WELLTOWER INC.
Company Overview 31
Business Strategy 32
Key Transactions 33
Key Performance Indicators, Trends and Uncertainties 34
Corporate Governance 36
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash 36
Off-Balance Sheet Arrangements 37
Contractual Obligations 37
Capital Structure 38
RESULTS OF OPERATIONS
Summary 38
Seniors Housing Operating 39
Triple-net 41
Outpatient Medical 43
Non-Segment/Corporate 45
OTHER
Non-GAAP Financial Measures 46
Critical Accounting Policies 54
Cautionary Statement Regarding Forward-Looking Statements 55
30-------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis is based primarily on the unaudited consolidated financial statements ofWelltower Inc. for the periods presented and should be read together with the notes thereto contained in this Quarterly Report on Form 10-Q. Other important factors are identified in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , including factors identified under the headings "Business," "Risk Factors," and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and updated risk factors in our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 . References herein to "we," "us," "our," or the "Company" refer toWelltower Inc. and its subsidiaries unless specifically noted otherwise. Executive Summary Company OverviewWelltower Inc. (NYSE:WELL), an S&P 500 company headquartered inToledo, Ohio , is driving the transformation of health care infrastructure. The Company invests with leading seniors housing operators, post-acute providers and health systems to fund the real estate and infrastructure needed to scale innovative care delivery models and improve people's wellness and overall health care experience. Welltower™, a real estate investment trust ("REIT"), owns interests in properties concentrated in major, high-growth markets inthe United States (U.S. ),Canada and theUnited Kingdom (U.K. ), consisting of seniors housing and post-acute communities and outpatient medical properties. The following table summarizes our consolidated portfolio for the three months endedSeptember 30, 2020 (dollars in thousands): Percentage of Number of Type of Property NOI (1) NOI Properties Seniors Housing Operating$ 174,361 43.3 % 515 Triple-net 108,361 26.9 % 652 Outpatient Medical 119,976 29.8 % 321 Totals$ 402,698 100.0 % 1,488
(1) Represents consolidated NOI and excludes our share of investments in unconsolidated entities. Entities in which we have a joint venture with a minority partner are shown at 100% of the joint venture amount. See Non-GAAP Financial Measures for additional information and reconciliation.
The extent to which the COVID-19 pandemic impacts our operations and those of our operators and tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic effects of the pandemic and containment measures, among others. The COVID-19 pandemic has had and may continue to have material and adverse effects on our financial condition, results of operations and cash flows in the future. Our Seniors Housing Operating revenues are dependent on occupancy. While admission bans were lifted across our portfolio during the second quarter and in July, move-out activity continued to outpace move-ins, resulting in occupancy losses throughout the period. Month-to-date, throughOctober 23, 2020 , total SHO portfolio occupancy declined by approximately 30 basis points. Consequently, we anticipate total SHO portfolio spot occupancy to decline 75 to 125 basis points in the fourth quarter relative toSeptember 30, 2020 . We have incurred increased operational costs as a result of the introduction of public health measures and other regulations affecting our properties, as well as additional health and safety measures adopted by us and our operators related to the COVID-19 pandemic, including increases in labor and property cleaning expenses and expenditures related to our efforts to procure PPE and supplies. We expect total Seniors Housing Operating expenses to remain elevated during the pandemic and potentially beyond as these additional health and safety measures become standard practice. Our Triple-net operators are experiencing similar occupancy declines and operating costs as described above with respect to our Seniors Housing Operating properties. However, long-term/post-acute care facilities are generally experiencing a higher degree of occupancy declines. These factors may continue to impact the ability of our Triple-net operators to make contractual rent payments to us in the future. Many of our Triple-net operators received funds under the Coronavirus Aid Relief, and Economic Security Act ("CARES Act") Paycheck Protection Program. In addition, operators of long-term/post-acute care facilities have generally received funds from Phase 1 of theProvider Relief Fund and operators of assisted living facilities are generally expecting funds from Phase 2 of theProvider Relief Fund . Accordingly, collection of Triple-net rent due during the COVID-19 pandemic to date (from March to September) has generally been consistent with historical collection rates and no significant rent concessions or deferrals have been made. Our Outpatient Medical tenants are experiencing temporary medical practice closures or decreases in revenue due to government-imposed restrictions on elective medical procedures, stay at home orders or decisions by patients to delay 31 -------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations treatments which may continue to adversely affect their ability to make contractual rent payments. These factors have and may continue to cause operators or tenants to seek modifications of such obligations, resulting in reductions in revenue and increases in uncollectible receivables. We will evaluate each request on a case-by-case basis and determine if a form of rent relief is warranted following an examination of the tenant's financial health, rent coverage, current operating situation and other factors. We have either collected or approved short term deferrals for over 99% of Outpatient Medical rent due in the third quarter, consisting of 97% cash collections and 2% of short term deferrals. In most cases, unless local ordinances mandate otherwise, the deferred rent represents two months of rent with expected repayment by the end of the year. Furthermore, collections of deferred rent due in the third quarter under executed deferrals was over 99%. To the extent that deferred rent is not repaid as expected, or the prolonged impact of the COVID-19 pandemic causes operators or tenants to seek further modifications of their lease agreements, we may recognize reductions in revenue and increases in uncollectible receivables. As a result of uncertainty regarding the length and severity of the COVID-19 pandemic and the impact of the pandemic on our business and related industries, our investments in and acquisitions of senior housing and health care properties, as well as our ability to transition or sell properties with profitable results, may be limited. We have a significant development portfolio as ofSeptember 30, 2020 . To date we have only experienced minor construction and licensing delays with respect to our development portfolio, but may experience more significant delays in the future. Such disruptions to acquisition, disposition and development activity may negatively impact our long-term competitive position. Business Strategy Our primary objectives are to protect stockholder capital and enhance stockholder value. We seek to pay consistent cash dividends to stockholders and create opportunities to increase dividend payments to stockholders as a result of annual increases in NOI and portfolio growth. To meet these objectives, we invest across the full spectrum of seniors housing and health care real estate and diversify our investment portfolio by property type, relationship and geographic location. Substantially all of our revenues are derived from operating lease rentals, resident fees and services and interest earned on outstanding loans receivable. These items represent our primary sources of liquidity to fund distributions and depend upon the continued ability of our obligors to make contractual rent and interest payments to us and the profitability of our operating properties. To the extent that our obligors/partners experience operating difficulties and become unable to generate sufficient cash to make payments or operating distributions to us, there could be a material adverse impact on our consolidated results of operations, liquidity and/or financial condition. To mitigate this risk, we monitor our investments through a variety of methods determined by the type of property. Our asset management process for seniors housing properties generally includes review of monthly financial statements and other operating data for each property, review of obligor/partner creditworthiness, property inspections and review of covenant compliance relating to licensure, real estate taxes, letters of credit and other collateral. Our internal property management division manages and monitors the outpatient medical portfolio with a comprehensive process including review of tenant relations, lease expirations, the mix of health service providers, hospital/health system relationships, property performance, capital improvement needs and market conditions among other things. We evaluate the operating environment in each property's market to determine the likely trend in operating performance of the facility. When we identify unacceptable trends, we seek to mitigate, eliminate or transfer the risk. Through these efforts, we generally aim to intervene at an early stage to address any negative trends, and in so doing, support both the collectability of revenue and the value of our investment. In addition to our asset management and research efforts, we also aim to structure our relevant investments to mitigate payment risk. Operating leases and loans are normally credit enhanced by guarantees and/or letters of credit. In addition, operating leases are typically structured as master leases and loans are generally cross-defaulted and cross-collateralized with other real estate loans, operating leases or agreements between us and the obligor and its affiliates. For the nine months endedSeptember 30, 2020 , resident fees and services and rental income represented 68% and 30%, respectively, of total revenues. Substantially all of our operating leases are designed with escalating rent structures. Leases with fixed annual rental escalators are generally recognized on a straight-line basis over the initial lease period, subject to a collectability assessment. Rental income related to leases with contingent rental escalators is generally recorded based on the contractual cash rental payments due for the period. Our yield on loans receivable depends upon a number of factors, including the stated interest rate, the average principal amount outstanding during the term of the loan and any interest rate adjustments. Our primary sources of cash include resident fees and services, rent and interest receipts, borrowings under our unsecured revolving credit facility and commercial paper program, public issuances of debt and equity securities, proceeds from investment dispositions and principal payments on loans receivable. Our primary uses of cash include dividend distributions, debt service payments (including principal and interest), real property investments (including acquisitions, capital expenditures, construction advances and transaction costs), loan advances, property operating expenses and general and administrative 32 -------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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. AtSeptember 30, 2020 , we had$1,603,740,000 of cash and cash equivalents,$551,593,000 of restricted cash and$3,000,000,000 of available borrowing capacity under our unsecured revolving credit facility. Key Transactions Capital The following summarizes key capital transaction that occurred during the nine months endedSeptember 30, 2020 and subsequent events: •During the nine months endedSeptember 30, 2020 , we extinguished$491,506,000 of secured debt at a blended average interest rate of 2.61%. •During the nine months endedSeptember 30, 2020 , we sold 2,128,000 shares of common stock under our ATM and DRIP programs, via both cash settle and forward sale agreements, generating gross proceeds of approximately$175,484,000 . The sale of these shares and settlement of previously outstanding forward sales resulted in gross proceeds of approximately$607,177,000 which were used to reduce borrowings under our unsecured revolving credit facility. •In April, we closed on a$1.0 billion two-year unsecured term loan. The term loan bears interest at a rate of 1-month LIBOR + 1.20%, based on our credit rating. •OnJune 30, 2020 , we completed the issuance of$600,000,000 senior unsecured notes bearing interest at 2.75% with a maturity date ofJanuary 2031 . Net proceeds were used to fund tender offers for$426,248,000 of our 3.75% senior unsecured notes due 2023 and our 3.95% senior unsecured notes due 2023 which settled onJuly 1, 2020 . The remaining proceeds were used to reduce borrowings under our term loan by$140 million . Investments The following summarizes our property acquisitions and joint venture investments completed during the nine months endedSeptember 30, 2020 (dollars in thousands): Investment Amount Properties (1) Capitalization Rates (2) Book Amount (3)
Seniors Housing Operating 6$ 168,725 4.9 %$ 159,049 Triple-net (4) - - - % 765 Outpatient Medical 16 235,387 6.1 % 238,705 Totals 22$ 404,112 5.6 %$ 398,519
(1) Represents stated pro rata purchase price including cash and any assumed debt but excludes fair value adjustments pursuant to
Dispositions The following summarizes property dispositions completed during the
nine months ended
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Properties Proceeds (1) Capitalization Rates (2) Book Amount (3)
Seniors Housing Operating 25 $ 1,099,585 5.0 % $ 1,093,477
Triple-net 6 78,439 6.5 % 33,445
Outpatient Medical 82 1,863,719 5.6 % 1,394,971
Totals 113 $ 3,041,743 5.4 % $ 2,521,893 (1) Represents pro rata proceeds received upon disposition including any seller financing. (2) Represents annualized contractual income that was being received in cash at date of disposition divided by disposition proceeds. (3) Represents carrying value of net real estate assets at time of disposition. See Note 5 to our unaudited consolidated financial statements for additional information.
