WELLTOWER INC.
Company Overview 26
Business Strategy 26
Key Transactions 27
Key Performance Indicators, Trends and Uncertainties 28
Corporate Governance 30
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash 30
Off-Balance Sheet Arrangements 31
Contractual Obligations 32
Capital Structure 32
Supplemental Guarantor Information 33
RESULTS OF OPERATIONS
Summary 33
Seniors Housing Operating 34
Triple-net 36
Outpatient Medical 38
Non-Segment/Corporate 39
OTHER
Non-GAAP Financial Measures 40
Critical Accounting Policies and Estimates 46
Cautionary Statement Regarding Forward-Looking Statements 47
25
-------------------------------------------------------------------------------- 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, 2022 , 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), a real estate investment trust ("REIT") and S&P 500 company headquartered inToledo, Ohio , is driving the transformation of health care infrastructure.Welltower 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 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 is the initial member and majority owner of Welltower OP, with an approximate ownership interest of 99.721% as ofMarch 31, 2023 . All of our property ownership, development and related business operations are conducted through Welltower OP andWelltower has no material assets or liabilities other than its investment in Welltower OP.Welltower 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 has fully and unconditionally guaranteed all existing 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 $ 252,897 41.7 % 854
Triple-net 226,342 37.4 % 575
Outpatient Medical 126,466 20.9 % 356
Totals $ 605,705 100.0 % 1,785
(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" below for additional information and reconciliation.
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.
Additionally, the extent to which the COVID-19 pandemic impacts our operations
and those of our operators and tenants in the future is uncertain and cannot be
predicted with confidence.
26
-------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations To mitigate this risk, we monitor our investments through a variety of methods determined by the type of property. Our asset management process for seniors housing properties generally includes review of monthly financial statements and other operating data for each property, review of obligor/partner creditworthiness, property inspections and review of covenant compliance relating to licensure, real estate taxes, letters of credit and other collateral. Our internal property management division manages and monitors the outpatient medical portfolio with a comprehensive process including review of tenant relations, lease expirations, the mix of health service providers, hospital/health system relationships, property performance, capital improvement needs and market conditions among other things. We evaluate the operating environment in each property's market to determine the likely trend in operating performance of the facility. When we identify unacceptable trends, we seek to mitigate, eliminate or transfer the risk. Through these efforts, we generally aim to intervene at an early stage to address any negative trends, and in so doing, support both the collectability of revenue and the value of our investment. In addition to our asset management and research efforts, we also aim to structure our relevant investments to mitigate payment risk. Operating leases and loans are normally credit enhanced by guarantees and/or letters of credit. In addition, operating leases are typically structured as master leases and loans are generally cross-defaulted and cross-collateralized with other real estate loans, operating leases or agreements between us and the obligor and its affiliates. For the three months endedMarch 31, 2023 , resident fees and services and rental income represented 73% 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. AtMarch 31, 2023 , we had$571,902,000 of cash and cash equivalents,$66,894,000 of restricted cash and$4,000,000,000 of available borrowing capacity under our unsecured revolving credit facility. Key Transactions
Capital The following summarizes key capital transactions that occurred during
the three months ended
•During the three months endedMarch 31, 2023 , we, sold 5,603,161 shares of common stock under our ATM Program generating gross proceeds of approximately$413,157,000 .
•During the three months ended
Investments The following summarizes our property acquisitions and joint venture investments completed during the three months endedMarch 31, 2023 (dollars in thousands): 27
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Properties Book Amount (1) Capitalization Rates (2)
Seniors Housing Operating 2 $ 19,816 7.5 %
Triple-net 8 81,659 3.6 %
Outpatient Medical 29 356,250 6.9 %
Totals 39 $ 457,725 6.9 %
(1) Represents amounts recorded in net real estate investments including fair value adjustments pursuant to
Dispositions The following summarizes property dispositions completed during the
three months ended
Properties Proceeds (1) Book Amount (2) Capitalization Rates (3)
Seniors Housing Operating 1 $ 19,054 $ 18,572 - %
Triple-net 1 2,604 2,028 - %
Totals 2 $ 21,658 $ 20,600 - %
(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. Excludes
properties sold that were recent development conversions.
Dividends Our Board of Directors declared a cash dividend for the quarter ended
Key Performance Indicators, Trends and Uncertainties
We utilize several key performance indicators to evaluate the various aspects of
our business. These indicators are discussed below and relate to operating
performance, credit strength and concentration risk. Management uses these key
performance indicators to facilitate internal and external comparisons to our
historical operating results, in making operating decisions and for budget
planning purposes.
Operating Performance We believe that net income and net income attributable to
common stockholders ("NICS") per the Consolidated Statements of Comprehensive
Income are the most appropriate earnings measures. Other useful supplemental
measures of our operating performance include funds from operations attributable
to common stockholders ("FFO") and consolidated net operating income ("NOI");
however, these supplemental measures are not defined by U.S. generally accepted
accounting principles ("U.S. GAAP"). Please refer to the section entitled
"Non-GAAP Financial Measures" for further discussion and reconciliations. These
earnings measures are widely used by investors and analysts in the valuation,
comparison and investment recommendations of companies.
