Company Overview 30 Business Strategy 31 Key Transactions 32 Key Performance Indicators, Trends and Uncertainties 32 Corporate Governance 35 LIQUIDITY AND CAPITAL RESOURCES Sources and Uses of Cash 35 Off-Balance Sheet Arrangements 36 Contractual Obligations 36 Capital Structure 36 RESULTS OF OPERATIONS Summary 38 Seniors Housing Operating 38 Triple-net 42 Outpatient Medical 44 Non-Segment/Corporate 46 OTHER Non-GAAP Financial Measures 46 Critical Accounting Policies and Estimates 54 Cautionary Statement Regarding Forward-Looking Statements 55 29
-------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read together with the Consolidated Financial Statements and related Notes thereto included in Item 1 of this report. Other important factors are identified in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , including factors identified under the headings "Business," "Risk Factors," and "Management's Discussion and Analysis of Financial Condition and Results of Operations." OnMarch 7, 2022 , we announced our intent to complete an UPREIT reorganization. InFebruary 2022 , the company formerly known asWelltower Inc. ("Old Welltower") formedWELL Merger Holdco Inc. ("New Welltower") as a wholly owned subsidiary, and New Welltower formedWELL Merger Holdco Sub Inc. ("Merger Sub") as a wholly owned subsidiary. OnApril 1, 2022 , Merger Sub merged with and into OldWelltower , with Old Welltower continuing as the surviving corporation and a wholly owned subsidiary of New Welltower (the "Merger"). In connection with the Merger, Old Welltower's name was changed to "Welltower OP Inc. ", and NewWelltower inherited the name "Welltower Inc. " EffectiveMay 24, 2022 ,Welltower OP Inc. ("Welltower OP") converted from aDelaware corporation into aDelaware limited liability company namedWelltower OP LLC (the "LLC Conversion"). Following the LLC Conversion, New Welltower's business continues to be conducted through Welltower OP and New Welltower does not have substantial assets or liabilities, other than through its investment in Welltower OP. Unless stated otherwise or the context otherwise requires, references to "Welltower" meanWelltower Inc. and references to "Welltower OP" meanWelltower OP LLC . References to "we," "us" and "our" mean collectivelyWelltower , Welltower OP and those entities/subsidiaries owned or controlled byWelltower and/or Welltower OP. 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 Inc. , 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.Welltower Inc. is the initial member and majority owner of Welltower OP, with an approximate ownership interest of 99.8% as ofJune 30, 2022 . All of our property ownership, development and related business operations are conducted throughWelltower OP andWelltower Inc. has no material assets or liabilities other than its investment in Welltower OP.Welltower Inc. issues equity from time to time, the net proceeds of which it is obligated to contribute as additional capital to Welltower OP. All debt including credit facilities, senior notes and secured debt is incurred by Welltower OP, andWelltower Inc. has fully and conditionally guaranteed all existing and future senior unsecured notes.
The following table summarizes our consolidated portfolio for the three months
ended
Percentage of Number of Type of Property NOI (1) NOI Properties Seniors Housing Operating$ 281,911 45.5 % 822 Triple-net 222,869 35.9 % 571 Outpatient Medical 115,674 18.6 % 318 Totals$ 620,454 100.0 % 1,711
(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 COVID-19 pandemic has had and may continue to have material and adverse effects on our financial condition, results of operations and cash flows in the future. 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 effectiveness of vaccines, the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic effects of the pandemic and containment measures, the overall pace of recovery, among others. Our Seniors Housing Operating revenues are dependent on occupancy which has increased during the six months endedJune 30, 2022 . As ofJune 30, 2022 , nearly all communities are open for new admissions and allowing visitors, in-person tours and communal dining and activities. We have incurred increased operational costs as a result 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, personal protective equipment and sanitation. 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. 30 -------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Our Triple-net operators are experiencing similar trends related to occupancy and operating costs 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") Paycheck Protection Program and theProvider Relief Fund .
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 endedJune 30, 2022 , resident fees and services and rental income represented 70% and 25%, 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, general and administrative expenses and other expenses. Depending upon the availability and cost of external capital, we believe our liquidity is sufficient to fund these uses of cash. We also continuously evaluate opportunities to finance future investments. New investments are generally funded from temporary borrowings under our unsecured revolving credit facility and commercial paper program, internally generated cash and the proceeds from investment dispositions. Our investments generate cash from NOI and principal payments on loans receivable. Permanent financing for future investments, which replaces funds drawn under our unsecured revolving credit facility and commercial paper program, has historically been provided through a combination of the issuance of public debt and equity securities and the incurrence or assumption of secured debt. Depending upon market conditions, we believe that new investments will be available in the future with spreads over our cost of capital that will generate appropriate returns to our stockholders. It is also likely that investment dispositions may occur in the future. To the extent that investment dispositions exceed new investments, our revenues and cash flows from operations could be adversely affected. We expect to reinvest the proceeds from any investment dispositions in new investments. To the extent that new investment requirements exceed our available cash on-hand, we expect to borrow under our unsecured revolving credit facility and commercial paper program. AtJune 30, 2022 , we had$363,339,000 of cash and cash equivalents,$78,912,000 of restricted cash and$3,646,000,000 of available borrowing capacity under our unsecured revolving credit facility. 31
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Key Transactions
Capital The following summarizes key capital transactions that occurred during
the six months ended
•In
•InApril 2022 , we entered into an amended and restated ATM Program (as defined below) pursuant to which we may offer and sell up to$3,000,000,000 of common stock from time to time. Since the beginning of the year, we sold 28,435,291 shares of common stock under our current and previous ATM Programs via forward sale agreements which are expected to generate gross proceeds of approximately$2,522,065,000 , of which 15,986,251 shares have been settled resulting in$1,379,002,000 of gross proceeds during the six months endedJune 30, 2022 . •InJune 2022 , we closed on an amended$5,200,000,000 unsecured credit facility with improved pricing across our term loans. The credit facility includes$4,000,000,000 of revolving credit capacity at a borrowing rate of 77.5 basis points over the adjusted SOFR rate,$1,000,000,000 of USD term loan capacity at a borrowing rate of 85.0 basis points over the adjusted SOFR rate and$250,000,000 CAD term loan capacity at 85.0 basis points over CDOR.
•During the six months ended
Investments The following summarizes our property acquisitions and joint venture investments completed during the six months endedJune 30, 2022 (dollars in thousands): Properties Book Amount (1) Capitalization Rates (2) Seniors Housing Operating 40$ 1,566,279 4.5 % Triple-net - 171 - % Outpatient Medical 9 262,563 5.5 % Totals 49$ 1,829,013 4.7 %
(1) Represents amounts recorded in net real estate investments including fair value adjustments pursuant to
Dispositions The following summarizes property dispositions completed during the
six months ended
Properties Proceeds (1) Book Amount (2) Capitalization Rates (3) Seniors Housing Operating 1$ 13,750 $ 13,470 - % Triple-net 9 90,154 70,571 6.6 % Totals 10$ 103,904 $ 84,041 6.6 % (1) Represents net proceeds received upon disposition, including any seller financing. (2) Represents carrying value of net real estate assets at time of disposition. See Note 5 to our unaudited consolidated financial statements for additional information. (3) Represents annualized contractual income that was being received in cash at date of disposition divided by stated purchase price.
