UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-8923
WELLTOWER INC.
(Exact name of registrant as specified in its charter)
Delaware
34-1096634
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
4500 Dorr Street, Toledo, Ohio
43615
(Address of principal executive offices)
(Zip Code)
(419) 247-2800
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☑
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ☑
As of July 31, 2016, the registrant had 357,915,158 shares of common stock outstanding.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets — June 30, 2016 and December 31, 2015
3
Consolidated Statements of Comprehensive Income — Three and six months ended June 30, 2016 and 2015
4
Consolidated Statements of Equity — Six months ended June 30, 2016 and 2015
6
Consolidated Statements of Cash Flows — Six months ended June 30, 2016 and 2015
7
Notes to Unaudited Consolidated Financial Statements
8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
27
Item 3. Quantitative and Qualitative Disclosures About Market Risk
54
Item 4. Controls and Procedures
55
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
56
Item 5. Other Information
Item 6. Exhibits
Signatures
57
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
WELLTOWER INC. AND SUBSIDIARIES
(In thousands)
June 30, 2016
December 31, 2015
(Unaudited)
(Note)
Assets:
Real estate investments:
Real property owned:
Land and land improvements
$
2,537,508
2,563,445
Buildings and improvements
25,293,007
25,522,542
Acquired lease intangibles
1,345,424
1,350,585
Real property held for sale, net of accumulated depreciation
501,192
169,950
Construction in progress
475,203
258,968
Gross real property owned
30,152,334
29,865,490
Less accumulated depreciation and amortization
(4,109,585)
(3,796,297)
Net real property owned
26,042,749
26,069,193
Real estate loans receivable
647,677
819,492
Net real estate investments
26,690,426
26,888,685
Other assets:
Investments in unconsolidated entities
543,068
542,281
Goodwill
68,321
Cash and cash equivalents
466,585
360,908
Restricted cash
58,440
61,782
Straight-line rent receivable
449,617
395,562
Receivables and other assets
688,044
706,306
Total other assets
2,274,075
2,135,160
Total assets
28,964,501
29,023,845
Liabilities and equity
Liabilities:
Borrowings under primary unsecured credit facility
745,000
835,000
Senior unsecured notes
8,711,790
8,548,055
Secured debt
3,442,178
3,509,142
Capital lease obligations
74,759
75,489
Accrued expenses and other liabilities
728,080
697,191
Total liabilities
13,701,807
13,664,877
Redeemable noncontrolling interests
394,126
183,083
Equity:
Preferred stock
1,006,250
Common stock
357,950
354,811
Capital in excess of par value
16,625,186
16,478,300
Treasury stock
(51,288)
(44,372)
Cumulative net income
4,102,919
3,725,772
Cumulative dividends
(7,491,922)
(6,846,056)
Accumulated other comprehensive income (loss)
(159,638)
(88,243)
Other equity
3,917
4,098
Total Welltower Inc. stockholders’ equity
14,393,374
14,590,560
Noncontrolling interests
475,194
585,325
Total equity
14,868,568
15,175,885
Total liabilities and equity
NOTE: The consolidated balance sheet at December 31, 2015 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.
See notes to unaudited consolidated financial statements
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In thousands, except per share data)
Three Months Ended
Six Months Ended
June 30,
2016
2015
Revenues:
Rental income
422,628
396,626
838,290
776,213
Resident fees and services
615,220
535,553
1,217,369
1,028,063
Interest income
24,007
20,576
49,195
37,570
Other income
14,802
4,414
18,851
9,500
Total revenues
1,076,657
957,169
2,123,705
1,851,346
Expenses:
Interest expense
132,326
118,861
265,285
239,942
Property operating expenses
458,832
398,354
908,468
774,815
Depreciation and amortization
226,569
208,802
455,265
397,631
General and administrative
39,914
38,474
85,606
73,612
Transaction costs
5,157
12,491
13,365
61,045
Loss (gain) on derivatives, net
-
(58,427)
Loss (gain) on extinguishment of debt, net
33
18,887
9
34,288
Impairment of assets
14,314
2,220
Other expenses
3,161
10,583
Total expenses
865,992
806,452
1,745,473
1,535,709
Income (loss) from continuing operations before income taxes
and income from unconsolidated entities
210,665
150,717
378,232
315,637
Income tax (expense) benefit
513
(7,417)
2,239
(7,113)
Income (loss) from unconsolidated entities
(1,959)
(2,952)
(5,778)
(15,600)
Income (loss) from continuing operations
209,219
140,348
374,693
292,924
Gain (loss) on real estate dispositions, net
1,530
190,111
246,956
Net income
210,749
330,459
376,223
539,880
Less:
Preferred stock dividends
16,352
32,703
Net income (loss) attributable to noncontrolling interests(1)
(1,077)
1,534
(924)
3,804
Net income (loss) attributable to common stockholders
195,474
312,573
344,444
503,373
Average number of common shares outstanding:
Basic
356,646
350,399
355,879
343,624
Diluted
358,891
351,366
357,489
344,623
Earnings per share:
Basic:
Income (loss) from continuing operations attributable to common stockholders, including real estate dispositions
0.55
0.89
0.97
1.46
Net income (loss) attributable to common stockholders*
Diluted:
0.54
0.96
Dividends declared and paid per common share
0.86
0.825
1.72
1.65
* Amounts may not sum due to rounding
(1) Includes amounts attributable to redeemable noncontrolling interests.
Three Months Ended June 30,
Six Months Ended June 30,
Other comprehensive income (loss):
Unrecognized gain (loss) on equity investments
(3,611)
(3,413)
(11,160)
(15,100)
Change in net unrealized gains (losses) on cash flow hedges:
Unrealized gains (losses) on cash flow hedges
487
462
970
(1,697)
Unrecognized actuarial gain (loss)
2
Foreign currency translation gain (loss)
(50,384)
32,384
(49,012)
3,187
Total other comprehensive income (loss)
(53,508)
29,433
(59,200)
(13,610)
Total comprehensive income (loss)
157,241
359,892
317,023
526,270
Less: Total comprehensive income (loss) attributable to noncontrolling interests(1)
(4,000)
5,140
11,271
(5,145)
Total comprehensive income (loss) attributable to common stockholders
161,241
354,752
305,752
531,415
5
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
Six Months Ended June 30, 2016
Accumulated
Capital in
Other
Preferred
Common
Excess of
Treasury
Cumulative
Comprehensive
Noncontrolling
Stock
Par Value
Net Income
Dividends
Income (Loss)
Equity
Interests
Total
Balances at beginning of period
Comprehensive income:
Net income (loss)
377,147
3,089
380,236
Other comprehensive income
(71,395)
12,195
Total comprehensive income
321,036
Net change in noncontrolling interests
(41,658)
(125,415)
(167,073)
Amounts related to stock incentive plans, net of forfeitures
688
32,284
(6,916)
(329)
25,727
Proceeds from issuance of common stock
2,451
156,260
158,711
Option compensation expense
148
Cash dividends paid:
Common stock cash dividends
(613,163)
Preferred stock cash dividends
(32,703)
Balances at end of period
Six Months Ended June 30, 2015
328,835
14,740,712
(35,241)
2,842,022
(5,635,923)
(77,009)
5,507
297,896
13,473,049
536,074
3,975
540,049
(4,661)
(8,949)
526,439
(2,786)
65,184
62,398
211
16,304
(6,452)
(1,721)
8,342
21,528
1,541,873
1,563,401
Equity component of convertible debt
1,077
4,738
5,815
452
(561,914)
351,651
16,300,841
(41,693)
3,378,096
(6,230,540)
(81,670)
4,238
358,106
15,045,279
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Operating activities:
Adjustments to reconcile net income to
net cash provided from (used in) operating activities:
Other amortization expenses
3,141
2,458
Stock-based compensation expense
15,217
20,178
Loss (income) from unconsolidated entities
5,778
15,600
Rental income in excess of cash received
(54,055)
(57,047)
Amortization related to above (below) market leases, net
332
870
Loss (gain) on sales of properties, net
(1,530)
(246,956)
Distributions by unconsolidated entities
351
282
Increase (decrease) in accrued expenses and other liabilities
36,705
10,417
Decrease (increase) in receivables and other assets
(3,009)
(42,048)
Net cash provided from (used in) operating activities
848,741
619,346
Investing activities:
Cash disbursed for acquisitions
(287,455)
(2,153,970)
Cash disbursed for capital improvements to existing properties
(87,529)
(67,086)
Cash disbursed for construction in progress
(249,867)
(114,478)
Capitalized interest
(7,343)
(4,446)
Investment in real estate loans receivable
(51,059)
(416,588)
Other investments, net of payments
(16,664)
(110,531)
Principal collected on real estate loans receivable
168,343
37,342
Contributions to unconsolidated entities
(39,644)
(117,047)
19,301
116,288
Proceeds from (payments on) derivatives
56,842
72,477
Decrease in restricted cash
3,342
12,422
Proceeds from sales of real property
130,298
523,175
Net cash provided from (used in) investing activities
(361,435)
(2,222,442)
Financing activities:
Net increase (decrease) under unsecured credit facilities
(90,000)
350,000
Proceeds from issuance of senior unsecured notes
693,560
743,407
Payments to extinguish senior unsecured notes
(400,000)
(477,550)
Net proceeds from the issuance of secured debt
161,992
136,801
Payments on secured debt
(281,051)
(323,950)
Net proceeds from the issuance of common stock
159,032
1,562,350
Decrease (increase) in deferred loan costs
(17,439)
(5,285)
Contributions by noncontrolling interests(1)
138,458
4,926
Distributions to noncontrolling interests(1)
(91,133)
(19,371)
Acquisitions of noncontrolling interests
(4,741)
Cash distributions to stockholders
(645,866)
(594,617)
Other financing activities
(730)
(27,253)
Net cash provided from (used in) financing activities
(373,177)
1,344,717
Effect of foreign currency translation on cash and cash equivalents
(8,452)
2,595
Increase (decrease) in cash and cash equivalents
105,677
(255,784)
Cash and cash equivalents at beginning of period
473,726
Cash and cash equivalents at end of period
217,942
Supplemental cash flow information:
Interest paid
236,861
208,885
Income taxes paid
3,889
10,140
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Business
Welltower Inc., an S&P 500 company headquartered in Toledo, 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 1,486 properties in major, high-growth markets in the United States, Canada and the United Kingdom, consisting of seniors housing and post-acute communities and outpatient medical properties. Founded in 1970, we were the first real estate investment trust to invest exclusively in health care facilities.
2. Accounting Policies and Related Matters
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. During the three months ended March 31, 2016, we determined that an immaterial portion of our noncontrolling interests related to a 2015 transaction was misclassified in permanent equity rather than temporary equity based on a redemption feature of the partnership agreement and we have corrected the $114,714,000 misclassification by recording the change in the consolidated statement of equity for the six months ended June 30, 2016. Operating results for the six months ended June 30, 2016 are not necessarily an indication of the results that may be expected for the year ending December 31, 2016. For further information, refer to the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015.
New Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted beginning after December 15, 2016. We are currently evaluating the impact that the standard will have on our consolidated financial statements and have not yet determined the method by which we will adopt the standard.
In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis”, which makes certain changes to both the variable interest model and the voting model, including changes to (1) the identification of variable interests (fees paid to a decision maker or service provider), (2) the variable interest entity characteristics for a limited partnership or similar entity and (3) the primary beneficiary determination. We adopted ASU 2015-02 on January 1, 2016. This guidance did not have a significant impact on our consolidated financial statements.
In September 2015, the FASB issued ASU No. 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments” to simplify the accounting for business combinations, specifically as it relates to measurement-period adjustments. Acquiring entities in a business combination must recognize measurement-period adjustments in the reporting period in which the adjustment amounts are determined. Also, ASU 2015-16 requires entities to present separately on the face of the income statement (or disclose in the notes to the financial statements) the portion of the amount recorded in the current period earnings, by line item, that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. We adopted ASU 2015-16 on January 1, 2016. This guidance did not have a significant impact on our consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities,” which will require entities to measure their investments at fair value and recognize any changes in fair value in net income unless the investments qualify for the new practicability exception. The practicability exception will be available for equity investments that do not have readily determinable fair values. ASU 2016-01 is effective for fiscal years and interim periods within those years, beginning after December 15, 2017. We are currently evaluating the impact that the standard will have on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which requires lessees to recognize assets and liabilities on their balance sheet related to the rights and obligations created by most leases, while continuing to recognize expenses on their income statements over the lease term. It will also require disclosures designed to give financial statement users information
regarding the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. We are currently evaluating the impact that the standard will have on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting”. This standard simplifies the accounting treatment for excess tax benefits and deficiencies, forfeitures, and cash flow considerations related to share-based compensation. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. We are currently evaluating the impact of the standard; however, we do not expect its adoption to have a significant impact on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments”. This standard requires a new forward-looking “expected loss” model to be used for receivables, held-to-maturity debt, loans, and other instruments. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, and early adoption is permitted for fiscal years beginning after December 15, 2018. We are currently evaluating the impact that the standard will have on our consolidated financial statements.
3. Real Property Acquisitions and Development
The total purchase price for all properties acquired has been allocated to the tangible and identifiable intangible assets, liabilities and noncontrolling interests based upon their respective fair values in accordance with our accounting policies. The results of operations for these acquisitions have been included in our consolidated results of operations since the date of acquisition and are a component of the appropriate segments. Transaction costs primarily represent costs incurred with property acquisitions, including due diligence costs, fees for legal and valuation services and termination of pre-existing relationships computed based on the fair value of the assets acquired, lease termination fees and other acquisition-related costs. Certain of our subsidiaries’ functional currencies are the local currencies of their respective countries. See Note 2 to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015 for information regarding our foreign currency policies.