The following table reflects the recent historical trends of our operating performance measures for the periods presented (in thousands):
Three Months Ended
March 31, December 31, September 30, June 30, March 31,
2023 2022 2022 2022 2022
Net income (loss) $ 28,635 $ 1,798 $ (2,653) $ 95,672 $ 65,751
NICS 25,673 (3,728) (6,767) 89,785 61,925
FFO 386,062 357,985 362,863 409,589 347,635
NOI 602,976 579,693 561,664 618,453 542,035
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:
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended
March 31, December 31, September 30, June 30, March 31,
2023 2022 2022 2022 2022
Net debt to book capitalization ratio 40% 39% 42% 43% 43%
Net debt to undepreciated book capitalization ratio 32% 32% 34% 35%
35%
Net debt to market capitalization ratio 28% 30% 32% 27% 24% Interest coverage ratio 3.44x 3.29x 3.48x 4.21x 4.03x Fixed charge coverage ratio 3.13x 3.01x 3.18x 3.78x 3.57x Concentration Risk We evaluate our concentration risk in terms of NOI by property mix, relationship mix and geographic mix. Concentration risk is a valuable measure in understanding what portion of our NOI could be at risk if certain sectors were to experience downturns. Property mix measures the portion of our NOI that relates to our various property types. Relationship mix measures the portion of our NOI that relates to our current top five relationships. Geographic mix measures the portion of our NOI that relates to our current top five states (or international equivalents).
The following table reflects our recent historical trends of concentration risk by NOI for the periods indicated below:
Three Months Ended
March 31, December 31, September 30, June 30, March 31,
2023 2022 2022 2022 2022
Property mix:(1)
Seniors Housing Operating 42% 40% 41% 45% 38%
Triple-net 37% 38% 38% 36% 41%
Outpatient Medical 21% 22% 21% 19% 21%
Relationship mix: (1)
Integra Healthcare Properties(2) 9% 1% -% -% -%
Sunrise Senior Living 6% 7% 7% 8% 6%
Cogir Management Corporation 4% 4% 4% 3% 2%
StoryPoint Senior Living 4% 3% 4% 3% 4%
HC-One Group 3% 3% 4% 4% 4%
Remaining relationships 74% 82% 81% 82% 84%
Geographic mix:(1)
California 13% 14% 13% 15% 13%
United Kingdom 10% 9% 10% 9% 11%
Texas 8% 8% 8% 7% 8%
Pennsylvania 6% 5% 5% 4% 5%
Canada 6% 6% 6% 5% 5%
Remaining geographic areas 57% 58% 58% 60% 58%
(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) In
29-------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Lease Expirations The following table sets forth information regarding lease expirations for certain portions of our portfolio as ofMarch 31, 2023 (dollars in thousands): Expiration Year (1) 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 Thereafter Triple-net: Properties 2 4 15 49 1 4 4 34 5 88 347 Base rent (2)$ 2,159 $ 13,088 $ 7,083 $ 45,392 $ 1,182 $ 5,246 $ 4,091 $ 69,215 $ 10,701 $ 65,614 $ 401,905 % of base rent 0.3 % 2.1 % 1.1 % 7.3 % 0.2 % 0.8 % 0.7 % 11.1 % 1.7 % 10.5 % 64.2 % Units/beds 270 692 451 3,404 80 440 219 3,669 423 4,314 37,490 % of Units/beds 0.5 % 1.3 % 0.9 % 6.6 % 0.2 % 0.9 % 0.4 % 7.1 % 0.8 % 8.4 % 72.9 % Outpatient Medical: Square feet 1,902,520 1,982,088 1,403,780 1,576,623 1,461,893 1,190,865 1,111,637 1,297,190 1,628,893 1,241,483 3,854,522 Base rent (2)$ 53,714 $ 60,111 $ 41,175 $ 42,708 $ 40,941 $ 32,221 $ 31,244 $ 34,996 $ 44,430 $ 37,110 $ 107,250 % of base rent 10.2 % 11.4 % 7.8 % 8.1 % 7.8 % 6.1 % 5.9 % 6.7 % 8.4 % 7.1 % 20.5 % Leases 415 346 259 239 218 180 105 96 65 131 466 % of Leases 16.5 % 13.7 % 10.3 % 9.5 % 8.7 % 7.1 % 4.2 % 3.8 % 2.6 % 5.2 % 18.4 %
(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, 2022 , under the headings "Business," "Risk Factors" and "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. Depending upon the availability and
cost of external capital, we believe our liquidity is sufficient to fund these
uses of cash. These sources and uses of cash are reflected in our Consolidated
Statements of Cash Flows and are discussed in further detail below.
30
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following is a summary of our sources and uses of cash flows for the periods
presented (dollars in thousands):
Three Months Ended Change
March 31, 2023 March 31, 2022 $ %
Cash, cash equivalents and restricted cash at
beginning of period $ 722,292 $ 346,755 $ 375,537 108 %
Cash provided from (used in) operating
activities 376,058 324,520 51,538 16 %
Cash provided from (used in) investing
activities (932,837) (808,547) (124,290) (15) %
Cash provided from (used in) financing
activities 470,470 505,105 (34,635) (7) %
Effect of foreign currency translation 2,813 (790) 3,603 456 %
Cash, cash equivalents and restricted cash at
end of period $ 638,796 $ 367,043 $ 271,753 74 %
Operating Activities Please see "Results of Operations" for discussion of net
income fluctuations. For the three months ended March 31, 2023 and 2022, 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):
Three Months Ended Change
March 31, 2023 March 31, 2022 $ %
New development $ 226,226 $ 138,141 $ 88,085 64 %
Recurring capital expenditures, tenant improvements and lease commissions
36,914 32,835 4,079 12 %
Renovations, redevelopments and other capital
improvements 54,425 57,394 (2,969) (5) %
Total $ 317,565 $ 228,370 $ 89,195 39 %
The change in new development is primarily due to the number and size of
construction projects on-going during the relevant periods. Renovations,
redevelopments and other capital improvements include expenditures to maximize
property value, increase net operating income, maintain a market-competitive
position and/or achieve property stabilization.
Financing Activities The changes in net cash provided from/used in financing
activities are primarily attributable to changes related to our long-term debt
arrangements, the issuances of common stock and dividend payments which are
summarized above in "Key Transactions." Please refer to Notes 10, 11 and 14 of
our unaudited consolidated financial statements for additional information.