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 byU.S. generally accepted accounting principles ("U.S. GAAP"). Please refer to the section entitled "Non-GAAP Financial Measures" for further discussion and reconciliations. These earnings measures are widely used by investors and analysts in the valuation, comparison and investment recommendations of companies. 32 -------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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, 2022 2022 2021 2021 2021 2021 Net income (loss)$ 95,672 $ 65,751 $ 66,194 $ 190,336 $ 45,757 $ 72,192 NICS 89,785 61,925 58,672 179,663 26,257 71,546 FFO 409,589 347,635 338,976 345,739 248,840 287,167 NOI 618,453 542,035 524,085 510,397 498,335 434,736 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 restricted cash. The coverage ratios indicate our ability to service interest and fixed charges (interest and secured debt principal amortization). 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, 2022 2022 2021 2021 2021 2021 Net debt to book capitalization ratio 43% 43% 42% 42% 43% 41% Net debt to undepreciated book capitalization ratio 35% 35% 35% 35% 35% 34% Net debt to market capitalization ratio 27% 24% 26% 27% 26% 28% Interest coverage ratio 4.21x 4.03x 3.89x 4.81x 3.30x 3.56x Fixed charge coverage ratio 3.78x 3.57x 3.42x 4.22x 2.93x 3.16x 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). 33
-------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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, 2022 2022 2021 2021 2021 2021 Property mix:(1) Seniors Housing Operating 45% 38% 34% 34% 32% 39% Triple-net 36% 41% 44% 45% 45% 36% Outpatient Medical 19% 21% 22% 21% 23% 25% Relationship mix: (1) Atria Senior Living(2) 12% 5% 4% 3% -% -% ProMedica 10% 11% 11% 11% 12% 12% Sunrise Senior Living 8% 6% 7% 9% 10% 14% HC-One Group 3% 4% 5% 5% 3% -% Cogir Management Corporation 3% 2% 2% 2% 2% 2% Remaining relationships 64% 72% 71% 70% 73% 72% Geographic mix:(1) California 15% 13% 13% 12% 12% 15% United Kingdom 9% 11% 13% 14% 13% 10% Texas 7% 8% 9% 9% 9% 7% Florida 6% 5% 5% 4% 5% 1% New Jersey 5% 5% 5% 5% 5% 7% Remaining geographic areas 58% 58% 55% 56% 56% 60% (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) Inclusive of$58,621,000 of income recognized upon termination of lease. See Note 3 to our unaudited consolidated financial statements for further details. Lease Expirations The following table sets forth information regarding lease expirations for certain portions of our portfolio as ofJune 30, 2022 (dollars in thousands): Expiration Year (1) 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Thereafter Triple-net: Properties 20 1 4 27 63 1 14 4 21 9 392 Base rent (2)$ 1,319 $ 840 $ 12,110 $ 6,612 $ 67,826 $ -
$ 19,383 $ 3,972 $ 43,411 $ 21,007 $ 429,254 % of base rent 0.2 % 0.1 % 2.0 % 1.1 % 11.2 % - % 3.2 % 0.7 % 7.2 % 3.5 % 70.8 % Units/beds 2,912 70 692 1,725 4,878 80 1,474 219 2,279 896 40,056 % of Units/beds 5.3 % 0.1 % 1.3 % 3.1 % 8.8 % 0.1 % 2.7 % 0.4 % 4.1 % 1.6 % 72.5 % Outpatient Medical: Square feet 1,008,657 1,709,294 1,991,461 1,114,858 1,438,037 1,379,053 968,966 820,496 1,137,474 1,700,753 4,834,444 Base rent (2)$ 28,600 $ 48,944 $ 60,662 $ 31,762 $ 40,648 $ 36,547 $ 26,142 $ 22,836 $ 30,486 $ 44,812 $ 106,737 % of base rent 6.0 % 10.2 % 12.7 % 6.6 % 8.5 % 7.6 % 5.5 % 4.8 % 6.4 % 9.4 % 22.3 % Leases 220 368 372 249 274 244 139 96 102 81 232 % of Leases 9.3 % 15.5 % 15.6 % 10.5 % 11.5 % 10.3 % 5.8 % 4.0 % 4.3 % 3.4 % 9.8 %
(1) Excludes our share of investments in unconsolidated entities, developments, land parcels, loans receivable and sub-leases. Investments classified as held for sale are included in the current year. (2) The most recent monthly cash base rent annualized. Base rent does not include tenant recoveries or amortization of above and below market lease intangibles or other non-cash income.
We evaluate our key performance indicators in conjunction with current expectations to determine if historical trends are indicative of future results. Our expected results may not be achieved, and actual results may differ materially from our expectations. Factors that may cause actual results to differ from expected results are described in more detail in "Cautionary Statement Regarding Forward-Looking Statements" and other sections of this Quarterly Report on Form 10-Q. Management regularly monitors economic and other factors to develop strategic and tactical plans designed to improve performance and maximize our competitive position. Our ability to achieve our financial objectives is dependent upon our ability to effectively execute these plans and to appropriately respond to emerging economic and company-specific trends. Please refer to our Annual Report on Form 10-K for the year endedDecember 31, 2021 , under the headings "Business," "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." 34
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Corporate Governance Maintaining investor confidence and trust is important in today's business environment. Our Board of Directors and management are strongly committed to policies and procedures that reflect the highest level of ethical business practices. Our corporate governance guidelines provide the framework for our business operations and emphasize our commitment to increase stockholder value while meeting all applicable legal requirements. These guidelines meet the listing standards adopted by theNew York Stock Exchange and are available on the Internet at www.welltower.com/investors/governance. The information on our website is not incorporated by reference in this Quarterly Report on Form 10-Q, and our web address is included as an inactive textual reference only.
Liquidity and Capital Resources
Sources and Uses of Cash
Our primary sources of cash include resident fees and services, rent and interest receipts, borrowings under our unsecured revolving credit facility and commercial paper program, public issuances of debt and equity securities, proceeds from investment dispositions and principal payments on loans receivable. Our primary uses of cash include dividend distributions, debt service payments (including principal and interest), real property investments (including acquisitions, capital expenditures, construction advances and transaction costs), loan advances, property operating expenses, general and administrative expenses and other 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, 2022 June 30, 2021 $ % Cash, cash equivalents and restricted cash at beginning of period$ 346,755 $ 2,021,043 $ (1,674,288) (83) % Cash provided from (used in) operating activities 719,331 638,913 80,418 13 % Cash provided from (used in) investing activities (2,085,261) (1,205,134) (880,127) (73) % Cash provided from (used in) financing activities 1,473,616 (648,114) 2,121,730 327 % Effect of foreign currency translation (12,190) 1,996 (14,186) (711) % Cash, cash equivalents and restricted cash at end of period$ 442,251 $ 808,704 $ (366,453) (45) % Operating Activities The changes in net cash provided from operating activities was immaterial. Please see "Results of Operations" for discussion of net income fluctuations. For the six months endedJune 30, 2022 and 2021, 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." Please refer to Notes 3 and 5 of our unaudited consolidated financial statements for additional information. 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, 2022 June 30, 2021 $ % New development$ 286,427 $ 144,344 $ 142,083 98 %
Recurring capital expenditures, tenant improvements and lease commissions
72,103 30,171 41,932 139 % Renovations, redevelopments and other capital improvements 127,966 64,312 63,654 99 % Total$ 486,496 $ 238,827 $ 247,669 104 % 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. The increase in recurring capital expenditures, tenant improvements and lease commissions is due primarily to portfolio growth and increased spending after a contraction during the pandemic. 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. InMarch 2022 , we completed the issuance of$550,000,000 senior unsecured notes with a maturity date ofJune 2032 . InApril 2022 , we closed on an amended$5,200,000,000 unsecured credit facility, increasing our term loan capacity by$500,000,000 . As ofJune 30, 2022 , we have total near-term available liquidity of approximately$4.1 billion . 35
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Off-Balance Sheet Arrangements
AtJune 30, 2022 , we had investments in unconsolidated entities with our ownership generally ranging from 10% to 88%. We use financial derivative instruments to hedge interest rate and foreign currency exchange rate exposure. AtJune 30, 2022 , we had 18 outstanding letter of credit obligations. Please see Notes 8, 12 and 13 to our unaudited consolidated financial statements for additional information.