Triple-net Activity
June 30, 2016(1)
June 30, 2015
18,901
45,268
160,209
447,229
2,876
2,817
60
Total assets acquired
181,986
495,380
(1,459)
(1,845)
Total liabilities assumed
Non-cash acquisition related activity(2)
(37,703)
(936)
142,824
492,599
Construction in progress additions
85,687
74,694
(3,771)
(3,303)
Foreign currency translation
(2,712)
240
79,204
71,631
Capital improvements to existing properties
14,877
19,029
Total cash invested in real property, net of cash acquired
236,905
583,259
(1) Includes acquisitions with an aggregate purchase price of $166,343,000 for which the allocation of the purchase price consideration is preliminary and subject to change.
(2) For the six months ended June 30, 2016, $31,014,000 relates to the acquisition of assets previously financed as real estate loans receivable and $6,630,000 previously financed as equity investments.
Seniors Housing Operating Activity
5,617
94,294
Building and improvements
128,200
1,174,465
6,334
71,089
5,425
894
23,645
Total assets acquired(2)
141,045
1,368,918
(208,960)
(4,853)
(19,011)
(227,971)
(549)
(86,842)
Non-cash acquisition related activity(3)
(7,659)
127,984
1,054,105
134,019
19,926
(2,011)
(715)
(5,344)
(40)
126,664
19,171
47,553
32,766
302,201
1,106,042
(1) Includes acquisitions with an aggregate purchase price of $117,545,000 for which the allocation of the purchase price consideration is preliminary and subject to change.
(2) Excludes $134,000 and $3,390,000 of cash acquired during the six months ended June 30, 2016 and 2015, respectively.
(3) Relates to the acquisition of assets previously financed as equity investments.
Outpatient Medical Activity
June 30, 2016 (1)
737
32,650
426,130
19,372
446,239
(112,000)
(990)
(2,743)
(114,743)
(68,535)
Non-cash acquisition activity(3)
(15,013)
16,647
262,961
50,896
26,025
(1,561)
(428)
Accruals(4)
(5,336)
(1,921)
43,999
23,676
25,099
15,291
Total cash invested in real property
85,745
301,928
(1) Includes acquisitions with an aggregate purchase price of $32,650,000 for which the allocation of the purchase price consideration is preliminary and subject to change.
(2) Excludes $0 and $4,372,000 of cash acquired during the six months ended June 30, 2016 and 2015, respectively.
(3) Relates to an acquisition of assets previously financed as a real estate loan. Refer to Note 6 for additional information.
(4) Represents non-cash consideration accruals for amounts to be paid in future periods relating to properties that converted in the periods noted above.
10
Construction Activity
The following is a summary of the construction projects that were placed into service and began generating revenues during the periods presented (in thousands):
Development projects:
Triple-net
72,775
Seniors housing operating
19,869
Outpatient medical
35,363
16,592
Total development projects
109,236
Expansion projects
2,879
38,808
Total construction in progress conversions
38,242
148,044
4. Real Estate Intangibles
The following is a summary of our real estate intangibles, excluding those classified as held for sale, as of the dates indicated (dollars in thousands):
In place lease intangibles
1,194,925
1,179,537
Above market tenant leases
62,544
67,529
Below market ground leases
62,447
80,224
Lease commissions
25,508
23,295
Gross historical cost
Accumulated amortization
(949,727)
(881,096)
Net book value
395,697
469,489
Weighted-average amortization period in years
15.8
13.4
Below market tenant leases
93,054
93,089
Above market ground leases
7,908
7,907
100,962
100,996
(49,874)
(46,048)
51,088
54,948
15.0
14.5
The following is a summary of real estate intangible amortization for the periods presented (in thousands):
Rental income related to above/below market tenant leases, net
210
(424)
290
(217)
Property operating expenses related to above/below market ground leases, net
(311)
(334)
(622)
(653)
Depreciation and amortization related to in place lease intangibles and lease commissions
(31,019)
(31,973)
(65,473)
(56,297)
The future estimated aggregate amortization of intangible assets and liabilities is as follows for the periods presented (in
11
thousands):
Assets
Liabilities
63,361
3,809
2017
81,279
6,807
2018
44,816
6,181
2019
25,471
5,771
2020
22,563
5,290
Thereafter
158,207
23,230
5. Dispositions, Assets Held for Sale and Discontinued Operations
We periodically sell properties for various reasons, including favorable market conditions or the exercise of tenant purchase options. During the six months ended June 30, 2016 and 2015, we recorded impairment charges on certain held-for-sale triple-net properties as the fair values less estimated costs to sell exceeded our carrying values. The following is a summary of our real property disposition activity for the periods presented (in thousands):
Real estate dispositions:
128,768
105,274
165,221(1)
Land parcels
5,724
Total dispositions
276,219
Proceeds from real estate dispositions
(1) Primarily related to the disposition of an unconsolidated equity investment with Forest City Enterprises.
Dispositions and Assets Held for Sale
Pursuant to our adoption of ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”, operating results attributable to properties sold subsequent to or classified as held for sale after January 1, 2014 and which do not meet the definition of discontinued operations are no longer reclassified on our Consolidated Statements of Comprehensive Income. The following represents the activity related to these properties for the periods presented (in thousands):
19,990
24,789
38,552
50,146
2,506
4,948
5,032
8,847
1,338
1,482
2,700
3,009
Provision for depreciation
3,071
7,042
7,022
13,473
6,915
13,472
14,754
25,329
Income (loss) from real estate dispositions, net
13,075
11,317
23,798
24,817
6. Real Estate Loans Receivable
The following is a summary of our real estate loan activity for the periods presented (in thousands):
12
Outpatient
Medical
Totals
Advances on real estate loans receivable:
Investments in new loans
8,223
379,604
Draws on existing loans
42,803
42,836
34,699
2,285
36,984
Net cash advances on real estate loans
51,026
51,059
414,303
416,588
Receipts on real estate loans receivable:
Loan payoffs
182,613
27,303
209,916
25,656
Principal payments on loans
4,454
11,686
Sub-total
187,067
214,370
Less: Non-cash activity
(31,014)
(46,027)
Net cash receipts on real estate loans
156,053
12,290
Net cash advances (receipts) on real estate loans
(105,027)
(12,257)
(117,284)
376,961
379,246
Change in balance due to foreign currency translation
(8,504)
1,127
Net change in real estate loans receivable
(144,545)
(27,270)
(171,815)
378,088
380,373
We recorded no provision for loan losses during the six months ended June 30, 2016. At June 30, 2016, we had no real estate loans with outstanding balances on non-accrual status and no allowances for loan losses were recorded.
7. Investments in Unconsolidated Entities
We participate in a number of joint ventures, which generally invest in seniors housing and health care real estate. The results of operations for these properties have been included in our consolidated results of operations from the date of acquisition by the joint ventures and are reflected in our Consolidated Statements of Comprehensive Income as income or loss from unconsolidated entities. The following is a summary of our investments in unconsolidated entities (dollars in thousands):
Percentage Ownership(1)
10% to 49%
28,794
36,351
10% to 50%
507,540
499,537
43%
6,734
6,393
(1) Excludes ownership of in-substance real estate.
At June 30, 2016, the aggregate unamortized basis difference of our joint venture investments of $153,126,000 is primarily attributable to the difference between the amount for which we purchase our interest in the entity, including transaction costs, and the historical carrying value of the net assets of the entity. This difference will be amortized over the remaining useful life of the related properties and included in the reported amount of income from unconsolidated entities.
8. Credit Concentration
We use net operating income from continuing operations (“NOI”) as our credit concentration metric. See Note 17 for additional information and reconciliation. The following table summarizes certain information about our credit concentration for the six month period ended June 30, 2016, excluding our share of NOI in unconsolidated entities (dollars in thousands):
13
Number of
Percent of
Concentration by relationship:(1)
Properties
NOI
NOI(2)
Genesis Healthcare
187
195,171
16%
Sunrise Senior Living(3)
143
160,057
13%
Brookdale Senior Living
84,526
7%
Revera(3)
97
73,992
6%
Benchmark Senior Living
49
48,880
4%
Remaining portfolio
796
652,611
54%
1,420
1,215,237
100%
(1) Genesis Healthcare is in our triple-net segment. Sunrise Senior Living and Revera are in our seniors housing operating segment. Benchmark Senior Living and Brookdale Senior Living are both in our triple-net and seniors housing operating segments.
(2) NOI with our top five relationships comprised 46% of total NOI for the year ending December 31, 2015.
(3) Revera owns a controlling interest in Sunrise Senior Living.
9. Borrowings Under Credit Facilities and Related Items
At June 30, 2016, we had a primary unsecured credit facility with a consortium of 29 banks that includes a $3,000,000,000 unsecured revolving credit facility, a $500,000,000 unsecured term credit facility and a $250,000,000 Canadian-denominated unsecured term credit facility. We have an option, through an accordion feature, to upsize the unsecured revolving credit facility and the $500,000,000 unsecured term credit facility by up to an additional $1,000,000,000, in the aggregate, and the $250,000,000 Canadian-denominated unsecured term credit facility by up to an additional $250,000,000. The primary unsecured credit facility also allows us to borrow up to $1,000,000,000 in alternate currencies (none outstanding at June 30, 2016). Borrowings under the unsecured revolving credit facility are subject to interest payable at the applicable margin over LIBOR interest rate (1.35% at June 30, 2016). The applicable margin is based on certain of our debt ratings and was 0.90% at June 30, 2016. In addition, we pay a facility fee quarterly to each bank based on the bank’s commitment amount. The facility fee depends on certain of our debt ratings and was 0.15% at June 30, 2016. The term credit facilities mature on May 13, 2021. The revolving credit facility is scheduled to mature on May 13, 2020 and can be extended for two successive terms of six months each at our option.
The following information relates to aggregate borrowings under the primary unsecured revolving credit facility for the periods presented (dollars in thousands):
Balance outstanding at quarter end(1)
Maximum amount outstanding at any month end
535,000
945,000
Average amount outstanding (total of daily
principal balances divided by days in period)
623,077
501,758
647,060
455,608
Weighted average interest rate (actual interest
expense divided by average borrowings outstanding)
1.26%
1.13%
1.28%
1.17%
(1) As of June 30, 2016, letters of credit in the aggregate amount of $48,930,000 have been issued, which reduces the borrowing capacity on the unsecured revolving credit facility.
10. Senior Unsecured Notes and Secured Debt
We may repurchase, redeem or refinance senior unsecured notes from time to time, taking advantage of favorable market conditions when available. We may purchase senior notes for cash through open market purchases, privately negotiated transactions, a tender offer or, in some cases, through the early redemption of such securities pursuant to their terms. The senior unsecured notes are redeemable at our option, at any time in whole or from time to time in part, at a redemption price equal to the sum of (1) the principal amount of the notes (or portion of such notes) being redeemed plus accrued and unpaid interest thereon up to the redemption date and (2) any “make-whole” amount due under the terms of the notes in connection with early redemptions. Redemptions and repurchases of debt, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. At June 30, 2016, the annual principal payments due on these debt obligations were as follows (in thousands):
14
Senior
Secured
Unsecured Notes(1,2)
Debt (1,3)
304,577
450,000
556,382
1,006,382
631,424
1,081,424
605,000
385,735
990,735
2020(4)
680,645
176,284
856,929
Thereafter(5,6,7,8,9,10)
6,631,879
1,366,864
7,998,743
8,817,524
3,421,266
12,238,790
(1) Amounts represent principal amounts due and do not include unamortized premiums/discounts, debt issuance costs, or other fair value adjustments as reflected on the balance sheet.
(2) Annual interest rates range from 1.15% to 6.5%.
(3) Annual interest rates range from 0.91% to 7.98%. Carrying value of the properties securing the debt totaled $5,972,202,000 at June 30, 2016.
(4) In November 2015, one of our wholly-owned subsidiaries issued and we guaranteed $300,000,000 of Canadian-denominated 3.35% senior unsecured notes due 2020 (approximately $230,645,000 based on the Canadian/U.S. Dollar exchange rate on June 30, 2016).
(5) On May 13, 2016, we refinanced the funding on a $250,000,000 Canadian-denominated unsecured term credit facility (approximately $192,204,000 based on the Canadian/U.S. Dollar exchange rate on June 30, 2016). The loan matures on May 13, 2021 and bears interest at the Canadian Dealer Offered Rate plus 95 basis points (1.84% at June 30, 2016).
(6) On May 13, 2016, we refinanced the funding on a $500,000,000 unsecured term credit facility. The loan matures on May 13, 2021 and bears interest at LIBOR plus 95 basis points (1.40% at June 30, 2016).
(7) On November 20, 2013, we completed the sale of £550,000,000 (approximately $727,925,000 based on the Sterling/U.S. Dollar exchange rate in effect on June 30, 2016) of 4.8% senior unsecured notes due 2028.
(8) On November 25, 2014, we completed the sale of £500,000,000 (approximately $661,750,000 based on the Sterling/U.S. Dollar exchange rate in effect on June 30, 2016) of 4.5% senior unsecured notes due 2034.
(9) In May 2015, we issued $750,000,000 of 4.0% senior unsecured notes due 2025. In October 2015, we issued an additional $500,000,000 of these notes under a re-opening of the offer.
(10) In March 2016, we issued $700,000,000 of 4.25% senior unsecured notes due 2026.
The following is a summary of our senior unsecured notes principal activity during the periods presented (dollars in thousands):
Weighted Avg.
Amount
Interest Rate
Beginning balance
8,645,758
4.237%
7,817,154
4.385%
Debt issued
705,000
4.228%
750,000
4.000%
Debt extinguished
3.625%
(300,000)
6.200%
Debt redeemed
0.000%
(158,990)
3.000%
Foreign currency
(133,234)
4.417%
1,298
3.601%
Ending balance
4.263%
8,109,462
4.252%
The following is a summary of our secured debt principal activity for the periods presented (dollars in thousands):
15
3,478,207
4.440%
2,941,765
4.940%
3.051%
2.845%
Debt assumed
317,897
3.223%
(243,314)
4.874%
(290,984)
4.208%
62,118
3.652%
(38,642)
3.994%
Principal payments
(37,737)
4.579%
(32,966)
4.775%
4.328%
3,033,871
4.750%
Our debt agreements contain various covenants, restrictions and events of default. Certain agreements require us to maintain certain financial ratios and minimum net worth and impose certain limits on our ability to incur indebtedness, create liens and make investments or acquisitions. As of June 30, 2016, we were in compliance with all of the covenants under our debt agreements.