In March 2022 , we completed the issuance of $550,000,000 senior unsecured notes
with a maturity date of June 2032 . In April 2022 , we closed on an amended
$5,200,000,000 unsecured credit facility, increasing our term loan capacity by
$500,000,000 . During the three months ended March 31, 2023 , we issued
$362,900,000 of secured debt at a blended average interest rate of 4.97% and
assumed $53,223,000 of secured debt at a blended average interest rate of 3.62%.
As of March 31, 2023 , we have total near-term available liquidity of
approximately $4.6 billion .
Off-Balance Sheet Arrangements
AtMarch 31, 2023 , 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. AtMarch 31, 2023 , we had 22 outstanding letter of credit obligations. Please see Notes 8, 12 and 13 to our unaudited consolidated financial statements for additional information. 31
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Contractual Obligations
The following table summarizes our payment requirements under contractual
obligations as of
Payments Due by Period
Contractual Obligations Total 2023 2024-2025 2026-2027 Thereafter
Senior unsecured notes and term credit
facilities: (1)
U.S. Dollar senior unsecured notes $ 9,900,000 $
-
221,811 - - 221,811 -
Pounds Sterling senior unsecured notes (2) 1,298,745 - - - 1,298,745
U.S. Dollar term credit facility 1,010,000 - 10,000 1,000,000 -
Canadian Dollar term credit facility (2) 184,843 - - 184,843 -
Secured debt: (1,2)
Consolidated 2,506,808 550,304 663,823 326,319 966,362
Unconsolidated 1,318,901 235,171 700,068 185,821 197,841Contractual interest obligations: (3)
Senior unsecured notes and term loans (2) 3,918,263 482,474 914,524 717,563 1,803,702 Consolidated secured debt (2) 518,918 80,378 155,596 110,274 172,670 Unconsolidated secured debt (2) 170,369 40,821 60,850 22,842 45,856 Financing lease liabilities (4) 206,650 70,014 5,632 3,606 127,398 Operating lease liabilities (4) 959,766 15,277 35,707 31,403 877,379 Purchase obligations (5) 2,252,308 1,228,576 955,820 67,912 - Total contractual obligations$ 24,467,382 $
2,703,015
(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 ofMarch 31, 2023 , 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 and Welltower OP 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's debt securities, common stock, preferred stock, depositary shares, guarantees of debt securities issued by Welltower OP, warrants and units and Welltower OP's debt securities and guarantees of debt securities issued byWelltower to replace Old Welltower's existing "universal" shelf registration statement filed with theSEC onMay 4, 2021 . OnApril 1, 2022 ,Welltower 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 ofApril 28, 2023 , 15,000,000 shares of common stock remained available for issuance under the DRIP registration statement. OnApril 4, 2022 ,Welltower and Welltower OP entered into (i) a second amended and restated equity distribution agreement (the "EDA") with (i)Robert W. Baird & 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 32 -------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 (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 to enter into forward sale agreements. As ofApril 28, 2023 , we had$682,342,278 of remaining capacity under the ATM Program and there were no outstanding forward sales agreements. Depending upon market conditions, we anticipate issuing securities under our registration statements to invest in additional properties and to repay borrowings under our unsecured revolving credit facility and commercial paper program. In connection with the filing of the new "universal" shelf registration statement,Welltower 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 (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 (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 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 99.721% owned byWelltower as ofMarch 31, 2023 . 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. 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" below for additional information and reconciliations. The following is a summary of our results of operations (dollars in thousands, except per share amounts): 33
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended Change
March 31, March 31,
2023 2022 Amount %
Net income (loss) $ 28,635 $ 65,751 $ (37,116) (56) %
NICS 25,673 61,925 (36,252) (59) %
FFO 386,062 347,635 38,427 11 %
EBITDA 515,195 496,548 18,647 4 %
NOI 602,976 542,035 60,941 11 %
SSNOI 439,449 402,216 37,233 9 %
Per share data (fully diluted):
NICS $ 0.05 $ 0.14 $ (0.09) (64) %
FFO $ 0.78 $ 0.77 $ 0.01 1 %
Interest coverage ratio 3.44 x 4.03 x (0.59) x (15) %
Fixed charge coverage ratio 3.13 x 3.57 x (0.44) x (12) %
Seniors Housing Operating
The following is a summary of our results of operations for the Seniors Housing Operating segment (dollars in thousands):
Three Months Ended Change
March 31, March 31,
2023 2022 $ %
Revenues:
Resident fees and services $ 1,131,685 $ 994,335 $ 137,350 14 %
Interest income 2,551 1,417 1,134 80 %
Other income 2,445 860 1,585 184 %
Total revenues 1,136,681 996,612 140,069 14 %
Property operating expenses 883,784 789,928 93,856 12 %
NOI (1) 252,897 206,684 46,213 22 %
Other expenses:
Depreciation and amortization 220,407 192,793 27,614 14 %
Interest expense 11,487 7,650 3,837 50 %
Loss (gain) on extinguishment of debt, net - (15) 15 100 %
Provision for loan losses, net (73) 267 (340) (127) %
Impairment of assets 12,629 - 12,629 n/a
Other expenses 17,579 8,191 9,388 115 %
262,029 208,886 53,143 25 %
Income (loss) from continuing operations
before income taxes and other items (9,132) (2,202) (6,930) (315) %
Income (loss) from unconsolidated entities (15,589) (17,782) 2,193 12 %
Gain (loss) on real estate dispositions, net 833 2,701 (1,868) (69) %
Income from continuing operations (23,888) (17,283) (6,605) (38) %
Net income (loss) (23,888) (17,283) (6,605) (38) %
Less: Net income (loss) attributable to
noncontrolling interests (3,317) (5,381) 2,064 38 %
Net income (loss) attributable to common
stockholders $ (20,571) $ (11,902) $ (8,669) (73) %
(1) See "Non-GAAP Financial Measures" below for additional information and reconciliations.