Dividends Our Board of Directors declared a cash dividend for the quarter endedSeptember 30, 2020 of$0.61 per share. OnNovember 19, 2020 , we will pay our 198th consecutive quarterly cash dividend to stockholders of record onNovember 10, 2020 . Key Performance Indicators, Trends and Uncertainties We utilize several key performance indicators to evaluate the various aspects of our business. These indicators are discussed below and relate to operating performance, credit strength and concentration risk. Management uses these key performance indicators to facilitate internal and external comparisons to our historical operating results, in making operating decisions and for budget planning purposes. Operating Performance We believe that net income and net income attributable to common stockholders ("NICS") per the Consolidated Statements of Comprehensive Income are the most appropriate earnings measures. Other useful supplemental measures of our operating performance include funds from operations attributable to common stockholders ("FFO") and consolidated net operating income ("NOI"); however, these supplemental measures are not defined byU.S. generally accepted accounting principles ("U.S. GAAP"). Please refer to the section entitled "Non-GAAP Financial Measures" for further discussion and reconciliations. These earnings measures are widely used by investors and analysts in the valuation, comparison and investment recommendations of companies. The following table reflects the recent historical trends of our operating performance measures for the periods presented (in thousands): Three Months Ended September 30, June 30, March 31, December 31, September 30, June 30, March 31, 2020 2020 2020 2019 2019 2019 2019 Net income (loss)$ 394,978 $ 159,216 $ 329,380 $ 240,136 $ 647,932 $ 150,040 $ 292,302 NICS 325,585 179,246 310,284 224,324 589,876 137,762 280,470 FFO 185,014 335,597 356,124 476,298 352,378 390,021 358,383 NOI 402,157 527,711 576,821 600,302 610,545 618,979 601,438 Credit Strength We measure our credit strength both in terms of leverage ratios and coverage ratios. The leverage ratios indicate how much of our balance sheet capitalization is related to long-term debt, net of cash and Internal Revenue Code section 1031 deposits. The coverage ratios indicate our ability to service interest and fixed charges (interest, secured debt principal amortization and preferred dividends). We expect to maintain capitalization ratios and coverage ratios sufficient to maintain a capital structure consistent with our current profile. The coverage ratios are based on earnings before interest, taxes, depreciation and amortization ("EBITDA"). Please refer to the section entitled "Non-GAAP Financial Measures" for further discussion and reconciliation of these measures. Leverage ratios and coverage ratios are widely used by investors, analysts and rating agencies in the valuation, comparison, investment recommendations and rating of companies. The following table reflects the recent historical trends for our credit strength measures for the periods presented: Three Months Ended September 30, June 30, March 31, December 31, September 30,
June 30, March 31,
2020 2020 2020 2019 2019 2019 2019
Net debt to book capitalization
ratio 41% 43% 44% 46% 45% 48% 43%
Net debt to undepreciated book
capitalization ratio 34% 35% 37% 39% 38% 41% 36%
Net debt to market capitalization
ratio 33% 36% 40% 30% 26% 30% 28%
Interest coverage ratio 6.23x 4.29x 5.42x 4.64x 7.61x 3.74x 4.80x
Fixed charge coverage ratio 5.52x 3.84x 4.88x 4.20x 6.96x 3.42x 4.38x
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Concentration Risk We evaluate our concentration risk in terms of NOI by
property mix, relationship mix and geographic mix. Concentration risk is a
valuable measure in understanding what portion of our NOI could be at risk if
certain sectors were to experience downturns. Property mix measures the portion
of our NOI that relates to our various property types. Relationship mix measures
the portion of our NOI that relates to our current top five relationships.
Geographic mix measures the portion of our NOI that relates to our current top
five states (or international equivalents). The following table reflects our
recent historical trends of concentration risk by NOI for the periods indicated
below:
Three Months Ended
September 30, June 30, March 31, December 31, September 30, June 30, March 31,
2020 2020 2020 2019 2019 2019 2019
Property mix:(1)
Seniors Housing Operating 43% 34% 42% 40% 42% 45% 44%
Triple-net 27% 42% 34% 38% 38% 37% 39%
Outpatient Medical 30% 24% 24% 22% 20% 18% 17%
Relationship mix: (1)
Sunrise Senior Living (2) 15% 10% 14% 14% 14% 14% 15%
ProMedica 13% 10% 9% 9% 9% 9% 9%
Revera (2) 6% 5% 6% 6% 6% 6% 6%
Avery Healthcare 5% 3% 3% 3% 3% 3% 3%
Sagora Senior Living 4% 3% 3% 3% 3% 3% 3%
Remaining relationships 57% 69% 65% 65% 65% 65% 64%
Geographic mix:(1)
California 17% 14% 15% 13% 14% 13% 13%
United Kingdom 12% 8% 9% 9% 8% 8% 9%
Texas 12% 10% 7% 9% 8% 8% 8%
Canada 8% 6% 7% 7% 7% 7% 7%
Florida 6% 5% 6% 6% 5% 5% 5%
Remaining geographic areas 45% 57% 56% 56% 58% 59% 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) Revera owns a controlling interest in Sunrise Senior Living.
Lease Expirations The following table sets forth information regarding lease
expirations for certain portions of our portfolio as of September 30, 2020
(dollars in thousands):
Expiration Year (1)
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Thereafter
Triple-net:
Properties 26 7 10 2 4 28 72 18 15 15 440
Base rent (2) $ 26,447 $ 12,550 $ 7,881 $ 840 $ 11,262 $ 25,687 $ 87,128 $ 35,574 $ 22,557 $ 31,309 $ 506,445
% of base rent 3.4 % 1.6 % 1.0 % 0.1 % 1.5 % 3.3 % 11.3 % 4.6 % 2.9 % 4.1 % 66.2 %
Units/beds 1,987 1,316 1,102 1,337 692 1,759 5,451 2,350 1,633 1,429 45,984
% of Units/beds 3.1 % 2.0 % 1.7 % 2.1 % 1.1 % 2.7 % 8.4 % 3.6 % 2.5 % 2.2 % 70.6 %
Outpatient Medical:
Square feet 550,600 1,413,849 1,935,563 2,028,635 2,084,623 1,223,469 1,113,705 1,057,247 940,345 784,443 5,386,478
Base rent (2) $ 14,992 $ 42,122 $ 54,741 $ 55,591 $ 62,579 $ 33,639 $ 30,609 $ 27,399 $ 24,754 $ 21,626 $ 113,948
% of base rent 3.1 % 8.7 % 11.4 % 11.5 % 13.0 % 7.0 % 6.4 % 5.7 % 5.1 % 4.5 % 23.6 %
Leases 137 360 387 413 342 250 163 141 121 83 212
% of Leases 5.3 % 13.8 % 14.8 % 15.8 % 13.1 % 9.6 % 6.2 % 5.4 % 4.6 % 3.2 % 8.2 %
(1) Excludes investments in unconsolidated entities, developments, land parcels, loans receivable and sub-leases. Investments classified as held for sale are included in the current year. (2) The most recent monthly cash base rent annualized. Base rent does not include tenant recoveries or amortization of above and below market lease intangibles or other non-cash income.
We evaluate our key performance indicators in conjunction with current
expectations to determine if historical trends are indicative of future results.
Our expected results may not be achieved and actual results may differ
materially from our expectations. Factors that may cause actual results to
differ from expected results are described in more detail in "Cautionary
Statement Regarding Forward-Looking Statements" and other sections of this
Quarterly Report on Form 10-
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
regularly monitors economic and other factors to develop strategic and tactical
plans designed to improve performance and maximize our competitive position. Our
ability to achieve our financial objectives is dependent upon our ability to
effectively execute these plans and to appropriately respond to emerging
economic and company-specific trends. Please refer to our Annual Report on Form
10-K for the year ended December 31, 2019 , under the headings "Business," "Risk
Factors" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our Quarterly Report on Form 10-Q for the quarter
ended March 31, 2020 for updated risk factors.
Corporate Governance
Maintaining investor confidence and trust is important in today's business
environment. Our Board of Directors and management are strongly committed to
policies and procedures that reflect the highest level of ethical business
practices. Our corporate governance guidelines provide the framework for our
business operations and emphasize our commitment to increase stockholder value
while meeting all applicable legal requirements. These guidelines meet the
listing standards adopted by the New York Stock Exchange and are available on
the Internet at www.welltower.com/investors/governance. The information on our
website is not incorporated by reference in this Quarterly Report on Form 10-Q,
and our web address is included as an inactive textual reference only.
