December 31, September 30, June 30, March 31, EBITDA Reconciliations: 2020 2020 2019 2019 2019 2019 Net income (loss)$ 159,216 $ 329,380 $ 240,136 $ 647,932 $ 150,040 $ 292,302 Interest expense 126,357 142,007 131,648 137,343 141,336 145,232 Income tax expense (benefit) 2,233 5,442 (4,832) 3,968 1,599
2,222
Depreciation and amortization 265,371 274,801 262,644 272,445 248,052 243,932 EBITDA$ 553,177 $ 751,630 $ 629,596 $ 1,061,688 $ 541,027 $ 683,688 Interest Coverage Ratio: Interest expense$ 126,357 $
142,007
$ 145,232 Non-cash interest expense (1,914) (8,125) (734) (1,988) (752) (5,171) Capitalized interest 4,541 4,746 4,868 4,148 3,929 2,327 Total interest 128,984 138,628 135,782 139,503 144,513 142,388 EBITDA$ 553,177 $ 751,630 $ 629,596 $ 1,061,688 $ 541,027 $ 683,688 Interest coverage ratio 4.29 x 5.42 x 4.64 x 7.61 x 3.74 x
4.80 x
Fixed Charge Coverage Ratio: Total interest$ 128,984 $
138,628
$ 142,388 Secured debt principal payments 15,183 15,526 13,977 13,121 13,684 13,543 Total fixed charges 144,167 154,154 149,759 152,624 158,197 155,931 EBITDA$ 553,177 $ 751,630 $ 629,596 $ 1,061,688 $ 541,027 $ 683,688 Fixed charge coverage ratio 3.84 x 4.88 x 4.20 x 6.96 x 3.42 x 4.38 x 47
--------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Six Months Ended
June 30, June 30,
EBITDA Reconciliations: 2020 2019
Net income (loss) $ 488,596 $ 442,342
Interest expense 268,364 286,568
Income tax expense (benefit) 7,675 3,821
Depreciation and amortization 540,172 491,984
EBITDA $ 1,304,807 $ 1,224,715
Interest Coverage Ratio:
Interest expense $ 268,364 $ 286,568
Non-cash interest expense (10,039) (5,923)
Capitalized interest 9,287 6,256
Total interest 267,612 286,901
EBITDA $ 1,304,807 $ 1,224,715
Interest coverage ratio 4.88 x 4.27 x
Fixed Charge Coverage Ratio:
Total interest $ 267,612 $ 286,901
Secured debt principal payments 30,709 27,227
Total fixed charges 298,321 314,128
EBITDA $ 1,304,807 $ 1,224,715
Fixed charge coverage ratio 4.37 x 3.90 x
48-------------------------------------------------------------------------------- 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 comparableU.S. GAAP measure, for the periods presented. Dollars are in thousands. Twelve Months Ended June 30, March 31, December 31, September 30, June 30, March 31, Adjusted EBITDA Reconciliations: 2020 2020 2019 2019 2019 2019 Net income$ 1,376,664
537,355 552,334 555,559 568,280 568,969 549,049
Income tax expense (benefit) 6,811 6,177 2,957 9,293 7,066 9,308
Depreciation and amortization 1,075,261 1,057,942 1,027,073 1,007,263 977,967 966,190
EBITDA 2,996,091 2,983,941 2,915,999 2,799,806 2,205,266 2,193,044
Loss (income) from unconsolidated entities (58,322) (47,941) (42,434) 14,791 17,709 7,411
Stock-based compensation expense (1) 24,229 24,601 25,047 25,347 26,113 23,618
Loss (gain) on extinguishment of debt, net 68,685 68,436 84,155 81,596 19,810 20,109
Loss (gain) on real estate dispositions, net (1,001,001) (843,456) (748,041) (777,890) (232,363) (244,800)
Impairment of assets 121,172 55,960 28,133 104,057 92,701 87,394
Provision for loan losses 8,494 7,072 18,690 18,690 18,690 18,690
Loss (gain) on derivatives and financial
instruments, net 5,260 5,739 (4,399) 2,296 10,043 670
Other expenses (1) 46,971 48,327 51,052 45,512 126,994 117,942
Other impairment (2) 34,110 32,268 - - - -
Additional other income - - - (4,027) (4,027) (14,832)
Adjusted EBITDA $ 2,245,689 Adjusted Interest Coverage Ratio: Interest expense$ 537,355 $ 552,334 $ 555,559 $ 568,280 $ 568,969 $ 549,049 Capitalized interest 18,303 17,691 15,272 11,952 9,725 7,896 Non-cash interest expense (12,761) (11,599) (8,645) (11,218) (10,888) (11,852) Total interest 542,897 558,426 562,186 569,014 567,806 545,093 Adjusted EBITDA$ 2,245,689
4.14 x 4.18 x 4.14 x 4.06 x 4.02 x 4.05 x
Adjusted Fixed Charge Coverage Ratio:
Total interest $ 542,897
57,807 56,308 54,325 54,342 55,129 55,584
Preferred dividends - - - 11,676 23,352 35,028
Total fixed charges 600,704
614,734 616,511 635,032 646,287 635,705
Adjusted EBITDA $ 2,245,689
3.74 x 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 straight-line recent receivable deemed uncollectible.
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.
49--------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
As of
June 30, March 31, December 31, September 30, June 30, March 31,
2020 2020 2019 2019 2019 2019
Book capitalization:
Unsecured credit facility and commercial
paper $ -
14,543,485 13,228,433 13,436,365 12,463,680 13,390,344 12,371,729
Cash and cash equivalents (2) (1,766,819) (303,423) (284,917) (265,788) (268,666) (249,127)
Total net debt 12,776,666 13,769,995 14,739,045 13,532,478 14,990,866 12,541,895
Total equity and noncontrolling
interests(3) 17,263,672 17,495,696 16,982,504 16,696,070 16,452,806 16,498,376
Book capitalization $ 30,040,338
43 % 44 % 46 % 45 % 48 % 43 %
Undepreciated book capitalization:
Total net debt $ 12,776,666
6,001,177 5,910,979 5,715,459 5,769,843 5,539,435 5,670,111
Total equity and noncontrolling
interests(3) 17,263,672 17,495,696 16,982,504 16,696,070 16,452,806 16,498,376
Undepreciated book capitalization $ 36,041,515 $ 37,176,670 $ 37,437,008 $ 35,998,391 $ 36,983,107 $ 34,710,382
Net debt to undepreciated book
capitalization ratio 35 % 37 % 39 % 38 % 41 % 36 %
Market capitalization:
Common shares outstanding 417,302 417,391 410,257 405,758 405,254 403,740
Period end share price $ 51.75 $ 45.78 $ 81.78 $ 90.65 $ 81.53 $ 77.6
Common equity market capitalization $ 21,595,379 $ 19,108,160 $ 33,550,817 $ 36,781,963 $ 33,040,359 $ 31,330,224
Total net debt 12,776,666 13,769,995 14,739,045 13,532,478 14,990,866 12,541,895
Noncontrolling interests(3) 1,215,532 1,362,913 1,442,060 1,430,005 1,458,351 1,419,885
Market capitalization $ 35,587,577
36 % 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. 50 -------------------------------------------------------------------------------- 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. 51
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