Resident fees and services and property operating expenses increased for the three month periods endedMarch 31, 2023 compared to the same period in the prior year primarily due to acquisitions outpacing dispositions during 2022 and year to date 2023. Additionally, our Seniors Housing Operating revenues are dependent on occupancy and rate growth, both of which have continued to increase since the same period in the prior year. Average occupancy is as follows: Three Months Ended(1) March 31, June 30, September 30, December 31, 2022 76.3 % 77.1 % 78.0 % 78.3 % 2023 79.0 % (1) Average occupancy includes our minority ownership share related to unconsolidated properties and excludes the minority partners' noncontrolling ownership share related to consolidated properties. Also excludes land parcels and properties under development. 34
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following is a summary of our SSNOI at
QTD Pool
Three Months Ended Change
March 31, 2023 March 31, 2022 $ %
SSNOI (1) $ 211,306 $ 177,089 $ 34,217 19.3 %
(1) For the
During the three months endedMarch 31, 2023 , we recorded impairment charges of$12,252,000 related to three held for sale properties for which the carrying values exceeded the estimated fair value less costs to sell and$377,000 related to one held for use property for which the carrying value exceeded the estimated fair value. No impairment was recorded during the same period in 2022. 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.
Depreciation and amortization fluctuates as a result of 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 three months endedMarch 31, 2023 , we completed one conversion representing$26,711,667 or$193,563 per unit. The following is a summary of our Seniors Housing Operating construction projects in process, excluding expansions (dollars in thousands): As ofMarch 31, 2023 Expected Conversion
Anticipated Remaining Construction in
Year(1) Properties Units/Beds Funding Progress Balance
2023 9 1,216 $ 67,110 $ 272,677
2024 15 2,439 529,421 404,803
2025 2 665 124,569 27,936
TBD(2) 11 106,173
Total 37 $ 811,589
(1) Properties expected to be converted in phases over multiple years are reflected in the last expected year. (2) Represents projects for which a final budget or expected conversion date are 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):
Three Months Ended
March 31, 2023 March 31, 2022
Weighted Average Weighted Average
Amount Interest Rate Amount Interest Rate
Beginning balance $ 1,701,939 4.32 % $ 1,599,522 2.81 %
Debt transferred - - % 32,478 4.79 %
Debt issued 362,900 4.97 % 5,385 3.08 %
Debt assumed 6,482 4.21 % - - %
Debt extinguished - - % (94,647) 4.21 %
Principal payments (13,007) 3.86 % (12,998) 2.92 %
Foreign currency 304 4.39 % 24,733 2.73 %
Ending balance $ 2,058,618 4.58 % $ 1,554,473 2.83 %
Monthly averages $ 1,822,546 4.44 % $ 1,606,723 2.84 %
35-------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The majority of our Seniors Housing Operating properties are formed through partnership interests. 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 (loss) related to joint ventures.
Triple-net
The following is a summary of our results of operations for the Triple-net segment (dollars in thousands):
Three Months Ended Change
March 31, March 31,
2023 2022 $ %
Revenues:
Rental income $ 202,419 $ 196,001 $ 6,418 3 %
Interest income 33,763 37,506 (3,743) (10) %
Other income 1,883 1,656 227 14 %
Total revenues 238,065 235,163 2,902 1 %
Property operating expenses 11,723 11,211 512 5 %
NOI (1) 226,342 223,952 2,390 1 %
Other expenses:
Depreciation and amortization 54,528 53,504 1,024 2 %
Interest expense (15) 314 (329) (105) %
Loss (gain) on derivatives and financial
instruments, net 930 2,578 (1,648) (64) %
Provision for loan losses, net 850 (1,065) 1,915 180 %
Other expenses 2,467 11,044 (8,577) (78) %
58,760 66,375 (7,615) (11) %
Income (loss) from continuing operations
before income taxes and other items 167,582 157,577 10,005 6 %
Income (loss) from unconsolidated entities 8,432 15,543 (7,111) (46) %
Gain (loss) on real estate dispositions, net 520 20,449 (19,929) (97) %
Income from continuing operations 176,534 193,569 (17,035) (9) %
Net income 176,534 193,569 (17,035) (9) %
Less: Net income (loss) attributable to
noncontrolling interests 5,903 7,065 (1,162) (16) %
Net income attributable to common stockholders $ 170,631 $ 186,504 $ (15,873) (9) %
(1) See "Non-GAAP Financial Measures" below for additional information and reconciliations.
Certain of our leases contain annual rental escalators that are contingent upon changes in the Consumer Price Index and/or changes in the gross operating revenues of the tenant's properties. These escalators are not fixed, so no straight-line rent is recorded; however, rental income is recorded based on the contractual cash rental payments due for the period. If gross operating revenues at our facilities and/or the Consumer Price Index do not increase, a portion of our revenues may not continue to increase. For the three months endedMarch 31, 2023 , we had 23 leases with rental rate increases ranging from 0.58% to 43.39% in our Triple-net portfolio.
The following is a summary of our SSNOI at
QTD Pool
Three Months Ended Change
March 31, 2023 March 31, 2022 $ %
SSNOI (1) $ 117,716 $ 116,780 $ 936 0.8 %
(1) For the
Depreciation and amortization fluctuates 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.
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.
