WELLTOWER INC. Company Overview 45 Business Strategy 46 Key Transactions 47
Key Performance Indicators, Trends and Uncertainties 48 Corporate Governance
49
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash 49
Off-Balance Sheet Arrangements 50
Contractual Obligations 51
Capital Structure 51
RESULTS OF OPERATIONS
Summary 52
Seniors Housing Operating 53
Triple-net 55
Outpatient Medical 57
Non-Segment/Corporate 59
OTHER
Non-GAAP Financial Measures 60
Critical Accounting Policies 65
44-------------------------------------------------------------------------------- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis is based primarily on the consolidated financial statements ofWelltower Inc. presented in conformity withU.S. generally accepted accounting principles ("U.S. GAAP") for the periods presented and should be read together with the notes thereto contained in this Annual Report on Form 10-K. Other important factors are identified in "Item 1 - Business" and "Item 1A - Risk Factors" above. 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 year endedDecember 31, 2020 (dollars in thousands): Percentage of Number
of
Type of Property NOI(1) NOI Properties
Seniors Housing Operating$ 755,552 37.6 % 556 Triple-net 748,121 37.2 % 641 Outpatient Medical 505,071 25.2 % 296 Totals$ 2,008,744 100.0 % 1,493 (1) Represents consolidated net operating income ("NOI") and excludes our share of investments in unconsolidated entities. Entities in which we have a joint venture with a minority partner are shown at 100% of the joint venture amount. See Non-GAAP Financial Measures for additional information and reconciliation. The COVID-19 pandemic has had and may continue to have material and adverse effects on our financial condition, results of operations and cash flows in the future. The extent to which the COVID-19 pandemic impacts our operations and those of our operators and tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the effectiveness and availability of vaccines and the success of ongoing vaccination deployment efforts in our facilities and the geographic areas in which we operate, 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. Our Seniors Housing Operating revenues are dependent on occupancy. While admission bans were lifted across our portfolio during the second and third quarter, with the ramp up of COVID-19 cases in the general community in the fourth quarter, admissions bans, both government-imposed and voluntary bans adopted by operators, have been reinstated in many locations which have significantly affected occupancy rates. Occupancy has consistently declined since the beginning of the pandemic to 76.2% as ofDecember 31, 2020 . ThroughFebruary 5, 2021 , total occupancy declined an additional 180 basis points to 74.4%. Occupancy metrics represents approximate spot occupancy as reported by our operators for properties in operation as ofFebruary 29, 2020 , including unconsolidated properties but excluding acquisitions, executed dispositions and development conversions since such date. 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, personal protective equipment and sanitation. We expect total Seniors Housing Operating expenses to remain elevated during the pandemic and potentially beyond as these additional health and safety measures become standard practice. 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 have or are expected to receive 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 December) has generally been consistent with historical collection rates and no significant rent concessions or deferrals have been made. 45 -------------------------------------------------------------------------------- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Our Outpatient Medical tenants have experienced temporary medical practice closures or decreases in revenue due to government-imposed restrictions on elective medical procedures, stay at home orders or decisions by patients to delay treatments which may continue to adversely affect their ability to make contractual rent payments. These factors have and may continue to cause operators or tenants to seek modifications of such obligations, resulting in reductions in revenue and increases in uncollectible receivables. We will continue to 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. Outpatient Medical rent collections through March were generally consistent with pre COVID-19 levels. During the second quarter we executed short term rent deferrals with certain Outpatient Medical tenants which in most cases were required to be repaid by year end. Since then we have collected approximately 99% of Outpatient Medical rent due in the second half of the year, with uncollected amounts primarily attributable to local jurisdictions with COVID-19 related ordinances providing temporary rent relief to tenants. Furthermore, collections of deferred rent due 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 seniors housing and health care properties, as well as our ability to transition or sell properties with profitable results in the future, may be limited. In response to the COVID-19 pandemic, acquisitions during the year endedDecember 31, 2020 declined compared to recent years. Additionally, we undertook certain opportunistic disposals to enhance near-term liquidity. We have a significant development portfolio as ofDecember 31, 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 year endedDecember 31, 2020 , resident fees and services and rental income represented 67% and 31%, respectively, of total revenues. Substantially all of our operating leases are designed with escalating rent structures. Leases with fixed annual rental escalators are generally recognized on a straight-line basis over the initial lease period, subject to a collectability assessment. Rental income related to leases with contingent rental escalators is generally recorded based on the contractual cash rental payments due for the period. Our yield on loans receivable depends upon a number of factors, including the stated interest rate, the average principal amount outstanding during the term of the loan and any interest rate adjustments. Our primary sources of cash include resident fees and services, rent and interest receipts, borrowings under our unsecured revolving credit facility and commercial paper program, public issuances of debt and equity securities, proceeds from investment dispositions and principal payments on loans receivable. Our primary uses of cash include dividend distributions, 46 -------------------------------------------------------------------------------- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations debt service payments (including principal and interest), real property investments (including acquisitions, capital expenditures, construction advances and transaction costs), loan advances, property operating expenses, general and administrative expenses and other expenses. Depending upon the availability and cost of external capital, we believe our liquidity is sufficient to fund these uses of cash. We also continuously evaluate opportunities to finance future investments. New investments are generally funded from temporary borrowings under our unsecured revolving credit facility and commercial paper program, internally generated cash and the proceeds from investment dispositions. Our investments generate cash from NOI and principal payments on loans receivable. Permanent financing for future investments, which replaces funds drawn under our unsecured revolving credit facility and commercial paper program, has historically been provided through a combination of the issuance of public debt and equity securities and the incurrence or assumption of secured debt. Depending upon market conditions, we believe that new investments will be available in the future with spreads over our cost of capital that will generate appropriate returns to our stockholders. It is also likely that investment dispositions may occur in the future. To the extent that investment dispositions exceed new investments, our revenues and cash flows from operations could be adversely affected. We expect to reinvest the proceeds from any investment dispositions in new investments. To the extent that new investment requirements exceed our available cash on-hand, we expect to borrow under our unsecured revolving credit facility and commercial paper program. During 2020, in response to the COVID-19 pandemic, we were strategic and opportunistic in disposing of certain real estate which provided significant near term liquidity. AtDecember 31, 2020 , we had$1,545,046,000 of cash and cash equivalents,$475,997,000 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 transactions that occurred during the year endedDecember 31, 2020 : •InApril 2020 , 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. •InJune 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$140,000,000 . •We sold 2,128,000 shares of common stock under our ATM and DRIP programs, primarily in the first quarter, 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. •We extinguished$632,288,000 of secured debt at a blended average interest rate of 2.21% throughout 2020. Investments The following summarizes property acquisitions and joint venture investments completed during the year endedDecember 31, 2020 (dollars in thousands): Investment Properties Amount(1) Capitalization Rates(2) Book Amount(3)
Seniors Housing Operating 26$ 574,793 3.5%$ 610,857 Triple-net 11 88,908 6.5% 90,731 Outpatient Medical 17 246,516 6.1% 249,312 Totals 54$ 910,217 4.5%$ 950,900 (1) Represents stated pro rata purchase price including cash and any assumed debt but excludes fair value adjustments pursuant toU.S. GAAP. (2) Represents annualized contractual or projected NOI to be received in cash divided by investment amounts. (3) Represents amounts recorded in real property including fair value adjustments pursuant toU.S. GAAP. See Note 3 to our consolidated financial statements for additional information. Dispositions The following summarizes property dispositions completed during the year endedDecember 31, 2020 (dollars in thousands): Properties Proceeds(1) Capitalization Rates(2) Book Amount(3) Seniors Housing Operating 31$ 1,282,439 4.8%$ 1,289,769 Triple-net 8 109,439 7.9% 51,666 Outpatient Medical 108 2,324,062 5.6% 1,755,864 Totals 147$ 3,715,940 5.4%$ 3,097,299 (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 consolidated financial statements for additional information. 47 -------------------------------------------------------------------------------- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Dividends OnFebruary 9, 2021 , the Board of Directors declared a cash dividend for the quarter endedDecember 31, 2020 of$0.61 per share, consistent with the cash dividends for the quarters endedSeptember 30 ,June 30 andMarch 31, 2020 , representing a 30% decrease from the$0.87 per share dividend for the quarter endedDecember 31, 2019 . The dividend declaration represents the 199th consecutive quarterly dividend payment. Key Performance Indicators, Trends and Uncertainties We utilize several key performance indicators to evaluate the various aspects of our business. These indicators are discussed below and relate to operating performance, credit strength and concentration risk. Management uses these key performance indicators to facilitate internal and external comparisons to our historical operating results, in making operating decisions, and for budget planning purposes. Operating Performance We believe that net income and net income attributable to common stockholders ("NICS") per the Statement of Comprehensive Income are the most appropriate earnings measures. Other useful supplemental measures of our operating performance include funds from operations attributable to common stockholders ("FFO") and consolidated net operating income ("NOI"); however, these supplemental measures are not defined byU.S. GAAP. Please refer to the section entitled "Non-GAAP Financial Measures" for further discussion and reconciliations. These earnings measures are widely used by investors and analysts in the valuation, comparison and investment recommendations of companies. The following table reflects the recent historical trends of our operating performance measures for the periods presented (in thousands): Year Ended December 31, 2020 2019 2018 Net income$ 1,038,852 $ 1,330,410 $ 829,750 Net income attributable to common stockholders 978,844 1,232,432 758,250 Funds from operations attributable to common stockholders 1,102,562 1,577,080 1,392,183 Consolidated net operating income 2,008,144 2,431,264 2,267,482 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 ("IRC") 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 adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted 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:
Year Ended
2020 2019 2018
Net debt to book capitalization ratio 40.9% 46.5% 45.0%
Net debt to undepreciated book capitalization ratio 33.8% 39.4% 37.8%
Net debt to market capitalization ratio 29.7% 29.6% 31.3%
Adjusted interest coverage ratio 3.97x 4.14x 4.11x
Adjusted fixed charge coverage ratio 3.54x 3.78x 3.44x
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 years
indicated below:
48--------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
December 31,(1)
2020 2019 2018
Property mix:
Seniors Housing Operating 38% 43% 43%
Triple-net 37% 38% 40%
Outpatient Medical 25% 19% 17%
Relationship mix:
Sunrise Senior Living(2) 13% 14% 15%
ProMedica 11% 9% 4%
Revera(2) 5% 6% 7%
Avery Healthcare 4% 3% 3%
Sagora Senior Living 3% 3% 3%
Remaining 64% 65% 68%
Geographic mix:
California 14% 13% 14%
United Kingdom 10% 8% 9%
Texas 9% 8% 8%
Canada 6% 7% 7%
Pennsylvania 6% 6% 5%
Remaining 55% 58% 57%
(1) Excludes our share of investments in unconsolidated entities and
non-segment/corporate NOI. Entities in which we have a joint venture with a
minority partner are shown at 100% of the joint venture amount.