Liquidity and Capital Resources
Sources and Uses of Cash
Our primary sources of cash include resident fees and services, rent and
interest receipts, borrowings under our unsecured revolving credit facility and
commercial paper program, public issuances of debt and equity securities,
proceeds from investment dispositions and principal payments on loans
receivable. Our primary uses of cash include dividend distributions, debt
service payments (including principal and interest), real property investments
(including acquisitions, capital expenditures, construction advances and
transaction costs), loan advances, property operating expenses and general and
administrative expenses. These sources and uses of cash are reflected in our
Consolidated Statements of Cash Flows and are discussed in further detail
below. The following is a summary of our sources and uses of cash flows for the
periods presented (dollars in thousands):
Nine Months Ended Change
September 30,
2020 September 30, 2019 $ %
Cash, cash equivalents and restricted
cash at beginning of period $ 385,765 $ 316,129 $ 69,636 22 %
Cash provided from (used in) operating
activities 1,109,584 1,209,900 (100,316) -8 %
Cash provided from (used in) investing
activities 2,329,745 (1,058,325) 3,388,070 320 %
Cash provided from (used in) financing
activities (1,666,195) (132,533) (1,533,662) -1,157 %
Effect of foreign currency translation (3,566) (4,436) 870 20 %
Cash, cash equivalents and restricted
cash at end of period $ 2,155,333 $ 330,735 $ 1,824,598 552 %
Operating Activities The changes in net cash provided from operating activities
are primarily attributable to declines in revenue and increases in property
operating expenses, as well as the impact of short-term rent deferrals granted
as a result of the COVID-19 pandemic in 2020. Please see "Results of Operations"
for discussion of net income fluctuations. For the nine months ended September
30, 2020 and 2019, cash flows provided from operations exceeded cash
distributions to stockholders.
Investing Activities The changes in net cash provided from/used in investing
activities are primarily attributable to net changes in real property
investments and dispositions, loans receivable and investments in unconsolidated
entities, which are summarized above in "Key Transactions" and Notes 3 and 5 of
our unaudited consolidated financial statements. The following is a summary of
cash used in non-acquisition capital improvement activities for the periods
presented (dollars in thousands):
Nine Months Ended Change
September 30, 2020 September 30, 2019 $
New development $
126,699 $ 258,113
61,047 86,488 (25,441)
Renovations, redevelopments and other capital
improvements 122,277 119,925 2,352
Total $ 310,023 $ 464,526 $ (154,503)
36-------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The change in new development is primarily due to the number and size of construction projects on-going during the relevant periods. Renovations, redevelopments and other capital improvements include expenditures to maximize property value, increase net operating income, maintain a market-competitive position and/or achieve property stabilization. Financing Activities The changes in net cash provided from/used in financing activities are primarily attributable to changes related to our long-term debt arrangements, the issuances of common stock and dividend payments which are summarized above in "Key Transactions". Please refer to Notes 10, 11 and 14 of our unaudited consolidated financial statements for additional information. OnApril 1, 2020 , in response to uncertain financial market conditions arising from the COVID-19 pandemic, we undertook steps to strengthen our balance sheet and to enhance our liquidity by entering into a$1.0 billion two-year unsecured term loan. Additionally, onJune 30, 2020 , we completed the issuance of$600 million senior unsecured notes with a maturity date ofJanuary 2031 . Net proceeds were used to fund tender offers for$426 million of our 3.75% senior unsecured notes due 2023 and our 3.95% senior unsecured notes due 2023, which settled onJuly 1, 2020 . The remaining proceeds were used to reduce borrowings under the term loan by$140 million . As ofSeptember 30, 2020 , we have total near-term available liquidity of approximately$4.6 billion . However, we are unable to accurately predict the full impact that the pandemic will have on our results from operations, financial condition, liquidity and cash flows due to numerous factors discussed in Part II Item 1A. Risk Factors in our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 . Off-Balance Sheet Arrangements AtSeptember 30, 2020 , we had investments in unconsolidated entities with our ownership generally ranging from 10% to 65%. We use financial derivative instruments to hedge interest rate and foreign currency exchange rate exposure. AtSeptember 30, 2020 , we had 8 outstanding letter of credit obligations. Please see Notes 8, 12 and 13 to our unaudited consolidated financial statements for additional information. Contractual Obligations The following table summarizes our payment requirements under contractual obligations as ofSeptember 30, 2020 (in thousands): Payments Due by Period Contractual Obligations Total 2020 2021-2022 2023-2024 Thereafter Unsecured credit facility and commercial paper (1,2) $ - $ - $ - $ - $ - Senior unsecured notes and term credit facilities:(2) U.S. Dollar senior unsecured notes 8,273,752 - - 2,023,7526,250,000 Canadian Dollar senior unsecured notes (3) 225,175 - - -225,175 Pounds Sterling senior unsecured notes (3) 1,356,705 - - -1,356,705 U.S. Dollar term credit facility 1,370,000 - 870,000 500,000 - Canadian Dollar term credit facility (3) 187,645 - - 187,645 - Secured debt: (2,3) Consolidated 2,469,188 75,915 882,864 507,935 1,002,474 Unconsolidated 952,930 20,915 87,265 132,023 712,727 Contractual interest obligations: (4) Unsecured credit facility and commercial paper - - - - - Senior unsecured notes and term loans (3) 3,954,897 123,819 829,951 745,026 2,256,101 Consolidated secured debt (3) 340,237 19,445 128,546 75,153 117,093 Unconsolidated secured debt (3) 194,536 7,987 60,686 54,609 71,254 Financing lease liabilities (5) 200,179 2,972 17,195 70,880 109,132 Operating lease liabilities (5) 1,032,932 5,305 40,848 38,607 948,172 Purchase obligations (6) 532,889 143,987 303,629 72,868 12,405 Total contractual obligations$ 21,091,065 $ 400,345 $ 3,220,984 $ 4,408,498 $ 13,061,238 (1) Relates to our unsecured credit facility and commercial paper with an aggregate commitment of$3,000,000,000 . See Note 10 to our unaudited consolidated financial statements for additional information. (2) Amounts represent principal amounts due and do not reflect unamortized premiums/discounts or other fair value adjustments as reflected on the balance sheet. (3) Based on foreign currency exchange rates in effect as of balance sheet date. (4) Based on variable interest rates in effect as of balance sheet date. (5) See Note 6 to our unaudited consolidated financial statements for additional information. (6) See Note 13 to our unaudited consolidated financial statements for additional information. 37
-------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Capital Structure Please refer to "Credit Strength" above for a discussion of our leverage and coverage ratio trends. Our debt agreements contain various covenants, restrictions and events of default. Certain agreements require us to maintain financial ratios and minimum net worth and impose certain limits on our ability to incur indebtedness, create liens and make investments or acquisitions. As ofSeptember 30, 2020 , we were in compliance with all of the covenants under our debt agreements. None of our debt agreements contain provisions for acceleration which could be triggered by our debt ratings. However, under our primary unsecured credit facility, the ratings on our senior unsecured notes are used to determine the fees and interest charged. We plan to manage the company to maintain compliance with our debt covenants and with a capital structure consistent with our current profile. Any downgrades in terms of ratings or outlook by any or all of the rating agencies could have a material adverse impact on our cost and availability of capital, which could have a material adverse impact on our consolidated results of operations, liquidity and/or financial condition. OnMay 17, 2018 , we filed with theSecurities and Exchange Commission (1) an open-ended automatic or "universal" shelf registration statement covering an indeterminate amount of future offerings of debt securities, common stock, preferred stock, depositary shares, warrants and units and (2) a registration statement in connection with our enhanced dividend reinvestment plan ("DRIP") under which we may issue up to 15,000,000 shares of common stock. As ofOctober 23, 2020 , 2,541,750 shares of common stock remained available for issuance under the DRIP registration statement. OnFebruary 25, 2019 , we entered into separate amended and restated equity distribution agreements with each ofBarclays Capital Inc. ,Citigroup Global Markets Inc. ,Credit Agricole Securities (USA) Inc. ,Deutsche Bank Securities Inc. ,Goldman Sachs & Co. LLC ,J.P. Morgan Securities LLC ,KeyBanc Capital Markets Inc. ,Merrill Lynch, Pierce, Fenner & Smith Incorporated ,Morgan Stanley & Co. LLC ,MUFG Securities Americas Inc. ,RBC Capital Markets, LLC ,UBS Securities LLC andWells Fargo Securities, LLC relating to the offer and sale from time to time of up to$1,500,000,000 aggregate amount of our common stock ("Equity Shelf Program"). The Equity Shelf Program also allows us to enter into forward sale agreements. As ofOctober 23, 2020 , we had$499,341,000 of remaining capacity under the Equity Shelf Program and there were no outstanding forward sales agreements. Depending upon market conditions, we anticipate issuing securities under our registration statements to invest in additional