36
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
During the three months ended March 31, 2023 , there were no Triple-net
construction projects completed. The following is a summary of our consolidated
Triple-net construction projects in process, excluding expansions (dollars in
thousands):
As of March 31, 2023
Expected Conversion
Anticipated Remaining Construction in
Year Properties Units/Beds Funding Progress Balance
2023 1 191 $ 32,701 $ 121,441
During the three months ended March 31, 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
March 31, 2023 March 31, 2022
Weighted Average Weighted Average
Amount Interest Rate Amount Interest Rate
Beginning balance $ 39,179 4.39 % $ 72,536 4.57 %
Debt transferred - - % (32,478) 4.79 %
Principal payments (230) 4.37 % (221) 4.37 %
Ending balance $ 38,949 4.39 % $ 39,837 4.39 %
Monthly averages $ 39,029 4.39 % $ 39,914 4.39 %
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 decrease
in income from unconsolidated entities is primarily related to the restructure
of an unconsolidated joint venture into a consolidated structure. Net income
attributable to noncontrolling interests represents our partners' share of net
income relating to those partnerships where we are the controlling partner.
37--------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Outpatient Medical
The following is a summary of our results of operations for the Outpatient Medical segment for the periods presented (dollars in thousands):
Three Months Ended Change
March 31, March 31,
2023 2022 $ %
Revenues:
Rental income $ 181,640 $ 160,389 $ 21,251 13 %
Interest income 91 71 20 28 %
Other income 3,100 2,863 237 8 %
Total revenues 184,831 163,323 21,508 13 %
Property operating expenses 58,365 49,915 8,450 17 %
NOI (1) 126,466 113,408 13,058 12 %
Other expenses:
Depreciation and amortization 64,177 57,791 6,386 11 %
Interest expense 4,104 4,567 (463) (10) %
Loss (gain) on extinguishment of debt, net 5 3 2 67 %
Provision for loan losses, net - (6) 6 100 %
Other expenses 547 789 (242) (31) %
68,833 63,144 5,689 9 %
Income (loss) from continuing operations
before income taxes and other items 57,633 50,264 7,369 15 %
Income (loss) from unconsolidated entities 86 (645) 731 113 %
Gain (loss) on real estate dispositions, net (606) (216) (390) (181) %
Income from continuing operations 57,113 49,403 7,710 16 %
Net income (loss) 57,113 49,403 7,710 16 %
Less: Net income (loss) attributable to
noncontrolling interests 682 2,142 (1,460) (68) %
Net income (loss) attributable to common
stockholders $ 56,431 $ 47,261 $ 9,170 19 %
(1) See "Non-GAAP Financial Measures" below for additional information and reconciliations.
Rental income has increased due primarily to acquisitions and construction conversions that occurred during 2022 and the year to date in 2023. Certain of our leases contain annual rental escalators that are contingent upon changes in the Consumer Price Index. These escalators are not fixed, so no straight-line rent is recorded; however, rental income is recorded based on the contractual cash rental payments due for the period. If the Consumer Price Index does not increase, a portion of our revenues may not continue to increase. Our leases could renew above or below current rental rates, resulting in an increase or decrease in rental income. For the three months endedMarch 31, 2023 , our consolidated outpatient medical portfolio signed 80,010 square feet of new leases and 539,121 square feet of renewals. The weighted-average term of these leases was seven years, with a rate of$32.21 per square foot and tenant improvement and lease commission costs of$13.81 per square foot. Substantially all of these leases contain an annual fixed or contingent escalation rent structure ranging from 1.0% to 9.0%. The fluctuations in property operating expenses and depreciation and amortization are primarily attributable to acquisitions and construction conversions that occurred during 2022 and year to date in 2023. To the extent that we acquire or dispose of additional properties in the future, these amounts will change accordingly.
The following is a summary of our SSNOI at
QTD Pool
Three Months Ended Change
March 31, 2023 March 31, 2022 $ %
SSNOI (1) $ 110,423 $ 108,347 $ 2,076 1.9 %
(1) For the
During the three months endedMarch 31, 2023 , we completed one conversion representing$9,351,000 or$555 per square foot. The following is a summary of the consolidated Outpatient Medical construction projects in process, excluding expansions (dollars in thousands): 38
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
As of March 31, 2023
Expected Conversion Anticipated Remaining Construction in
Year Properties Square Feet Funding Progress Balance
2023 3 228,276 $ 88,881 $ 39,856
2024 2 211,368 118,010 22,478
TBD(1) 2 36,679
Total 7 $ 99,013
(1) Represents projects for which a final budget or expected conversion date are not yet known.
Total interest expense represents secured debt interest expense. The change in
secured debt interest expense is primarily due to the net effect and timing of
assumptions, extinguishments and principal amortizations. The following is a
summary of our Outpatient Medical secured debt principal activity (dollars in
thousands):
Three Months Ended
March 31, 2023 March 31, 2022
Weighted Average Weighted Average
Amount Interest Rate Amount Interest Rate
Beginning balance $ 388,836 4.38 % $ 530,254 3.49 %
Debt assumed 46,741 3.54 % - - %
Debt extinguished (24,631) 4.53 % (6,174) 4.17 %
Principal payments (1,705) 4.27 % (2,749) 4.38 %
Ending balance $ 409,241 4.43 % $ 521,331 3.51 %
Monthly averages $ 409,860 4.41 % $ 526,392 3.49 %
A portion of our Outpatient Medical properties were formed through partnerships.
Income or loss from unconsolidated entities represents our share of net income
or losses from partnerships where we are the noncontrolling partner. Net income
attributable to noncontrolling interests represents our partners' share of net
income or loss relating to those partnerships where we are the controlling
partner.
Non-Segment/Corporate
The following is a summary of our results of operations for the
Non-Segment/Corporate activities for the periods presented (dollars in
thousands):
Three Months Ended Change
March 31, March 31,
2023 2022 $ %
Revenues:
Other income $ 1,152 $ 606 $ 546 90 %
Total revenues 1,152 606 546 90 %
Property operating expenses 3,881 2,615 1,266 48 %
NOI (1) (2,729) (2,009) (720) (36) %
Expenses:
Interest expense 128,827 109,165 19,662 18 %
General and administrative expenses 44,371 37,706 6,665 18 %
Other expenses 2,152 6,045 (3,893) (64) %
175,350 152,916 22,434 15 %
Loss from continuing operations before income
taxes and other items (178,079) (154,925) (23,154) (15) %
Income tax benefit (expense) (3,045) (5,013) 1,968 39 %
Loss from continuing operations (181,124) (159,938) (21,186) (13) % Net loss attributable to common stockholders$ (181,124) $ (159,938) $ (21,186)
(13) %
(1) See "Non-GAAP Financial Measures" below for additional information and reconciliations.