Contractual Obligations
The following table summarizes our payment requirements under contractual
obligations as of
Payments Due by Period Contractual Obligations Total 2022 2023-2024 2025-2026 Thereafter Unsecured credit facility and commercial paper (1,3)$ 354,000 $ - $ -$ 354,000 $ - Senior unsecured notes and term credit facilities:(1) U.S. Dollar senior unsecured notes 9,900,000 - 1,350,000 1,950,0006,600,000 Canadian Dollar senior unsecured notes (2) 233,082 - - -233,082 Pounds Sterling senior unsecured notes (2) 1,277,010 - - -1,277,010 U.S. Dollar term credit facility 1,010,000 - - 10,0001,000,000 Canadian Dollar term credit facility (2) 194,235 - - - 194,235 Secured debt: (1,2) Consolidated 2,200,626 396,742 742,015 361,898 699,971 Unconsolidated 1,282,324 95,212 317,292 568,503 301,317 Contractual interest obligations: (3) Unsecured credit facility and commercial paper 32,781 4,098 16,390 12,293 - Senior unsecured notes and term loans (2) 3,942,497 268,303 914,448 743,361 2,016,385 Consolidated secured debt (2) 262,334 39,679 99,858 58,432 64,365 Unconsolidated secured debt (2) 185,364 24,141 76,800 31,083 53,340 Financing lease liabilities (4) 207,079 4,920 71,634 3,354 127,171 Operating lease liabilities (4) 964,483 9,820 39,073 31,043 884,547 Purchase obligations (5) 2,099,174 794,544 1,226,754 77,876 - Total contractual obligations$ 24,144,989 $
1,637,459
(1) Amounts represent principal amounts due and do not reflect unamortized premiums/discounts or other fair value adjustments as reflected on the balance sheet. (2) Based on foreign currency exchange rates in effect as of the balance sheet date. (3) Based on variable interest rates in effect as of the balance sheet date. (4) See Note 6 to our unaudited consolidated financial statements for additional information. (5) See Note 13 to our unaudited consolidated financial statements for additional information. Capital Structure Please refer to "Credit Strength" above for a discussion of our leverage and coverage ratio trends. Our debt agreements contain various covenants, restrictions and events of default. Certain agreements require us to maintain financial ratios and minimum net worth and impose certain limits on our ability to incur indebtedness, create liens and make investments or acquisitions. As ofJune 30, 2022 , we were in compliance in all material respects with 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. OnApril 1, 2022 ,Welltower Inc. andWelltower OP LLC jointly filed with theSecurities and Exchange Commission (the "SEC") an open-ended automatic or "universal" shelf registration statement on Form S-3 covering an indeterminate amount of future offerings ofWelltower Inc.'s debt securities, common stock, preferred stock, depositary shares, guarantees of debt securities issued byWelltower OP LLC's , warrants and units andWelltower OP LLC's debt securities and guarantees of debt securities issued byWelltower Inc. to replace OldWelltower's existing "universal" shelf registration statement filed with theSEC onMay 4, 2021 . OnApril 1, 2022 ,Welltower Inc. also filed with theSEC a registration statement in connection with its enhanced dividend reinvestment plan ("DRIP") under which it may issue up to 15,000,000 shares of common stock to replace Old Welltower's existing DRIP registration statement on Form S-3 filed with theSEC onMay 4, 2021 . As ofAugust 5, 2022 , 15,000,000 shares of common stock remained available for issuance under the DRIP registration statement. OnApril 4, 2022 ,Welltower Inc. entered into (i) a second amended and restated equity distribution agreement (the "EDA") with (i) Robert W. 36 -------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of OperationsBaird & Co. Incorporated ,Barclays Capital Inc. ,BMO Capital Markets Corp. ,BNP Paribas Securities Corp. ,BNY Mellon Capital Markets, LLC ,BofA Securities, Inc. ,BOK Financial Securities, Inc. ,Capital One Securities Inc. ,Citigroup Global Markets Inc. ,Comerica Securities, Inc. ,Credit Agricole Securities (USA) Inc. ,Deutsche Bank Securities Inc. ,Fifth Third Securities, Inc. ,Goldman Sachs & Co. LLC ,Jefferies LLC ,JMP Securities LLC ,J.P. Morgan Securities LLC ,KeyBanc Capital Markets Inc. ,Loop Capital Markets LLC ,Mizuho Securities USA LLC ,Morgan Stanley & Co. LLC ,MUFG Securities Americas Inc. ,RBC Capital Markets, LLC ,Regions Securities LLC ,Scotia Capital (USA) Inc. ,SMBC Nikko Securities America, Inc. ,Synovus Securities, Inc. ,TD Securities (USA) LLC ,Truist Securities, Inc. andWells Fargo Securities, LLC as sales agents and forward sellers and (ii) the forward purchasers named therein relating to issuances, offers and sales from time to time of up to$3,000,000,000 aggregate amount of common stock ofWelltower Inc. (together with the existing master forward sale confirmations relating thereto, the "ATM Program"), amending and restating the ATM Program entered into onJuly 30, 2021 to, among other amendments, increase the total amount of shares of common stock that may be offered and sold under the ATM Program from$2,500,000,000 to$3,000,000,000 , which amount excludes shares Old Welltower had previously sold pursuant to the prior program. The ATM Program also allowsWelltower Inc. to enter into forward sale agreements. As ofAugust 5, 2022 , we had$3,000,000,000 of remaining capacity under the ATM Program, which excludes forward sales agreements outstanding for the sale of 16,990,804 shares or approximately$1,481,131,000 with maturity dates in 2023. In addition, we have forward sale agreements for the sale of 5,466,182 shares or approximately$487,172,000 with maturity dates in 2023 under theJuly 30, 2021 ATM Program. We expect to physically settle the forward sales for cash proceeds. 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. In connection with the filing of the new "universal" shelf registration statement,Welltower Inc. also filed with theSEC two prospectus supplements that will continue offerings that were previously covered by Old Welltower's prospectus supplements and the accompanying prospectus to the prior registration statement relating to: (i) the registration of up to 620,731 shares of common stock ofWelltower Inc. (the "DownREIT Shares"), that may be issued from time to time if, and to the extent that, certain holders of Class A units (the "DownREIT Units") ofHCN G&L DownREIT, LLC , aDelaware limited liability company (the "DownREIT"), tender such DownREIT Units for redemption by the DownREIT, andHCN DownREIT Member, LLC , a majority-owned indirect subsidiary ofWelltower Inc. (including its permitted successors and assigns, the "Managing Member"), or a designated affiliate of the Managing Member, elects to assume the redemption obligations of the DownREIT and to satisfy all or a portion of the redemption consideration by issuing DownREIT Shares to the holders instead of or in addition to paying a cash amount; and (ii) the registration of up to 475,327 shares of common stock ofWelltower Inc. (the "DownREIT II Shares"), that may be issued from time to time if, and to the extent that, certain holders of Class A units (the "DownREIT II Units," and collectively with the DownREIT Units, the "Units") ofHCN G&L DownREIT II LLC , aDelaware limited liability company (the "DownREIT II"), tender such DownREIT II Units for redemption by the DownREIT II, and the Managing Member, or a designated affiliate of the Managing Member, elects to assume the redemption obligations of the DownREIT II and to satisfy all or a portion of the redemption consideration by issuing DownREIT II Shares to the holders instead of or in addition to paying a cash amount. OnJuly 22, 2022 ,Welltower Inc. filed with theSEC a prospectus supplement relating to the registration of up to 300,026 shares of common stock ofWelltower Inc. that may be issued from time to time if, and to the extent that, certain holders of Class A Common Units (the "OP Units") of Welltower OP tender the OP Units for redemption by Welltower OP, andWelltower Inc. elects to assume the redemption obligations of Welltower OP and to satisfy all or a portion of the redemption consideration by issuing shares of its common stock to the holders instead of or in addition to paying a cash amount.
Supplemental Guarantor Information
Welltower OP has issued the unsecured notes described in Note 11 to our Consolidated Financial Statements. All unsecured notes are fully and unconditionally guaranteed byWelltower , and Welltower OP is 99.753% owned byWelltower . EffectiveJanuary 4, 2021 , theSEC adopted amendments to the financial disclosure requirements applicable to registered debt offerings that include certain credit enhancements. The Company has adopted these new rules, which permits subsidiary issuers of obligations guaranteed by the parent to omit separate financial statements if the consolidated financial statements of the parent company have been filed, the subsidiary obligor is a consolidated subsidiary of the parent company, the guaranteed security is debt or debt-like, and the security is guaranteed fully and unconditionally by the parent. Accordingly, separate consolidated financial statements of Welltower OP have not been presented. Furthermore,Welltower and Welltower OP have no material assets, liabilities, or operations other than financing activities and their investments in non-guarantor subsidiaries. Therefore, we meet the criteria in Rule 13-01 of Regulation S-X to omit the summarized financial information from our disclosures. 37
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 Funds From Operations ("FFO") and 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, 2022 2021 Amount % 2022 2021 Amount % Net income$ 95,672 $ 45,757 $ 49,915 109 %$ 161,423 $ 117,949 $ 43,474 37 % NICS 89,785 26,257 63,528 242 % 151,710 97,803 53,907 55 % FFO 409,589 248,840 160,749 65 % 757,224 536,007 221,217 41 % EBITDA 536,782 406,762 130,020 32 % 1,033,330 850,465 182,865 22 % NOI 618,453 498,335 120,118 24 % 1,160,488 933,071 227,417 24 % SSNOI 420,542 380,414 40,128 11 % 805,624 766,404 39,220 5 % Per share data (fully diluted): NICS$ 0.20 $ 0.06 $ 0.14 233 %$ 0.33 $ 0.23 $ 0.10 43 % FFO$ 0.90 $ 0.59 $ 0.31 53 %$ 1.67 $ 1.28 $ 0.39 30 % Interest coverage ratio 4.21 x 3.30 x 0.91 x 28 % 4.12 x 3.43 x 0.69 x 20 % Fixed charge coverage ratio 3.78 x 2.93 x 0.85 x 29 % 3.68 x 3.04 x 0.64 x 21 %
Seniors Housing Operating
The following is a summary of our SSNOI at
QTD Pool YTD Pool Three Months Ended Change Six Months Ended Change June 30, 2022 June 30, 2021 $ % June 30, 2022 June 30, 2021 $ % SSNOI (1)$ 168,748 $ 140,720 $ 28,028 19.9 %$ 314,141 $ 291,590 $ 22,551 7.7 %
(1) For the QTD and YTD Pools, amounts relate to 532 and 531 same store properties, respectively. Please see Non-GAAP Financial Measures for additional information and reconciliations.