properties and to repay borrowings under our unsecured revolving credit facility and commercial paper program. Results of Operations Summary Our primary sources of revenue include resident fees and services, rent and interest income. Our primary expenses include property operating expenses, depreciation and amortization, interest expense, general and administrative expenses and other expenses. We evaluate our business and make resource allocations on our three business segments: Seniors Housing Operating, Triple-net and Outpatient Medical. The primary performance measures for our properties are NOI and same store NOI ("SSNOI"), and other supplemental measures include FFO and EBITDA, which are further discussed below. Please see Non-GAAP Financial Measures for additional information and reconciliations. The following is a summary of our results of operations (dollars in thousands, except per share amounts): Three Months Ended Change Nine Months Ended Change September 30, September 30, September 30, September 30, 2020 2019 Amount % 2020 2019 Amount % Net income$ 394,978 $ 647,932 $ (252,954) -39 %$ 883,574 $ 1,090,274 $ (206,700) -19 % NICS 325,585 589,876 (264,291) -45 % 815,115 1,008,108 (192,993) -19 % FFO 185,014 352,378 (167,364) -47 % 876,735 1,100,782 (224,047) -20 % EBITDA 777,364 1,061,688 (284,324) -27 % 2,082,171 2,286,403 (204,232) -9 % NOI 402,157 610,545 (208,388) -34 % 1,506,689 1,830,962 (324,273) -18 % SSNOI 421,974 480,230 (58,256) -12 % 1,142,628 1,270,094 (127,466) -10 % Per share data (fully diluted): NICS$ 0.77 $ 1.45 $ (0.68) -47 %$ 1.94 $ 2.51 $ (0.55) -22 % FFO$ 0.44 $ 0.87 $ (0.43) -49 %$ 2.10 $ 2.74 $ (0.64) -23 % Interest coverage ratio 6.23 x 7.61 x (1.38) x -18 % 5.31 x 5.36 x (0.05) x -1 % Fixed charge coverage ratio 5.52 x 6.96 x (1.44) x -21 % 4.74 x 4.90 x (0.16) x -3 % 38
-------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Seniors Housing Operating The following is a summary of our SSNOI atWelltower's Share for the Seniors Housing Operating segment (dollars in thousands): QTD Pool YTD Pool Three Months Ended Change Nine Months Ended Change September 30, September 30, September 30, September 30, 2020 2019 $ % 2020 2019 $ % SSNOI (1)$ 161,601 $ 220,797 $ (59,196) -26.8 %$ 461,268 $ 577,971 $ (116,703) -20.2 % (1) For the three and nine months endedSeptember 30, 2020 and 2019, amounts relate to 512 and 402 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 theSeniors Housing Operating segment (dollars in thousands): Three Months Ended Change Nine Months Ended Change September 30, September 30, September 30, September 30, 2020 2019 $ % 2020 2019 $ % Revenues: Resident fees and services$ 740,956 $ 834,121 $ (93,165) -11 %$ 2,360,488 $ 2,616,491 $ (256,003) -10 % Interest income 113 - 113 n/a 305 - 305 n/a Other income 996 1,375 (379) -28 % 6,050 6,920 (870) -13 % Total revenues 742,065 835,496 (93,431) -11 % 2,366,843 2,623,411 (256,568) -10 % Property operating expenses 567,704 581,341 (13,637) -2 % 1,771,088 1,826,344 (55,256) -3 % NOI (1) 174,361 254,155 (79,794) -31 % 595,755 797,067 (201,312) -25 % Other expenses: Depreciation and amortization 133,224 148,126 (14,902) -10 % 419,161 416,252 2,909 1 % Interest expense 12,728 16,356 (3,628) -22 % 43,191 52,179 (8,988) -17 % Loss (gain) on extinguishment of debt, net - 1,450 (1,450) -100 % (492) 1,450 (1,942) -134 % Provision for loan losses 86 - 86 n/a 86 - 86 n/a Impairment of assets 12,778 2,599 10,179 392 % 91,424 2,599 88,825 3,418 % Other expenses 6,488 4,274 2,214 52 % 13,463 19,077 (5,614) -29 % 165,304 172,805 (7,501) -4 % 566,833 491,557 75,276 15 % Income (loss) from continuing operations before income taxes and other items 9,057 81,350 (72,293) -89 % 28,922 305,510 (276,588) -91 % Income (loss) from unconsolidated entities (7,678) (3,859) (3,819) -99 % (25,489) (37,892) 12,403 33 % Gain (loss) on real estate dispositions, net 313,319 519,203 (205,884) n/a 327,635 518,493 (190,858) n/a Income from continuing operations 314,698 596,694 (281,996) -47 % 331,068 786,111 (455,043) -58 % Net income (loss) 314,698 596,694 (281,996) -47 % 331,068 786,111 (455,043) -58 % Less: Net income (loss) attributable to noncontrolling interests 60,642 46,849 13,793 n/a 32,554 50,826 (18,272) n/a Net income (loss) attributable to common stockholders$ 254,056 $ 549,845 $ (295,789) -54 %$ 298,514 $ 735,285 $ (436,771) -59 %
(1) See Non-GAAP Financial Measures below.
Decreases in resident fees and services and property operating expenses are primarily a result of dispositions and decreases in occupancy across the portfolio due to the COVID-19 pandemic. Occupancy within our Seniors Housing Operating portfolio has declined as follows:
February March April May June July August September
Spot occupancy (1) 85.6 % 84.8 % 82.5 % 80.8 % 79.9 % 79.2 % 78.7 % 78.4 %
Sequential occupancy change (0.8) % (2.3) % (1.7) % (0.9) % (0.7) % (0.5) % (0.3) %
(1) Spot occupancy represents approximate month end occupancy for properties in
operation as of February 29, 2020 , including unconsolidated properties but
excluding acquisitions, dispositions and development conversions since this
date.
In addition, we have experienced increased operational costs, net of
reimbursements, of $18,192,000 and $68,327,000 during the three and nine months
ended September 30, 2020 , respectively, included in property operating expenses
as a result of the introduction of public health measures and other regulations
affecting our properties, as well as additional health and safety measures
adopted by us and our operators related to the COVID-19 pandemic,
including increases in labor and property cleaning expenses and expenditures
related to our efforts to procure PPE and supplies, net of reimbursements.
39
--------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The fluctuations in depreciation and amortization are due to acquisitions and
dispositions and variations in amortization of short-lived intangible assets. To
the extent that we acquire or dispose of additional properties in the future,
these amounts will change accordingly.
During the nine months ended September 30, 2020 , we recorded impairment charges
of $91,424,000 related to 13 held for sale or sold properties and four held for
use properties. During the nine months ended September 30, 2019 , we recorded
impairment charges of $2,599,000 related to four held for use properties.
Transaction costs related to asset acquisitions are capitalized as a component
of the purchase price. Changes in the gain on sales of properties are related to
the volume and timing of property sales and the sales prices. During the three
months ended September 30, 2020 , we recognized a gain on real estate disposition
of $313 million related to an 11 property U.S. portfolio. During the three
months ended September 30, 2019 we recognized a gain on real estate disposition
of $520 million related to the Benchmark portfolio. The fluctuation in other
expenses is primarily due to the timing of noncapitalizable transaction costs
associated with acquisitions and operator transitions.
During the nine months ended September 30, 2020 , we completed three Seniors
Housing Operating construction projects representing $93,188,000 or $300,606 per
unit. The following is a summary of our Seniors Housing Operating construction
projects, excluding expansions, pending as of September 30, 2020 (dollars in
thousands):
Location Units Commitment Balance Est. Completion
Potomac, MD 120 $ 56,720 $ 45,938 4Q20
Beckenham, UK 100 60,858 36,990 3Q21
Barnet, UK 100 66,543 35,200 4Q21
Hendon, UK 102 72,099 41,585 1Q22
422 $ 256,220 159,713
Toronto, ON Project in planning stage 44,402
Brookline, MA Project in planning stage 21,987
Washington, DC Project in planning stage 22,437
$ 248,539
Interest expense represents secured debt interest expense which fluctuates based
on the net effect and timing of assumptions, segment transitions, fluctuations
in foreign currency rates, extinguishments and principal amortizations. The
following is a summary of our Seniors Housing Operating segment property secured
debt principal activity (dollars in thousands):
Three Months Ended Nine Months Ended
September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019
Wtd. Avg. Wtd. Avg. Wtd. Avg. Wtd. Avg.
Amount Interest Rate Amount Interest Rate Amount Interest Rate Amount Interest Rate
Beginning balance $ 1,779,625 2.91 % $ 2,018,180 3.80 % $ 2,115,037 3.54 % $ 1,810,587 3.87 %
Debt issued - - % 22,885 3.95 % 44,921 2.58 % 318,854 3.51 %
Debt assumed - - % - - % - - % 42,000 4.62 %
Debt extinguished - - % (42,131) 4.15 % (306,238) 2.90 % (193,604) 4.37 %
Debt transferred - - % (12,072) 3.89 % - - % (12,072) 3.89 %
Principal payments (12,249) 3.15 % (10,556) 3.49 % (36,025) 3.25 % (32,987) 3.38 %
Foreign currency 22,609 2.94 % (12,614) 3.34 % (27,710) 3.15 % 30,914 3.21 %
Ending balance $ 1,789,985 2.91 % $ 1,963,692 3.58 % $ 1,789,985 2.91 % $ 1,963,692 3.58 %
Monthly averages $ 1,794,932 2.91 % $ 1,980,216 3.67 % $ 1,971,507 3.21 % $ 1,955,651 3.76 %
The majority of our Seniors Housing Operating properties are formed through
partnership interests. Losses from unconsolidated entities are largely
attributable to depreciation and amortization of short-lived intangible assets
related to certain investments in unconsolidated joint ventures, as well as the
disposal of an investment in an unconsolidated entity during the nine months
ended September 30, 2019 . Net income attributable to noncontrolling interests
represents our partners' share of net income (loss) related to joint ventures.
The increase during the three months ended September 30, 2020 and 2019, relates
primarily to our partner's share of the gains recognized on the sale of the 11
property U.S. portfolio and the sale of the Benchmark portfolio, respectively.
During the nine month period ended September 30, 2020 , these gains in partners'
share of gains on dispositions are partially offset by our partners' share of
impairment charges recognized.