11. Derivative Instruments
We are exposed to various market risks, including the potential loss arising from adverse changes in interest rates. We may elect to use financial derivative instruments to hedge interest rate exposure. These decisions are principally based on our policy to manage the general trend in interest rates at the applicable dates and our perception of the future volatility of interest rates. In addition, non-U.S. investments expose us to the potential losses associated with adverse changes in foreign currency to U.S. Dollar exchange rates. We may elect to manage this risk through the use of forward contracts and issuing debt in foreign currencies.
Interest Rate Swap Contracts and Foreign Currency Forward Contracts Designated as Cash Flow Hedges
For instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (“OCI”), and reclassified into earnings in the same period or periods, during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in earnings. Approximately $4,911,000 of gains, which are included in accumulated other comprehensive income (“AOCI”), are expected to be reclassified into earnings in the next 12 months.
Foreign Currency Hedges
For instruments that are designated and qualify as net investment hedges, the variability in the foreign currency to U.S. Dollar of the instrument is recorded as a cumulative translation adjustment component of OCI. During the six months ended June 30, 2016 and 2015, we settled certain net investment hedges generating cash proceeds of $56,842,000 and $72,477,000, respectively. The balance of the cumulative translation adjustment will be reclassified to earnings when the hedged investment is sold or substantially liquidated.
The following presents the notional amount of derivatives and other financial instruments as of the dates indicated (in thousands):
16
Derivatives designated as net investment hedges:
Denominated in Canadian Dollars
1,175,000
Denominated in Pounds Sterling
£
550,000
Financial instruments designated as net investment hedges:
250,000
1,050,000
Derivatives designated as cash flow hedges:
Denominated in U.S. Dollars
57,000
90,000
72,000
75,000
60,000
Derivative instruments not designated:
43,329
47,000
The following presents the impact of derivative instruments on the Consolidated Statements of Comprehensive Income for the periods presented (in thousands):
Location
Gain (loss) on interest rate swaps reclassified from AOCI into income (effective portion)
(477)
(462)
(960)
(928)
Gain (loss) on forward exchange contracts recognized in income
2,697
1,191
1,369
3,938
Loss (gain) on option exercise(1)
Gain (loss) on foreign exchange contracts and term loans designated as net investment hedge recognized in OCI
OCI
178,575
(149,436)
175,836
34,615
(1) In April 2011, we completed the acquisition of substantially all of the real estate assets of privately-owned Genesis Healthcare Corporation. In conjunction with this transaction, we received the option to acquire an ownership interest in Genesis Healthcare. In February 2015, Genesis Healthcare closed on a transaction to merge with Skilled Healthcare Group to become a publicly traded company which required us to record the value of the derivative asset due to the net settlement feature.
17
12. Commitments and Contingencies
At June 30, 2016, we had ten outstanding letter of credit obligations totaling $91,783,000 and expiring between 2016 and 2018. At June 30, 2016, we had outstanding construction in progress of $475,203,000 and were committed to providing additional funds of approximately $627,775,000 to complete construction. Purchase obligations at June 30, 2016 include $1,150,000,000 representing acquisitions expected to be completed before year-end. Purchase obligations also include contingent purchase obligations totaling $22,475,000 which relate to unfunded capital improvement obligations and contingent obligations on acquisitions. Rents due from the tenant are increased to reflect the additional investment in the property.
We evaluate our leases for operating versus capital lease treatment in accordance with Accounting Standards Codification (“ASC”) Topic 840 “Leases.” A lease is classified as a capital lease if it provides for transfer of ownership of the leased asset at the end of the lease term, contains a bargain purchase option, has a lease term greater than 75% of the economic life of the leased asset, or if the net present value of the future minimum lease payments are in excess of 90% of the fair value of the leased asset. Certain leases contain bargain purchase options and have been classified as capital leases. At June 30, 2016, we had operating lease obligations of $1,088,213,000 relating to certain ground leases and company office space and capital lease obligations of $96,201,000 relating primarily to certain investment properties. Regarding ground leases, we have sublease agreements with certain of our operators that require the operators to reimburse us for our monthly operating lease obligations. At June 30, 2016, aggregate future minimum rentals to be received under these noncancelable subleases totaled $76,954,000.
13. Stockholders’ Equity
The following is a summary of our stockholders’ equity capital accounts as of the dates indicated:
Preferred Stock:
Authorized shares
50,000,000
Issued shares
25,875,000
Outstanding shares
Common Stock, $1.00 par value:
700,000,000
358,624,595
355,594,373
357,689,980
354,777,670
Common Stock. The following is a summary of our common stock issuances during the six months ended June 30, 2016 and 2015 (dollars in thousands, except per share amounts):
Shares Issued
Average Price
Gross Proceeds
Net Proceeds
February 2015 public issuance
19,550,000
75.50
1,476,025
1,423,935
2015 Dividend reinvestment plan issuances
1,766,585
72.83
128,653
2015 Option exercises
211,041
46.26
9,762
2015 Stock incentive plans, net of forfeitures
179,037
2015 Senior note conversions
1,076,971
2015 Totals
22,783,634
1,614,440
2016 Dividend reinvestment plan issuances
1,971,758
64.65
127,470
2016 Option exercises
37,409
48.73
1,823
2016 Equity shelf program issuances
443,096
67.12
30,192
29,739
2016 Stock incentive plans, net of forfeitures
460,047
2016 Totals
2,912,310
159,485
Dividends. The increase in dividends is primarily attributable to increases in our common shares outstanding as described above and an increase in common dividends per share. The following is a summary of our dividend payments (in thousands, except per share amounts):
18
Per Share
Common Stock
1.7200
613,163
1.6500
561,914
Series I Preferred Stock
1.6250
23,359
Series J Preferred Stock
0.8126
9,344
645,866
594,617
Accumulated Other Comprehensive Income. The following is a summary of accumulated other comprehensive income (loss) for the periods presented (in thousands):
Unrecognized gains (losses) related to:
Foreign Currency Translation
Available for Sale Securities
Actuarial Losses
Cash Flow Hedges
Balance at December 31, 2015
(85,484)
(1,343)
(1,416)
Other comprehensive income before reclassification adjustments
(61,207)
(72,355)
Reclassification amount to net income
960 (1)
960
Net current-period other comprehensive income
Balance at June 30, 2016
(146,691)
(1,341)
(446)
Balance at December 31, 2014
(74,770)
(1,589)
(650)
12,136
(2,625)
(5,589)
928 (1)
928
Balance at June 30, 2015
(62,634)
(2,347)
(1) Please see note 11 for additional information.
14. Stock Incentive Plans
Our 2016 Long-Term Incentive Plan (“2016 Plan”) authorizes up to 10,000,000 shares of common stock to be issued at the discretion of the Compensation Committee of the Board of Directors. Our non-employee directors, officers and key employees are eligible to participate in the 2016 Plan. The 2016 Plan allows for the issuance of, among other things, stock options, stock appreciation rights, restricted stock, deferred stock units and dividend equivalent rights. Vesting periods for options, deferred stock units and restricted shares generally range from three to five years. Options expire ten years from the date of grant. Stock-based compensation expense totaled $7,031,000 and $15,217,000 for the three and six months ended June 30, 2016, respectively, and $11,124,000 and $20,178,000 for the same periods in 2015.
15. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
19
Numerator for basic and diluted earnings
per share - net income (loss) attributable
to common stockholders
Denominator for basic earnings per
share - weighted average shares
Effect of dilutive securities:
Employee stock options
129
153
115
176
Non-vested restricted shares
465
471
359
444
Redeemable shares
1,651
1,136
Convertible senior unsecured notes
343
379
Dilutive potential common shares
2,245
967
1,610
999
Denominator for diluted earnings per
share - adjusted weighted average shares
Basic earnings per share
Diluted earnings per share
The Series I Cumulative Convertible Perpetual Preferred Stock was not included in the calculations as the effect of conversions into common stock was anti-dilutive.
16. Disclosure about Fair Value of Financial Instruments
U.S. GAAP provides authoritative guidance for measuring and disclosing fair value measurements of assets and liabilities. The guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Please see Note 2 to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015 for additional information.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.
Mortgage Loans and Other Real Estate Loans Receivable — The fair value of mortgage loans and other real estate loans receivable is generally estimated by using Level 2 and Level 3 inputs such as discounting the estimated future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
Cash and Cash Equivalents — The carrying amount approximates fair value.
Available-for-sale Equity Investments — Available-for-sale equity investments are recorded at their fair value based on Level 1 publicly available trading prices.
20
Borrowings Under Primary Unsecured Credit Facility — The carrying amount of the primary unsecured credit facility approximates fair value because the borrowings are interest rate adjustable.
Senior Unsecured Notes — The fair value of the fixed rate senior unsecured notes was estimated based on Level 1 publicly available trading prices. The carrying amount of variable rate senior unsecured notes approximates fair value because they are interest rate adjustable.
Secured Debt — The fair value of fixed rate secured debt is estimated using Level 2 inputs by discounting the estimated future cash flows using the current rates at which similar loans would be made with similar credit ratings and for the same remaining maturities. The carrying amount of variable rate secured debt approximates fair value because the borrowings are interest rate adjustable.
Foreign Currency Forward Contracts — Foreign currency forward contracts are recorded in other assets or other liabilities on the balance sheet at fair market value. Fair market value is determined using Level 2 inputs by estimating the future value of the currency pair based on existing exchange rates, comprised of current spot and traded forward points, and calculating a present value of the net amount using a discount factor based on observable traded interest rates.
Redeemable OP Unitholder Interests — The fair value of our redeemable unitholder interests are recorded on the balance sheet at fair value using Level 2 inputs. The fair value is measured using the closing price of our common stock, as units may be redeemed at the election of the holder for cash or, at our option, one share of our common stock per unit, subject to adjustment in certain circumstances.
The carrying amounts and estimated fair values of our financial instruments are as follows (in thousands):
Carrying Amount
Fair Value
Financial assets:
Mortgage loans receivable
479,062
506,072
635,492
663,501
Other real estate loans receivable
168,615
172,425
184,000
185,693
Available-for-sale equity investments
11,619
22,779
Foreign currency forward contracts
102,231
129,520
Financial liabilities:
Borrowings under unsecured credit facilities
9,683,007
9,020,529
3,674,116
3,678,564
3,047
Redeemable OP unitholder interests
125,758
112,029
Items Measured at Fair Value on a Recurring Basis
The market approach is utilized to measure fair value for our financial assets and liabilities reported at fair value on a recurring basis. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The following summarizes items measured at fair value on a recurring basis (in thousands):
Fair Value Measurements as of June 30, 2016
Level 1
Level 2
Level 3
Available-for-sale equity investments(1)
Foreign currency forward contracts, net(2)
99,184
236,561
224,942
(1) Unrealized gains or losses on equity investments are recorded in accumulated other comprehensive income (loss) at each measurement date. During the year ended December 31, 2015, we recognized an other than temporary impairment charge of $35,648,000 on the Genesis Healthcare stock investment. Also, see Note 11 for details related to the gain on the derivative asset originally recognized.
(2) Please see Note 11 for additional information.
21
Items Measured at Fair Value on a Nonrecurring Basis
In addition to items that are measured at fair value on a recurring basis, we also have assets and liabilities in our balance sheet that are measured at fair value on a nonrecurring basis. As these assets and liabilities are not measured at fair value on a recurring basis, they are not included in the tables above. Assets, liabilities and noncontrolling interests that are measured at fair value on a nonrecurring basis include those acquired/assumed in business combinations (see Note 3) and asset impairments (if applicable, see Note 5 for impairments of real property and Note 6 for impairments of loans receivable). We have determined that the fair value measurements included in each of these assets and liabilities rely primarily on company-specific inputs and our assumptions about the use of the assets and settlement of liabilities, as observable inputs are not available. As such, we have determined that each of these fair value measurements generally reside within Level 3 of the fair value hierarchy. We estimate the fair value of real estate and related intangibles using the income approach and unobservable data such as net operating income and estimated capitalization and discount rates. We also consider local and national industry market data including comparable sales, and commonly engage an external real estate appraiser to assist us in our estimation of fair value. We estimate the fair value of assets held for sale based on current sales price expectations or, in the absence of such price expectations, Level 3 inputs described above. We estimate the fair value of secured debt assumed in business combinations using current interest rates at which similar borrowings could be obtained on the transaction date.
17. Segment Reporting
We invest in seniors housing and health care real estate. We evaluate our business and make resource allocations on our three operating segments: triple-net, seniors housing operating and outpatient medical. During the three months ended March 31, 2016, we reclassified four properties previously classified in the triple-net segment to the outpatient medical segment. Accordingly, the segment information provided in this note has been reclassified to conform to the current presentation for all periods presented.
Our triple-net properties include long-term/post-acute care facilities, assisted living facilities, independent living/continuing care retirement communities, care homes (United Kingdom), independent support living facilities (Canada), care homes with nursing (United Kingdom) and combinations thereof. Under the triple-net segment, we invest in seniors housing and health care real estate through acquisition and financing of primarily single tenant properties. Properties acquired are primarily leased under triple-net leases and we are not involved in the management of the property. Our seniors housing operating properties include the seniors housing communities referenced above that are owned and/or operated through RIDEA structures (see Notes 3 and 18).
Our outpatient medical properties include outpatient medical buildings and, during past years, life science buildings which are aggregated into our outpatient medical reportable segment. Our outpatient medical buildings are typically leased to multiple tenants and generally require a certain level of property management. During the three months ended June 30, 2015, we disposed of our life science investments.