38
-------------------------------------------------------------------------------- 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 theSeniors Housing Operating segment (dollars in thousands): Three Months Ended Change Six Months Ended Change June 30, June 30, June 30, June 30, 2022 2021 $ % 2022 2021 $ % Revenues: Resident fees and services$ 1,009,999 $ 740,891 $ 269,108 36 %$ 2,004,334 $ 1,464,355 $ 539,979 37 % Interest income 1,683 856 827 97 % 3,100 1,975 1,125 57 % Other income 59,528 802 58,726 n/a 60,388 2,621 57,767 n/a Total revenues 1,071,210 742,549 328,661 44 % 2,067,822 1,468,951 598,871 41 % Property operating expenses 789,299 582,361 206,938 36 % 1,579,227 1,138,329 440,898 39 % NOI (1) 281,911 160,188 121,723 76 % 488,595 330,622 157,973 48 % Other expenses: Depreciation and amortization 201,178 131,035 70,143 54 % 393,971 263,621 130,350 49 % Interest expense 7,481 10,553 (3,072) (29) % 15,131 21,971 (6,840) (31) % Loss (gain) on extinguishment of debt, net 400 3,106 (2,706) (87) % 385 (1,537) 1,922 125 % Provision for loan losses, net 342 (181) 523 289 % 609 70 539 770 % Impairment of assets - 17,713 (17,713) (100) % - 22,317 (22,317) (100) % Other expenses 29,249 3,709 25,540 689 % 37,440 7,168 30,272 422 % 238,650 165,935 72,715 44 % 447,536 313,610 133,926 43 % Income (loss) from continuing operations before income taxes and other items 43,261 (5,747) 49,008 853 % 41,059 17,012 24,047 141 % Income (loss) from unconsolidated entities (12,669) (12,938) 269 2 % (30,451) (7,704) (22,747) (295) % Gain (loss) on real estate dispositions, net (1,224) (28) (1,196) n/a 1,477 5,167 (3,690) (71) % Income from continuing operations 29,368 (18,713) 48,081 257 % 12,085 14,475 (2,390) (17) % Net income (loss) 29,368 (18,713) 48,081 257 % 12,085 14,475 (2,390) (17) % Less: Net income (loss) attributable to noncontrolling interests (2,857) 7,469 (10,326) (138) % (8,238) 2,545 (10,783) (424) % Net income (loss) attributable to common stockholders$ 32,225 $ (26,182) $ 58,407 223 %$ 20,323 $ 11,930 $ 8,393 70 %
(1) See Non-GAAP Financial Measures below.
Resident fees and services and property operating expenses increased for the three and six month periods endedJune 30, 2022 compared to the same periods in the prior year primarily due to increases acquisitions, including the acquisition of the Holiday Retirement portfolio onJuly 30, 2021 for a total purchase price of$1.6 billion . The increases were partially offset due to property dispositions. Our Seniors Housing Operating revenues are dependent on occupancy, which has steadily increased in recent months. As ofJune 30, 2022 , nearly all communities are open for new admissions and allowing visitors, in-person tours and communal dining and activities. Average occupancy, excluding land parcels and properties under development, is as follows: Three Months Ended March 31, June 30, September 30, December 31, 2021 72.7 % 73.0 % 74.9 % 76.3 % 2022 76.3 % 77.1 % Effective onApril 1, 2022 , our leasehold interest relating to the master lease with National Health Investors, Inc. ("NHI") for 17 properties assumed in conjunction with the Holiday Retirement acquisition was terminated as a result of the transition or sale of the properties by NHI. The lease termination was part of an agreement to resolve outstanding litigation with NHI. In conjunction with the agreement, a wholly owned subsidiary and the lessee on the master lease agreed to release$6,883,000 of cash to the landlord, which represents the net cash flow generated from the properties since we assumed the leasehold interest. Additionally, in conjunction with the lease termination, during the three months endedJune 30, 2022 we recognized$58,621,000 in other income on our Consolidated Statements of Comprehensive Income, from the derecognition of the right of use asset and related lease liability. Property-level operating expenses associated with the COVID-19 pandemic relating to our Seniors Housing Operating portfolio totaled$9,015,000 and$20,018,000 for the three and six months endedJune 30, 2022 , respectively, as compared to$16,948,000 and$44,924,000 during the three and six months endedJune 30, 2021 , respectively. These expenses were incurred 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 39
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
and property cleaning expenses and expenditures related to our efforts to procure personal protective equipment and supplies. Certain new expenses incurred since the start of the pandemic may continue on an ongoing basis as part of new health and safety protocols.
In 2021 and 2022, we received government grants under the CARES Act primarily to cover increased expenses and lost revenue during the COVID-19 pandemic, as well as under similar programs in theU.K. andCanada . In 2021 and 2022, we received government grants under the CARES Act primarily to cover increased expenses and lost revenue during the COVID-19 pandemic, as well as under similar programs in theU.K. andCanada . We recognized$21,804,000 and$27,564,000 during the three and six months endedJune 30, 2022 , respectively, as compared to$18,525,000 and$67,705,000 during the three and six months endedJune 30, 2021 , respectively. These grants represent a reduction to property operating expenses in our Consolidated Statements of Comprehensive Income.
The fluctuations in depreciation and amortization are due to acquisitions, dispositions and transitions. 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, 2021 , we recorded impairment charges of$22,317,000 related to two held for use properties in which the carrying values exceeded the estimated fair value. Transaction costs related to asset acquisitions are capitalized as a component of the purchase price. The fluctuation in other expenses is primarily due to the timing of noncapitalizable transaction costs associated with acquisitions and operator transitions. Changes in the gain on sales of properties are related to the volume and timing of property sales and the sales prices.
During the six months ended
40
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Location Units/Beds Commitment Balance Est. Completion London, UK 82$ 42,567 $ 21,155 3Q22 Sachse, TX 193 38,054 25,035 3Q22 Princeton, NJ 80 29,780 30,333 3Q22 Berea, OH 120 14,975 13,657 3Q22 Painesville, OH 119 14,721 12,496 3Q22 Beaver, PA 116 14,892 12,116 3Q22 New Rochelle, NY 72 42,669 21,650 4Q22 Pflugerville, TX 196 39,500 20,063 4Q22 Georgetown, TX 188 36,215 23,899 4Q22 Denton, TX 65 20,194 8,604 4Q22 Wombourne, UK 66 14,594 13,018 4Q22 Leicester, UK 60 13,621 11,069 4Q22 Rugby, UK 76 18,624 11,811 1Q23 Meadville, PA 128 13,716 13,716 1Q23 Brookline, MA 159 148,590 49,445 2Q23 Buzzards Bay, MA 120 31,126 31,126 2Q23 Manchester, CT 128 21,915 21,915 2Q23 East Windsor, CT 122 20,530 20,530 2Q23 Lake Jackson, TX 130 32,075 5,943 2Q23 Washington, DC 137 121,200 34,825 3Q23 Charlotte, NC 328 91,836 48,795 3Q23 White Marsh, MD 188 78,610 9,769 3Q23 Weymouth, MA 165 77,578 19,615 3Q23 Queen Creek, AZ 199 54,754 8,491 3Q23 Glendale, AZ 204 53,400 15,233 3Q23 Blue Springs, MO 134 20,854 20,854 4Q23 Miami Twp, OH 122 18,206 3,664 4Q23 Melissa, TX 52 16,531 2,273 1Q24 Gaithersburg, MD 302 173,548 46,670 2Q24 Leander, TX 72 26,179 3,547 2Q24 Temple, TX 256 66,265 5,943 4Q24 Kyle, TX 225 62,864 4,888 1Q25 4,604$ 1,470,183 592,148 Anna, TX(1) 3,615 Boise, ID(1) 33,945 Boise, ID(1)12,603 Kuna , ID(1) 5,565 Columbus, OH(1) 14,695 Kansas City, MO(1) 13,046 Raleigh, NC(1) 3,590 Toronto, ON(1) 51,290 Wellesley, MA(1) 9,709$ 740,206
(1) Final units/beds, commitment amount and expected conversion date not yet known.
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 fluctuations in loss (gain) on extinguishment of debt is primarily attributable to the volume of extinguishments and terms of the related secured debt. The following is a summary of our Seniors Housing Operating segment property secured debt principal activity (dollars in thousands): 41
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended
Six Months EndedJune 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 Weighted Average Weighted Average Amount Interest Rate Amount Interest Rate Amount Interest Rate Amount Interest Rate Beginning balance$ 1,554,473 2.83 %$ 1,667,278 2.89 %$ 1,599,522 2.81 %$ 1,706,189 3.05 % Debt transferred - - % - - % 32,478 4.79 % - - % Debt issued 4,959 3.40 % - - % 10,344 3.23 % - - % Debt assumed 221,159 4.32 % - - % 221,159 4.32 % - - % Debt extinguished (60,916) 4.26 % (24,660) 3.31 % (155,563) 4.23 % (66,593) 6.01 % Principal payments (11,515) 3.11 % (11,986) 3.06 % (24,513) 3.03 % (24,246) 3.11 % Foreign currency (31,068) 3.01 % 14,658 2.74 % (6,335) 2.97 % 29,940 2.77 % Ending balance$ 1,677,092 3.34 %$ 1,645,290 2.83 %$ 1,677,092 3.34 %$ 1,645,290 2.83 % Monthly averages$ 1,605,163 2.92 %$ 1,670,234 2.86 %$ 1,605,943 2.88 %$ 1,679,223 2.94 % The majority of our Seniors Housing Operating properties are formed through partnership interests. Income from unconsolidated entities recognized during the six months endedJune 30, 2021 includes a gain recognized from the sale of a home health business owned by one of our unconsolidated entities. Net income attributable to noncontrolling interests represents our partners' share of net income (loss) related to joint ventures. The fluctuation during the three and six month periods relates primarily to our partners' share of reserves for previously recognized straight-line receivables.