(2) Revera owns a controlling interest in Sunrise Senior Living.
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 "Item 1 - Business
- Cautionary Statement Regarding Forward-Looking Statements" and "Item 1A - Risk
Factors" and other sections of this Annual Report on Form 10-K. Management
regularly monitors economic and other factors to develop strategic and tactical
plans designed to improve performance and maximize our competitive position. Our
ability to achieve our financial objectives is dependent upon our ability to
effectively execute these plans and to appropriately respond to emerging
economic and company-specific trends. Please refer to "Item 1 - Business," "Item
1A - Risk Factors" in this Annual Report on Form 10-K for further discussion of
these risk factors.
Corporate Governance
Maintaining investor confidence and trust is important in today's business
environment. Our Board of Directors and management are strongly committed to
policies and procedures that reflect the highest level of ethical business
practices. Our corporate governance guidelines provide the framework for our
business operations and emphasize our commitment to increase stockholder value
while meeting all applicable legal requirements. These guidelines meet the
listing standards adopted by the New York Stock Exchange and are available on
the Internet at www.welltower.com/investors/governance. The information on our
website is not incorporated by reference in this Annual Report on Form 10-K, and
our web address is included as an inactive textual reference only.
Liquidity and Capital Resources
Sources and Uses of Cash
Our primary sources of cash include resident fees and services, rent and
interest receipts, borrowings under our unsecured revolving credit facility and
commercial paper program, public issuances of debt and equity securities,
proceeds from investment dispositions and principal payments on loans
receivable. Our primary uses of cash include dividend distributions, debt
service payments (including principal and interest), real property investments
(including acquisitions, capital expenditures, construction advances and
transaction costs), loan advances, property operating expenses, general and
administrative expenses and other expenses. These sources and uses of cash are
reflected in our Consolidated Statements of Cash Flows and are discussed in
further detail below. The following is a summary of our sources and uses of cash
flows for the periods presented (dollars in thousands):
49--------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Year Ended One Year Change Year Ended One Year Change Two Year Change
December 31, December 31, December 31,
2020 2019 $ % 2018 $ % $ %
Cash, cash equivalents and
restricted cash at beginning
of period $ 385,766 $ 316,129 $ 69,637 22 % $ 309,303 $ 6,826 2 % $ 76,463 25 %
Net cash provided from (used
in):
Operating activities 1,364,756 1,535,968 (171,212) -11 % 1,583,944 (47,976) -3 % (219,188) -14 %
Investing activities 2,347,928 (2,048,791) 4,396,719 n/a (2,386,471) 337,680 -14 % 4,734,399 n/a
Financing activities (2,080,858) 577,150 (2,658,008) n/a 818,368 (241,218) -29 % (2,899,226) n/a
Effect of foreign currency
translation 3,451 5,310 (1,859) -35 % (9,015) 14,325 n/a 12,466 n/a
Cash, cash equivalents and
restricted cash at end of
period $ 2,021,043 $ 385,766 $ 1,635,277 424 % $ 316,129 $ 69,637 22 % $ 1,704,914 539 %
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 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 years ended December 31, 2020 ,
2019 and 2018, cash flows from operations exceeded cash distributions to
stockholders.
Investing Activities The changes in net cash used in investing activities are
primarily attributable to net changes in real property investments and
dispositions, loans receivable and investments in unconsolidated entities which
are summarized above in "Key Transactions." Please refer to Notes 3 and 5 of our
consolidated financial statements for additional information. The following is a
summary of cash used in non-acquisition capital improvement activities for the
periods presented (dollars in thousands):
Year Ended One Year Change Year Ended One Year Change Two Year Change
December 31, December 31, December 31,
2020 2019 $ % 2018 $ % $ %
New development $ 201,336 $ 323,488 $ (122,152) -38 % $ 160,706 $ 162,782 101 % $ 40,630 25 %
Recurring capital
expenditures, tenant
improvements and lease
commissions 83,146 136,535 (53,389) -39 % 90,190 46,345 51 % (7,044) -8 %
Renovations, redevelopments
and other capital improvements 161,843 192,289 (30,446) -16 % 175,993 16,296 9 % (14,150) -8 %
Total $ 446,325 $ 652,312 $ (205,987) -32 % $ 426,889 $ 225,423 53 % $ 19,436 5 %
The change in new development is primarily due to the number and size of
construction projects on-going during the relevant periods. Renovations,
redevelopments and other capital improvements include expenditures to maximize
property value, increase net operating income, maintain a market-competitive
position and/or achieve property stabilization.
Financing Activities The changes in net cash provided from/used in financing
activities are primarily attributable to changes related to our long-term debt
arrangements, the issuances of common stock and dividend payments which are
summarized above in "Key Transactions." Please refer to Notes 10, 11 and 14 of
our consolidated financial statements for additional information.
On April 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, on June 30, 2020 , we completed the issuance of
$600,000,000 senior unsecured notes with a maturity date of January 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 on July 1, 2020 . The remaining proceeds were used to reduce borrowings
under the term loan by $140,000,000 . As of December 31, 2020 , we have total
near-term available liquidity of approximately $4.5 billion . However, we are
unable to accurately predict the full impact that the pandemic will have on our
results from operations, financial condition, liquidity and cash flows due to
numerous factors discussed in Part I Item 1A. Risk Factors.
Off-Balance Sheet Arrangements
At December 31, 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.
At December 31, 2020 , we had nine outstanding letter of credit obligations.
Please see Notes 8, 12 and 13 to our consolidated financial statements for
additional information.