We evaluate performance based upon NOI by segment. We define NOI as total revenues, including tenant reimbursements, less property level operating expenses. We believe NOI provides investors relevant and useful information because it measures the operating performance of our properties at the property level on an unleveraged basis. We use NOI to make decisions about resource allocations and to assess the property level performance of our properties.
Non-segment revenue consists mainly of interest income on non-real estate investments and other income. Non-segment assets consist of corporate assets including cash, deferred loan expenses and corporate offices and equipment among others. Non-property specific revenues and expenses are not allocated to individual segments in determining NOI.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2 to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015). The results of operations for all acquisitions described in Note 3 are included in our consolidated results of operations from the acquisition dates and are components of the appropriate segments. There are no intersegment sales or transfers.
Summary information for the reportable segments is as follows for the periods presented (in thousands):
22
Three Months Ended June 30, 2016:
Seniors Housing Operating
Outpatient Medical
Non-segment / Corporate
287,134
135,494
21,971
1,042
994
1,206
8,989
4,153
454
310,311
625,251
140,641
417,996
40,836
Net operating income from continuing operations
207,255
99,805
617,825
2,019
42,689
5,402
82,216
75,809
102,312
48,448
1,291
3,247
619
121
(88)
Income (loss) from continuing operations before income taxes and income from unconsolidated entities
231,071
59,095
45,336
(124,837)
Income tax expense
(213)
2,023
(248)
(1,049)
(Loss) income from unconsolidated entities
3,018
(4,887)
(90)
233,876
56,231
44,998
(125,886)
235,406
12,201,470
11,626,090
5,020,102
116,839
Three Months Ended June 30, 2015:
272,573
124,053
18,189
1,345
3,210
195
39
291,732
539,805
125,593
360,569
37,785
179,236
87,808
558,815
1,313
38,834
6,993
71,721
70,525
88,844
49,433
7,579
3,937
975
(102)
18,989
212,417
47,621
30,407
(139,728)
(3,121)
(3,449)
(161)
(686)
1,453
(6,083)
1,678
38,089
31,924
(140,414)
222,035
23
Six Months Ended June 30, 2016:
570,958
267,332
44,824
2,073
2,298
2,695
11,178
4,466
512
618,477
1,230,620
274,096
826,890
81,578
403,730
192,518
7,623
83,518
11,146
162,998
155,609
204,144
95,512
4,143
7,180
2,042
436,691
108,976
83,818
(251,253)
(528)
4,789
(476)
(1,546)
(Loss) income from unconsolidated
entities
6,100
(11,822)
(56)
442,263
101,943
83,286
(252,799)
443,793
Six Months Ended June 30, 2015:
534,565
241,648
32,888
2,609
4,853
4,229
356
62
572,306
1,034,365
244,613
699,076
75,739
335,289
168,874
1,076,531
9,736
73,293
14,382
142,531
139,946
165,479
92,206
43,750
15,979
1,316
10,235
24,053
424,846
80,538
60,970
(250,717)
(2,703)
(3,982)
305
(733)
2,846
(21,156)
2,710
424,989
55,400
63,985
(251,450)
54,097
192,859
479,086
256,844
24
Our portfolio of properties and other investments are located in the United States, the United Kingdom and Canada. Revenues and assets are attributed to the country in which the property is physically located. The following is a summary of geographic information for our operations for the periods presented (dollars in thousands):
%
United States
862,115
80.1%
771,031
80.6%
1,704,470
80.3%
1,516,168
81.9%
United Kingdom
102,593
9.5%
103,531
10.8%
203,148
195,345
10.6%
Canada
111,949
10.4%
82,607
8.6%
216,087
10.2%
139,833
7.6%
100.0%
As of
23,546,510
81.3%
25,995,793
89.6%
2,789,104
9.6%
1,741,973
6.0%
2,628,887
9.1%
1,286,079
4.4%
18. Income Taxes and Distributions
We elected to be taxed as a REIT commencing with our first taxable year. To qualify as a REIT for federal income tax purposes, at least 90% of taxable income (excluding 100% of net capital gains) must be distributed to stockholders. REITs that do not distribute a certain amount of current year taxable income in the current year are also subject to a 4% federal excise tax. The main differences between undistributed net income for federal income tax purposes and financial statement purposes are the recognition of straight-line rent for reporting purposes, basis differences in acquisitions, recording of impairments, differing useful lives and depreciation and amortization methods for real property and the provision for loan losses for reporting purposes versus bad debt expense for tax purposes.
Under the provisions of the REIT Investment Diversification and Empowerment Act of 2007 (“RIDEA”), for taxable years beginning after July 30, 2008, a REIT may lease “qualified health care properties” on an arm’s-length basis to a taxable REIT subsidiary (“TRS”) if the property is operated on behalf of such TRS by a person who qualifies as an “eligible independent contractor.” Generally, the rent received from the TRS will meet the related party rent exception and will be treated as “rents from real property.” A “qualified health care property” includes real property and any personal property that is, or is necessary or incidental to the use of, a hospital, nursing facility, assisted living facility, congregate care facility, qualified continuing care facility, or other licensed facility which extends medical or nursing or ancillary services to patients. We have entered into various joint ventures that were structured under RIDEA. Resident level rents and related operating expenses for these facilities are reported in the unaudited consolidated financial statements and are subject to federal and state income taxes as the operations of such facilities are included in TRS entities. Certain net operating loss carryforwards could be utilized to offset taxable income in future years.
Income taxes reflected in the financial statements primarily represents U.S. federal and state and local income taxes as well as non-U.S. income based or withholding taxes on certain investments located in jurisdictions outside the U.S. The provision for income taxes for the three and six months ended June 30, 2016 and 2015, was primarily due to operating income or losses, offset by certain discrete items at our TRS entities. In 2014, we established certain wholly-owned direct and indirect subsidiaries in Luxembourg and Jersey and transferred interests in certain foreign investments into this holding company structure. The structure includes a property holding company that is tax resident in the United Kingdom. No material adverse current tax consequences in Luxembourg, Jersey or the United Kingdom resulted from the creation of this holding company structure and all of the subsidiary entities in the structure are treated as disregarded entities of the company for U.S. federal income tax purposes. The company reflects current and deferred tax liabilities for any such withholding taxes incurred as a result of this holding company structure in its consolidated financial statements. Generally, given current statutes of limitations, we are subject to audit by the Internal Revenue Service (“IRS”) for the year ended December 31, 2012 and subsequent years and by state taxing authorities for the year ended December 31, 2011 and subsequent years. The company and its subsidiaries are also subject to audit by the Canada Revenue Agency and provincial authorities generally for periods subsequent to our initial investments in Canada in May 2012, by HM Revenue & Customs for periods subsequent to our
25
initial investments in the United Kingdom in August 2012 and by Luxembourg taxing authorities generally for periods subsequent to our establishment of certain Luxembourg-based subsidiaries during 2014.
19. Variable Interest Entities
We have entered into joint ventures to own certain seniors housing and outpatient medical assets which are deemed to be variable interest entities (“VIE”). We have concluded that we are the primary beneficiary of these VIE’s based on a combination of operational control of the joint venture and the rights to receive residual returns or the obligation to absorb losses arising from the joint ventures. Except for capital contributions associated with the initial joint venture formations, the joint ventures have been and are expected to be funded from the ongoing operations of the underlying properties. Accordingly, such joint ventures have been consolidated, and the table below summarizes the balance sheets of consolidated VIE’s in the aggregate (in thousands):
1,006,674
453,889
10,946
8,759
11,828
8,082
Total assets(1)
1,029,448
470,730
451,450
147,021
12,807
7,732
78,477
70,090
486,714
245,887
(1) Note that assets of the consolidated variable interest entities can only be used to settle obligations relating to such variable interest entities. Liabilities of the consolidated variable interest entities represent claims against the specific assets of the variable interest entities.
26
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
EXECUTIVE SUMMARY
Company Overview
Business Strategy
Capital Market Outlook
Key Transactions in 2016
Key Performance Indicators, Trends and Uncertainties
Corporate Governance
28
29
30
32
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash
Off-Balance Sheet Arrangements
Contractual Obligations
Capital Structure
34
RESULTS OF OPERATIONS
Summary
Non-Segment/Corporate
35
37
42
OTHER
Non-GAAP Financial Measures
Other Disclosures
Critical Accounting Policies
43
53
Cautionary Statement Regarding Forward-Looking Statements
The following discussion and analysis is based primarily on the unaudited consolidated financial statements of Welltower Inc. for the periods presented and should be read together with the notes thereto contained in this Quarterly Report on Form 10-Q. Other important factors are identified in our Annual Report on Form 10-K for the year ended December 31, 2015, including factors identified under the headings “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” References herein to “we,” “us,” “our,” or the “company” refer to Welltower Inc. and its subsidiaries unless specifically noted otherwise.
Executive Summary
Welltower Inc. (NYSE:HCN), an S&P 500 company headquartered in Toledo, 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 properties in major, high-growth markets in the United States, Canada and the United Kingdom, consisting of seniors housing and post-acute communities and outpatient medical properties. Our capital programs, when combined with comprehensive planning, development and property management services, make us a single-source solution for acquiring, planning, developing, managing, repositioning and monetizing real estate assets.
The following table summarizes our consolidated portfolio for the three months ended June 30, 2016 (dollars in thousands):
Percentage of
Type of Property
NOI(1)
50.2%
770
33.6%
384
16.2%
266
617,371
(1) 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.
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 net operating income 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 customers/partners experience operating difficulties and become unable to generate sufficient cash to make payments 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 proactive and comprehensive 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 actively manages and monitors the outpatient medical portfolio with a comprehensive process including 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. In monitoring our portfolio, our personnel use a proprietary database to collect and analyze property-specific data. Additionally, we conduct extensive research to ascertain industry trends. 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 are generally able 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 structure our investments to help mitigate payment risk. Operating leases and loans are normally credit enhanced by guaranties and/or letters of credit. In addition, operating leases are typically structured as master leases and loans are generally cross-defaulted and cross-collateralized with other real estate loans, operating leases or agreements between us and the obligor and its affiliates.
For the six months ended June 30, 2016, rental income and resident fees and services represented 39% and 57%, 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 rent and interest receipts, resident fees and services, borrowings under our primary unsecured credit facility, public issuances of debt and equity securities, proceeds from investment dispositions and principal payments on loans receivable. Our primary uses of cash include dividend distributions, debt service payments (including principal and interest), real property investments (including acquisitions, capital expenditures, construction advances and transaction costs), loan advances, property operating expenses and general and administrative expenses. Depending upon the availability and cost of external capital, we believe our liquidity is sufficient to fund these uses of cash.
We also continuously evaluate opportunities to finance future investments. New investments are generally funded from temporary borrowings under our primary unsecured credit facility, internally generated cash and the proceeds from investment dispositions. Our investments generate cash from net operating income and principal payments on loans receivable. Permanent financing for future investments, which replaces funds drawn under our primary unsecured credit facility, 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 possible 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 primary unsecured credit facility. At June 30, 2016, we had $466,585,000 of cash and cash equivalents, $58,440,000 of restricted cash and $2,206,070,000 of available borrowing capacity under our primary unsecured credit facility.
We believe the capital markets remain supportive of our investment strategy. For the 18 months ended June 30, 2016, we raised $4,134,944,000 in aggregate gross proceeds through the issuance of common stock and unsecured debt. The capital raised, in combination with available cash and borrowing capacity under our primary unsecured credit facility, supported pro rata gross new investments of $4,819,684,000 during 2015 and $703,780,000 during the six months ended June 30, 2016. We expect attractive investment opportunities to remain available in the future as we continue to leverage the benefits of our relationship investment strategy.
Capital. In March 2016, we issued $700,000,000 of 4.25% senior unsecured notes due 2026, generating approximately $688,560,000 of net proceeds. In May 2016, we closed on a new primary unsecured credit facility that includes a $3,000,000,000 unsecured revolving credit facility, a $500,000,000 unsecured term credit facility and a $250,000,000 Canadian-denominated unsecured term credit facility plus an option to upsize the unsecured revolving credit facility and the $500,000,000 unsecured term credit facility by up to an additional $1,000,000,000, in the aggregate, and the $250,000,000 Canadian-denominated unsecured term credit facility by up to an additional $250,000,000. The facility also allows us to borrow up to $1,000,000,000 in alternate currencies. Based on our current credit ratings, the unsecured revolving credit facility is priced at 0.90% over LIBOR with a 0.15% annual facility fee and the unsecured term credit facilities are priced at 0.95% over LIBOR for the U.S. tranche and CDOR for the Canadian tranche. The unsecured term credit facilities mature on May 13, 2021 and the unsecured revolving credit facility matures on May 13, 2020. The unsecured revolving credit facility can be extended for two successive terms of six months each at our option. During the six months ended June 30, 2016, we raised $157,209,000 through our dividend reinvestment program and our Equity Shelf Program (as defined below).
Investments. The following summarizes our acquisitions and joint venture investments completed during the six months ended June 30, 2016 (dollars in thousands):
Investment Amount(1)
Capitalization Rates(2)
Book Amount(3)
184,041
7.3%
124,654
6.9%
6.3%
341,345
7.0%
355,681
(1) Represents stated pro rata purchase price including cash and any assumed debt but excludes fair value adjustments pursuant to U.S. GAAP.
(2) Represents annualized contractual or projected income to be received in cash divided by investment amounts.
(3) Represents amounts recorded on our books including fair value adjustments pursuant to U.S. GAAP. See Notes 3 and 7 to our unaudited consolidated financial statements for additional information.
Dispositions. The following summarizes property dispositions made during the six months ended June 30, 2016 (dollars in thousands):
Proceeds(1)
133,113
5.9%
(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 assets at time of disposition. See Note 5 to our unaudited consolidated financial statements for additional information.