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.
39
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following is a summary of our Non-Segment/Corporate interest expense for the
periods presented (dollars in thousands):
Three Months Ended Change
March 31, March 31,
2023 2022 $ %
Senior unsecured notes $ 120,814 $ 101,239 $ 19,575 19 %
Unsecured credit facility and commercial
paper program 2,406 2,779 (373) (13) %
Loan expense 5,607 5,147 460 9 %
Totals $ 128,827 $ 109,165 $ 19,662 18 %
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.
General and administrative expenses as a percentage of consolidated revenues for
the three months ended March 31, 2023 and 2022 were 2.84% and 2.70%,
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.
Other
Non-GAAP Financial Measures
We believe that net income and net income attributable to common stockholders,
as defined by U.S. GAAP, are the most appropriate earnings measurements.
However, we consider FFO, NOI, SSNOI, EBITDA and Adjusted EBITDA to be useful
supplemental measures of our operating performance. Historical cost accounting
for real estate assets in accordance with U.S. GAAP implicitly assumes that the
value of real estate assets diminishes predictably over time as evidenced by the
provision for depreciation. However, since real estate values have historically
risen or fallen with market conditions, many industry investors and analysts
have considered presentations of operating results for real estate companies
that use historical cost accounting to be insufficient. In response, the
National Association of Real Estate Investment Trusts ("NAREIT") created funds
from operations attributable to common stockholders ("FFO") as a supplemental
measure of operating performance for REITs that excludes historical cost
depreciation from net income. FFO, as defined by NAREIT, means NICS, computed in
accordance with U.S. GAAP, excluding gains (or losses) from sales of real estate
and impairment of depreciable assets, plus depreciation and amortization, and
after adjustments for unconsolidated entities and noncontrolling interests.
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 general overhead costs that are unrelated to property
operations and unallocable to the properties. These expenses include, but are
not limited to, payroll and benefits related to corporate employees,
professional services, office expenses and depreciation of corporate fixed
assets. Same store NOI ("SSNOI") is used to evaluate the operating performance
of our properties using a consistent population which controls for changes in
the composition of our portfolio. We believe the drivers of property level NOI
for both consolidated properties and unconsolidated properties are generally the
same and therefore, we evaluate SSNOI based on our ownership interest in each
property ("Welltower Share"). To arrive at Welltower's Share, NOI is adjusted by
adding our minority ownership share related to unconsolidated properties and by
subtracting the minority partners' noncontrolling ownership interests for
consolidated properties. We do not control investments in unconsolidated
properties and while we consider disclosures at Welltower Share to be useful,
they may not accurately depict the legal and economic implications of our joint
venture arrangements and should be used with caution. As used herein, same store
is generally defined as those revenue-generating properties in the portfolio for
the relevant year-over-year reporting periods. Acquisitions and development
conversions are included in SSNOI five full quarters after acquisition or being
placed into service for the QTD Pool . Land parcels, loans and sub-leases, as
well as any properties sold or classified as held for sale during the respective
periods are excluded from SSNOI. Redeveloped properties (including major
refurbishments of a Seniors Housing Operating property where 20% or more of
units are simultaneously taken out of commission for 30 days or more or
Outpatient Medical properties undergoing a change in intended use) are excluded
from SSNOI until five full quarters post completion of the redevelopment for the
QTD Pool . Properties undergoing operator transitions and/or segment transitions
are also excluded from SSNOI until five full quarters post completion of the
transition for the QTD Pool . In addition, properties significantly impacted by
force majeure, acts of God, or other extraordinary adverse events are excluded
from SSNOI until five full quarters after the properties are placed back into
service for the QTD Pool .
40
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
SSNOI excludes non-cash NOI and includes adjustments to present consistent
ownership percentages and to translate Canadian properties and U.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 as
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 with
U.S. GAAP and should not be considered as alternative measures of profitability
or liquidity. Finally, the supplemental measures, as defined by us, may not be
comparable to similarly entitled items reported by other real estate investment
trusts or other companies.
The table below reflects the reconciliation of FFO to NICS, the most directly
comparable U.S. GAAP measure, for the periods presented. Noncontrolling interest
and unconsolidated entity amounts represent adjustments to reflect our share of
depreciation and amortization, gains/loss on real estate dispositions and
impairment of assets. Amounts are in thousands except for per share data.
Three Months Ended
March 31, December 31, September 30, June 30, March 31,
FFO Reconciliation: 2023 2022 2022 2022 2022
Net income (loss) attributable to common
stockholders $ 25,673
339,112 342,286 353,699 310,295 304,088
Impairment of assets 12,629 13,146 4,356 - -
Loss (gain) on real estate dispositions, net (747) 4,423 (1,064) 3,532 (22,934)
Noncontrolling interests (13,327) (13,989) (14,614) (13,173) (14,753)
Unconsolidated entities 22,722 15,847 27,253 19,150 19,309
FFO $ 386,062 $ 357,985 $ 362,863 $ 409,589 $ 347,635
Average diluted shares outstanding
For net income (loss) purposes 494,494 483,305 463,366 457,082 449,802
For FFO purposes 494,494 486,419 466,950 457,082 449,802
Per diluted share data:
Net income attributable to common
stockholders(1) $ 0.05 $ (0.01) $ (0.01) $ 0.20 $ 0.14
FFO $ 0.78 $ 0.74 $ 0.78 $ 0.90 $ 0.77 (1) Includes adjustment to the numerator for income (loss) attributable to OP Unitholders.