50
--------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Contractual Obligations
The following table summarizes our payment requirements under contractual
obligations as of December 31, 2020 (in thousands):
Payments Due by Period
Contractual Obligations Total 2021 2022-2023 2024-2025 Thereafter
Senior unsecured notes and term credit
facilities:(1)
U.S. Dollar senior unsecured notes $ 8,273,752 $
-
Canadian Dollar senior unsecured notes(2) 235,239 - - -235,239 Pounds Sterling senior unsecured notes(2) 1,434,510 - - -1,434,510 U.S. Dollar term credit facility 1,370,000 - 1,370,000 - - Canadian Dollar term credit facility(2) 196,032 - 196,032 - - Secured debt:(1,2) Consolidated 2,378,073 451,038 833,433 397,785 695,817 Unconsolidated 1,064,949 54,073 206,924 557,508 246,444
Contractual interest obligations:(3)
Senior unsecured notes and term loans(2) 3,872,398 423,475 816,492 651,101 1,981,330 Consolidated secured debt(2) 309,885 72,990 101,412 58,755 76,728 Unconsolidated secured debt(2) 200,426 35,099 65,011 42,031 58,285 Financing lease liabilities(4) 197,427 8,777 78,026 2,950 107,674 Operating lease obligations(4) 1,002,538 20,316 38,133 33,955 910,134 Purchase obligations(5) 784,797 399,771 309,660 65,920 9,446 Total contractual obligations$ 21,320,026 $
1,465,539
(1) Amounts represent principal amounts due and do not reflect unamortized premiums/discounts or other fair value adjustments as reflected on the Consolidated Balance Sheets. (2) Based on foreign currency exchange rates in effect as of balance sheet date. (3) Based on variable interest rates in effect as ofDecember 31, 2020 . (4) See Note 6 to our consolidated financial statements for additional information. (5) See Note 13 to our consolidated financial statements for additional information. Capital Structure Please refer to "Credit Strength" above for a discussion of our leverage and coverage ratio trends. Our debt agreements contain various covenants, restrictions and events of default. Certain agreements require us to maintain financial ratios and minimum net worth and impose certain limits on our ability to incur indebtedness, create liens and make investments or acquisitions. As ofDecember 31, 2020 , we were in compliance with all of the covenants under our debt agreements. None of our debt agreements contain provisions for acceleration which could be triggered by our debt ratings. However, under our primary unsecured credit facility, the ratings on our senior unsecured notes are used to determine the fees and interest charged. We plan to manage the company to maintain compliance with our debt covenants and with a capital structure consistent with our current profile. Any downgrades in 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 ofJanuary 29, 2021 , 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 ofJanuary 29, 2021 , 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. OnMay 1, 2020 , our Board of Directors authorized a share repurchase program whereby we may repurchase up to$1 billion of common stock throughDecember 31, 2021 (the "Repurchase Program"). Under this authorization, we are not required to purchase shares but may choose to do so in the open market or through private transactions at times and amounts based on our 51 -------------------------------------------------------------------------------- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations evaluation of market conditions and other factors. We expect to finance any share repurchases under the Repurchase Program using available cash and may use proceeds from borrowings or debt offerings. Results of Operations Summary Our primary sources of revenue include resident fees and services, rent and interest income. Our primary expenses include property operating expenses, depreciation and amortization, interest expense, general and administrative expenses, and other expenses. We evaluate our business and make resource allocations on our three business segments: Seniors Housing Operating, Triple-net and Outpatient Medical. The primary performance measures for our properties are NOI and same store NOI ("SSNOI") and other supplemental measures include FFO and Adjusted EBITDA, which are further discussed below. Please see "Non-GAAP Financial Measures" for additional information and reconciliations related to these supplemental measures. This section of this Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 . The following is a summary of our results of operations for the periods presented (dollars in thousands, except per share amounts): Year Ended One Year Change Year Ended One Year Change Two Year Change December 31, December 31, December 31, 2020 2019 Amount % 2018 Amount % Amount % Net income$ 1,038,852 $ 1,330,410 $ (291,558) -22 %$ 829,750 $ 500,660 60 %$ 209,102 25 % NICS 978,844 1,232,432 (253,588) -21 % 758,250 474,182 63 % 220,594 29 % FFO 1,102,562 1,577,080 (474,518) -30 % 1,392,183 184,897 13 % (289,621) -21 % Adjusted EBITDA 2,048,412 2,328,202 (279,790) -12 % 2,153,005 175,197 8 % (104,593) -5 % Consolidated NOI 2,008,144 2,431,264 (423,120) -17 % 2,267,482 163,782 7 % (259,338) -11 % Per share data (fully diluted): Net income attributable to common stockholders (1)$ 2.33 $ 3.05 $ (0.72) -24 %$ 2.02 $ 1.03 51 % $ 0.31 15 % Funds from operations attributable to common stockholders$ 2.64 $ 3.91 $ (1.27) -32 %$ 3.71 $ 0.20 5 %$ (1.07) -29 % Adjusted interest coverage ratio 3.97x 4.14x -0.17x -4 % 4.11x 0.03x 1 % -0.14x -3 % Adjusted fixed charge coverage ratio 3.54x 3.78x -0.24x -6 % 3.44x 0.34x 10 % 0.10x 3 %
(1) Includes adjustment to the numerator for income (loss) attributable to OP unitholders.
The following table represents the changes in outstanding common stock for the
period from
Year Ended
December 31, 2020 December 31, 2019 December 31, 2018 Totals
Beginning balance 410,257 383,675 371,732 371,732
Dividend reinvestment plan
issuances 264 5,799 6,529 12,592
Preferred stock conversions - 12,712 - 12,712
Option exercises - 11 57 68
Equity Shelf Program issuances 6,800 7,856 5,241 19,897
Repurchase of common stock (202) - - (202)
Other, net 282 204 116 602
Ending balance 417,401 410,257 383,675 417,401
Average number of shares outstanding:
Basic 415,451 401,845 373,620
Diluted 417,387 403,808 375,250
During the past three years, inflation has not significantly affected our
earnings because of the moderate inflation rate. Additionally, a portion of our
earnings are derived primarily from long-term investments with predictable rates
of return. These investments are mainly financed with a combination of equity,
senior unsecured notes, secured debt and borrowings under our primary unsecured
credit facility. During inflationary periods, which generally are accompanied by
rising interest rates, our ability to grow may be adversely affected because the
yield on new investments may increase at a slower rate than new borrowing costs.
Presuming the current inflation rate remains moderate and long-term interest
rates do not increase significantly, we believe that inflation will not impact
the availability of equity and debt financing for us.
52
--------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Seniors Housing Operating
The following is a summary of our SSNOI at Welltower's Share for the Seniors
Housing Operating segment (dollars in thousands):
QTD Pool YTD Pool
Three Months Ended Change Year Ended Change
December 31, December 31, December 31, December 31,
2020 2019 $ % 2020 2019 $ %
SSNOI(1) $ 154,373 $ 216,166 $ (61,793) -28.6 % $ 591,133 $ 764,328 $ (173,195) -22.7 %
(1) Relates to 514 properties for the QTD Pool and 399 properties for the YTD
Pool . Please see "Non-GAAP Financial Measures for additional information and
reconciliations.
The following is a summary of our results of operations for the Seniors Housing
Operating segment for the years presented (dollars in thousands):
Year Ended One Year Change Year Ended One Year Change Two Year Change
December 31, December 31, December 31,
2020 2019 $ % 2018 $ % $ %
Revenues:
Resident fees and services $ 3,074,022 $ 3,448,175 $ (374,153) -11 % $ 3,234,852 $ 213,323 7 % $ (160,830) -5 %
Interest income 618 36 582 n/a 578 (542) -94 % 40 7 %
Other income 7,223 8,658 (1,435) -17 % 5,024 3,634 72 % 2,199 44 %
Total revenues 3,081,863 3,456,869 (375,006) -11 % 3,240,454 216,415 7 % (158,591) -5 %
Property operating expenses 2,326,311 2,417,349 (91,038) -4 % 2,255,432 161,917 7 % 70,879 3 %
NOI(1) 755,552 1,039,520 (283,968) -27 % 985,022 54,498 6 % (229,470) -23 %Other expenses:
Depreciation and amortization 544,462 553,189 (8,727) -2 % 529,449 23,740 4 % 15,013 3 %
Interest expense 54,901 67,983 (13,082) -19 % 69,060 (1,077) -2 % (14,159) -21 %
Loss (gain) on extinguishment of debt,
net 12,659 1,614 11,045 684 % 110 1,504 n/a 12,549 n/a
Provision for loan losses 671 - 671 n/a - - n/a 671 n/a
Impairment of assets 100,741 2,145 98,596 n/a 7,599 (5,454) -72 % 93,142 1,226 %
Other expenses 14,265 26,348 (12,083) -46 % 6,624 19,724 298 % 7,641 115 %
727,699 651,279 76,420 12 % 612,842 38,437 6 % 114,857 19 %Income (loss) from continuing operations before income taxes and other items
27,853 388,241 (360,388) -93 % 372,180 16,061 4 % (344,327) -93 %
Income (loss) from unconsolidated entities (33,857) 12,388 (46,245) -373 % (28,142) 40,530 144 % (5,715) -20 %
Gain (loss) on real estate dispositions, net 328,249 528,747 (200,498) -38 % (2,245) 530,992 n/a 330,494 n/a
Income from continuing operations 322,245 929,376 (607,131) -65 % 341,793 587,583 172 % (19,548) -6 %
Net income (loss) 322,245 929,376 (607,131) -65 % 341,793 587,583 172 % (19,548) -6 %
Less: Net income (loss) attributable to noncontrolling interests 20,301 56,513 (36,212) -64 % (660) 57,173 n/a 20,961 n/a
Net income (loss) attributable to common stockholders $ 301,944 $ 872,863 $ (570,919) -65 % $ 342,453 $ 530,410 155 % $ (40,509) -12 %
(1) See Non-GAAP Financial Measures below.