Dividends. Our Board of Directors increased the annual cash dividend to $3.44 per common share ($0.86 per share quarterly), as compared to $3.30 per common share for 2015, beginning in February 2016. The dividend declared for the quarter ended June 30, 2016 represents the 181stconsecutive quarterly dividend payment.
We utilize several key performance indicators to evaluate the various aspects of our business. These indicators are discussed below and relate to operating performance, concentration risk and credit strength. 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 attributable to common stockholders (“NICS”) is the most appropriate earnings measure. Other useful supplemental measures of our operating performance include funds from operations attributable to common stockholders (“FFO”), net operating income from continuing operations (“NOI”) and same store NOI (“SSNOI”); however, these supplemental measures are not defined by U.S. generally accepted accounting principles (“U.S. GAAP”). Please refer to the section entitled “Non-GAAP Financial Measures” for further discussion and reconciliations of FFO, NOI and SSNOI. These earnings measures and their relative per share amounts 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, except per share amounts):
March 31,
September 30,
December 31,
190,799
182,043
132,931
148,969
Funds from operations attributable to common stockholders
344,250
340,588
392,295
332,509
391,264
416,974
517,716
570,294
590,746
597,414
Same store net operating income
442,424
456,332
454,977
451,434
455,448
468,435
Per share data (fully diluted):
0.56
0.52
0.37
0.42
1.02
1.11
0.94
1.10
1.16
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. The coverage ratios indicate our ability to service interest and fixed charges (interest, secured debt principal amortization and preferred dividends). We expect to maintain capitalization ratios and coverage ratios sufficient to maintain a capital structure consistent with our current profile. The coverage ratios are based on earnings before interest, taxes, depreciation and amortization (“EBITDA”) which is discussed in further detail, and reconciled to net income, below in “Non-GAAP Financial 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:
March, 31
Debt to book capitalization ratio
42%
46%
Debt to undepreciated book
capitalization ratio
38%
39%
41%
40%
Debt to market capitalization ratio
28%
32%
31%
33%
Interest coverage ratio
4.21x
5.32x
4.39x
3.88x
3.85x
Fixed charge coverage ratio
3.34x
4.19x
3.45x
3.06x
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 top five relationships. Geographic mix measures the portion of our NOI that relates to our top five states (or international equivalents). The following table reflects our recent historical trends of concentration risk by NOI for the periods indicated below:
31
Property mix:(1)
55%
52%
50%
30%
34%
15%
14%
Relationship mix:(1)
17%
Sunrise Senior Living(2)
8%
Revera(2)
5%
Remaining relationships
53%
Geographic mix:(1)
California
10%
9%
New Jersey
Pennsylvania
Remaining geographic areas
63%
61%
59%
60%
(1) Excludes our share of investments in unconsolidated entities. Entities in which the company has a joint venture with a minority partner are shown at 100% of the joint venture amount.
(2) Revera owns a controlling interest in Sunrise Senior Living.
Lease Expirations. The following table sets forth information regarding lease expirations for certain portions of our portfolio as of June 30, 2016 (dollars in thousands):
Expiration Year
2021
2022
2023
2024
2025
Triple-net:
1
499
Base rent(1)
0
12,846
42,371
1,267
14,603
25,484
4,905
706
10,938
66,865
914,702
% of base rent
0.0%
1.2%
3.9%
0.1%
1.3%
2.3%
0.4%
1.0%
6.1%
83.6%
Units/beds
1,165
3,655
123
1,074
2,349
531
762
4,189
55,235
% of Units/beds
1.7%
5.3%
0.2%
1.6%
3.4%
0.8%
1.1%
79.9%
Outpatient medical:
Square feet
397,676
1,081,130
949,618
1,134,417
1,269,153
1,373,263
2,193,341
1,138,277
1,447,444
611,684
4,225,600
11,430
27,231
24,878
29,384
32,979
35,632
46,271
27,942
38,593
17,417
100,429
2.9%
7.5%
8.4%
11.8%
7.1%
9.8%
25.7%
Leases
179
287
278
254
232
191
162
105
77
188
% of Leases
8.1%
12.9%
12.0%
12.5%
11.4%
10.5%
4.7%
3.5%
8.5%
(1) The most recent monthly base rent including straight line for leases with fixed escalators or annual cash rents for leases with contingent escalators. Base rent does not include tenant recoveries or amortization of above and below market lease intangibles.
We evaluate our key performance indicators in conjunction with current expectations to determine if historical trends are indicative of future results. Our expected results may not be achieved and actual results may differ materially from our expectations. Factors that may cause actual results to differ from expected results are described in more detail in “Cautionary Statement Regarding Forward-Looking Statements” and other sections of this Quarterly Report on Form 10-Q. Management regularly monitors economic and other factors to develop strategic and tactical plans designed to improve performance and maximize our competitive position. Our ability to achieve our financial objectives is dependent upon our ability to effectively execute these plans and to appropriately respond to emerging economic and company-specific trends. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2015, under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of these risk factors.
Maintaining investor confidence and trust is important in today’s business environment. Our Board of Directors and management are strongly committed to policies and procedures that reflect the highest level of ethical business practices. Our corporate governance guidelines provide the framework for our business operations and emphasize our commitment to increase stockholder value while meeting all applicable legal requirements. These guidelines meet the listing standards adopted by the New York Stock Exchange and are available on the Internet at www.welltower.com/investors/governance. The information on our website is not incorporated by reference in this Quarterly Report on Form 10-Q, and our web address is included as an inactive textual reference only.
Liquidity and Capital Resources
Our primary sources of cash include rent and interest receipts, resident fees and services, borrowings under our primary unsecured credit facility, public issuances of debt and equity securities, proceeds from investment dispositions and principal payments on loans receivable. Our primary uses of cash include dividend distributions, debt service payments (including principal and interest), real property investments (including acquisitions, capital expenditures, construction advances and transaction costs), loan advances, property operating expenses, and general and administrative expenses. These sources and uses of cash are reflected in our Consolidated Statements of Cash Flows and are discussed in further detail below. The following is a summary of our sources and uses of cash flows (dollars in thousands):
Change
(112,818)
-24%
Cash provided from (used in) operating activities
229,395
37%
Cash provided from (used in) investing activities
1,861,007
-84%
Cash provided from (used in) financing activities
(1,717,894)
n/a
Effect of foreign currency translation
(11,047)
248,643
114%
Operating Activities. The change in net cash provided from operating activities is primarily attributable to increases in NOI, which is primarily due to acquisitions. Please see “Results of Operations” for further discussion. For the six months ended June 30, 2016 and 2015, cash flow provided 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, real estate loans receivable and investments in unconsolidated entities, which are summarized above in “Key Transactions in 2016” and Notes 3 and 6 of our unaudited consolidated financial statements. The following is a summary of cash used in non-acquisition capital improvement activities (dollars in thousands):
New development
249,867
114,478
135,389
118%
Recurring capital expenditures, tenant improvements and lease commissions
28,354
25,599
2,755
11%
Renovations, redevelopments and other capital improvements
59,175
41,487
17,688
337,396
181,564
155,832
86%
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. Generally, these expenditures have increased as a result of acquisitions, primarily in our seniors housing operating segment.
Financing Activities. The changes in net cash provided from financing activities are primarily attributable to changes related to our long-term debt arrangements, the issuance/conversion of common and preferred stock and dividend payments. Please refer to Notes 9, 10 and 13 of our unaudited consolidated financial statements for additional information.
At June 30, 2016, we had investments in unconsolidated entities with our ownership generally ranging from 10% to 50%. Please see Note 7 to our unaudited consolidated financial statements for additional information. We use financial derivative instruments to hedge interest rate and foreign currency exchange rate exposure. Please see Note 11 to our unaudited consolidated financial statements for additional information. At June 30, 2016, we had ten outstanding letter of credit obligations. Please see Note 12 to our unaudited consolidated financial statements for additional information.
The following table summarizes our payment requirements under contractual obligations as of June 30, 2016 (in thousands):
Payments Due by Period
2017-2018
2019-2020
Unsecured revolving credit facility(1)
Senior unsecured notes and term credit facilities:(2)
U.S. Dollar senior unsecured notes
6,500,000
900,000
4,550,000
Pounds Sterling senior unsecured notes(3)
1,389,675
Canadian Dollar senior unsecured notes(3)
230,645
U.S. Dollar term credit facility
505,000
5,000
500,000
Canadian Dollar term credit facility(3)
192,204
Secured debt:(2,3)
Consolidated
1,187,806
562,019
Unconsolidated
483,005
19,498
37,164
28,468
397,875
Contractual interest obligations:(4)
Unsecured revolving credit facility
55,200
5,018
20,073
10,036
Senior unsecured notes and term loans(3)
3,674,777
222,789
727,079
643,991
2,080,918
Consolidated secured debt(3)
619,272
73,945
212,557
129,677
203,093
Unconsolidated secured debt(3)
130,576
8,581
32,056
29,711
60,228
Capital lease obligations(5)
96,201
2,366
9,409
8,506
75,920
Operating lease obligations(5)
1,088,213
8,450
33,886
33,442
1,012,435
Purchase obligations(5)
1,800,250
1,275,523
523,167
675
885
Other long-term liabilities(6)
4,917
738
2,950
1,229
Total contractual obligations
20,936,201
1,921,485
3,686,147
2,743,436
12,585,133
(1) Relates to unsecured revolving credit facility with an aggregate commitment of $3,000,000,000. See Note 9 to our unaudited consolidated financial statements for additional information.
(2) Amounts represent principal amounts due and do not reflect unamortized premiums/discounts or other fair value adjustments as reflected on the balance sheet.
(3) Based on foreign currency exchange rates in effect as of balance sheet date.
(4) Based on variable interest rates in effect as of balance sheet date.
(5) See Note 12 to our unaudited consolidated financial statements for additional information.
(6) Primarily relates to payments to be made under our Supplemental Executive Retirement Plan.
Our debt agreements contain various covenants, restrictions and events of default. Certain agreements require us to maintain certain financial ratios and minimum net worth and impose certain limits on our ability to incur indebtedness, create liens and make investments or acquisitions. As of June 30, 2016, 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 in turn have a material adverse impact on our consolidated results of operations, liquidity and/or financial condition.
On May 1, 2015, we filed with the Securities and Exchange Commission (the “SEC”) (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 under which we may issue up to 15,000,000 shares of common stock. As of July 31, 2016, 9,717,384 shares of common stock
remained available for issuance under this registration statement. We have entered into separate Equity Distribution Agreements with each of UBS Securities LLC, KeyBanc Capital Markets Inc. and Credit Agricole Securities (USA) Inc. relating to the offer and sale from time to time of up to $630,015,000 aggregate amount of our common stock (“Equity Shelf Program”). As of July 31, 2016, we had $378,734,000 of remaining capacity under the Equity Shelf Program. Depending upon market conditions, we anticipate issuing securities under our registration statements to invest in additional properties and to repay borrowings under our primary unsecured credit facility.
Results of Operations
Our primary sources of revenue include rent and resident fees and services. Our primary expenses include interest expense, depreciation and amortization, property operating expenses, transaction costs and general and administrative expenses. We evaluate our business and make resource allocations on our three business segments: triple-net, seniors housing operating and outpatient medical. The primary performance measures for our properties are NOI and SSNOI, which are discussed below. Please see Note 17 to our unaudited consolidated financial statements for additional information. The following is a summary of our results of operations (dollars in thousands, except per share amounts):
(117,099)
-37%
(158,929)
-32%
76,386
22%
808,241
684,839
123,402
18%
EBITDA
569,131
665,539
(96,408)
-14%
1,094,534
1,184,566
(90,032)
-8%
Net operating income from continuing operations (NOI)
59,010
138,706
Same store NOI
12,103
3%
923,884
898,756
25,128
(0.35)
-39%
(0.50)
-34%
0.19
20%
2.26
1.99
0.27
-1.11x
-21%
4.03x
4.77x
-0.74x
-16%
-0.85x
-20%
3.20x
3.77x
-0.57x
-15%
The following is a summary of our NOI for the triple-net segment (dollars in thousands):
SSNOI(1)
225,508
219,891
447,817
436,519
11,298
Non-cash NOI attributable to same store properties(1)
20,624
24,885
(4,261)
-17%
43,712
49,062
(5,350)
-11%
NOI attributable to non same store properties(2)
64,179
46,956
17,223
126,948
86,725
40,223
18,579
46,171
(1) Change is due to increases in cash NOI and decreases in non-cash NOI (described below) related to 606 same store properties.
(2) Change is primarily due to the acquisition of 90 properties and the conversion of 11 construction projects into revenue-generating properties subsequent to January 1, 2015.
During the six months ended June 30, 2016, we reclassified four properties previously classified in the triple-net segment to the outpatient medical segment. Accordingly, the information has been reclassified to conform to the current presentation for all periods presented. The following is a summary of our results of operations for the triple-net segment (dollars in thousands):
14,561
36,393
3,782
21%
11,936
36%
236
24%
(2,158)
-44%
Other expenses:
(2,113)
-22%
58,427
-100%
5,284
15,663
(6,288)
-83%
(39,607)
-91%
223
(10,138)
-99%
12,094
545%
Total other expenses
79,240
79,315
(75)
0%
181,786
147,460
34,326
23%
Income from continuing operations before income taxes and income (loss) from unconsolidated entities
18,654
11,845
Income tax benefit (expense)
2,908
-93%
2,175
-80%
1,565
108%
3,254
Income from continuing operations
23,127
17,274
Gain (loss) on real estate dispositions, net(1)
(52,567)
-97%
24,657
12%
(35,293)
-7%
Less: Net income (loss) attributable to noncontrolling interests
774
548
226
433
1,001
(568)
-57%
Net income attributable to common stockholders
234,632
210,201
24,431
443,360
478,085
(34,725)
(1) See Note 5 to our unaudited consolidated financial statements.