41
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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
March 31, December 31, September 30, June 30, March 31,
NOI Reconciliations: 2023 2022 2022 2022 2022
Net income (loss) $ 28,635 $ 1,798 $ (2,653) $ 95,672 $ 65,751
Loss (gain) on real estate dispositions, net (747) 4,423 (1,064) 3,532 (22,934)
Loss (income) from unconsolidated entities 7,071 4,650 6,698 7,058
2,884
Income tax expense (benefit) 3,045 (4,088) 3,257 3,065 5,013 Other expenses 22,745 24,954 15,481 35,166 26,069 Impairment of assets 12,629 13,146 4,356 - - Provision for loan losses, net 777 10,469 490 165
(804)
Loss (gain) on extinguishment of debt, net 5 87 2 603
(12)
Loss (gain) on derivatives and financial instruments, net 930 258 6,905 (1,407)
2,578
General and administrative expenses 44,371 41,319 34,811 36,554
37,706
Depreciation and amortization 339,112 342,286 353,699 310,295 304,088 Interest expense 144,403 140,391 139,682 127,750 121,696 Consolidated net operating income (NOI) $
602,976
NOI by segment: Seniors Housing Operating$ 252,897 $ 234,091 $ 230,686 $ 281,911 $ 206,684 Triple-net 226,342 222,879 217,324 222,869 223,952 Outpatient Medical 126,466 124,421 119,257 115,674 113,408 Non-segment/corporate (2,729) (1,698) (5,603) (2,001) (2,009) Total NOI$ 602,976 $ 579,693 $ 561,664 $ 618,453 $ 542,035 The following is a reconciliation of the properties included in ourQTD Pool for SSNOI: QTD Pool Seniors Housing SSNOI Property Reconciliations: Operating Triple-net Outpatient Medical Total Consolidated properties 854 575 356 1,785 Unconsolidated properties 105 39 79 223 Total properties 959 614 435 2,008 Recent acquisitions/development conversions(1) (98) (13) (44) (155) Under development (41) - (6) (47) Under redevelopment(2) (9) (6) (4) (19) Current held for sale (5) (7) (1) (13) Land parcels, loans and subleases (21) (8) (9) (38) Transitions(3) (29) (163) - (192) Other(4) (10) (2) - (12) Same store properties 746 415 371 1,532 (1) Acquisitions and development conversions will enter theQTD Pool five full quarters after acquisition or certificate of occupancy. (2) Redevelopment properties will enter theQTD Pool five full quarters of operations post redevelopment completion. (3) Transitioned properties will enter theQTD Pool after five full quarters of operations with the new operator in place or under the new structure. (4) Represents properties that are either closed or being closed. 42
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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
Three Months Ended
SSNOI Reconciliations: March 31, 2023 March 31, 2022
Seniors Housing Operating:
Consolidated NOI $ 252,897 $ 206,684
NOI attributable to unconsolidated investments 12,126 12,751
NOI attributable to noncontrolling interests (16,260) (24,392)
NOI attributable to non-same store properties (35,634) (12,519)
Non-cash NOI attributable to same store properties (1,301) (1,865)
Currency and ownership adjustments (1) (522) (3,570)
SSNOI at Welltower Share 211,306 177,089
Triple-net:
Consolidated NOI 226,342 223,952
NOI attributable to unconsolidated investments 9,293 9,955
NOI attributable to noncontrolling interests (7,608) (15,338)
NOI attributable to non-same store properties (95,978) (91,430)
Non-cash NOI attributable to same store properties (14,099) (8,567)
Currency and ownership adjustments (1) (234) (1,792)
SSNOI at Welltower Share 117,716 116,780
Outpatient Medical:
Consolidated NOI 126,466 113,408
NOI attributable to unconsolidated investments 4,935 4,830
NOI attributable to noncontrolling interests (5,188) (5,240)
NOI attributable to non-same store properties (11,676) (1,989)
Non-cash NOI attributable to same store properties (4,294) (3,237)
Currency and ownership adjustments (1) 180 575
SSNOI at Welltower Share 110,423 108,347
SSNOI at Welltower Share:
Seniors Housing Operating 211,306 177,089
Triple-net 117,716 116,780
Outpatient Medical 110,423 108,347
Total $ 439,445 $ 402,216
(1) Includes adjustments to reflect consistent property ownership percentages, to translate Canadian
properties at a USD/CAD rate of 1.37 and to translate
43--------------------------------------------------------------------------------
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 March 31, December 31, September 30, June 30, March 31, EBITDA Reconciliations: 2023 2022 2022 2022 2022 Net income (loss)$ 28,635 $ 1,798 $ (2,653) $ 95,672 $ 65,751 Interest expense 144,403 140,391 139,682 127,750 121,696 Income tax expense (benefit) 3,045 (4,088) 3,257 3,065
5,013
Depreciation and amortization 339,112 342,286 353,699 310,295 304,088 EBITDA$ 515,195 $ 480,387 $ 493,985 $ 536,782 $ 496,548 Interest Coverage Ratio: Interest expense$ 144,403 $ 140,391 $ 139,682 $ 127,750 $ 121,696 Non-cash interest expense (5,083) (4,280) (6,759) (6,606) (4,109) Capitalized interest 10,335 9,762 8,863 6,387 5,479 Total interest 149,655 145,873 141,786 127,531 123,066 EBITDA$ 515,195 $ 480,387 $ 493,985 $ 536,782 $ 496,548 Interest coverage ratio 3.44 x 3.29 x 3.48 x 4.21 x 4.03 x Fixed Charge Coverage Ratio: Total interest$ 149,655
14,942 13,989 13,775 14,382 15,968
Total fixed charges 164,597 159,862 155,561 141,913 139,034
EBITDA $ 515,195 $ 480,387 $ 493,985 $ 536,782 $ 496,548
Fixed charge coverage ratio 3.13 x 3.01 x 3.18 x 3.78 x 3.57 x