Decreases in resident fees and services and property operating expenses are
primarily a result of property 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:
Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec.
Spot occupancy (1) 85.6 % 84.9 % 82.6 % 80.9 % 79.9 % 79.3 % 78.7 % 78.4 % 78.0 % 77.3 % 76.2 %
Sequential occupancy
change (0.7) % (2.3) % (1.7) % (1.0) % (0.6) % (0.6) % (0.3) % (0.4) % (0.7) % (1.1) %
(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 $78,792,000 during the year ended December 31, 2020 , included
in property operating expenses relating to our consolidated properties. These
expenses were incurred as a result of the introduction of public health measures
and other regulations affecting our properties, as well as additional health and
safety measures adopted by us and our operators related to the COVID-19
pandemic, including increases in labor and property cleaning expenses and
expenditures related to our efforts to procure PPE and supplies, net of
reimbursements. We expect total portfolio expenses to be elevated during the
pandemic and potentially beyond as these additional health and safety measures
become standard practice.
53
--------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
In 2020 applications were made for amounts under Phase 2 and Phase 3 of the
Provider Relief Fund following the announcement from the Department of Health
and Human Services that it expanded the eligibility of the CARES Act Provider
Relief Fund to include assisted living facilities. During the fourth quarter, we
received Provider Relief Funds of approximately $9 million which was recognized
as a reduction to property operating expenses. To date in 2021, we have received
approximately $34 million of Provider Relief Funds.
During the year ended December 31, 2020 , we recorded impairment charges of
$100,741,000 related to 15 held for sale or sold properties and six held for use
properties. During the year ended December 31, 2019 , we recorded impairment
charges of $2,145,000 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 sale of properties are due to the volume of
property sales and sales prices. During the year ended December 31, 2020 , we
recognized a gain on real estate disposition of $313 million related to an 11
property U.S. portfolio. During the year ended December 31, 2019 , we recognized
a gain on real estate disposition of $520 million related to the Benchmark
Senior Living portfolio. The fluctuation in other expenses is primarily due to
the timing of noncapitalizable transaction costs associated with acquisitions
and operator transitions.
Depreciation and amortization fluctuates as a result of acquisitions,
disposition and transitions. To the extent we acquire or dispose of additional
properties in the future, our provision for depreciation and amortization will
change accordingly.
During the year ended December 31, 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 consolidated Seniors Housing Operating
construction projects, excluding expansions, pending as of December 31, 2020
(dollars in thousands):
Location Units/Beds Commitment Balance Est. Completion
Potomac, MD 120 $ 56,720 $ 48,783 2Q21
Beckenham, UK 100 64,348 45,722 3Q21
Barnet, UK 100 70,769 41,215 4Q21
Hendon, UK 102 75,824 50,817 1Q22
Princeton, NJ 80 29,780 19,209 3Q22
Berea, OH 120 14,934 1,538 4Q22
Painesville, OH 119 14,462 1,508 4Q22
Beaver, PA 116 14,184 1,152 4Q22
857 $ 341,021 209,944
Toronto, ON Project in planning stage 46,856
Brookline, MA Project in planning stage 23,679
Washington, DC Project in planning stage 22,951
Columbus, OH Project in planning stage 11,492
Raleigh, NC Project in planning stage 3,107
$ 318,029
Interest expense represents secured debt interest expense which fluctuates based
on the net effect and timing of assumptions, segment transitions, fluctuations
in foreign currency rates, extinguishments and principal amortizations. The
fluctuations in loss (gain) on extinguishment of debt is primarily attributable
to the volume of extinguishments and terms of the related secured debt. The
following is a summary of our Seniors Housing Operating segment property secured
debt principal activity (dollars in thousands):
Year Ended Year Ended Year Ended
December 31, 2020 December 31, 2019 December 31, 2018
Weighted Avg. Weighted Avg. Weighted Avg.
Amount Interest Rate Amount Interest Rate Amount Interest Rate
Beginning balance $ 2,115,037 3.54% $ 1,810,587 3.87% $ 1,988,700 3.66%
Debt transferred in - -% - -% 35,830 3.84%
Debt issued 62,055 2.55% 343,696 3.11% 45,447 3.40%
Debt assumed - -% 183,061 4.58% 121,612 5.55%
Debt extinguished (441,208) 2.18% (219,864) 4.28% (240,095) 4.83%
Debt transferred out - -% (12,072) 3.89% - -%
Principal payments (48,498) 3.30% (43,997) 3.45% (47,886) 3.59%
Foreign currency 18,803 2.93% 53,626 3.33% (93,021) 3.31%
Ending balance $ 1,706,189 3.05% $ 2,115,037 3.54% $ 1,810,587 3.87%
Monthly averages $ 1,875,910 3.19% $ 1,966,892 3.70% $ 1,915,663 3.74%
54-------------------------------------------------------------------------------- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The majority of our Seniors Housing Operating properties are formed through partnership interests. Losses from unconsolidated entities during the year endedDecember 31, 2020 are largely attributable to depreciation and amortization of short-lived intangible assets related to certain investments in unconsolidated joint ventures. The gains from unconsolidated entities during the year endedDecember 31, 2019 are largely due to a gain on the disposition of an unconsolidated entity. Net income attributable to noncontrolling interests represents our partners' share of net income (loss) related to joint ventures. The increase during the years endedDecember 31, 2020 and 2019 relates primarily to our partner's share of the gains recognized on the sale of the 11 propertyU.S. portfolio and theBenchmark Senior Living portfolio, respectively. Triple-net The following is a summary of our SSNOI atWelltower's Share for the Triple-net segment (dollars in thousands): QTD Pool YTD Pool Three Months Ended Change Year Ended Change December 31, December 31, December 31, December 31, 2020 2019 $ % 2020 2019 $ % SSNOI(1)$ 168,697 $ 170,052 $ (1,355) -0.8 %$ 628,972 $ 624,877 $ 4,095 0.7 % (1) Relates to 632 properties for theQTD Pool and 608 properties for theYTD Pool . 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 for the years presented (dollars in thousands): Year Ended One Year Change Year Ended One Year Change Two Year Change December 31, December 31, December 31, 2020 2019 $ % 2018 $ % $ % Revenues: Rental income$ 733,776 $ 903,798 $ (170,022) -19 %$ 828,865 $ 74,933 9 %$ (95,089) -11 % Interest income 62,625 62,599 26 - % 54,926 7,673 14 % 7,699 14 % Other income 4,903 6,246 (1,343) -22 % 17,173 (10,927) -64 % (12,270) -71 % Total revenues 801,304 972,643 (171,339) -18 % 900,964 71,679 8 % (99,660) -11 % Property operating expenses 53,183 53,900 (717) -1 % 915 52,985 5,791 52,268 5,712 NOI(1) 748,121 918,743 (170,622) -19 % 900,049 18,694 2 % (151,928) -17 %
Other expenses:
Depreciation and amortization 232,604 232,626 (22) - % 235,480 (2,854) -1 % (2,876) -1 %
Interest expense 9,477 12,892 (3,415) -26 % 14,225 (1,333) -9 % (4,748) -33 %
Loss (gain) on derivatives and
financial instruments, net 11,049 (4,399) 15,448 351 % (4,016) (383) -10 % 15,065 375 %
Loss (gain) on extinguishment of
debt, net - - - n/a (32) 32 100 % 32 100 %
Provision for loan losses 90,563 18,690 71,873 385 - 18,690 n/a 90,563 n/a
Impairment of assets 34,867 11,926 22,941 192 % 107,980 (96,054) -89 % (73,113) -68 %
Other expenses 22,923 13,771 9,152 66 % 90,975 (77,204) -85 % (68,052) -75 %
401,483 285,506 115,977 41 % 444,612 (159,106) -36 % (43,129) -10 %Income from continuing operations before income taxes and other items
346,638 633,237 (286,599) -45 % 455,437 177,800 39 % (108,799) -24 %
Income (loss) from unconsolidated entities 18,462 22,985 (4,523) -20 % 21,938 1,047 5 % (3,476) -16 %
Gain (loss) on real estate dispositions, net 64,288 218,322 (154,034) -71 % 196,589 21,733 11 % (132,301) -67 %
Income from continuing operations 429,388 874,544 (445,156) -51 % 673,964 200,580 30 % (244,576) -36 %
Net income 429,388 874,544 (445,156) -51 % 673,964 200,580 30 % (244,576) -36 %
Less: Net income attributable to noncontrolling
interests 39,985 36,271 3,714 10 % 19,306 16,965 88 % 20,679 107 %
Net income attributable to common stockholders $ 389,403 $ 838,273 $ (448,870) -54 % $ 654,658 $ 183,615 28 % $ (265,255) -41 %
(1) See Non-GAAP Financial Measures below.