Triple-net
The following is a summary of our SSNOI at
QTD Pool YTD Pool Three Months Ended Change Six Months Ended Change June 30, 2022 June 30, 2021 $ % June 30, 2022 June 30, 2021 $ % SSNOI (1)$ 149,684 $ 139,974 $ 9,710 6.9 %$ 286,624 $ 275,904 $ 10,720 3.9 %
(1) For the QTD and YTD Pools, amounts relate to 558 and 532 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, 2022 2021 $ % 2022 2021 $ % Revenues: Rental income$ 197,182 $ 204,725 $ (7,543) (4) %$ 393,183 $ 357,188 $ 35,995 10 % Interest income 35,392 32,861 2,531 8 % 72,898 47,783 25,115 53 % Other income 1,786 1,355 431 32 % 3,442 2,452 990 40 % Total revenues 234,360 238,941 (4,581) (2) % 469,523 407,423 62,100 15 % Property operating expenses 11,491 12,627 (1,136) (9) % 22,702 25,468 (2,766) (11) % NOI (1) 222,869 226,314 (3,445) (2) % 446,821 381,955 64,866 17 % Other expenses: Depreciation and amortization 49,561 54,406 (4,845) (9) % 103,065 111,073 (8,008) (7) % Interest expense 320 1,704 (1,384) (81) % 634 3,586 (2,952) (82) % Loss (gain) on derivatives and financial instruments, net (1,407) (359) (1,048) (292) % 1,171 1,575 (404) (26) % Provision for loan losses, net (176) 10,019 (10,195) (102) % (1,241) 10,872 (12,113) (111) % Impairment of assets - 3,768 (3,768) (100) % - 22,732 (22,732) (100) % Other expenses 463 4,110 (3,647) (89) % 11,507 9,093 2,414 27 % 48,761 73,648 (24,887) (34) % 115,136 158,931 (43,795) (28) % Income (loss) from continuing operations before income taxes and other items 174,108 152,666 21,442 14 % 331,685 223,024 108,661 49 % Income (loss) from unconsolidated entities 5,874 4,877 997 20 % 21,417 9,784 11,633 119 % Gain (loss) on real estate dispositions, net (2,129) 42,709 (44,838) (105) % 18,320 44,751 (26,431) (59) % Income from continuing operations 177,853 200,252 (22,399) (11) % 371,422 277,559 93,863 34 % Net income 177,853 200,252 (22,399) (11) % 371,422 277,559 93,863 34 % Less: Net income (loss) attributable to noncontrolling interests 7,241 11,405 (4,164) (37) % 14,306 14,805 (499) (3) % Net income attributable to common stockholders$ 170,612 $ 188,847 $ (18,235) (10) %$ 357,116 $ 262,754 $ 94,362 36 %
(1) See Non-GAAP Financial Measures below.
42 -------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Rental income has decreased primarily due to property dispositions during 2021 and 2022, including 51 properties during the year endedDecember 31, 2021 with a book amount of$486 million and nine properties during the six months endedJune 30, 2022 with a book amount of$71 million . Additionally, during the six months endedJune 30, 2021 , we recorded reserves of previously recognized straight-line receivables of$49,241,000 . 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, 2022 , we had 12 leases with rental rate increases ranging from 2.00% to 33.39% in our Triple-net portfolio. Our Triple-net operators are experiencing similar impacts on occupancy and operating costs due to the COVID-19 pandemic to our Seniors Housing Operating properties. Long-term/post-acute facilities have generally experienced a higher degree of occupancy declines which in some cases impacted the ability of our Triple-net operators to make contractual rent payments to us. However, many of our Triple-net operators received funds under the CARES Act Paycheck Protection Program and theProvider Relief Fund . Depreciation and amortization fluctuate as a result of the acquisitions, dispositions and segment 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. The increase to interest income is primarily driven by interest recognized on senior loan financings of £540,000,000 made to affiliates of Safanad as part of the recapitalization of its investment inHC-One Group during the second quarter 2021. Additionally during the six months endedJune 30, 2021 , we recognized a provision for loan losses under the current expected credit losses accounting standard, primarily related to the initial recognition of that loan. During the six months endedJune 30, 2021 , we recorded impairment charges of$22,732,000 related to three held for sale properties and two held for use properties. Transaction costs related to asset acquisitions are capitalized as a component of purchase price. The fluctuation in other expenses is primarily due to noncapitalizable transaction costs from acquisitions and segment transitions. Changes in the gain on sales of properties are related to the volume and timing of property sales and the sales prices. During the six months endedJune 30, 2022 , there were no Triple-net projects completed; however, four projects transitioned out of the Triple-net segment and into the Seniors Housing Operating segment. The following is a summary of our consolidated Triple-net construction projects, excluding expansions, pending as ofJune 30, 2022 (dollars in thousands): Location Units/Beds Commitment Balance Est. Completion Redhill, UK 76$ 19,338 $ 17,759 3Q22 Raleigh, NC 191 154,142 87,027 2Q23 267$ 173,480 $ 104,786 During the six months endedJune 30, 2022 , loss (gain) on derivatives and financial instruments, net is primarily attributable to the mark-to-market of the equity warrants received as part of the Safanad/HC-One transaction that closed in the second quarter of 2021. In addition, the mark-to-market adjustment on our Genesis Healthcare available-for-sale investment is reflected in all periods. 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 Ended June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 Weighted Weighted Average Average Amount Interest Rate Amount Interest Rate Amount Interest Rate Amount Interest Rate Beginning balance$ 39,837 4.39 %$ 123,139 4.91 %$ 72,536 4.57 %$ 123,652 4.91 % Debt transferred - - % - - % (32,478) 4.79 % - - % Principal payments (215) 4.37 % (1,246) 5.16 % (436) 4.37 % (2,467) 5.16 % Foreign currency - - % 673 5.43 % - - % 1,381 5.43 % Ending balance$ 39,622 4.39 %$ 122,566 4.91 %$ 39,622 4.39 %$ 122,566 4.91 % Monthly averages$ 39,693 4.39 %$ 123,570 4.92 %$ 39,804 4.39 %$ 123,348 4.92 % 43
-------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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. The increase in income from unconsolidated entities during the six months endedJune 30, 2022 is primarily related to the write off of straight-line rent payable balances on an unconsolidated joint venture that was restructured during the quarter. Net income attributable to noncontrolling interests represents our partners' share of net income relating to those partnerships where we are the controlling partner.
Outpatient Medical
The following is a summary of our SSNOI at
QTD Pool YTD Pool Three Months Ended Change Six Months Ended Change June 30, 2022 June 30, 2021 $ % June 30, 2022 June 30, 2021 $ % SSNOI (1)$ 102,110 $ 99,720 $ 2,390 2.4 %$ 204,859 $ 198,910 $ 5,949 3.0 %
(1) For the QTD and YTD Pools, amounts relate to 351 and 350 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 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, 2022 2021 $ % 2022 2021 $ % Revenues: Rental income$ 164,229 $ 149,998 $ 14,231 9 %$ 324,618 $ 300,378 $ 24,240 8 % Interest income 65 4,731 (4,666) (99) % 136 8,269 (8,133) (98) % Other income 2,028 4,343 (2,315) (53) % 4,891 6,648 (1,757) (26) % Total revenues 166,322 159,072 7,250 5 % 329,645 315,295 14,350 5 % Property operating expenses 50,648 45,495 5,153 11 % 100,563 92,358 8,205 9 % NOI (1) 115,674 113,577 2,097 2 % 229,082 222,937 6,145 3 % Other expenses: Depreciation and amortization 59,556 55,444 4,112 7 % 117,347 110,617 6,730 6 % Interest expense 4,531 3,907 624 16 % 9,098 7,922 1,176 15 % Loss (gain) on extinguishment of debt, net 4 - 4 n/a 7 - 7 n/a Provision for loan losses, net (1) (3,641) 3,640 100 % (7) (3,362) 3,355 100 % Impairment of assets - 2,211 (2,211) (100) % - 2,211 (2,211) (100) % Other expenses 207 1,098 (891) (81) % 996 1,810 (814) (45) % 64,297 59,019 5,278 9 % 127,441 119,198 8,243 7 % Income (loss) from continuing operations before income taxes and other items 51,377 54,558 (3,181) (6) % 101,641 103,739 (2,098) (2) % Income (loss) from unconsolidated entities (263) 85 (348) (409) % (908) 2,993 (3,901) (130) % Gain (loss) on real estate dispositions, net (179) 1,987 (2,166) (109) % (395) 53,830 (54,225) (101) % Income from continuing operations 50,935 56,630 (5,695) (10) % 100,338 160,562 (60,224) (38) % Net income (loss) 50,935 56,630 (5,695) (10) % 100,338 160,562 (60,224) (38) % Less: Net income (loss) attributable to noncontrolling interests 1,498 629 869 138 % 3,640 2,799 841 30 % Net income (loss) attributable to common stockholders$ 49,437 $ 56,001 $ (6,564) (12) %$ 96,698 $ 157,763 $ (61,065) (39) %
(1) See Non-GAAP Financial Measures.