40
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Triple-net
The following is a summary of our SSNOI at Welltower's Share for the Triple-net
segment (dollars in thousands):
QTD Pool YTD Pool
Three Months Ended Change Nine Months Ended Change
September 30, September 30, September 30, September 30,
2020 2019 $ % 2020 2019 $ %
SSNOI (1) $ 175,436 $ 175,185 $ 251 0.1 % $ 478,577 $ 494,328 $ (15,751) -3.2 %
(1) For the three and nine months ended September 30, 2020 and 2019, amounts
relate to 649 and 630 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 Nine Months Ended Change
September 30, September 30, September 30, September 30,
2020 2019 $ % 2020 2019 $ %
Revenues:
Rental income $ 103,938 $ 227,499 $ (123,561) -54 % $ 512,815 $ 681,893 $ (169,078) -25 %
Interest income 15,877 15,279 598 4 % 46,068 47,343 (1,275) -3 %
Other income 1,113 1,829 (716) -39 % 3,393 4,370 (977) -22 %
Total revenues 120,928 244,607 (123,679) -51 % 562,276 733,606 (171,330) -23 %
Property operating expenses 12,567 13,922 (1,355) -10 % 39,432 41,700 (2,268) -5 %
NOI (1) 108,361 230,685 (122,324) -53 % 522,844 691,906 (169,062) -24 %
Other expenses:
Depreciation and amortization 58,157 57,147 1,010 2 % 173,989 174,551 (562) - %
Interest expense 2,070 3,076 (1,006) -33 % 7,668 9,741 (2,073) -21 %
Loss (gain) on derivatives and
financial instruments, net 1,395 1,244 151 12 % 10,480 670 9,810 n/a
Provision for loan losses 372 - 372 n/a 8,895 18,690 (9,795) -52 %
Impairment of assets 10,535 12,314 (1,779) -14 % 34,867 11,374 23,493 n/a
Other expenses 2,805 (2,496) 5,301 212 % 6,818 6,093 725 12 %
75,334 71,285 4,049 6 % 242,717 221,119 21,598 10 %
Income (loss) from continuing
operations before income taxes and
other items 33,027 159,400 (126,373) -79 % 280,127 470,787 (190,660) -40 %
Income (loss) from unconsolidated
entities (423) 5,276 (5,699) -108 % 11,776 17,512 (5,736) -33 %
Gain (loss) on real estate
dispositions, net (619) 51,529 (52,148) -101 % 51,166 217,973 (166,807) -77 %
Income from continuing operations 31,985 216,205 (184,220) -85 % 343,069 706,272 (363,203) -51 %
Net income 31,985 216,205 (184,220) -85 % 343,069 706,272 (363,203) -51 %
Less: Net income (loss)
attributable to noncontrolling
interests 8,597 9,096 (499) -5 % 36,275 27,422 8,853 32 %
Net income attributable to common
stockholders $ 23,388 $ 207,109 $ (183,721) -89 % $ 306,794 (1) See Non-GAAP Financial Measures below.
The decrease in rental income is primarily attributable to the write off of straight-line rent receivables balances of$112,398,000 and$146,508,000 during the three and nine month periods endedSeptember 30, 2020 , respectively, relating to leases for which collection of substantially all contractual lease payments was no longer deemed probable. Included in such amounts was$91,025,000 relating to Genesis Healthcare whom noted substantial doubt as to their ability to continue as a going concern in August. 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 endedSeptember 30, 2020 , we had 17 leases with rental rate increases ranging from 0.10% to 0.66% in our Triple-net portfolio. Our Triple-net operators are experiencing similar impacts on occupancy and operating costs due to the COVID-19 pandemic as described above with respect to our Seniors Housing Operating properties. However, long-term/post-acute facilities are generally experiencing a higher degree of occupancy declines which may impact the ability of our Triple-net operators to make contractual rent payments to us in the future. Many of our Triple-net operators received funds under the CARES Act Paycheck Protection Program. In addition, operators of long-term/post-acute facilities have generally received funds from Phase 1 of theProvider Relief Fund and operators of assisted living facilities are generally expecting funds from Phase 2 of theProvider Relief Fund . Accordingly, collection of rent due during the 41 -------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations COVID-19 pandemic to date (from March to September) have generally been consistent with historical collection rates and no significant rent concessions or deferrals have been made to date. Depreciation and amortization fluctuates as a result of the acquisitions, dispositions and transitions of triple-net properties. To the extent we acquire or dispose of additional properties in the future, our provision for depreciation and amortization will change accordingly. InMarch 2019 , we recognized a provision for loan losses of$18,690,000 to fully reserve for certain real estate loans receivable that were no longer deemed collectible. During the nine months endedSeptember 30, 2020 , we recognized a provision for loan losses of$8,201,000 to fully reserve for one real estate loan receivable and one non-real estate loan receivable that were no longer deemed collectible. During the nine months endedSeptember 30, 2020 , we recorded impairment charges of$34,867,000 related to one held for sale and four held for use properties. During the nine months endedSeptember 30, 2019 , we recorded impairment charges of$11,374,000 related to two properties. Changes in the gain on sales of properties are related to the volume and timing of property sales and the sales prices. Transaction costs related to asset acquisitions are capitalized as a component of purchase price. The fluctuation in other expenses is primarily due to noncapitalizable transaction costs from acquisitions and segment transitions. During the nine months endedSeptember 30, 2020 , we completed two Triple-net construction project representing$59,201,000 or$224,246 per unit. The following is a summary of Triple-net construction projects, excluding expansions, pending as ofSeptember 30, 2020 (dollars in thousands): Location Units/Beds Commitment Balance Est. Completion Thousand Oaks, CA 82$ 24,870 $ 18,157 4Q20 Droitwich, UK 70 16,364 14,339 4Q20 Redhill, UK 76 20,544 11,118 2Q21 Leicester, UK 60 14,472 4,491 1Q22 Wombourne, UK 66 15,505 4,062 2Q22 354$ 91,755 $ 52,167 The fluctuation in loss (gain) on derivatives and financial instruments, net is primarily attributable to the mark-to-market adjustment recorded on our Genesis Healthcare available-for-sale investment. Interest expense represents secured debt interest expense and related fees. The change in secured debt interest expense is due to the net effect and timing of assumptions, segment transitions, fluctuations in foreign currency rates, extinguishments and principal amortizations. The following is a summary of our Triple-net secured debt principal activity for the periods presented (dollars in thousands): Three Months Ended Nine Months Ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 Wtd. Avg. Wtd. Avg. Wtd. Avg. Wtd. Avg. Amount Interest Rate Amount Interest Rate Amount Interest Rate Amount Interest Rate Beginning balance$ 289,321 3.27 %$ 287,952 3.63 %$ 306,038 3.60 %$ 288,386 3.63 % Debt extinguished (176,875) 2.03 % - - % (176,875) 2.03 % - - % Debt transferred - - % 12,072 3.89 % - - % 12,072 3.89 % Principal payments (1,101) 5.16 % (1,037) 5.17 % (3,203) 5.16 % (2,945) 5.22 % Foreign currency 11,341 2.35 % (5,986) 2.95 % (3,274) 3.53 % (4,512) 3.23 % Ending balance$ 122,686 4.91 %$ 293,001 3.64 %$ 122,686 4.91 %$ 293,001 3.64 % 0.0355003165979432 Monthly averages$ 164,836 4.19 %$ 291,300 3.64 %$ 242,312 3.69 %$ 291,475 3.63 % 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 during the three months endedSeptember 30, 2020 is primarily related to the write-off of Genesis Healthcare straight-line rent receivable balances at unconsolidated entities. Net income attributable to noncontrolling interests represents our partners' share of net income relating to those partnerships where we are the controlling partner. The increase during the nine months endedSeptember 30, 2020 , relates primarily to our partner's share of gains on disposal of properties. 42 -------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Outpatient Medical The following is a summary of our SSNOI at Welltower Share for the Outpatient Medical segment (dollars in thousands): QTD Pool YTD Pool Three Months Ended Change Nine Months Ended Change September 30, September 30, September 30, September 30, 2020 2019 $ % 2020 2019 $ % SSNOI (1)$ 84,937 $ 84,248 $ 689 0.8 %$ 202,783 $ 197,795 $ 4,988 2.5 % (1) For the three and nine months endedSeptember 30, 2020 and 2019, amounts relate to 294 and 232 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 Nine Months Ended Change September 30, September 30, September 30, September 30, 2020 2019 $ % 2020 2019 $ % Revenues: Rental income$ 171,108 $ 184,648 $ (13,540) -7 %$ 548,496 $ 496,924 $ 51,572 10 % Interest income 760 358 402 112 % 1,687 769 918 119 % Other income 836 183 653 357 % 2,681 322 2,359 733 % Total revenues 172,704 185,189 (12,485) -7 % 552,864 498,015 54,849 11 % Property operating expenses 52,728 60,325 (7,597) -13 % 165,024 159,478 5,546 3 % NOI (1) 119,976 124,864 (4,888) -4 % 387,840 338,537 49,303 15 % Other expenses: Depreciation and amortization 64,151 67,172 (3,021) -4 % 202,554 173,626 28,928 17 % Interest expense 4,287 3,363 924 27 % 13,421 10,097 3,324 33 % Loss (gain) on extinguishment of debt, net - - - n/a 741 - 741 n/a Provision for loan losses 2,399 - 2,399 n/a 2,370 - 2,370 n/a Impairment of assets - 3,183 (3,183) -100 % - 14,062 (14,062) -100 % Other expenses 781 524 257 49 % 8,244 1,274 6,970 547 % 71,618 74,242 (2,624) -4 % 227,330 199,059 28,271 14 % Income (loss) from continuing operations before income taxes and other items 48,358 50,622 (2,264) -4 % 160,510 139,478 21,032 15 % Income (loss) from unconsolidated entities 2,120 1,845 275 15 % 5,372 5,394 (22) - % Gain (loss) on real estate dispositions, net 171,604 (482) 172,086 n/a 524,190 (489) 524,679 n/a Income from continuing operations 222,082 51,985 170,097 327 % 690,072 144,383 545,689 378 % Net income (loss) 222,082 51,985 170,097 327 % 690,072 144,383 545,689 378 % Less: Net income (loss) attributable to noncontrolling interests 154 2,111 (1,957) -93 % (370) 3,918 (4,288) -109 % Net income (loss) attributable to common stockholders$ 221,928 $ 49,874 $ 172,054 345 %$ 690,442 $ 140,465 $ 549,977 392 %
(1) See Non-GAAP Financial Measures.