The decrease in rental income is primarily attributable to the write-off of straight-line rent receivable balances of$146,508,000 during the year endedDecember 31, 2020 , 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 ended 55 -------------------------------------------------------------------------------- Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsDecember 31, 2020 , we had 18 leases with rental rate increasers ranging from 0.07% to 0.34% 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 ourSeniors 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 have or are expected to receive funds from Phase 2 of theProvider Relief Fund . Accordingly, collection of rent due during the COVID-19 pandemic to date (March through December) has generally been consistent with historical collection rates and no significant rent concessions or deferrals have been made. Depreciation and amortization fluctuates as a result of acquisitions, disposition 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. During the year endedDecember 31, 2020 , we recognized a provision for loan losses of$90,563,000 , of which$80,873,000 represents additional reserves as a result of the current collateral estimate related to the Genesis Healthcare outstanding loans. During the year endedDecember 31, 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 year endedDecember 31, 2020 , we recorded impairment charges of$34,867,000 related to one held for sale and four held for use properties. During the year endedDecember 31, 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. The fluctuation in other expense is primarily due to noncapitalizable transaction costs from acquisitions and segment transitions. During the year endedDecember 31, 2020 , we completed three Triple-net construction projects representing$75,149,000 or$224,997 per unit. The following is a summary of our consolidated Triple-net construction projects, excluding expansions, pending as ofDecember 31, 2020 (dollars in thousands): Location Units/Beds Commitment Balance Est. Completion Thousand Oaks, CA 82$ 25,391 $ 21,408 1Q21 Redhill, UK 76 21,723 11,869 2Q21 Leicester, UK 60 15,301 5,566 1Q22 Wombourne, UK 66 16,394 5,537 2Q22 Raleigh, NC 191 154,256 14,339 2Q23 Total 475$ 233,065 $ 58,719 Loss (gain) on derivatives and financial instruments, net is primarily attributable to the mark-to-market adjustments 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): Year Ended Year Ended Year Ended December 31, 2020 December 31, 2019 December 31, 2018 Weighted Avg. Weighted Avg. Weighted Avg. Amount Interest Rate Amount Interest Rate Amount Interest Rate Beginning balance$ 306,038 3.60%$ 288,386 3.63%$ 347,474 3.55% Debt transferred in - -% 12,072 3.89% - -% Debt extinguished (176,875) 2.03% - -% (4,107) 4.94% Debt transferred out - -% - -% (35,830) 3.84% Principal payments (4,376) 5.16% (4,017) 5.21% (3,982) 5.38% Foreign currency (1,135) 2.97% 9,597 2.99% (15,169) 3.44% Ending balance$ 123,652 4.91%$ 306,038 3.60%$ 288,386 3.63% Monthly averages$ 215,796 3.85%$ 294,080 3.63%$ 321,730 3.51% 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 year endedDecember 31, 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. 56 -------------------------------------------------------------------------------- Item 7. 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 Year Ended Change December 31, December 31, December 31, December 31, 2020 2019 $ % 2020 2019 $ % SSNOI(1)$ 84,985 $ 84,144 $ 841 1.0 %$ 252,512 $ 246,789 $ 5,723 2.3 % (1) Relates to 303 properties for theQTD Pool and 231 properties for theYTD Pool . 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): Year Ended One Year Change Year Ended One Year Change Two Year Change December 31, December 31, December 31, 2020 2019 $ % 2018 $ % $ % Revenues: Rental income$ 709,584 $ 684,602 $ 24,982 4 %$ 551,557 $ 133,045 24 %$ 158,027 29 % Interest income 5,913 1,195 4,718 395 % 310 885 285 % 5,603 n/a Other income 4,522 2,031 2,491 123 % 4,939 (2,908) -59 % (417) -8 % Total revenues 720,019 687,828 32,191 5 % 556,806 131,022 24 % 163,213 29 % Property operating expenses 214,948 218,793 (3,845) -2 % 176,670 42,123 24 % 38,278 22 % NOI(1) 505,071 469,035 36,036 8 % 380,136 88,899 23 % 124,935 33 %
Other expenses:
Depreciation and amortization 261,371 241,258 20,113 8 % 185,530 55,728 30 % 75,841 41 %
Interest expense 17,579 13,411 4,168 31 % 7,051 6,360 90 % 10,528 149 %
Loss (gain) on extinguishment of
debt, net 1,046 - 1,046 n/a 11,928 (11,928) -100 % (10,882) -91 %
Provision for loan losses. 3,202 - 3,202 n/a - - n/a 3,202 n/a
Impairment of assets - 14,062 (14,062) -100 % - 14,062 n/a - n/a
Other expenses 8,218 1,788 6,430 360 % 7,570 (5,782) -76 % 648 9 %
291,416 270,519 20,897 8 % 212,079 58,440 28 % 79,337 37 %
Income from continuing operations before income taxes and other item
213,655 198,516 15,139 8 % 168,057 30,459 18 % 45,598 27 %
Income (loss) from unconsolidated entities 7,312 7,061 251 4 % 5,563 1,498 27 % 1,749 31 %
Gain (loss) on real estate dispositions, net 695,918 972 694,946 n/a 221,231 (220,259) -100 % 474,687 215 %
Income from continuing operations 916,885 206,549 710,336 344 % 394,851 (188,302) -48 % 522,034 132 %
Net income (loss) 916,885 206,549 710,336 344 % 394,851 (188,302) -48 % 522,034 132 %Less: Net income (loss) attributable to noncontrolling interests
(278) 5,194 (5,472) -105 % 6,150 (956) -16 % (6,428) -105 %
Net income (loss) attributable to common stockholders $ 917,163 $ 201,355 $ 715,808 355 % $ 388,701 $ (187,346) -48 % $ 528,462 136 %
(1) See Non-GAAP Financial Measures below.
Increases in rental income are primarily attributable to the 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 in May 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 ended December 31, 2020 , our
consolidated outpatient medical portfolio signed 133,859 square feet of new
leases and 282,719 square feet of renewals. The weighted-average term of these
leases was six years, with a rate of $26.55 per square foot and tenant
improvement and lease commission costs of $15.23 per square foot. Substantially
all of these leases contain an annual fixed or contingent escalation rent
structure ranging from 2.0% 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 affect their ability to make contractual rent payments.
Outpatient Medical rent collections through March were generally consistent with
pre COVID-19 levels. During the second quarter we executed short term rent
deferrals with certain Outpatient Medical tenants which in most cases were
required to be repaid by year end. Since then we have collected approximately
99% of Outpatient Medical rent due in the second half of the year, with
uncollected amounts primarily attributable to local jurisdictions with COVID-19
related ordinances providing temporary rent relief to tenants. Furthermore,
57
--------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
collections of deferred rent due 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.
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 year ended December 31, 2019 , we recognized
impairment charges of $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 year ended
December 31, 2020 is primarily due to noncapitalizable transaction costs from
acquisitions no longer expected to be consummated.