The increase in rental income is primarily attributable to the acquisitions of new properties and the conversion of newly constructed triple-net properties from which we receive rent. 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. Sales of real property would offset revenue increases and, to the extent that they exceed new acquisitions, could result in decreased revenues. Our leases could renew above or below current rent rates, resulting in an increase or decrease in rental income. For the three months ended June 30, 2016, we had no lease renewals but we had 26 leases with rental rate increasers ranging from 0.05% to 0.57% in our triple-net portfolio. The change in interest income is due to a higher loan volume in the current year, which includes two first mortgage loans to Genesis Healthcare. The decrease in other income is due to the receipt of an early prepayment fee in 2015 related to a real estate loan receivable.
During the six months ended June 30, 2016, we did not complete any construction projects but did complete an expansion project totaling $2,879,000. The following is a summary of triple-net construction projects pending as of June 30, 2016 (dollars in thousands):
36
Units/Beds
Commitment
Balance
Est. Completion
Edmond, OK
142
24,500
17,362
3Q16
Carrollton, TX
104
18,900
13,436
London, UK
79
26,470
16,707
Tulsa, OK
145
25,800
12,576
4Q16
Lititz, PA
80
15,200
7,209
Piscataway, NJ
124
40,800
27,566
1Q17
Raleigh, NC
225
93,000
64,499
Lancaster, PA
15,875
6,759
Bracknell, UK
64
14,623
8,189
2Q17
Livingston, NJ
120
51,440
25,977
Alexandria, VA
116
60,156
13,828
1Q18
1,279
386,764
214,108
Interest expense for the six months ended June 30, 2016 and 2015 represents secured debt interest expense and gains and losses on forward exchange contracts. The change in 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 (dollars in thousands):
Wtd. Avg.
522,399
5.467%
568,108
5.562%
554,014
5.488%
670,769
5.337%
(59,093)
5.260%
(21,398)
5.739%
(93,012)
5.492%
(112,207)
4.404%
(239)
5.315%
1,478
5.316%
5,052
(6,856)
(2,798)
5.607%
(2,982)
5.559%
(5,785)
5.548%
(6,500)
5.593%
460,269
5.509%
545,207
5.408%
5.480%
Monthly averages
497,403
5.493%
550,659
5.411%
518,490
5.490%
564,669
5.453%
In April 2011, we completed the acquisition of substantially all of the real estate assets of privately-owned Genesis Healthcare Corporation. In conjunction with this transaction, we received the option to acquire an ownership interest in Genesis Healthcare. In February 2015, Genesis Healthcare closed on a transaction to merge with Skilled Healthcare Group to become a publicly traded company which required us to record the value of the derivative asset due to the net settlement feature. This event resulted in $58,427,000 gain in the first quarter of 2015.
Depreciation and amortization increased primarily as a result of new property acquisitions and the conversions of newly constructed triple-net properties. To the extent that we acquire or dispose of additional properties in the future, our provision for depreciation and amortization will change accordingly.
Transaction costs are costs incurred with property acquisitions including due diligence costs, fees for legal and valuation services, the termination of pre-existing relationships, lease termination expenses and other similar costs. The 2015 transaction costs include a charge related to the termination of pre-existing relationships, the termination of a lease obligation and overall higher transaction volume. The fluctuation in losses/gains on debt extinguishment is primarily attributable to the volume of extinguishments and the terms of the related secured debt.
Changes in the gain on sales of properties are related to property sales which totaled nine and eleven for the six months ended June 30, 2016 and 2015, respectively. During the six months ended June 30, 2016 and 2015, we recorded impairment charges on certain held-for-sale triple-net properties as the fair values less estimated costs to sell exceeded our carrying values.
The following is a summary of our NOI for the seniors housing operating segment (dollars in thousands):
167,368
162,234
5,134
326,061
314,696
11,365
Non-cash NOI attributable to same store properties
(242)
(253)
-4%
(490)
(504)
-3%
40,129
17,255
22,874
133%
78,159
21,097
57,062
270%
28,019
68,441
(1) Relates to 298 same store properties.
(2) Change is primarily due to the acquisition of 85 properties subsequent to January 1, 2015 and one development property.
The following is a summary of our seniors housing operating results of operations (dollars in thousands):
79,667
189,306
5,779
180%
6,949
164%
85,446
196,255
19%
57,427
127,814
3,855
10,225
13,468
38,665
(690)
-18%
(8,799)
-55%
148,160
131,615
16,545
294,754
254,751
40,003
Income (loss) from continuing operations before income taxes and income (loss) from unconsolidated entities
11,474
28,438
35%
5,472
8,771
-220%
1,196
9,334
18,142
48%
46,543
84%
(190)
1,520
(1,710)
167
2,793
(2,626)
-94%
56,421
36,569
19,852
101,776
52,607
49,169
93%
Fluctuations in revenues and property operating expenses are primarily a result of acquisitions and the movement of U.S. and foreign currency exchange rates. The fluctuations in depreciation and amortization are due to acquisitions and variations in amortization of short-lived intangible assets. To the extent that we acquire or dispose of additional properties in the future, these amounts will change accordingly.
During the six month period ended June 30, 2016, we did not complete any construction projects. The following is a summary of our seniors housing operating construction projects, excluding expansions, pending as of June 30, 2016 (dollars in thousands):
38
Units
Camberley, UK
102
25,015
20,414
Bushey, UK
95
52,419
15,889
2Q18
Chertsey, UK
94
40,939
12,551
3Q18
291
118,373
48,854
New York, NY
Project in planning stage
118,722
167,576
Interest expense represents secured debt interest expense as well as interest expense related to all foreign senior unsecured debt. The increase in interest expense is attributed primarily to the $300,000,000 Canadian-denominated senior unsecured notes issued in November 2015. Please refer to Note 10 to our unaudited consolidated financial statements for additional information. The following is a summary of our seniors housing operating property secured debt principal activity (dollars in thousands):
2,355,182
3.980%
1,810,437
4.356%
2,290,552
3.958%
1,654,531
4.422%
86,856
3.040%
54,077
3.623%
205,897
3.976%
(33,080)
4.588%
(37,004)
3.386%
(91,613)
3.594%
(119,965)
3.517%
(3,131)
3.503%
9,552
3.590%
57,066
3.504%
(31,786)
3.709%
(12,199)
3.907%
(9,939)
4.101%
(24,369)
3.933%
(18,355)
4.204%
2,393,628
3.923%
1,827,123
4.353%
2,400,782
3.940%
1,828,513
4.351%
2,353,251
3.955%
1,725,752
4.391%
Transaction costs fluctuate based on the volume of acquisitions in a year. For the current year, transaction costs are lower because of decreased acquisition volume. The majority of our seniors housing operating properties are formed through partnership interests. Net income attributable to noncontrolling interests represents our partners’ share of net income (loss) related to joint ventures. The fluctuations in income (loss) from unconsolidated entities is primarily due to depreciation and amortization of short-lived intangible assets and the timing of additional investments in unconsolidated entities.
The following is a summary of our NOI for the outpatient medical segment (dollars in thousands):
75,559
74,207
1,352
2%
150,006
147,541
2,465
1,485
2,054
(569)
-28%
2,978
4,325
(1,347)
-31%
22,761
11,547
11,214
97%
39,534
17,008
22,526
132%
11,997
23,644
(1) Relates to 221 same store properties.
(2) Change is primarily due to acquisitions of 17 properties and conversions of construction projects into two revenue-generating properties subsequent to January 1, 2015.
During the six months ended June 30, 2016, we reclassified four properties previously classified in the triple-net segment to the outpatient medical segment. Accordingly, the information has been reclassified to conform to the current presentation for all periods presented. The following is a summary of our results of operations for the outpatient medical segment (dollars in thousands):
11,441
25,684
(351)
-26%
-12%
3,958
2030%
4,110
1154%
15,048
29,483
3,051
5,839
(1,591)
-23%
(3,236)
(985)
-2%
3,306
(356)
726
54,469
57,401
(2,932)
-5%
108,700
107,904
1%
Income from continuing operations before income taxes and income from unconsolidated entities
14,929
49%
22,848
(87)
(781)
Income from unconsolidated entities
(1,768)
(2,766)
13,074
(190,111)
(192,859)
(177,037)
(173,558)
-68%
(1,660)
(534)
(1,126)
211%
(1,525)
(1,535)
46,658
222,569
(175,911)
-79%
84,811
256,834
(172,023)
-67%
The increase in rental income is primarily attributable to the acquisitions of new properties and the conversion of newly constructed outpatient medical properties from which we receive rent. 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. Sales of real property would offset revenue increases and, to the extent that they exceed new acquisitions, could result in decreased revenues. Our leases could renew above or below current rent rates, resulting in an increase or decrease in rental income. For the three months ended June 30, 2016, our consolidated outpatient medical portfolio signed 72,307 square feet of new leases and 159,748 square feet of renewals. The weighted-average term of these leases was six years, with a rate of $41.13 per square foot and tenant improvement and lease commission costs of $17.30 per square foot. Substantially all of these leases during the referenced quarter contain an annual fixed or contingent escalation rent structure ranging from the change in CPI to 5%.
During the six months ended June 30, 2016, we completed two outpatient medical construction projects representing $35,363,000 or $267 per square foot. The following is a summary of the outpatient medical construction projects, excluding expansions, pending as of June 30, 2016 (dollars in thousands):
40
Square Feet
Missouri, TX
23,863
9,180
6,024
Stamford, CT
92,345
41,735
20,853
Marietta, GA
103,156
24,893
6,546
Wausau, WI
43,883
14,100
8,396
Castle Rock, CO
56,822
13,148
2,316
Timmonium, MD
46,000
20,996
9,371
Howell, MI
56,211
15,509
2,747
Brooklyn, NY
140,955
103,624
28,439
3Q17
563,235
243,185
84,692
Total interest expense represents secured debt interest expense. The change in secured debt interest expense is primarily due to the net effect and timing of assumptions, extinguishments and principal amortizations. The following is a summary of our outpatient medical secured debt principal activity (dollars in thousands):
605,360
5.218%
587,235
5.841%
627,689
5.177%
609,268
5.838%
112,000
1.837%
(38,321)
5.878%
(40,154)
5.176%
(57,508)
5.993%
(58,812)
5.341%
(3,807)
6.281%
(4,091)
6.098%
(6,949)
5.924%
(7,466)
5.870%
563,232
5.129%
654,990
5.193%
579,824
5.147%
592,911
5.671%
598,764
5.186%
596,570
5.677%
The increase in property operating expenses is primarily attributable to acquisitions and construction conversions of new outpatient medical facilities for which we incur certain property operating expenses. Transaction costs represent costs incurred with property acquisitions including due diligence costs, fees for legal and valuation services, termination of pre-existing relationships, lease termination expenses and other similar costs. Income from unconsolidated entities represents our share of net income or losses related to the periods for which we held a joint venture investment with Forest City Enterprises and certain unconsolidated property investments. Changes in gains/losses on sales of properties are related to volume of property sales and the sales prices. A portion of our outpatient medical properties were formed through partnerships. 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.
41
The following is a summary of our results of operations for the non-segment/corporate activities (dollars in thousands):
415
1064%
450
726%
10,495
20,467
1,440
11,994
Loss on extinguishment of debt, net
(18,989)
(24,053)
(7,422)
-70%
125,291
139,767
(14,476)
-10%
251,765
250,779
986
Loss from continuing operations before income taxes
14,891
(536)
(363)
(813)
111%
Loss from continuing operations
14,528
(1,349)
Less: Preferred stock dividends
Net loss attributable to common stockholders
(142,238)
(156,766)
-9%
(285,502)
(284,153)
The following is a summary of our non-segment/corporate interest expense (dollars in thousands):
75,684
65,674
10,010
149,671
130,073
19,598
78
99
(21)
175
(12)
-6%
Primary unsecured credit facility
3,296
2,716
580
7,005
5,764
1,241
Swap loss (savings)
(9)
Loan expense
3,158
3,241
(83)
6,147
6,519
(372)
The change in interest expense on senior unsecured notes is due to the net effect of issuances and extinguishments, excluding our foreign senior unsecured debt, which is in our seniors housing operating segment. Please refer to Note 10 to our unaudited consolidated financial statements for additional information. Loan expense represents the amortization of deferred loan costs incurred in connection with the issuance and amendments of debt. Loan expense changes are due to amortization of charges for costs incurred in connection with senior unsecured note issuances. The change in interest expense on the primary unsecured credit facility is due primarily to the net effect and timing of draws, paydowns and variable interest rate changes. Please refer to Note 9 of our unaudited consolidated financial statements for additional information regarding our primary unsecured credit facility.
General and administrative expenses as a percentage of consolidated revenues for the three months ended June 30, 2016 and 2015 were 3.70% and 4.02%, respectively. The increase in general and administrative expenses for the six months ended June 30, 2016 is primarily related to professional service fees for tax and legal consulting and costs associated with our initiatives to attract and retain appropriate personnel to achieve our business objectives. Other expenses in both years included costs associated with the retirement of executive officers. Other expenses for the three months ended June 30, 2015 also included costs associated with the termination of our investment in a strategic medical office partnership.
We believe that net income, as defined by U.S. GAAP, is the most appropriate earnings measurement. 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 net income attributable to common stockholders, 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.
Net operating income from continuing operations (“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 seniors housing operating and medical facility properties. These expenses include, but are not limited to, property-related payroll and benefits, property management fees, marketing, housekeeping, food service, maintenance, utilities, property taxes and insurance. General and administrative expenses represent costs unrelated to property operations or transaction costs. 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 cash-based operating performance of our properties under a consistent population which eliminates changes in the composition of our portfolio. As used herein, same store is generally defined as those revenue-generating properties in the portfolio for the reporting period subsequent to January 1, 2015. Land parcels, loans and sub-leases as well as any properties acquired, developed/redeveloped, transitioned, sold or classified as held for sale during that period are excluded from the same store amounts. We believe NOI and SSNOI provide investors relevant and useful information because they measure the operating performance of our properties at the property level on an unleveraged basis. We use NOI and SSNOI to make decisions about resource allocations and to assess the property level performance of our properties.