44-------------------------------------------------------------------------------- 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 March 31, December 31, September 30, June 30, March 31, Adjusted EBITDA Reconciliations: 2023 2022 2022 2022 2022 Net income$ 123,452 $ 160,568 $ 224,964 $ 417,953 $ 368,038 Interest expense 552,226 529,519 510,976 493,816 488,407 Income tax expense (benefit) 5,279 7,247 13,386 15,069
9,783
Depreciation and amortization 1,345,392 1,310,368 1,252,583 1,166,638 1,097,228 EBITDA 2,026,349 2,007,702 2,001,909 2,093,476 1,963,456 Loss (income) from unconsolidated entities 25,477 21,290 28,814 37,948
38,866
Stock-based compensation expense 27,709 26,027 22,402 20,766
18,994
Loss (gain) on extinguishment of debt, net 697 680 (497) (504)
54,505
Loss (gain) on real estate dispositions, net 6,144 (16,043) (32,139) (151,029) (199,229) Impairment of assets 30,131 17,502 6,713 3,847 27,539 Provision for loan losses, net 11,098 10,320 (188) (949)
5,083
Loss (gain) on derivatives and financial instruments, net 5,751 8,334 7,246 (7,737) (6,689) Other expenses 98,346 101,670 92,199 80,293 56,814 Lease termination and leasehold interest adjustment (1) (56,397) (64,854) (63,454) (64,094)
(7,697)
Casualty losses, net of recoveries 14,865 10,391 7,802 8,472 5,799 Other impairment (2) (620) (620) (620) (620) - Adjusted EBITDA $
2,189,550
Adjusted Interest Coverage Ratio: Interest expense $
552,226
$ 488,407 Capitalized interest 35,347 30,491 26,054 21,860
20,335
Non-cash interest expense (22,728) (21,754) (18,679) (21,258)
(18,624)
Total interest 564,845 538,256 518,351 494,418
490,118
Adjusted EBITDA $
2,189,550
$ 1,957,441 Adjusted interest coverage ratio 3.88 x 3.94 x 3.99 x 4.09 x
3.99 x
Adjusted Fixed Charge Coverage Ratio: Total interest $
564,845
$ 490,118 Secured debt principal payments 57,088 58,114 61,002 64,267 65,600 Total fixed charges 621,933 596,370 579,353 558,685 555,718 Adjusted EBITDA $
2,189,550
$ 1,957,441 Adjusted fixed charge coverage ratio 3.52 x 3.56 x 3.57 x 3.62 x
3.52 x
(1) 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. (2) 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. 45
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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 our leverage ratios to our
balance sheets for the periods presented. Amounts are in thousands, except share
price.
As of
March 31 , December 31 , September 30 , June 30 , March 31,
2023 2022 2022 2022 2022
Book capitalization:
Unsecured credit facility and commercial paper $ - $ - $ 654,715 $ 354,000 $ 299,968
Long-term debt obligations (1) 15,074,320 14,661,552 14,555,643 14,790,432 14,352,529
Cash and cash equivalents and restricted cash (638,796) (722,292) (425,184) (442,251) (367,043)
Total net debt 14,435,524 13,939,260 14,785,174 14,702,181 14,285,454
Total equity and noncontrolling interests(2) 21,596,155 21,393,996 20,457,650 19,873,913 19,178,026
Book capitalization $ 36,031,679 $ 35,333,256 $ 35,242,824 $ 34,576,094 $ 33,463,480
Net debt to book capitalization ratio 40% 39% 42% 43% 43%
Undepreciated book capitalization:
Total net debt $ 14,435,524 $ 13,939,260 $ 14,785,174 $ 14,702,181 $ 14,285,454
Accumulated depreciation and amortization 8,417,151 8,075,733 7,687,077 7,437,779 7,215,622
Total equity and noncontrolling interests(2) 21,596,155 21,393,996 20,457,650 19,873,913 19,178,026
Undepreciated book capitalization $ 44,448,830 $ 43,408,989 $ 42,929,901 $ 42,013,873 $ 40,679,102
Net debt to undepreciated book capitalization ratio 32% 32% 34% 35% 35%
Market capitalization:
Common shares outstanding 496,295 490,509 472,517 463,369 453,948
Period end share price $ 71.69 $ 65.55 $ 64.32 $ 82.35 $ 96.14
Common equity market capitalization $ 35,579,389 $ 32,152,865 $ 30,392,293 $ 38,158,437 $ 43,642,561
Total net debt 14,435,524 13,939,260 14,785,174 14,702,181 14,285,454
Noncontrolling interests(2) 1,148,000 1,099,182 1,288,343 1,317,733 1,282,450
Market capitalization $ 51,162,913 $ 47,191,307 $ 46,465,810 $ 54,178,351 $ 59,210,465
Net debt to market capitalization ratio 28% 30% 32% 27% 24%(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, 2022 for further information on significant accounting policies that impact us. There have been no material changes to these policies in 2023. 46
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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 impact of the COVID-19 pandemic; the status of the economy; the status of capital markets, including availability and cost of capital; issues facing the health care industry, including compliance with, and changes to, regulations and payment policies, responding to government investigations and punitive settlements and operators'/tenants' difficulty in cost effectively obtaining and maintaining adequate liability and other insurance; changes in financing terms; competition within the health care and seniors housing industries; negative developments in the operating results or financial condition of operators/tenants, including, but not limited to, their ability to pay rent and repay loans;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 maintain its 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, 2022 , including factors identified under the headings "Business," "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Finally,Welltower 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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