During the year ended December 31, 2020 , we completed three Outpatient Medical
construction projects representing $43,493,000 or $306 per square foot. The
following is a summary of our consolidated Outpatient Medical construction
projects pending as of December 31, 2020 (dollars in thousands):
Location Square Feet Commitment Balance Est. Completion
Brooklyn, NY 140,955 $ 105,306 $ 104,148 2Q21
Kalamazoo, MI 40,607 14,267 2,654 3Q21
Total 181,562 $ 119,573 $ 106,802
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 for the
periods presented (dollars in thousands):
Year Ended Year Ended Year Ended
December 31, 2020 December 31, 2019 December 31, 2018
Weighted Avg. Weighted Avg. Weighted Avg.
Amount Interest Rate Amount Interest Rate Amount Interest Rate
Beginning balance $ 572,267 3.97% $ 386,738 4.20% $ 279,951 4.72%
Debt assumed - -% 202,084 4.12% 171,275 3.99%
Debt extinguished (14,205) 5.34% (10,244) 5.75% (61,291) 7.43%
Principal payments (9,833) 4.60% (6,311) 4.97% (3,197) 5.91%
Ending balance $ 548,229 3.55% $ 572,267 3.97% $ 386,738 4.20%
Monthly averages $ 562,017 3.72% $ 397,756 4.15% $ 238,214 4.25%
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.
58
--------------------------------------------------------------------------------
Item 7. 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 (dollars in thousands) for the periods
presented:
Year Ended One Year Change Year Ended One Year Change Two Year Change
December 31, December 31, December 31, 2020 2019 $ % 2018 $ % $ % Revenues: Other income$ 2,781 $ 3,966 $ (1,185) -30 %$ 2,275 $ 1,691 74 % $ 506 22 % Total revenues 2,781 3,966 (1,185) -30 % 2,275 1,691 74 % 506 22 % Property operating expenses 3,381 - 3,381 n/a - - n/a 3,381 n/a NOI(1) (600) 3,966 (4,566) -115 % 2,275 1,691 74 % (2,875) -126 % Other expenses:
Interest expense 432,431 461,273 (28,842) -6 % 436,256 25,017 6 % (3,825) -1 %
General and administrative expenses 128,394 126,549 1,845 1 % 126,383 166 0 % 2,011 2 %
Loss (gain) on extinguishments of
debt, net 33,344 82,541 (49,197) -60 % 4,091 78,450 1,918 % 29,253 715 %
Other expenses 24,929 10,705 14,224 133 % 7,729 2,976 39 % 17,200 223 %
Total expenses 619,098 681,068 (61,970) -9 % 574,459 106,609 19 % 44,639 8 %Loss from continuing operations before income taxes and other items
(619,698) (677,102) 57,404 8 % (572,184) (104,918) -18 % (47,514) -8 %
Gain (loss) on real estate dispositions, net - - - n/a - - n/a - n/a
Income tax benefit (expense) (9,968) (2,957) (7,011) -237 % (8,674) 5,717 66 % (1,294) -15 %
Loss from continuing operations (629,666) (680,059) 50,393 7 % (580,858) (99,201) -17 % (48,808) -8 %
Preferred stock dividends - - - n/a 46,704 (46,704) -100 % (46,704) -100 %
Net loss attributable to common stockholders $ (629,666) $ (680,059) $ 50,393 7 % $ (627,562) $ (52,497) -8 % $ (2,104) 0 %
(1) See Non-GAAP Financial Measures below.
Property operating expenses represent insurance costs related to our captive insurance company formed as ofJuly 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 for the periods presented (dollars in thousands):
Year Ended One Year Change Year Ended One Year Change Two Year Change
December 31, December 31, December 31,
2020 2019 $ % 2018 $ % $ %
Senior unsecured notes $ 400,014 $ 402,133 $ (2,119) -1 % $ 387,955 $ 14,178 4 % $ 12,059 3 %
Secured debt - - - n/a 115 (115) -100 % (115) -100 %
Unsecured credit facility
and commercial paper
program 15,313 43,861 (28,548) -65 % 34,626 9,235 27 % (19,313) -56 %
Loan expense 17,104 15,279 1,825 12 % 13,560 1,719 13 % 3,544 26 %
Totals $ 432,431 $ 461,273 $ (28,842) -6 % $ 436,256 $ 25,017 6 % $ (3,825) -1 %
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 to
consolidated financial statements for additional information. The change in
interest expense on our unsecured 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 of our consolidated financial
statements for additional information regarding our unsecured revolving credit
facility and commercial paper program. Loan expenses represent the amortization
of costs incurred in connection with senior unsecured notes issuances. The loss
on extinguishment recognized during the year ended December 31, 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 in 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 , the early extinguishment of the $450,000,000 of 4.95%
senior unsecured notes due 2021 and the $600,000,000 of 5.25% senior unsecured
notes due 2022 in September 2019 and the early redemption of the $300 million
Canadian-denominated 3.35% senior unsecured notes due 2020 in December 2019 .
General and administrative expenses as a percentage of consolidated revenues for
the years ended December 31, 2020 , 2019 and 2018 were 2.79%, 2.47% and 2.69%,
respectively. Other expenses for all years include severance-related costs
associated with the departure of certain executive officers and key employees.
Income tax expense primarily relates to state taxes, foreign taxes and taxes
based on income generated by entities that are structured as TRSs.
59
--------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Other
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 eight
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 eight 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 eight 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 eight 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 U.K.
properties using a consistent exchange rate. We believe NOI and SSNOI provide
investors relevant and useful information because they measure the operating
performance of our properties at the property level on an unleveraged basis. We
use NOI and SSNOI to make decisions about resource allocations and to assess the
property level performance of our properties.
EBITDA is defined as earnings (net income) before interest, taxes, depreciation
and amortization. Adjusted EBITDA is defined as EBITDA excluding unconsolidated
entities and including adjustments for stock-based compensation expense,
provision for loan losses, gains/losses on extinguishment of debt,
gains/loss/impairments on properties, gains/losses on derivatives and financial
instruments, other 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, secured debt principal amortization, and
preferred dividends. 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
interests. Undepreciated book capitalization represents book capitalization
adjusted for accumulated
60
--------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
depreciation and amortization. Market capitalization represents book
capitalization adjusted for the fair market value of our common stock.
Our supplemental reporting measures and similarly entitled financial measures
are widely used by investors, equity and debt analysts and rating agencies in
the valuation, comparison, rating and investment recommendations of companies.
Management uses these financial measures to facilitate internal and external
comparisons to our historical operating results and in making operating
decisions. Additionally, these measures are utilized by the Board of Directors
to evaluate management. None of our supplemental measures represent net income
or cash flow provided from operating activities as determined in accordance with
U.S. GAAP and should not be considered as alternative measures of profitability
or liquidity. Finally, the supplemental measures, as defined by us, may not be
comparable to similarly entitled items reported by other real estate investment
trusts or other companies.
The table below reflects the reconciliation of FFO to NICS, the most directly
comparable U.S. GAAP measure, for the periods presented. Noncontrolling interest
and unconsolidated entity amounts represent adjustments to reflect our share of
depreciation and amortization, gains/losses on real estate dispositions and
impairments of assets. Amounts are in thousands except for per share data.
Year Ended December 31,
FFO Reconciliation: 2020 2019 2018
Net income attributable to common stockholders $ 978,844 $ 1,232,432 $ 758,250
Depreciation and amortization 1,038,437 1,027,073 950,459
Impairment of assets 135,608 28,133 115,579
Loss (gain) on real estate dispositions, net (1,088,455) (748,041) (415,575)
Noncontrolling interests (23,968) (20,197) (69,193)
Unconsolidated entities 62,096 57,680 52,663
Funds from operations attributable to common
stockholders $ 1,102,562 Average diluted shares outstanding: 417,387 403,808 375,250 Per diluted share data: Net income attributable to common stockholders(1)$ 2.33 $ 3.05 $ 2.02 Funds from operations attributable to common stockholders$ 2.64
(1) Includes adjustment to the numerator for income (loss) attributable to OP unitholders.