Rental income has decreased for the three month period endingSeptember 30, 2020 due primarily to significant dispositions that have closed during second and third quarters of the current year. The increase in rental income for the nine months endedSeptember 30, 2020 is primarily attributable to acquisitions of new properties and the conversion of newly constructed outpatient medical properties, particularly the$1.25 billion CNL Healthcare Properties portfolio acquisition that closed inMay 2019 , partially offset by 2020 dispositions. Certain of our leases contain annual rental escalators that are contingent upon changes in the Consumer Price Index. These escalators are not fixed, so no straight-line rent is recorded; however, rental income is recorded based on the contractual cash rental payments due for the period. If the Consumer Price Index does not increase, a portion of our revenues may not continue to increase. Our leases could renew above or below current rental rates, resulting in an increase or decrease in rental income. For the three months endedSeptember 30, 2020 , our consolidated outpatient medical portfolio signed 146,538 square feet of new leases and 411,113 square feet of renewals. The weighted-average term of these leases was six years, with a rate of$32.71 per square foot and tenant improvement and lease commission costs of$18.01 per square foot. Substantially all of these leases contain an annual fixed or contingent escalation rent structure ranging from 1.5% to 3.5%. In addition, our Outpatient Medical tenants are experiencing temporary medical practice closures or decreases in revenue due to government imposed restrictions on elective medical procedures or decisions by patients to delay treatments which may adversely effect their ability to make contractual rent payments. We have either collected or approved 43 -------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations short term deferrals for over 99% of rent due in the third quarter, consisting of 97% cash collections and 2% of short term deferrals. In most cases, unless local ordinances mandate otherwise, the deferred rent represents two months of rent with expected repayment by the end of the year. Furthermore, collections of deferred rent due in the third quarter under executed deferrals was over 99%. The fluctuation in property operating expenses and depreciation and amortization are primarily attributable to acquisitions and construction conversions of outpatient medical facilities, offset by dispositions. To the extent that we acquire or dispose of additional properties in the future, these amounts will change accordingly. During the nine months endedSeptember 30, 2019 , we recognized impairment charges$14,062,000 related to three held for sale properties as the carrying values exceeded the estimated fair values less costs to sell. Changes in gains/losses on sales of properties are related to volume of property sales and the sales prices. The increase in other expense during the nine months endedSeptember 30, 2020 is primarily due to noncapitalizable transaction costs from acquisitions no longer expected to be consummated. During the nine months endedSeptember 30, 2020 , we completed three Outpatient Medical construction projects representing$43,493,000 or$306 per square foot. The following is a summary of the Outpatient Medical construction projects, excluding expansions, pending as ofSeptember 30, 2020 (dollars in thousands): Location Square Feet Commitment Balance Est. Completion Brooklyn, NY 140,955$ 105,306 $ 99,616 1Q21 Kalamazoo, MI 40,607 14,267 946 3Q21 181,562$ 119,573 $ 100,562 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 Nine Months Ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 Wtd. Ave Wtd. Ave Wtd. Ave Wtd. Ave Amount Interest Rate Amount Interest Rate Amount Interest Rate Amount Interest Rate Beginning balance$ 559,043 3.59 %$ 383,850 4.22 %$ 572,267 3.97 %$ 386,738 4.20 % Debt extinguished - - % - - % (8,393) 4.40 % - - % Principal payments (2,526) 4.62 % (1,528) 4.97 % (7,357) 4.63 % (4,416) 5.03 % Ending balance$ 556,517 3.58 %$ 382,322 4.09 %$ 556,517 3.58 %$ 382,322 4.09 % Monthly averages$ 557,773 3.58 %$ 383,084 4.17 %$ 565,331 3.77 %$ 384,590 4.21 % 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. 44
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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 Nine Months Ended Change
September 30, September 30, September 30, September 30,
2020 2019 $ % 2020 2019 $ %
Revenues:
Other income $ 1,177 $ 841 $ 336 40 % $ 1,968 $ 3,452 $ (1,484) -43 %
Total revenue 1,177 841 336 40 % 1,968 3,452 (1,484) -43 %
Property operating expenses 1,718 - 1,718 n/a 1,718 - 1,718 n/a
NOI (1) (541) 841 (1,382) -164 % 250 3,452 (3,202) -93 %
Expenses:
Interest expense 105,766 114,548 (8,782) -8 % 328,935 351,894 (22,959) -7 %
General and administrative
expenses 31,003 31,019 (16) - % 100,546 100,042 504 1 %
Loss (gain) on extinguishment of
debt, net 33,004 64,374 (31,370) -49 % 33,004 80,093 (47,089) -59 %
Other expenses 1,470 3,884 (2,414) -62 % 8,722 10,126 (1,404) -14 %
171,243 213,825 (42,582) -20 % 471,207 542,155 (70,948) -13 %
Loss from continuing operations
before
income taxes and other items (171,784) (212,984) 41,200 19 % (470,957) (538,703) 67,746 13 %
Income tax (expense) benefit (2,003) (3,968) 1,965 50 % (9,678) (7,789) (1,889) -24 %
Loss from continuing operations (173,787) (216,952) 43,165 20 % (480,635) (546,492) 65,857 12 %
Net loss attributable to common
stockholders $ (173,787) $ (216,952) $ 43,165 20 % $ (480,635) $ (546,492) $ 65,857 12 %
(1) See Non-GAAP Financial
Measures.
Property operating expenses represent insurance costs related to our captive
insurance company formed as of July 1, 2020 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 or the
periods presented (dollars in thousands):
Three Months Ended Change Nine Months Ended Change
September 30, September 30, September 30, September 30,
2020 2019 $ % 2020 2019 $ %
Senior unsecured notes $ 100,354 $ 100,356 $ (2) - % $ 302,029 $ 307,587 $ (5,558) -2 %
Unsecured credit facility
and commercial paper
program 1,156 10,300 (9,144) -89 % 14,140 32,978 (18,838) -57 %
Loan expense 4,256 3,892 364 9 % 12,766 11,329 1,437 13 %
Totals $ 105,766 $ 114,548 $ (8,782) -8 % $ 328,935 $ 351,894 $ (22,959) -7 %
The change in interest expense on senior unsecured notes is due to the net
effect of issuances and extinguishments, as well as the movement in foreign
exchange rates and related hedge activity. Please refer to Note 11 for
additional information. The change in interest expense on our unsecured
revolving credit facility and commercial paper program is due primarily to the
net effect and timing of draws, paydowns and variable interest rate
changes. Please refer to Note 10 for additional information regarding our
unsecured revolving credit facility and commercial paper program. The loss on
extinguishment recognized during the nine months ended September 30, 2020 is due
primarily to the early extinguishment of $160,872,000 of our 3.75% senior
unsecured notes due March 2023 and $265,376,000 of our 3.95% senior unsecured
notes due September 2023 . The loss on extinguishment recognized during the nine
months ended September 30, 2019 is due primarily to the early extinguishment of
the $600,000,000 of 4.125% senior unsecured notes due 2019 and the $450,000,000
of 6.125% senior unsecured notes due 2020 in March 2019 , and the early
extinguishment of the $450,000,000 of 4.95% senior unsecured notes due 2021 and
$600,000,000 of 5.25% senior unsecured notes due 2022 in September 2019 .
General and administrative expenses as a percentage of consolidated revenues for
the three months ended September 30, 2020 and 2019 were 2.99% and 2.45%,
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.
45
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Non-GAAP Financial Measures
We believe that net income and net income attributable to common stockholders
("NICS"), as defined by U.S. GAAP, are the most appropriate earnings
measurements. However, we consider FFO, 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.
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 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 or seven
full quarters after acquisition or being placed into service for the QTD Pool
and the YTD 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 seven full quarters post completion of the redevelopment
for the QTD Pool and YTD Pool , respectively. Properties undergoing operator
transitions and/or segment transitions are also excluded from SSNOI until five
full quarters or seven full quarters post completion of the transition for the
QTD Pool and YTD 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 seven full quarters after
the properties are placed back into service for the QTD Pool and YTD Pool ,
respectively. SSNOI excludes non-cash NOI and includes adjustments to present
consistent ownership percentages and to translate Canadian properties and UK
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 expense, additional other income and other impairment
charges. 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 any IRC Section
1031 deposits), total equity and redeemable noncontrolling
46
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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.