Rental income has increased due primarily to acquisitions and construction conversions that occurred during 2021 and the first half of 2022. 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, 2022 , our consolidated outpatient medical portfolio signed 108,076 square feet of new leases and 395,653 square feet of renewals. The weighted-average term of these leases was eight years, with a rate of$46.32 per square foot and tenant improvement and lease commission costs of$20.42 per square foot. Substantially all of these leases contain an annual fixed or contingent escalation rent structure ranging from 1.0% to 4.0%. 44 -------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The decrease in interest income for the three and six months endedJune 30, 2022 is due primarily to a$178,207,000 first mortgage loan initiated inAugust 2020 , which was subsequently repaid in full in June of 2021, resulting in the reversal of the previously established allowance for credit losses. The fluctuation in property operating expenses and depreciation and amortization are primarily attributable to acquisitions and construction conversions that occurred during 2021 and the first half of 2022. 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, 2021 , we recognized an impairment charge of$2,211,000 related to one held for sale property. Transaction costs related to asset acquisitions are capitalized as a component of purchase price. The fluctuation in other expenses is primarily due to noncapitalizable transaction costs. Changes in gains/losses on sales of properties are related to volume of property sales and the sales prices. During the six months endedJune 30, 2022 , there were no Outpatient Medical projects completed. The following is a summary of the consolidated Outpatient Medical construction projects, excluding expansions, pending as ofJune 30, 2022 (dollars in thousands): Location Square Feet Commitment Balance Est. Completion Tyler, TX 85,214$ 35,369 $ 24,621 4Q22 Stafford, TX 36,788 18,031 10,549 4Q22 League City, TX 16,835 9,935 1,493 1Q23 Beaumont, TX 35,831 11,822 1,256 2Q23 Total 174,668$ 75,157 $ 37,919 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, 2022 June 30, 2021 June 30, 2022 June 30, 2021 Weighted Weighted Average Average Amount Interest Rate Amount Interest Rate Amount Interest Rate Amount Interest Rate Beginning balance$ 521,331 3.51 %$ 545,755 3.54 %$ 530,254 3.49 %$ 548,229 3.55 % Debt extinguished (34,767) 3.79 % - - % (40,941) 3.84 % - - % Principal payments (2,652) 4.37 % (2,483) 4.47 % (5,401) 4.39 % (4,957) 4.47 % Ending balance$ 483,912 3.68 %$ 543,272 3.52 %$ 483,912 3.68 %$ 543,272 3.52 % Monthly averages$ 507,966 3.64 %$ 544,109 3.53 %$ 517,179 3.57 %$ 545,361 3.54 % 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. 45
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Non-Segment/Corporate The following is a summary of our results of operations for the Non-Segment/Corporate activities for the periods presented (dollars in thousands): Three Months Ended Change Six Months Ended Change June 30, June 30, June 30, June 30, 2022 2021 $ % 2022 2021 $ % Revenues: Other income$ 644 $ 430 $ 214 50 %$ 1,250 $ 1,385 $ (135) (10) % Total revenues 644 430 214 50 % 1,250 1,385 (135) (10) % Property operating expenses 2,645 2,174 471 22 % 5,260 3,828 1,432 37 % NOI (1) (2,001) (1,744) (257) (15) % (4,010) (2,443) (1,567) (64) % Expenses: Interest expense 115,418 106,177 9,241 9 % 224,583 212,004 12,579 6 % General and administrative expenses 36,554 31,436 5,118 16 % 74,260 61,362 12,898 21 % Loss (gain) on extinguishment of debt, net 199 52,506 (52,307) (100) % 199 52,506 (52,307) (100) % Other expenses 5,247 2,770 2,477 89 % 11,292 4,610 6,682 145 % 157,418 192,889 (35,471) (18) % 310,334 330,482 (20,148) (6) % Loss from continuing operations before income taxes and other items (159,419) (194,633) 35,214 18 % (314,344) (332,925) 18,581 6 % Income tax benefit (expense) (3,065) 2,221 (5,286) (238) % (8,078) (1,722) (6,356) (369) % Loss from continuing operations (162,484) (192,412) 29,928 16 % (322,422) (334,647) 12,225 4 % Net loss attributable to common stockholders$ (162,484) $ (192,412) $ 29,928 16 %$ (322,422) $ (334,647) $ 12,225 4 %
(1) See Non-GAAP Financial Measures.
Property operating expenses represent insurance costs related to our captive insurance company, which acts as a direct insurer of property level insurance coverage for our portfolio.
The following is a summary of our Non-Segment/Corporate interest expense for the periods presented (dollars in thousands):
Three Months Ended Change Six Months Ended Change June 30, June 30, June 30, June 30, 2022 2021 $ % 2022 2021 $ % Senior unsecured notes$ 106,431 $ 99,923 $ 6,508 7 %$ 207,670 $ 200,136 $ 7,534 4 % Unsecured credit facility and commercial paper program 4,088 1,940 2,148 111 % 6,866 3,120 3,746 120 % Loan expense 4,899 4,314 585 14 % 10,047 8,748 1,299 15 % Totals$ 115,418 $ 106,177 $ 9,241 9 %$ 224,583 $ 212,004 $ 12,579 6 % 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. Loan expenses represent the amortization of costs incurred in connection with senior unsecured notes issuances. The loss on extinguishment recognized during the six months endedJune 20, 2021 is due primarily to the early extinguishment of$339,128,000 of our 3.75% senior unsecured notes dueMarch 2023 and$334,624,000 of our 3.95% senior unsecured notes dueSeptember 2023 . General and administrative expenses as a percentage of consolidated revenues for the six months endedJune 30, 2022 and 2021 were 2.59% and 2.80%, 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. The fluctuation in the provision for income taxes is primarily related to a revaluation of deferred taxes due to a change in theU.K. tax rate and an adjustment to a deferred tax liability due to the recognition of an impairment charge. Other
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 46 -------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 quarter after acquisition or being placed into service for theQTD Pool andYTD 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 andU.K. 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 is defined as earnings (net income) before interest, taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA excluding unconsolidated entities and including adjustments for stock-based compensation expense, provision for loan losses, gains/losses on extinguishment of debt, gains/loss/impairments on properties, gains/losses on derivatives and financial instruments, other expenses, other impairment charges and other adjustments deemed appropriate. We believe that EBITDA and Adjusted EBITDA, along with net income, are important supplemental measures because they provide additional information to assess and evaluate the performance of our operations. We primarily use these measures to determine our interest coverage ratio, which represents EBITDA and Adjusted EBITDA divided by total interest, and our fixed charge coverage ratio, which represents EBITDA and Adjusted EBITDA divided by fixed charges. Fixed charges include total interest and secured debt principal amortization. Covenants in our unsecured senior notes and primary credit facility contain financial ratios based on a definition of EBITDA and Adjusted EBITDA that is specific to those agreements. Our leverage ratios are defined as the proportion of net debt to total capitalization and include book capitalization, undepreciated book capitalization and market capitalization. Book capitalization represents the sum of net debt (defined as total long-term debt, excluding operating lease liabilities, less cash and cash equivalents and restricted cash), 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 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 47 -------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations measures, as defined by us, may not be comparable to similarly entitled items reported by other real estate investment trusts or other companies. 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: 2022 2022 2021 2021 2021 2021 Net income attributable to common stockholders$ 89,785 $
61,925
$ 71,546 Depreciation and amortization 310,295 304,088 284,501 267,754 240,885 244,426 Impairment of assets - - 2,357 1,490 23,692 23,568 Loss (gain) on real estate dispositions, net 3,532 (22,934) (11,673) (119,954) (44,668)
(59,080)
Noncontrolling interests (13,173) (14,753) (13,988) (11,095) (16,591)
(12,516)
Unconsolidated entities 19,150 19,309 19,107 27,881 19,265 19,223 FFO$ 409,589 $ 347,635 $ 338,976 $ 345,739 $ 248,840 $ 287,167 Average diluted shares outstanding 457,082 449,802 438,719 429,983 419,305
419,079
Per diluted share data: Net income attributable to common stockholders(1)$ 0.20 $ 0.14 $ 0.13 $ 0.42$ 0.06 $ 0.17 FFO$ 0.90 $ 0.77 $ 0.77 $ 0.80$ 0.59 $ 0.69 (1) Includes adjustment to the numerator for income (loss) attributable to OP unitholders. Six Months Ended June 30, June 30, FFO Reconciliations: 2022 2021 Net income attributable to common stockholders$ 151,710 $ 97,803 Depreciation and amortization 614,383 485,311 Impairment of assets - 47,260 Loss (gain) on real estate dispositions, net (19,402) (103,748) Noncontrolling interests (27,926) (29,107) Unconsolidated entities 38,459 38,488 FFO $
757,224
Average diluted common shares outstanding: 453,455 419,205 Per diluted share data: Net income attributable to common stockholders(1)$ 0.33 $ 0.23 FFO $
1.67
(1) Includes adjustment to the numerator for income (loss) attributable to OP unitholders.