The following tables reflect the reconciliation of NOI to net income, the most directly comparableU.S. GAAP measure, for the years presented. Dollar amounts are in thousands. Year Ended December 31, NOI Reconciliation: 2020 2019 2018 Net income$ 1,038,852 $ 1,330,410 $ 829,750 Loss (gain) on real estate dispositions, net (1,088,455) (748,041) (415,575) Loss (income) from unconsolidated entities 8,083 (42,434) 641 Income tax expense (benefit) 9,968 2,957 8,674 Other expenses 70,335 52,612 112,898 Impairment of assets 135,608 28,133 115,579 Provision for loan losses 94,436 18,690 - Loss (gain) on extinguishment of debt, net 47,049 84,155 16,097
Loss (gain) on derivatives and financial instruments, net
11,049 (4,399) (4,016)
General and administrative expenses 128,394 126,549 126,383
Depreciation and amortization 1,038,437 1,027,073 950,459
Interest expense 514,388 555,559 526,592
Consolidated net operating income (NOI) $ 2,008,144 $ 2,431,264 $ 2,267,482
NOI by segment:
Seniors Housing Operating $ 755,552 $ 1,039,520 $ 985,022
Triple-net 748,121 918,743 900,049
Outpatient Medical 505,071 469,035 380,136
Non-segment/corporate (600) 3,966 2,275
Total NOI $ 2,008,144 $ 2,431,264 $ 2,267,482
61
--------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Quarterly NOI by Segment:
(in thousands) Three Months Ended Year Ended
March 31 , June 30 , September 30 , December 31 , December 31,
2020 2019 2020 2019 2020 2019 2020 2019 2020 2019
Seniors Housing Operating:
Total revenues $ 851,128 $ 872,386
607,871 607,686 595,513 637,317 567,704 581,341 555,223 591,005 2,326,311 2,417,349
NOI $ 243,257 $ 264,700 $ 178,137 $ 278,212 $ 174,361 $ 254,155 $ 159,797 $ 242,453 $ 755,552 $ 1,039,520
Triple-net:
Total revenues $ 207,729 $ 248,241 $ 233,619 $ 240,758 $ 120,928 $ 244,607
13,302 14,955 13,563 12,823 12,567 13,922 13,751 12,200 53,183 53,900
NOI $ 194,427 $ 233,286 $ 220,056 $ 227,935 $ 108,361 $ 230,685 $ 225,277 $ 226,837 $ 748,121 $ 918,743
Outpatient Medical:
Total revenues $ 199,329 $ 149,461 $ 180,831 $ 163,365 $ 172,704 $ 185,189
60,608 48,166 51,688 50,987 52,728 60,325 49,924 59,315 214,948 218,793
NOI $ 138,721 $ 101,295 $ 129,143 $ 112,378 $ 119,976 $ 124,864 $ 117,231 $ 130,498 $ 505,071 $ 469,035
Corporate:
Total revenues $ 416 $ 2,157 $ 375 $ 454 $ 1,177 $ 841 $ 813 $ 514 $ 2,781 $ 3,966
Property operating expenses - - - - 1,718 - 1,663 - 3,381 -
NOI $ 416 $ 2,157 $ 375 $ 454 $ (541) $ 841 $ (850) $ 514 $ (600) $ 3,966
The following is a reconciliation of the properties included in our QTD Pool and
YTD Pool for SSNOI:
QTD Pool YTD Pool
Seniors Housing Seniors Housing
SSNOI Property Reconciliations: Operating Triple-net Outpatient Medical Total Operating Triple-net Outpatient Medical Total
Consolidated properties 556 641 296 1,493 556 641 296 1,493 Unconsolidated properties 90 39 72 201 90 39 72 201 Total properties 646 680 368 1,694 646 680 368 1,694
Recent acquisitions/development
conversions(1) (46) (18) (51) (115) (93) (24) (123) (240) Under development (27) (4) (2) (33) (27) (4) (2) (33) Under redevelopment(2) (10) (1) (2) (13) (11) (1) (2)
(14)
Current held for sale (10) (1) (2) (13) (10) (1) (2)
(13)
Loans, land parcels and subleases (11) (18) (8) (37) (11) (18) (8) (37) Transitions(3) (27) (6) - (33) (93) (24) - (117) Other(4) (1) - - (1) (2) - - (2) Same store properties 514 632 303 1,449 399 608 231 1,238 (1) Acquisitions and development conversions will enter theQTD Pool andYTD Pool five full quarters and eight full quarters after acquisition or certificate of occupancy, respectively. (2) Redevelopment properties will enter theQTD Pool andYTD Pool after five full quarters and eight full quarters of operations post redevelopment completion, respectively. (3) Transitioned properties will enter theQTD Pool andYTD Pool after five full quarters and eight full quarters of operations with the new operator in place or under the new structure, respectively. (4) Includes one closed property in the QTD pool and one closed property and one flooded property in the YTD pool. 62
--------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following is a reconciliation of our consolidated NOI to same store NOI for
the periods presented for the respective pools. Dollar amounts are in thousands.
QTD Pool YTD Pool
Three Months Ended Twelve Months Ended
December 31 ,
2020 2019 2020 2019
Seniors Housing Operating:
Consolidated NOI $ 159,797 $
242,453
13,182 16,491 53,736 65,387
NOI attributable to noncontrolling
interests (9,405) (19,436) (51,334) (81,426)
Non-cash NOI attributable to same store
properties (349) (842) (3,239) (4,295)
NOI attributable to non-same store
properties (8,291) (23,254) (166,567) (261,002)
Currency and ownership adjustments (1) (561) 754 2,985 6,144
SSNOI at Welltower Share 154,373 216,166 591,133 764,328
Triple-net:
Consolidated NOI 225,277
226,837
4,818 5,133 13,797 20,532
NOI attributable to noncontrolling
interests (14,563) (14,751) (58,288) (58,462)
Non-cash NOI attributable to same store
properties (12,313) (15,224) 80,630 (58,846)
NOI attributable to non-same store
properties (34,236) (32,080) (155,566) (197,487)
Currency and ownership adjustments (1) (286) 137 278 397
SSNOI at Welltower Share 168,697 170,052 628,972 624,877
Outpatient Medical:
Consolidated NOI 117,231 130,498 505,071 469,035
NOI attributable to unconsolidated
investments 3,481 541 9,629 1,930
NOI attributable to noncontrolling
interests (4,264) (6,853) (16,565) (27,637)
Non-cash NOI attributable to same store
properties (1,542) (2,915) (1,094) (2,807)
NOI attributable to non-same store
properties (24,050) (19,674) (204,525) (129,723)
Currency and ownership adjustments (1) (5,871) (17,453) (40,004) (64,009)
SSNOI at Welltower Share 84,985 84,144 252,512 246,789
SSNOI at Welltower Share:
Seniors Housing Operating 154,373 216,166 591,133 764,328
Triple-net 168,697 170,052 628,972 624,877
Outpatient Medical 84,985 84,144 252,512 246,789
Total $ 408,055 $ 470,362 $ 1,472,617 $ 1,635,994
63-------------------------------------------------------------------------------- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The table below reflects the reconciliation of EBITDA and Adjusted EBITDA to net income, the most directly comparableU.S. GAAP measure, for the periods presented. Dollars are in thousands. Year Ended December 31, Adjusted EBITDA Reconciliation: 2020 2019 2018 Net income (loss)$ 1,038,852 $ 1,330,410 $ 829,750 Interest expense 514,388 555,559 526,592 Income tax expense (benefit) 9,968 2,957 8,674 Depreciation and amortization 1,038,437 1,027,073 950,459 EBITDA 2,601,645 2,915,999 2,315,475 Loss (income) from unconsolidated entities 8,083 (42,434) 641 Stock-based compensation expense(1) 28,318 25,047 27,646 Loss (gain) on extinguishment of debt, net 47,049 84,155 16,097 Loss (gain) on real estate dispositions, net (1,088,455) (748,041) (415,575) Impairment of assets 135,608 28,133 115,579 Provision for loan losses 94,436 18,690 - Loss (gain) on derivatives and financial instruments, net 11,049 (4,399) (4,016) Other expenses(1) 64,171 51,052 111,990 Other impairment 146,508 - - Additional other income - - (14,832) Adjusted EBITDA$ 2,048,412 $ 2,328,202 $ 2,153,005 Adjusted Interest Coverage Ratio: Interest expense$ 514,388 $ 555,559 $ 526,592 Capitalized interest 17,472 15,272 7,905 Non-cash interest expense (15,751) (8,645) (10,860) Total interest 516,109 562,186 523,637 Adjusted EBITDA$ 2,048,412 $ 2,328,202 $ 2,153,005 Adjusted interest coverage ratio 3.97x 4.14x 4.11x Adjusted Fixed Charge Coverage Ratio: Total interest$ 516,109 $ 562,186 $ 523,637 Secured debt principal payments 62,707 54,325 56,288 Preferred dividends - - 46,704 Total fixed charges 578,816 616,511 626,629 Adjusted EBITDA$ 2,048,412 $ 2,328,202 $ 2,153,005 Adjusted fixed charge coverage ratio 3.54x 3.78x 3.44x
(1) Certain severance-related costs are included in stock-based compensation and excluded from other expenses.