Three Months Ended
September 30 ,
June 30, March 31, December 31, September 30, June 30, March 31,
NOI Reconciliations: 2020 2020 2020 2019 2019 2019 2019
Net income (loss) $ 394,978 $ 159,216 $ 329,380 $ 240,136 $ 647,932 $ 150,040 $ 292,302
Loss (gain) on real estate dispositions,
net (484,304) (155,863) (262,824) (12,064) (570,250) 1,682 (167,409)
Loss (income) from unconsolidated entities 5,981 (1,332) 3,692 (57,420) (3,262) 9,049 9,199
Income tax expense (benefit) 2,003 2,233 5,442 (4,832) 3,968 1,599 2,222
Other expenses 11,544 19,411 6,292 16,042 6,186 21,628 8,756
Impairment of assets 23,313 75,151 27,827 98 18,096 9,939 -
Provision for loan losses 2,857 1,422 7,072 - - - 18,690
Loss (gain) on extinguishment of debt, net 33,004 249 - 2,612 65,824 - 15,719
Loss (gain) on derivatives and financial
instruments, net 1,395 1,434 7,651 (5,069) 1,244 1,913 (2,487)
General and administrative expenses 31,003 34,062 35,481 26,507 31,019 33,741 35,282
Depreciation and amortization 255,532 265,371 274,801 262,644 272,445 248,052 243,932
Interest expense 124,851 126,357 142,007 131,648 137,343 141,336 145,232
Consolidated net operating income (NOI) $ 402,157 NOI by segment: Seniors Housing Operating$ 174,361 $ 178,137 $ 243,257 $ 242,453 $ 254,155 $ 278,212 $ 264,700 Triple-net 108,361 220,056 194,427 226,837 230,685 227,935 233,286 Outpatient Medical 119,976 129,143 138,721 130,498 124,864 112,378 101,295 Non-segment/corporate (541) 375 416 514 841 454 2,157 Total NOI$ 402,157 $ 527,711 $ 576,821 $ 600,302 $ 610,545 $ 618,979 $ 601,438 47
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Nine Months Ended
September 30, 2020 September 30, 2019
NOI Reconciliations:
Net income (loss) $ 883,574 $ 1,090,274
Loss (gain) on real estate dispositions, net (902,991) (735,977)
Loss (income) from unconsolidated entities 8,341 14,986
Income tax expense (benefit) 9,678 7,789
Other expenses 37,247 36,570
Impairment of assets 126,291 28,035
Provision for loan losses 11,351 18,690
Loss (gain) on extinguishment of debt, net 33,253 81,543
Loss (gain) on derivatives and financial instruments, net 10,480 670
General and administrative expenses 100,546 100,042
Depreciation and amortization 795,704 764,429
Interest expense 393,215 423,911
Consolidated net operating income (NOI) $ 1,506,689 $ 1,830,962
NOI by segment:
Seniors Housing Operating $ 595,755 $ 797,067
Triple-net 522,844 691,906
Outpatient Medical 387,840 338,537
Non-segment/corporate 250 3,452
Total NOI $ 1,506,689 $ 1,830,962
48--------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
QTD Pool YTD Pool
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
SSNOI Reconciliations: 2020 2019 2020 2019
Seniors Housing Operating:
Consolidated NOI $ 174,361 $
254,155
12,323 16,434 40,554 48,896
NOI attributable to noncontrolling
interests (11,306) (20,120) (40,804) (61,990)
NOI attributable to non-same store
properties (13,227) (27,331) (135,172) (208,045)
Non-cash NOI attributable to same store
properties (1,008) (3,880) (2,872) (3,462)
Currency and ownership adjustments (1) 458 1,539 3,807 5,505
SSNOI at Welltower Share 161,601 220,797 461,268 577,971
Triple-net:
Consolidated NOI 108,361 230,685 522,844 691,906
NOI attributable to unconsolidated
investments (1,288) 5,133 8,978 15,399
NOI attributable to noncontrolling
interests (14,328) (14,581) (44,080) (43,717)
NOI attributable to non-same store
properties (26,916) (31,053) (91,869) (123,923)
Non-cash NOI attributable to same store
properties 109,451 (16,015) 81,605 (46,137)
Currency and ownership adjustments (1) 156 1,016 1,099 800
SSNOI at Welltower Share 175,436 175,185 478,577 494,328
Outpatient Medical:
Consolidated NOI 119,976 124,864 387,840 338,537
NOI attributable to unconsolidated
investments 2,624 390 6,148 1,007
NOI attributable to noncontrolling
interests (4,179) (7,526) (11,923) (20,784)
NOI attributable to non-same store
properties (27,305) (20,252) (157,432) (85,441)
Non-cash NOI attributable to same store
properties (1,438) (1,912) (1,043) (1,834)
Currency and ownership adjustments (1) (4,741) (11,316) (20,807) (33,690)
SSNOI at Welltower Share 84,937 84,248 202,783 197,795
SSNOI at Welltower Share:
Seniors Housing Operating 161,601 220,797 461,268 577,971
Triple-net 175,436 175,185 478,577 494,328
Outpatient Medical 84,937 84,248 202,783 197,795
Total $ 421,974 $ 480,230 $ 1,142,628 $ 1,270,094 (1) Includes adjustments to reflect consistent property ownership percentages, to translate Canadian properties at a USD/CAD rate
of 1.32 and to translate
49--------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 515 652 321 1,488 515 652 321 1,488
Unconsolidated properties 84 39 49 172 84 39 49 172
Total properties 599 691 370 1,660 599 691 370 1,660
Recent acquisitions/development conversions(1) (25) (8) (60) (93) (70) (12) (122) (204)
Under development (25) (5) (2) (32) (25) (5) (2) (32)
Under redevelopment(2) (10) (1) (2) (13) (11) (1) (2) (14)
Current held for sale (8) (2) (4) (14) (8) (2) (4) (14)
Land parcels, loans and subleases (10) (17) (8) (35) (10) (17) (8) (35)
Transitions(3) (9) (9) - (18) (72) (24) - (96)
Other - - - - (1) - - (1)
Same store properties 512 649 294 1,455 402 630 232 1,264
(1) Acquisitions and development conversions will enter the
(3) Transitioned properties will enter the
The table below reflects the reconciliation of FFO to NICS, the most directly comparableU.S. GAAP measure, for the periods presented. Noncontrolling interest and unconsolidated entity amounts represent adjustments to reflect our share of depreciation and amortization, gains/loss on real estate dispositions and impairment of assets. Amounts are in thousands except for per share data. Three Months Ended September 30, June 30, March 31, December 31, September 30, June 30, March 31, FFO Reconciliation: 2020 2020 2020 2019 2019 2019 2019 Net income attributable to common stockholders$ 325,585 $
179,246
$ 137,762 $ 280,470 Depreciation and amortization 255,532 265,371 274,801 262,644 272,445 248,052 243,932 Impairment of assets 23,313 75,151 27,827 98 18,096 9,939 - Loss (gain) on real estate dispositions, net (484,304) (155,863) (262,824) (12,064) (570,250) 1,682 (167,409) Noncontrolling interests 48,559 (42,539) (9,409) (14,895) 31,347 (18,889) (17,760) Unconsolidated entities 16,329 14,231 15,445 16,191 10,864 11,475 19,150 FFO$ 185,014 $
335,597
Average diluted shares outstanding 418,987 419,121 412,420 407,904 406,891 406,673 393,452 Per diluted share data: Net income attributable to common stockholders(1) $ 0.77$ 0.42 $ 0.75 $ 0.55 $ 1.45$ 0.34 $ 0.71 FFO $ 0.44$ 0.80 $ 0.86 $ 1.17 $ 0.87$ 0.96 $ 0.91
(1) Includes adjustment to the numerator for income (loss) attributable to OP unitholders.
50
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Nine Months Ended
September 30, September 30,
FFO Reconciliations: 2020 2019
Net income attributable to common stockholders $ 815,115 $ 1,008,108
Depreciation and amortization 795,704 764,429
Impairment of assets 126,291 28,035
Loss (gain) on real estate dispositions, net (902,991) (735,977)
Noncontrolling interests (3,389) (5,302)
Unconsolidated entities 46,005 41,489
FFO $
876,735
Average diluted common shares outstanding: 416,860 402,412 Per diluted share data: Net income attributable to common stockholders(1) $ 1.94 $ 2.51 FFO $
2.10 $ 2.74
(1) Includes adjustment to the numerator for income (loss) attributable to OP unitholders.
The tables below reflects the reconciliation of EBITDA to net income, the most directly comparableU.S. GAAP measure, for the periods presented. Dollars are in thousands. Three Months Ended September 30, June 30, March 31, December 31, September 30, June 30, March 31, EBITDA Reconciliations: 2020 2020 2020 2019 2019 2019 2019 Net income (loss)$ 394,978 $
159,216
$ 150,040 $ 292,302 Interest expense 124,851 126,357 142,007 131,648 137,343 141,336 145,232 Income tax expense (benefit) 2,003 2,233 5,442 (4,832) 3,968 1,599 2,222 Depreciation and amortization 255,532 265,371 274,801 262,644 272,445 248,052 243,932 EBITDA$ 777,364 $ 553,177 $ 751,630 $ 629,596 $ 1,061,688 $ 541,027 $ 683,688 Interest Coverage Ratio: Interest expense$ 124,851 $
126,357
$ 141,336 $ 145,232 Non-cash interest expense (3,973) (1,914) (8,125) (734) (1,988) (752) (5,171) Capitalized interest 3,947 4,541 4,746 4,868 4,148 3,929 2,327 Total interest 124,825 128,984 138,628 135,782 139,503 144,513 142,388 EBITDA$ 777,364 $ 553,177 $ 751,630 $ 629,596 $ 1,061,688 $ 541,027 $ 683,688
Interest coverage ratio 6.23 x 4.29 x 5.42 x 4.64 x 7.61 x 3.74 x 4.80 x Fixed Charge Coverage Ratio: Total interest$ 124,825 $ 128,984 $ 138,628 $ 135,782 $ 139,503 $ 144,513 $ 142,388 Secured debt principal payments 15,876 15,183 15,526 13,977 13,121 13,684 13,543 Total fixed charges 140,701 144,167 154,154 149,759 152,624 158,197 155,931 EBITDA$ 777,364 $ 553,177 $ 751,630 $ 629,596 $ 1,061,688 $ 541,027 $ 683,688
Fixed charge coverage ratio 5.52 x 3.84 x 4.88 x 4.20 x 6.96 x 3.42 x 4.38 x
51--------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Nine Months Ended
September 30, September 30,
EBITDA Reconciliations: 2020 2019
Net income (loss) $ 883,574 $ 1,090,274
Interest expense 393,215 423,911
Income tax expense (benefit) 9,678 7,789
Depreciation and amortization 795,704 764,429
EBITDA $ 2,082,171 $ 2,286,403
Interest Coverage Ratio:
Interest expense $ 393,215 $ 423,911
Non-cash interest expense (14,012) (7,911)
Capitalized interest 13,234 10,404
Total interest 392,437 426,404
EBITDA $ 2,082,171 $ 2,286,403
Interest coverage ratio 5.31 x 5.36 x
Fixed Charge Coverage Ratio:
Total interest $ 392,437 $ 426,404
Secured debt principal payments 46,585 40,348
Total fixed charges 439,022 466,752
EBITDA $ 2,082,171 $ 2,286,403
Fixed charge coverage ratio 4.74 x 4.90 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 September 30, June 30, March 31, December 31, September 30, June 30, March 31, Adjusted EBITDA Reconciliations: 2020 2020 2020 2019 2019 2019 2019 Net income$ 1,123,710 $
1,376,664
$ 651,264 $ 668,497 Interest expense 524,863 537,355 552,334 555,559 568,280 568,969 549,049 Income tax expense (benefit) 4,846 6,811 6,177 2,957 9,293 7,066 9,308 Depreciation and amortization 1,058,348 1,075,261 1,057,942 1,027,073 1,007,263 977,967 966,190 EBITDA 2,711,767 2,996,091 2,983,941 2,915,999 2,799,806 2,205,266 2,193,044 Loss (income) from unconsolidated entities (49,079) (58,322) (47,941) (42,434) 14,791 17,709 7,411 Stock-based compensation expense (1) 25,485 24,229 24,601 25,047 25,347 26,113 23,618 Loss (gain) on extinguishment of debt, net 35,865 68,685 68,436 84,155 81,596 19,810 20,109 Loss (gain) on real estate dispositions, net (915,055) (1,001,001) (843,456) (748,041) (777,890) (232,363) (244,800) Impairment of assets 126,389 121,172 55,960 28,133 104,057 92,701 87,394 Provision for loan losses 11,351 8,494 7,072 18,690 18,690 18,690 18,690 Loss (gain) on derivatives and financial instruments, net 5,411 5,260 5,739 (4,399) 2,296 10,043 670 Other expenses (1) 52,630 46,971 48,327 51,052 45,512 126,994 117,942 Other impairment (2) 146,508 34,110 32,268 - - - - Additional other income - - - - (4,027) (4,027) (14,832) Adjusted EBITDA$ 2,151,272 $
2,245,689
Adjusted Interest Coverage Ratio: Interest expense$ 524,863 $ 537,355 $ 552,334 $ 555,559 $ 568,280 $ 568,969 $ 549,049 Capitalized interest 18,102 18,303 17,691 15,272 11,952 9,725 7,896 Non-cash interest expense (14,746) (12,761) (11,599) (8,645) (11,218) (10,888) (11,852) Total interest 528,219 542,897 558,426 562,186 569,014 567,806 545,093 Adjusted EBITDA$ 2,151,272 $
2,245,689
$ 2,280,936 $ 2,209,246 Adjusted interest coverage ratio 4.07 x 4.14 x 4.18 x 4.14 x 4.06 x 4.02 x 4.05 x Adjusted Fixed Charge Coverage Ratio: Total interest$ 528,219 $
542,897
$ 567,806 $ 545,093 Secured debt principal payments 60,562 57,807 56,308 54,325 54,342 55,129 55,584 Preferred dividends - - - - 11,676 23,352 35,028 Total fixed charges 588,781 600,704 614,734 616,511 635,032 646,287 635,705 Adjusted EBITDA$ 2,151,272 $
2,245,689
$ 2,280,936 $ 2,209,246 Adjusted fixed charge coverage ratio 3.65 x 3.74 x 3.80 x 3.78 x 3.64 x 3.53 x 3.48 x
(1) Certain severance-related costs are included in stock-based compensation and excluded from other expenses. (2) Represents write-off of straight-line rent receivable deemed uncollectible.