48
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The table below reflects the reconciliation of consolidated NOI to net income,
the most directly comparable
Three Months Ended June 30, March 31, December 31, September 30, June 30, March 31, NOI Reconciliations: 2022 2022 2021 2021 2021 2021 Net income (loss)$ 95,672
3,532 (22,934) (11,673) (119,954) (44,668) (59,080) Loss (income) from unconsolidated entities 7,058 2,884 12,174 15,832 7,976 (13,049) Income tax expense (benefit) 3,065 5,013 2,051 4,940 (2,221) 3,943 Other expenses 35,166 26,069 15,483 3,575 11,687 10,994 Impairment of assets - - 2,357 1,490 23,692 23,568 Provision for loan losses, net 165 (804) (39) (271) 6,197 1,383 Loss (gain) on extinguishment of debt, net 603 (12) (1,090) (5) 55,612 (4,643) Loss (gain) on derivatives and financial instruments, net (1,407) 2,578 (830) (8,078) (359) 1,934 General and administrative expenses 36,554 37,706 33,109 32,256 31,436 29,926 Depreciation and amortization 310,295 304,088 284,501 267,754 240,885 244,426 Interest expense 127,750 121,696 121,848 122,522 122,341 123,142 Consolidated net operating income (NOI)$ 618,453
NOI by segment: Seniors Housing Operating$ 281,911 $ 206,684 $ 180,375 $ 172,909 $ 160,188 $ 170,434 Triple-net 222,869 223,952 230,846 228,321 226,314 155,641 Outpatient Medical 115,674 113,408 113,982 111,431 113,577 109,360 Non-segment/corporate (2,001) (2,009) (1,118) (2,264) (1,744) (699) Total NOI$ 618,453 $ 542,035 $ 524,085 $ 510,397 $ 498,335 $ 434,736 Six Months Ended June 30, 2022 June 30, 2021 NOI Reconciliations: Net income (loss)$ 161,423 $ 117,949 Loss (gain) on real estate dispositions, net (19,402) (103,748) Loss (income) from unconsolidated entities 9,942 (5,073) Income tax expense (benefit) 8,078 1,722 Other expenses 61,235 22,681 Impairment of assets - 47,260 Provision for loan losses, net (639) 7,580 Loss (gain) on extinguishment of debt, net 591 50,969 Loss (gain) on derivatives and financial instruments, net 1,171 1,575 General and administrative expenses 74,260 61,362 Depreciation and amortization 614,383 485,311 Interest expense 249,446 245,483 Consolidated net operating income (NOI)$ 1,160,488 $ 933,071 NOI by segment: Seniors Housing Operating$ 488,595 $ 330,622 Triple-net 446,821 381,955 Outpatient Medical 229,082 222,937 Non-segment/corporate (4,010) (2,443) Total NOI$ 1,160,488 $ 933,071 49
-------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following is a reconciliation of the properties included in ourQTD Pool for SSNOI: QTD Pool YTD Pool Seniors Housing Seniors Housing SSNOI Property Reconciliations: Operating Triple-net Outpatient Medical Total Operating Triple-net Outpatient Medical Total Consolidated properties 822 571 318 1,711 822 571 318 1,711 Unconsolidated properties 82 39 79 200 82 39 79 200 Total properties 904 610 397 1,911 904 610 397 1,911 Recent acquisitions/development conversions(1) (203) (19) (30) (252) (204) (30) (31) (265) Under development (49) (1) (6) (56) (49) (1) (6) (56) Under redevelopment(2) (4) (4) (3) (11) (4) (3) (3) (10) Current held for sale (2) (11) (1) (14) (2) (11) (1) (14) Land parcels, loans and subleases (13) (10) (6) (29) (13) (10) (6) (29) Transitions(3) (99) (4) - (103) (99) (20) - (119) Other(4) (2) (3) - (5) (2) (3) - (5) Same store properties 532 558 351 1,441 531 532 350 1,413 (1) Acquisitions and development conversions will enter theQTD Pool andYTD Pool after five full quarters and six full quarters after acquisition or certificate of occupancy, respectively. (2) Redevelopment properties will enter theQTD Pool andYTD Pool after five full quarters and six full quarters of operations post redevelopment completion, respectively. (3) Transitioned properties will enter theQTD Pool andYTD Pool after five full quarters and six full quarters of operations with the new operator in place or under the new structure, respectively. (4) Represents properties that are either closed or being closed. 50
-------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following is a reconciliation of our consolidated NOI to same store NOI for the periods presented for the respective pools. Dollar amounts are in thousands. QTD Pool YTD Pool Three Months Ended Six Months Ended SSNOI Reconciliations: June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 Seniors Housing Operating: Consolidated NOI$ 281,911 $
160,188
11,947 11,289 21,536 23,199 NOI attributable to noncontrolling interests (70,074) (27,726) (88,826) (38,020) NOI attributable to non-same store properties (55,167) (13,661) (107,168) (33,252) Non-cash NOI attributable to same store properties (204) 12,268 (278) 11,403 Currency and ownership adjustments (1) 335 (1,638) 282 (2,362) SSNOI at Welltower Share 168,748 140,720 314,141 291,590 Triple-net: Consolidated NOI 222,869 226,314 446,821 381,955 NOI attributable to unconsolidated investments 6,788 4,889 12,511 9,779 NOI attributable to noncontrolling interests (10,207) (14,053) (21,407) (22,081) NOI attributable to non-same store properties (51,229) (65,070) (125,535) (77,770) Non-cash NOI attributable to same store properties (19,956) (14,001) (28,506) (20,594) Currency and ownership adjustments (1) 1,419 1,895 2,740 4,615 SSNOI at Welltower Share 149,684 139,974 286,624 275,904 Outpatient Medical: Consolidated NOI 115,674 113,577 229,082 222,937 NOI attributable to unconsolidated investments 4,910 4,988 9,740 9,712 NOI attributable to noncontrolling interests (5,541) (4,235) (10,557) (9,188) NOI attributable to non-same store properties (10,407) (11,865) (18,918) (18,022) Non-cash NOI attributable to same store properties (2,468) (2,744) (4,548) (5,441) Currency and ownership adjustments (1) (58) (1) 60 (1,088) SSNOI at Welltower Share 102,110 99,720 204,859 198,910 SSNOI at Welltower Share: Seniors Housing Operating 168,748 140,720 314,141 291,590 Triple-net 149,684 139,974 286,624 275,904 Outpatient Medical 102,110 99,720 204,859 198,910 Total$ 420,542 $ 380,414 $ 805,624 $ 766,404
(1) Includes adjustments to reflect consistent property ownership percentages, to translate Canadian properties at a USD/CAD rate of
1.2738 and to translate
51
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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: 2022 2022 2021 2021 2021 2021 Net income (loss)$ 95,672 $ 65,751 $ 66,194 $ 190,336 $ 45,757 $ 72,192 Interest expense 127,750 121,696 121,848 122,522 122,341 123,142 Income tax expense (benefit) 3,065 5,013 2,051 4,940 (2,221)
3,943
Depreciation and amortization 310,295 304,088 284,501 267,754 240,885 244,426 EBITDA$ 536,782 $ 496,548 $ 474,594 $ 585,552 $ 406,762 $ 443,703 Interest Coverage Ratio: Interest expense$ 127,750 $
121,696
$ 123,142 Non-cash interest expense (6,606) (4,109) (5,082) (5,461) (3,972) (2,991) Capitalized interest 6,387 5,479 5,325 4,669 4,862 4,496 Total interest 127,531 123,066 122,091 121,730 123,231 124,647 EBITDA$ 536,782 $ 496,548 $ 474,594 $ 585,552 $ 406,762 $ 443,703 Interest coverage ratio 4.21 x 4.03 x 3.89 x 4.81 x 3.30 x 3.56 x Fixed Charge Coverage Ratio: Total interest$ 127,531 $
123,066
$ 124,647 Secured debt principal payments 14,382 15,968 16,877 17,040 15,715 15,955 Total fixed charges 141,913 139,034 138,968 138,770 138,946 140,602 EBITDA$ 536,782 $ 496,548 $ 474,594 $ 585,552 $ 406,762 $ 443,703 Fixed charge coverage ratio 3.78 x 3.57 x 3.42 x 4.22 x 2.93 x 3.16 x Six Months Ended June 30, June 30, EBITDA Reconciliations: 2022 2021 Net income (loss)$ 161,423 $ 117,949 Interest expense 249,446 245,483 Income tax expense (benefit) 8,078 1,722 Depreciation and amortization 614,383 485,311 EBITDA$ 1,033,330 $ 850,465 Interest Coverage Ratio: Interest expense$ 249,446 $ 245,483 Non-cash interest expense (10,715) (6,963) Capitalized interest 11,866 9,358 Total interest 250,597 247,878 EBITDA$ 1,033,330 $ 850,465 Interest coverage ratio 4.12 x 3.43 x Fixed Charge Coverage Ratio: Total interest$ 250,597 $ 247,878 Secured debt principal payments 30,350 31,670 Total fixed charges 280,947 279,548 EBITDA$ 1,033,330 $ 850,465 Fixed charge coverage ratio 3.68 x 3.04 x 52