EBITDA stands for earnings before interest, taxes, depreciation and amortization. We believe that EBITDA, along with net income and cash flow provided from operating activities, is an important supplemental measure because it provides additional information to assess and evaluate the performance of our operations. We primarily utilize EBITDA to measure our interest coverage ratio, which represents EBITDA divided by total interest, and our fixed charge coverage ratio, which represents EBITDA divided by fixed charges. Fixed charges include total interest, secured debt principal amortization and preferred dividends.
A covenant in our primary unsecured credit facility contains a financial ratio based on a definition of EBITDA that is specific to that agreement. Failure to satisfy these covenants could result in an event of default that could have a material adverse impact on our cost and availability of capital, which could in turn have a material adverse impact on our consolidated results of operations, liquidity and/or financial condition. Due to the materiality of these debt agreements and the financial covenants, we have disclosed Adjusted EBITDA, which represents EBITDA as defined above and adjusted for items per our covenant. We use Adjusted EBITDA to measure our adjusted fixed charge coverage ratio, which represents Adjusted EBITDA divided by fixed charges on a trailing twelve months basis. Fixed charges include total interest (excluding capitalized interest and non-cash interest expenses), secured debt principal amortization and preferred dividends. Our covenant requires an adjusted fixed charge coverage ratio of at least 1.50 times.
Other than Adjusted EBITDA, 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. Adjusted EBITDA is used to demonstrate our compliance with a comparable financial covenant in our primary unsecured credit facility and is not being presented for use by investors for any other purpose. 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 net income attributable to common stockholders, 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. Amounts are in thousands except for per share data.
FFO Reconciliations:
188,829
205,799
222,809
228,696
(56,845)
(2,046)
(31,385)
(7,249)
(10,467)
(11,647)
(9,908)
(17,319)
(20,616)
Unconsolidated entities
26,496
19,791
18,146
18,062
16,604
17,077
Average common shares outstanding:
336,754
351,765
353,604
355,076
337,812
353,107
354,972
356,051
Per share data:
Net income attributable to
common stockholders
0.57
0.38
1.12
1.17
(17,716)
(37,934)
46,287
33,682
2.27
The table below reflects the reconciliation of EBITDA to net income, the most directly comparable U.S. GAAP measure, for the periods presented. Interest expense includes discontinued operations. Dollars are in thousands.
44
EBITDA Reconciliations:
209,422
199,257
149,416
165,474
121,080
121,130
131,097
132,960
Income tax expense (benefit)
(304)
7,417
(3,344)
2,682
(1,725)
(513)
519,027
522,842
506,004
525,405
Interest Coverage Ratio:
Non-cash interest expense
(119)
4,202
(3,791)
(2,878)
599
(1,519)
2,387
2,060
1,865
2,358
3,037
4,306
Total interest
123,348
125,123
119,204
130,577
136,596
135,113
Fixed Charge Coverage Ratio:
Secured debt principal payments
15,630
17,336
15,817
18,281
18,642
19,096
Preferred dividends
Total fixed charges
155,330
158,811
151,373
165,210
171,590
170,561
7,113
(2,239)
4,082
(920)
4,446
7,343
248,470
271,708
32,966
37,737
314,139
342,148
45
The table below reflects the reconciliation of Adjusted EBITDA to net income, the most directly comparable U.S. GAAP measure, for the periods presented. Interest expense includes discontinued operations. Dollars are in thousands.
Twelve Months Ended
Adjusted EBITDA
Reconciliations:
656,521
899,126
945,612
888,549
844,606
724,894
481,321
479,083
481,778
492,169
504,048
517,512
(3,832)
2,016
8,870
6,451
5,030
(2,899)
799,641
793,994
798,823
826,240
866,106
883,873
1,933,651
2,174,219
2,235,083
2,213,409
2,219,790
2,123,380
117,140
122,590
118,369
110,926
70,579
63,245
33,462
30,416
31,622
30,844
29,976
25,883
25,108
43,464
41,356
34,677
19,252
398
Losses/impairments (gains) on properties, net
(208,147)
(385,179)
(357,621)
(278,167)
(209,228)
(20,647)
(59,922)
(60,273)
(60,322)
20,727
15,250
4,988
40,636
37,386
Additional other income
(2,144)
(13,955)
1,859,875
1,938,343
2,011,331
2,091,754
2,168,861
2,215,690
Adjusted Fixed Charge Coverage Ratio:
7,931
8,292
8,378
8,670
9,320
11,566
(2,215)
3,636
392
(2,586)
(1,868)
(7,589)
487,037
491,011
490,548
498,253
511,500
521,489
Adjusted interest coverage ratio
3.82x
3.95x
4.10x
4.20x
4.24x
4.25x
62,455
63,988
65,256
67,064
70,076
71,836
65,408
65,406
614,900
620,407
621,212
630,723
646,984
658,733
Adjusted fixed charge coverage ratio
3.02x
3.12x
3.24x
3.32x
3.35x
3.36x
The following tables reflect the reconciliation of NOI (which derives directly from consolidated results) and SSNOI for the periods presented. Dollars are in thousands.
46
NOI Reconciliations:
Consolidated revenues:
280,575
298,038
305,460
308,168
494,561
547,081
586,826
605,369
119,019
133,856
136,190
133,455
Non-segment/corporate
1,008
58
Total consolidated revenues
894,177
978,997
1,029,484
1,047,050
Consolidated property operating expenses:
338,507
368,050
399,882
408,894
37,954
40,653
38,856
40,742
Total consolidated property operating expenses
376,461
408,703
438,738
449,636
Consolidated net operating income:
156,054
179,031
186,944
196,475
81,065
93,203
97,334
92,713
Total consolidated net operating income
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Same Store NOI Reconciliations:
NOI:
517,694
558,776
570,272
589,738
597,356
Adjustments:
Non-cash NOI on same store properties
(24,178)
(24,885)
(24,888)
(22,764)
(23,092)
(20,624)
NOI attributable to non same store properties
(39,769)
(46,956)
(52,222)
(60,682)
(62,768)
(64,179)
Subtotal
(63,947)
(71,841)
(77,110)
(83,446)
(85,860)
(84,803)
Seniors housing operating:
251
253
250
249
248
242
(3,843)
(17,255)
(19,054)
(32,156)
(38,030)
(40,129)
(3,592)
(17,002)
(18,804)
(31,907)
(37,782)
(39,887)
(2,271)
(2,054)
(2,115)
(2,052)
(1,493)
(1,485)
(5,460)
(11,547)
(17,266)
(20,899)
(16,773)
(22,761)
(7,731)
(13,601)
(19,381)
(22,951)
(18,266)
(24,246)
Same store NOI:
606
216,628
220,928
222,014
222,308
298
152,462
160,227
155,037
158,693
221
73,334
73,822
74,383
74,447
1,125
Same Store NOI Property Reconciliation:
Total properties
Acquisitions
(192)
Developments
(22)
Held-for-sale
(74)
Other(1)
(7)
Same store properties
(1) Includes six land parcels and one loan.
48
1,076,469
1,214,725
(49,062)
(43,712)
(86,725)
(126,948)
(135,787)
(170,660)
504
490
(21,097)
(78,159)
(20,593)
(77,669)
(4,325)
(2,978)
(17,008)
(39,534)
(21,333)
(42,512)
United States of America
Policy and legislative changes that increase or decrease government reimbursement impact our operators and tenants that participate in Medicare, Medicaid or other government programs. The reimbursement methodologies applied to health care facilities continue to evolve. To the extent that policy or legislative changes, or new reimbursement methodologies decrease government reimbursement to our operators and tenants, our revenue and operations may be indirectly adversely affected.
Licensing and Certification
Certain health care facilities are subject to a variety of licensure and certificate of need (“CON”) laws and regulations. Where applicable, CON laws generally require, among other requirements, that a facility demonstrate the need for (1) constructing a new facility, (2) adding beds or expanding an existing facility, (3) investing in major capital equipment or adding new services, (4) changing the ownership or control of an existing licensed facility, or (5) terminating services that have been previously approved through the CON process. State and federal officials, increasingly including the Federal Trade Commission (“FTC”) and the U.S. Department of Justice (“DOJ”), are challenging CON laws for reducing competition in the industry, creating barriers to entry and expansion, limiting consumer choice, and stifling innovation. We cannot predict whether current or future efforts to repeal or amend these state laws will be successful, nor can we predict the impact that such repeals or amendments would have on our operators or tenants and their ability to meet their obligations to us.
Reimbursement
The Department of Health and Human Services (“HHS”) pledged to tie 30% of Medicare payments to quality or alternative payment models by the end of 2016 and to tie 50% of Medicare payments to quality or alternate payment models by the end of 2018. In January 2015, the Administration announced that it achieved its goal of tying 30% of Medicare payments to quality ahead of schedule, by year end 2015 rather than the targeted deadline of year end 2016. Providers increasingly are entering into value-based purchasing arrangements, which to the extent Welltower’s operators and tenants enter into such agreements, could affect their reimbursement and indirectly impact our revenues and operations. For example, the Centers for Medicare and Medicaid Services (“CMS”) launched the Hospital Value-Based Purchasing (“VBP”) Program in 2013, which is an initiative designed to reward acute-care hospitals with incentive payments for the quality of care they provide to Medicare beneficiaries. Similarly, other public and private payors have started considering whether to base reimbursement decisions on access, price, quality, efficiency, and alignment of incentives, rewarding higher quality healthcare providers with enhanced payments and increased market share.
On October 6, 2014, the President signed into law the Improving Medicare Post-Acute Transformation Act of 2014 (“IMPACT Act”). The law required MedPAC to submit a report to Congress by June 30, 2016, evaluating and recommending features of a post-acute payment system that establishes payment rates according to individual characteristics instead of the post-acute setting where the patient is treated. On June 15, 2016, MedPAC submitted this report to Congress, which provides general guidelines, rather than specific details, for developing a new cross-facility payment system, including a common unit of service, a common risk adjustment system using patient characteristics, separate models to establish payments for non-therapy ancillary services and therapy services, and two outlier policies for high-cost stays and short stays. The IMPACT Act requires MedPAC to issue another report in 2023, following CMS’s development of an actual payment prototype.
On November 3, 2015, CMS published a proposed rule that would revise the discharge planning requirements that hospitals, including long-term acute care hospitals (“LTCHs”), inpatient rehabilitation facilities (“IRFs”) and home health agencies (“HHAs”) must meet in order to participate in the Medicare and Medicaid programs. Among other things, the proposed rule would require hospitals and other facilities to evaluate patients for their discharge needs and develop specific written discharge plans for them. The proposed rule would also implement the discharge planning requirements of the IMPACT Act. Provider groups have expressed concern that the proposed rule, if implemented, could create burdensome paperwork requirements, resulting in the need to hire additional staff and necessarily expend more resources.
On February 9, 2016, President Obama released his budget proposal for fiscal year (“FY”) 2017. The proposed budget would cut Medicare payments to providers by $420 billion over ten years. Among other Medicare-related changes, the President’s budget plan over ten years would: (1) reduce bad debt payments to providers by $32.9 billion, (2) reduce the payment updates for post-acute care providers by $86.6 billion, (3) raise the “60% Rule” threshold for IRFs back to 75% for reductions of $2.2 billion, and (4) implement bundled post-acute care payments for reductions of $9.9 billion. If these recommendations are adopted, we cannot predict whether they will have a material impact on our operators’ or tenants’ property or business.
On March 11, 2016, CMS published a proposed rule to test new models regarding Medicare Part B payments for prescription drugs. The proposal is designed to test different physician and patient incentives to drive the prescribing of the most effective drugs and test new payment approaches to reward positive patient outcomes. If this proposed rule is finalized, it may impact our operators’ and tenants’ Medicare reimbursement rates, and our revenues and operations may be indirectly affected.
On March 15, 2016, the House Energy and Commerce Committee approved the Common Sense Act of 2016, which would lower the maximum rate for Medicaid provider tax assessments from 6.0% of taxpayer revenues to 5.5%. If enacted, the bill could lower funds available for state Medicaid programs and may result in lower Medicaid rates to our operators.
On March 24, 2016, CMS announced the next phase of its Initiative to Reduce Avoidable Hospitalizations among Nursing Facility Residents. Through this new payment model, CMS will encourage healthcare practitioners to provide additional treatments for especially ill or frail nursing home residents by equalizing the payments between a comprehensive assessment given at skilled nursing facilities (“SNFs”) and hospitals. Participating SNFs will also receive payment to provide additional treatment for common medical conditions that often lead to avoidable hospitalizations.
On April 1, 2016, CMS’s bundled payment program for Lower Extremity Joint Replacement (“CJR”) procedures went into effect. The CJR bundled payment program is mandatory for all hospitals paid under the Medicare Inpatient Prospective Payment System and located in the 67 selected Metropolitan Statistical Areas. This could have an effect on our SNF operators as patients are down streamed for recovery.
On April 4, 2016, CMS announced the final 2017 payment rates for Medicare Advantage, with an expected average payment increase of 0.85%. Changes in Medicare Advantage plan payments may indirectly affect our operators and tenants that contract with Medicare Advantage plans.
On April 25, 2016, CMS published proposed rules regarding FY 2017 Medicare payment policies and rates for SNFs and IRFs. Under the proposed SNF rule, CMS projects that aggregate payments to SNFs will increase by $800 million, or 2.1%, from payments in FY 2016. Under the proposed IRF rule, CMS projects that aggregate payments to IRFs will increase by $125 million, or 1.6%, from payments in FY 2016.