Our leverage ratios include book capitalization, undepreciated book
capitalization and market capitalization. Book capitalization represents the sum
of net debt (defined as total long-term debt less cash and cash equivalents and
any IRC section 1031 deposits), total equity and redeemable noncontrolling
interests. Undepreciated book capitalization represents book capitalization
adjusted for accumulated depreciation and amortization. Market capitalization
represents book capitalization adjusted for the fair market value of our common
stock. Our leverage ratios are defined as the proportion of net debt to total
capitalization. The table below reflects the reconciliation of our leverage
ratios to our balance sheets for the periods presented. Amounts are in
thousands, except share price.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
As of
September 30, June 30, March 31, December 31, September 30, June 30, March 31,
2020 2020 2020 2019 2019 2019 2019
Book capitalization:
Unsecured credit facility and
commercial paper $ - $
-
$ 1,869,188 $ 419,293 Long-term debt obligations (1) 13,889,030 14,543,485 13,228,433 13,436,365 12,463,680 13,390,344 12,371,729 Cash and cash equivalents (2) (2,096,571) (1,766,819) (303,423) (284,917) (265,788) (268,666) (249,127) Total net debt 11,792,459 12,776,666 13,769,995 14,739,045 13,532,478 14,990,866 12,541,895 Total equity and noncontrolling interests(3) 17,291,155 17,263,672 17,495,696 16,982,504 16,696,070 16,452,806 16,498,376 Book capitalization$ 29,083,614 $
30,040,338
41 % 43 % 44 % 46 % 45 % 48 % 43 %
Undepreciated book capitalization:
Total net debt $ 11,792,459 $
12,776,666
6,002,775 6,001,177 5,910,979 5,715,459 5,769,843 5,539,435 5,670,111
Total equity and noncontrolling
interests(3) 17,291,155 17,263,672 17,495,696 16,982,504 16,696,070 16,452,806 16,498,376
Undepreciated book capitalization $ 35,086,389 $ 36,041,515 $ 37,176,670 $ 37,437,008 $ 35,998,391 $ 36,983,107 $ 34,710,382
Net debt to undepreciated book
capitalization ratio 34 % 35 % 37 % 39 % 38 % 41 % 36 %
Market capitalization:
Common shares outstanding 417,305 417,302 417,391 410,257 405,758 405,254 403,740 Period end share price$ 55.09 $ 51.75 $ 45.78 $ 81.78 $ 90.65 $ 81.53 $ 77.60 Common equity market capitalization$ 22,989,332 $ 21,595,379 $ 19,108,160 $ 33,550,817 $ 36,781,963 $ 33,040,359 $ 31,330,224 Total net debt 11,792,459 12,776,666 13,769,995 14,739,045 13,532,478 14,990,866 12,541,895 Noncontrolling interests(3) 1,183,281 1,215,532 1,362,913 1,442,060 1,430,005 1,458,351 1,419,885 Market capitalization$ 35,965,072 $
35,587,577
33 % 36 % 40 % 30 % 26 % 30 % 28 %
(1) Amounts include senior unsecured notes, secured debt and lease liabilities related to financing leases, as reflected on our Consolidated Balance Sheet. Operating lease
liabilities related to the ASC 842 adoption are excluded.
(2) Inclusive of IRC section 1031 deposits of $381 million at September 30, 2020 and $88 million at June 30, 2020 . September 30, 2020 also includes $112 million of restricted
cash related to secured debt that was defeased in September and subsequently extinguished in October 2020 .
(3) Includes amounts attributable to both redeemable noncontrolling interests and noncontrolling interests as reflected on our Consolidated Balance Sheet.
Critical Accounting Policies
Our unaudited consolidated financial statements are prepared in accordance with
U.S. GAAP, which requires us to make estimates and assumptions. Management
considers an accounting estimate or assumption critical if:
•the nature of the estimates or assumptions is material due to the levels of
subjectivity and judgment necessary to account for highly uncertain matters or
the susceptibility of such matters to change; and
•the impact of the estimates and assumptions on financial condition or operating
performance is material.
Management has discussed the development and selection of its critical
accounting policies with the Audit Committee of the Board of
Directors. Management believes the current assumptions and other considerations
used to estimate amounts reflected in our unaudited consolidated financial
statements are appropriate and are not reasonably likely to change in the
future. However, since these estimates require assumptions to be made that were
uncertain at the time the estimate was made, they bear the risk of change. If
actual experience differs from the assumptions and other considerations used in
estimating amounts reflected in our unaudited consolidated financial statements,
the resulting changes could have a material adverse effect on our consolidated
results of operations, liquidity and/or financial condition. Please refer to
Note 2 to the financial statements included in our Annual Report on Form 10-K
for the year ended December 31, 2019 for further information regarding
significant accounting policies that impact us. There have been no material
changes to these policies in 2020, except the adoption of ASC 2016-13. See Notes
2 and 7 to the unaudited consolidated financial statements for details.
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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. When Welltower
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 cause Welltower's actual results to
differ materially from Welltower's expectations discussed in the forward-looking
statements. This may be a result of various factors, including, but not limited
to: the duration and scope of the COVID-19 pandemic; the impact of
the COVID-19 pandemic on occupancy rates and on the operations of Welltower and
its operators/tenants; actions governments take in response to
the COVID-19 pandemic, including the introduction of public health measures and
other regulations affecting Welltower's properties and the operations of
Welltower and its operators/tenants; the effects of health and safety measures
adopted by Welltower 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 to Welltower ;
disruptions to Welltower'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 affecting
Welltower'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 affecting Welltower's
properties; changes in rules or practices governing Welltower's financial
reporting; the movement of U.S. and foreign currency exchange rates; Welltower's
ability to maintain Welltower's qualification as a REIT; key management
personnel recruitment and retention; and other risks described in Welltower's
reports filed from time to time with the SEC . Other important factors are
identified in the Company's Annual Report on Form 10-K for the year ended
December 31, 2019 , including factors identified under the headings "Business,"
"Risk Factors" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." Finally, the Company undertakes no obligation to
update or revise publicly any forward-looking statements, whether because of new
information, future events or otherwise, or to update the reasons why actual
results could differ from those projected in any forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various market risks, including the potential loss arising
from adverse changes in interest rates and foreign currency exchange rates. We
seek to mitigate the underlying foreign currency exposures with gains and losses
on derivative contracts hedging these exposures. We seek to mitigate the effects
of fluctuations in interest rates by matching the terms of new investments with
new long-term fixed rate borrowings to the extent possible. We may or may not
elect to use financial derivative instruments to hedge interest rate exposure.
These decisions are principally based on our policy to match our variable rate
investments with comparable borrowings, but are also based on the general trend
in interest rates at the applicable dates and our perception of the future
volatility of interest rates. This section is presented to provide a discussion
of the risks associated with potential fluctuations in interest rates and
foreign currency exchange rates.
We historically borrow on our unsecured revolving credit facility and commercial
paper program to acquire, construct or make loans relating to health care and
seniors housing properties. Then, as market conditions dictate, we will issue
equity or long-term fixed rate debt to repay the borrowings under our unsecured
revolving credit facility and commercial paper program. We are subject to risks
associated with debt financing, including the risk that existing indebtedness
may not be refinanced or that the terms of refinancing may not be as favorable
as the terms of current indebtedness. The majority of our borrowings were
completed under indentures or contractual agreements that limit the amount of
indebtedness we may incur. Accordingly, in the event that we are unable to raise
additional equity or borrow money because of these limitations, our ability to
acquire additional properties may be limited.
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