-------------------------------------------------------------------------------- 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: 2022 2022 2021 2021 2021 2021 Net income$ 417,953 $ 368,038 $ 374,479 $ 463,563 $ 668,205 $ 781,664 Interest expense 493,816 488,407 489,853 489,178 491,507 495,523 Income tax expense (benefit) 15,069 9,783 8,713 6,952 4,015 8,469 Depreciation and amortization 1,166,638 1,097,228 1,037,566 995,798 983,576 1,008,062 EBITDA 2,093,476 1,963,456 1,910,611 1,955,491 2,147,303 2,293,718 Loss (income) from unconsolidated entities 37,948 38,866 22,933 10,501 650 (8,658) Stock-based compensation expense (1) 20,945 19,681 17,812 22,248 24,278 26,811 Loss (gain) on extinguishment of debt, net (504) 54,505 49,874 64,760 97,769 42,406 Loss (gain) on real estate dispositions, net (151,029) (199,229) (235,375) (409,166) (773,516) (884,711) Impairment of assets 3,847 27,539 51,107 58,067 79,890 131,349 Provision for loan losses, net (949) 5,083 7,270 90,394 93,522 88,747 Loss (gain) on derivatives and financial instruments, net (7,737) (6,689) (7,333) (5,934) 3,539 5,332 Other expenses (1) 80,114 56,127 40,860 52,960 60,985 68,939 Lease termination and leasehold interest adjustment (2) (64,094) (7,697) 760 (640) - - Casualty losses, net of recoveries (3) 8,472 5,799 5,786 998 - - Other impairment (4) (620) - 49,241 49,241 161,639 163,481 Adjusted EBITDA$ 2,019,869
Adjusted Interest Coverage Ratio: Interest expense$ 493,816 $ 488,407 $ 489,853 $ 489,178 $ 491,507 $ 495,523 Capitalized interest 21,860 20,335 19,352 18,265 17,543 17,222 Non-cash interest expense (21,258) (18,624) (17,506) (14,163) (12,675) (10,617) Total interest 494,418 490,118 491,699 493,280 496,375 502,128 Adjusted EBITDA$ 2,019,869
$ 1,927,414 Adjusted interest coverage ratio 4.09 x 3.99 x 3.89 x 3.83 x 3.82 x 3.84 x Adjusted Fixed Charge Coverage Ratio: Total interest$ 494,418
$ 502,128 Secured debt principal payments 64,267 65,600 65,587 64,832 63,668 63,136 Total fixed charges 558,685 555,718 557,286 558,112 560,043 565,264 Adjusted EBITDA$ 2,019,869
$ 1,927,414 Adjusted fixed charge coverage ratio 3.62 x 3.52 x 3.43 x 3.38 x 3.39 x 3.41 x (1) Certain severance-related costs are included in stock-based compensation and excluded from other expenses. (2) Represents revenues and property operating expenses associated with a leasehold portfolio interest relating to 26 properties assumed by a wholly-owned affiliate in conjunction with the Holiday Retirement transaction. Subsequent to the initial transaction, we purchased eight of the leased properties and one of the properties was sold by the landlord and removed from the lease. No rent was paid in excess of net cash flow relating to the leasehold properties and therefore, the net impact has been excluded from Adjusted EBITDA. Additionally, in conjunction with the lease termination, during the three months endedJune 30, 2022 we recognized$58,621,000 in other income from the derecognition of the right of use asset and related lease liability which has also been excluded from Adjusted EBITDA. (3) Represents casualty losses net of any insurance recoveries. (4) Represents changes in the reserve for straight-line rent receivable balances relating to leases placed on cash recognition. 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 restricted cash), 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. 53
-------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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. As ofJune 30 ,March 31 ,December 31 ,September 30 ,June 30 ,March 31, 2022 2022 2021 2021 2021 2021 Book capitalization: Unsecured credit facility and commercial paper $ 354,000 $ 299,968 $ 324,935 $ 290,996 $ - $ - Long-term debt obligations (1) 14,790,432 14,352,529 13,917,702 13,488,656 13,572,816 14,618,713 Cash and cash equivalents and restricted cash (442,251) (367,043) (346,755) (362,645) (808,705) (2,558,822) Total net debt 14,702,181 14,285,454 13,895,882 13,417,007 12,764,111 12,059,891 Total equity and noncontrolling interests(2) 19,873,913 19,178,026 18,997,873 18,172,111 17,243,208 17,046,932 Book capitalization $ 34,576,094 $ 33,463,480 $ 32,893,755 $ 31,589,118 $ 30,007,319 $ 29,106,823 Net debt to book capitalization ratio 43% 43% 42% 42% 43% 41% Undepreciated book capitalization: Total net debt $ 14,702,181 $ 14,285,454 $ 13,895,882 $ 13,417,007 $ 12,764,111 $ 12,059,891 Accumulated depreciation and amortization 7,437,779 7,215,622 6,910,114 6,634,061 6,415,676 6,212,432 Total equity and noncontrolling interests(2) 19,873,913 19,178,026 18,997,873 18,172,111 17,243,208 17,046,932 Undepreciated book capitalization $ 42,013,873 $ 40,679,102 $ 39,803,869 $ 38,223,179 $ 36,422,995 $ 35,319,255 Net debt to undepreciated book capitalization ratio 35% 35% 35% 35% 35% 34% Market capitalization: Common shares outstanding 463,369 453,948 447,239 435,274 422,562 417,520 Period end share price $ 82.35 $ 96.14 $ 85.77 $ 82.40 $ 83.10 $ 71.63 Common equity market capitalization $ 38,158,437 $ 43,642,561 $ 38,359,689 $ 35,866,578 $ 35,114,902 $ 29,906,958 Total net debt 14,702,181 14,285,454 13,895,882 13,417,007 12,764,111 12,059,891 Noncontrolling interests(2) 1,317,733 1,282,450 1,361,872 1,308,908 1,322,762 1,248,054 Market capitalization $ 54,178,351 $ 59,210,465 $ 53,617,443 $ 50,592,493 $ 49,201,775 $ 43,214,903 Net debt to market capitalization ratio 27% 24% 26% 27% 26% 28% (1) Amounts include senior unsecured notes, secured debt and lease liabilities related to financing leases, as reflected on our Consolidated Balance Sheets. Operating lease liabilities related to the ASC 842 adoption are excluded. (2) Includes amounts attributable to both redeemable noncontrolling interests and noncontrolling interests as reflected on our Consolidated Balance Sheets.
Critical Accounting Policies and Estimates
Our unaudited consolidated financial statements are prepared in accordance with
•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 and estimates 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 our financial statements included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 for further information on significant accounting policies that impact us. There have been no material changes to these policies in 2022. 54
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statement Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q may contain "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. WhenWelltower uses words such as "may," "will," "intend," "should," "believe," "expect," "anticipate," "project," "pro forma," "estimate" or similar expressions that do not relate solely to historical matters,Welltower is making forward-looking statements. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that may causeWelltower's actual results to differ materially fromWelltower's expectations discussed in the forward-looking statements. This may be a result of various factors, including, but not limited to: the duration and scope of the COVID-19 pandemic; uncertainty regarding the implementation and impact of the CARES Act and future stimulus or other COVID-19 relief legislation; 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, 2021 , 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.
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