64
--------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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.
Year Ended December 31,
2020 2019 2018
Book capitalization:
Unsecured credit facility and commercial paper
$ -
13,905,822 13,436,365 12,150,144
Cash and cash equivalents(2) (1,968,765) (284,917) (215,376)
Total net debt 11,937,057 14,739,045 13,081,768
Total equity and noncontrolling interests(3) 17,225,062 16,982,504 16,010,645
Book capitalization $ 29,162,119 $ 31,721,549 $ 29,092,413
Net debt to book capitalization ratio 40.9 % 46.5 % 45.0 %
Undepreciated book capitalization:
Total net debt
6,104,297 5,715,459 5,499,958
Total equity and noncontrolling interests(3) 17,225,062 16,982,504 16,010,645
Undepreciated book capitalization $ 35,266,416 $ 37,437,008 $ 34,592,371
Net debt to undepreciated book capitalization
ratio 33.8 % 39.4 % 37.8 %
Market capitalization:
Common shares outstanding 417,401 410,257 383,675
Period end share price $ 26,972,453 $ 33,550,817 $ 26,630,882 Total net debt 11,937,057 14,739,045 13,081,768 Noncontrolling interests(3) 1,252,343 1,442,060 1,378,311 Preferred stock - - 718,498 Market capitalization:$ 40,161,853 $ 49,731,922 $ 41,809,459 Net debt to market capitalization ratio 29.7 % 29.6 % 31.3 % (1) Amounts include senior unsecured notes, secured debt and lease liabilities related to financing leases, as reflected on our Consolidated Balance Sheets. Operating lease liabilities related to the ASC 842 adoption are excluded. (2) Inclusive of IRC Section 1031 deposits, if any. (3) Includes amounts attributable to both redeemable noncontrolling interests and noncontrolling interests as reflected on our Consolidated Balance Sheets. Critical Accounting Policies Our consolidated financial statements are prepared in accordance withU.S. GAAP, which requires us to make estimates and assumptions. Management considers an accounting estimate or assumption critical if: •the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and •the impact of the estimates and assumptions on financial condition or operating performance is material. Management has discussed the development and selection of its critical accounting policies with the Audit Committee of the Board of Directors. Management believes the current assumptions and other considerations used to estimate amounts reflected in our 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 consolidated financial statements, the resulting changes could have a material adverse effect on our consolidated results of operations, liquidity and/or financial condition. Please refer to Note 2 to our consolidated financial statements for further information on significant accounting policies that impact us and for the impact of new accounting standards, including accounting pronouncements that were issued but not yet adopted by us. The following table presents information about our critical accounting policies, as well as the material assumptions used to develop each estimate: 65
--------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Nature of Critical Assumptions/Approach
Accounting Estimate Used
Impairment of Real Property Quarterly, we evaluate our real estate investments on a
property by property basis to determine if there are
Assessing impairment of real property involves indicators of impairment. These indicators may include
subjectivity in determining if indicators of expected operational performance, the tenant's ability to
impairment are present and in estimating the make rent payments, a decision to dispose of an asset
future undiscounted cash flows or estimated fair before the end of its estimated useful life and changes in
value of an asset. In estimating the the market that may permanently reduce the value of the
undiscounted cash flows or fair value, key property. If indicators of impairment exist, an
assumptions that would be made are the undiscounted cash flow analysis will be prepared and the
estimation of future rental revenues, operating results of such analysis will be compared to the current
expenses, capitalization rates and the ability net book value to determine if an impairment charge is
and intent to hold the respective asset, all of necessary. This analysis requires us to use judgment in
which are affected by our expectations of future determining whether indicators of impairment exist and to
market or economic conditions. These estimates estimate the expected future undiscounted cash flows or
can have a significant impact on the estimated fair values of the property. Properties that
undiscounted cash flows or estimated fair value meet the held for sale criteria are recorded at the lesser
of an asset. of the fair value less costs to sell or carrying value.
Real Estate Acquisitions
We believe that substantially all of our real The allocation of the purchase price to the related real
estate acquisitions are considered asset estate acquired (tangible assets and intangible assets and
acquisitions for which we record the related liabilities) involves subjectivity as such allocations are
real estate acquired (tangible assets and based on a relative fair value analysis. In determining
identifiable intangible assets and liabilities) the fair values that drive such analysis, we estimate the
at cost on a relative fair value basis. fair value of each component of the real estate acquired
Liabilities assumed and any associated which generally includes land, buildings and improvements,
noncontrolling interests are reflected at fair the above or below market component of in-place leases and
value. Tangible assets consist primarily of the value of in-place leases. Significant assumptions used
land, building and improvements. Identifiable to determine such fair values include comparable land
intangible assets and liabilities primarily sales, capitalization rates, discount rates, market rental
consist of the above or below market component rates and property operating data, all of which can be
of in-place leases and the value of in-place impacted by expectations about future market or economic
leases. The total amount of other intangible conditions. Our estimates of the values of these
assets acquired is further allocated to in-place components affect the amount of depreciation and
lease values and customer relationship values amortization we record over the estimated useful life of
based on management's evaluation of the specific the property or the term of the lease.
characteristics of each tenant's lease and our
overall relationship with respect to that
tenant.
Principles of Consolidation
The consolidated financial statements include We make judgments about which entities are VIEs based on
our accounts, the accounts of our wholly-owned an assessment of whether (i) the equity investors as a
subsidiaries, and the accounts of joint venture group, if any, do not have a controlling financial
entities in which we own a majority voting interest, or (ii) the equity investment at risk is
interest with the ability to control operations insufficient to finance that entity's activities without
and where no substantive participating rights or additional subordinated financial support. We make
substantive kick out rights have been granted to judgments with respect to our level of influence or
the noncontrolling interests. In addition, we control of an entity and whether we are (or are not) the
consolidate those entities deemed to be variable primary beneficiary of a VIE. Consideration of various
interest entities ("VIEs") in which we are factors includes, but is not limited to, our ability to
determined to be the primary beneficiary. All direct the activities that most significantly impact the
material intercompany transactions and balances entity's economic performance, our form of ownership
have been eliminated in consolidation. interest, our representation on the entity's governing
body, the size and seniority of our investment, our
ability and the rights of other investors to participate
in policy making decisions, replace the manager and/or
liquidate the entity, if applicable. Our ability to
correctly assess our influence or control over an entity
at inception of our involvement or on a continuous basis
when determining the primary beneficiary of a VIE affects
the presentation of these entities in our consolidated
financial statements. If we perform a primary beneficiary
analysis at a date other than at inception of the VIE, our
assumptions may be different and may result in the
identification of a different primary beneficiary.
66--------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Nature of Critical Assumptions/Approach
Accounting Estimate Used
Allowance for Credit Losses on Loans Receivable
The allowance for credit losses is maintained at The determination of the allowance for credit losses is
a level believed adequate to absorb potential based on a quarterly evaluation of all outstanding loans,
losses in our loans receivable. The including general economic conditions and estimated
determination of the credit allowance is based collectability of loan payments. We evaluate the
on a quarterly evaluation of all outstanding collectability of our loans receivable based on a
loans, including general economic conditions and combination of factors, including, but not limited to,
estimated collectability of loan payments. payment status, historical loan charge-offs, financial
strength of the borrower and guarantors, and nature,
extent and value of the underlying collateral. A loan is
considered to have deteriorated credit quality when, based
on current information and events, it is probable that we
will be unable to collect all amounts due as scheduled
according to the contractual terms of the loan agreement.
For those loans we identified as having deteriorated
credit quality, we determine the amount of credit loss on
an individual basis. Placement on non-accrual status may
be required. Consistent with this definition, all loans on
non-accrual are deemed to have deteriorated credit
quality. To the extent circumstances improve and the risk
of collectability is diminished, we may return these loans
to income accrual status. While a loan is on non-accrual
status, any cash receipts are applied against the
outstanding principal balance. For the remaining loans, we
assess credit loss on a collective pool basis and use our
historical loss experience for similar loans to determine
the reserve for credit losses.
67--------------------------------------------------------------------------------
© Edgar Online, source