On April 26, 2016, CMS published a proposed rule regarding FY 2017 Medicare payment policies and rates for LTCHs. As a result of the continuation of the phase-in of site neutral payment rates for specified cases in LTCHs, CMS projects FY 2017 Medicare payments to LTCHs would decrease by 6.9%, or approximately $355 million under the rule. Payment rates would increase by 0.3% for cases that qualify for the higher standard LTCH Prospective Payment System rate. The proposed rule would also implement a
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25% threshold policy (“25% rule”), under which payment adjustments are made when the number of cases an LTCH admits from a single hospital exceeds a specified threshold (generally 25%). Finally, in response to the federal district court’s review of the “Two-Midnight” payment policy in Shands Jacksonville Medical Center, Inc., et al. v. Burwell, No. 14-263 (D.D.C.), CMS proposes to remove the 0.2% Medicare Part A hospital payment cut and also its effects for FYs 2014, 2015, and 2016 by adjusting the FY 2017 payment rates. The impact of this proposal would be to increase FY 2017 payments by approximately 0.8%.
On June 16, 2016, CMS published a proposed rule that would update the requirements that hospitals and critical access hospitals (“CAHs”) must meet to participate in the Medicare and Medicaid programs. The rule would apply new conditions of participation to such hospitals, including revisions to reduce readmissions, advance non-discrimination protections, increase infection control, and address other quality measures. If finalized, these new conditions of participation may potentially increase the operating costs of our tenants and operators.
On July 6, 2016, CMS issued a proposed rule regarding 2017 Medicare payment rates for Hospital Outpatient Departments (“HOPDs”) and Ambulatory Surgery Centers (“ASCs”). CMS Estimates that updates in the proposed rule would increase HOPD payments by approximately 1.6% and ASC payments by 1.2% in 2017. In addition, CMS proposes to implement section 603 of the Bipartisan Budget Act of 2015, which requires that, with the exception of dedicated emergency department services, services furnished in off-campus provider-based departments that began billing under the HOPD Prospective Payment System (“PPS”) on or after November 2, 2015 would no longer be paid under the HOPD PPS; instead, these services would be paid under other applicable Part B payment systems, including the Physician Fee Schedule (“PFS”), beginning January 1, 2017. Specifically, CMS would pay physicians at the “nonfacility” PFS rate and there would be no payment made directly to the hospital by Medicare.
HHS Office of Inspector General Recommendations Addressing SNF Billing
In the HHS, Office of Inspector General’s (“OIG’s”) April 2016 Compendium of Unimplemented Recommendations, OIG cited its prior September 2014 report addressing the need to reform the Medicare payment system for SNF services. In response to its findings that Medicare payments for therapy greatly exceeded SNF’s costs for therapy, OIG recommended, among other things, that CMS evaluate the extent to which Medicare payment rates for therapy should be reduced. Similarly, in May 2016, OIG issued a report finding that the improper payment rate for SNF claims increased by 4.10% in FY 2015 (compared to FY 2014) due to insufficient documentation. If followed, these reports and recommendations may impact our tenants and operators.
Other Related Laws, Initiatives, and Considerations
On February 12, 2016, CMS published a final rule regarding the obligations of Medicare providers to report and return overpayments arising under Parts A and B. The final rule, which became effective March 14, 2016, implements § 6402(a) of the Affordable Care Act, also known as the “60-day report and return statute,” which requires providers to report and return Medicare and Medicaid overpayments within the later of (a) 60 days after the overpayment is “identified,” or (b) the date any corresponding cost report is due, if applicable. An overpayment impermissibly retained under this statute could violate the federal False Claims Act and subject providers to potential Medicare and Medicaid program exclusion and penalties under the federal Civil Monetary Penalty statute.
On March 9, 2016, CMS released SNF utilization and payment data around facility costs and services. In its press release, CMS expressed concern that the amount of therapy provided for ultra-high and very high resource utilization groups is often very close to the minimum amount of minutes needed to qualify a patient for these categories. CMS referred the issue to Recovery Auditor Contractors for further investigation. On March 30, 2016, the Department of Justice launched 10 regional Elder Justice Task Forces to coordinate and enhance efforts to pursue nursing homes that provide grossly substandard care to their residents. We cannot predict the extent to which increased monitoring and auditing activities by government agencies may impact our operators.
On June 30, 2016, DOJ issued an interim rule increasing the penalties under the False Claims Act (“FCA”) from the current range of $5,500 to $11,000 per false claim, to a new range of $10,781 to $21,562. The interim rule takes effect August 1, 2016, and applies to false claims made after November 2, 2015.
Many of our operators and tenants are subject to federal and state privacy and security laws. There have been increased enforcement efforts under these laws, and we expect this trend to continue. Under the Health Information Technology for Economic and Clinical Health Act (“HITECH”), state attorney generals have the right to prosecute Health Insurance Portability and Accountability Act (“HIPAA”) violations committed against residents of their states, and several such actions have been brought to-date. In addition, HITECH mandates that the Secretary of HHS conduct periodic compliance audits of HIPAA covered entities and business associates. On March 21, 2016, the HHS Office of Civil Rights announced the official start of the 2016 Phase 2 HIPAA
51
Audit Program. Enforcement actions may stem from these audits, including civil monetary penalty fines or monetary settlements, which may impact an operator’s ability to meet their financial obligations to us.
Brexit
On June 23, 2016, the United Kingdom (“UK”) held an “in-or-out referendum” on the UK’s membership of the European Union (“EU”), the result of which favored the exit of the UK from the EU (“Brexit”). A process of negotiation will determine the future terms of the UK’s relationship with the EU which could take many forms. In the meantime, the UK remains a member of the EU. The potential impact of Brexit is currently unclear, but may include reduced economic growth and volatility, changes to the regulatory environment and uncertainty in the capital markets. We cannot predict whether Brexit will have a material impact on our operators’ or tenants’ property or business.
National Minimum Wage
In the July 2015, Budget the UK government announced that it would introduce the National Living Wage at a premium of 50 pence above the National Minimum Wage to take effect from April 2016. The National Minimum Wage (Amendment) Regulations 2016 came into force on April 1, 2016 (“2016 Regulations”). The 2016 Regulations amend the Regulation of the National Minimum Wage Regulations 2015 to provide a National Living Wage rate of £7.20 an hour for workers aged 25 and over. The current National Minimum Wage for adults of £6.70 will continue to apply for workers aged 21 to 24. The 2016 Regulations also amend the National Minimum Wage Act 1998 by increasing the financial penalty payable by employers who underpay the National Minimum Wage from 100% to 200% of the underpayment due to each worker. The maximum fine for non-payment will be £20,000 per worker and employers who fail to pay will be banned from being a company director for up to 15 years.
Privacy
In the EU, data protection is governed by the EU Data Protection Directive 95/46/EC (the “Data Protection Directive”). The Data Protection Directive has been implemented in the UK by the Data Protection Act 1998 (the “Act”) which entered into force on March 2000 and is enforced by the Information Commissioner’s Office (“ICO”).
A new EU General Data Protection Regulation will replace the Data Protection Directive and impose a significant number of new obligations including, among others, a requirement to appoint data protection officers, having detailed documentation on the processing of personal data, carrying out privacy impact assessments in certain circumstances, providing standardized data protection notices, reporting security breaches without undue delay, and providing certain rights to individuals such as a right of erasure of personal data. The EU General Data Protection Regulation is expected to have significant enforcement powers with fines proposed by the European Commission of up to 4% of annual worldwide turnover or €20 million, whichever is greater. The EU General Data Protection Regulation was adopted in May 2016 and will enter into force in EU Member States on May 25, 2018. If the Regulation is adopted, we cannot predict whether it will have a material impact on our operators’ or tenants’ property or business.
Licensing and Regulation
British Columbia
The Community Care and Assisted Living Act, the Residential Care Regulation, and the Community Care and Assisted Living Regulation (together, the “B.C. Act”) regulate “community care facilities” (long-term care facilities) as premises used for the purpose of supervising vulnerable persons who require three or more prescribed services (from a list that includes regular assistance with activities of daily living; distribution of medication; management of cash resources; monitoring of food intake; structured behavior management and intervention; and psychosocial or physical rehabilitative therapy).
The B.C. Act also creates a separate regime for regulating “assisted living residences,” the definition of which changed in May 2016 to facilities providing one or more prescribed care services.
Quebec
52
In Québec, retirement homes are regulated by the Act Respecting Health Services and Social Services and the Regulation required to obtain a certificate of compliance based on operating standards for a private seniors’ residence. The required certificate of compliance is issued for a period of four years, is renewable and can only be validly transferred to another person with the written permission of the regional licensing agency.
Other Legislation
In Quebec, the Safety Code was amended in December 2015 to require that private seniors’ residences be equipped with a fire alarm and detection system, as well as the installation of a sprinkler system in certain private seniors’ residences. The amendments came into force March 18, 2016, except regarding the installation of the sprinkler system, which has a five year grace period, and comes into force December 2, 2020.
Our unaudited consolidated financial statements are prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions. Management considers an accounting estimate or assumption critical if:
· the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and
· the impact of the estimates and assumptions on financial condition or operating performance is material.
Management has discussed the development and selection of its critical accounting policies with the Audit Committee of the Board of Directors. Management believes the current assumptions and other considerations used to estimate amounts reflected in our unaudited consolidated financial statements are appropriate and are not reasonably likely to change in the future. However, since these estimates require assumptions to be made that were uncertain at the time the estimate was made, they bear the risk of change. If actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our unaudited consolidated financial statements, the resulting changes could have a material adverse effect on our consolidated results of operations, liquidity and/or financial condition. Please refer to Note 2 to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015 for further information regarding significant accounting policies that impact us. There have been no material changes to these policies in 2016.
This Quarterly Report on Form 10-Q may contain “forward-looking” statements as defined in the Private Securities Litigation Reform Act of 1995. When the company uses words such as “may,” “will,” “intend,” “should,” “believe,” “expect,” “anticipate,” “project,” “estimate” or similar expressions that do not relate solely to historical matters, it is making forward-looking statements. In particular, these forward-looking statements include, but are not limited to, those relating to the company’s opportunities to acquire, develop or sell properties; the company’s ability to close its anticipated acquisitions, investments or dispositions on currently anticipated terms, or within currently anticipated timeframes; the expected performance of the company’s operators/tenants and properties; the company’s expected occupancy rates; the company’s ability to declare and to make distributions to shareholders; the company’s investment and financing opportunities and plans; the company’s continued qualification as a real estate investment trust (“REIT”); the company’s ability to access capital markets or other sources of funds; and the company’s ability to meet its earnings guidance. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that may cause the company’s actual results to differ materially from the company’s expectations discussed in the forward-looking statements. This may be a result of various factors, including, but not limited to: the status of the economy; the status of capital markets, including availability and cost of capital; issues facing the health care industry, including compliance with, and changes to, regulations and payment policies, responding to government investigations and punitive settlements and operators’/tenants’ difficulty in cost-effectively obtaining and maintaining adequate liability and other insurance; changes in financing terms; competition within the health care and seniors housing industries; negative developments in the operating results or financial condition of operators/tenants, including, but not limited to, their ability to pay rent and repay loans; the company’s ability to transition or sell properties with profitable results; the failure to make new investments or acquisitions as and when anticipated; natural disasters and other acts of God affecting the company’s properties; the company’s ability to re-lease space at similar rates as vacancies occur; the company’s ability to timely reinvest sale proceeds at similar rates to assets sold; operator/tenant or joint venture partner bankruptcies or insolvencies; the cooperation of joint venture partners; government regulations affecting Medicare and Medicaid reimbursement rates and operational requirements; liability or contract claims by or against operators/tenants; unanticipated difficulties and/or expenditures relating to future investments or acquisitions; environmental laws affecting the company’s properties; changes in rules or practices governing the company’s financial reporting; the movement of U.S. and foreign currency exchange rates; the company’s ability to maintain its qualification as a REIT; and key management personnel recruitment and retention. Other important factors are identified in the company’s Annual Report on Form 10-K for the year ended December 31, 2015, including factors identified under the headings
“Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Finally, the company undertakes no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events or otherwise, or to update the reasons why actual results could differ from those projected in any forward-looking statements.
We are exposed to various market risks, including the potential loss arising from adverse changes in interest rates and foreign currency exchange rates. We seek to mitigate the underlying foreign currency exposures with gains and losses on derivative contracts hedging these exposures. We seek to mitigate the effects of fluctuations in interest rates by matching the terms of new investments with new long-term fixed rate borrowings to the extent possible. We may or may not elect to use financial derivative instruments to hedge interest rate exposure. These decisions are principally based on our policy to match our variable rate investments with comparable borrowings, but are also based on the general trend in interest rates at the applicable dates and our perception of the future volatility of interest rates. This section is presented to provide a discussion of the risks associated with potential fluctuations in interest rates and foreign currency exchange rates.
We historically borrow on our primary unsecured credit facility to acquire, construct or make loans relating to health care and seniors housing properties. Then, as market conditions dictate, we will issue equity or long-term fixed rate debt to repay the borrowings under our primary unsecured credit facility. We are subject to risks associated with debt financing, including the risk that existing indebtedness may not be refinanced or that the terms of refinancing may not be as favorable as the terms of current indebtedness. The majority of our borrowings were completed under indentures or contractual agreements that limit the amount of indebtedness we may incur. Accordingly, in the event that we are unable to raise additional equity or borrow money because of these limitations, our ability to acquire additional properties may be limited.
A change in interest rates will not affect the interest expense associated with our fixed rate debt. Interest rate changes, however, will affect the fair value of our fixed rate debt. Changes in the interest rate environment upon maturity of this fixed rate debt could have an effect on our future cash flows and earnings, depending on whether the debt is replaced with other fixed rate debt, variable rate debt or equity or repaid by the sale of assets. To illustrate the impact of changes in the interest rate markets, we performed a sensitivity analysis on our fixed rate debt instruments whereby we modeled the change in net present values arising from a hypothetical 1% increase in interest rates to determine the instruments’ change in fair value. The following table summarizes the analysis performed as of the dates indicated (in thousands):
Principal
Change in
balance
fair value
8,120,320
(574,842)
7,965,107
(519,901)
2,657,077
(89,196)
2,757,123
(91,376)
10,777,397
(664,038)
10,722,230
(611,277)
Our variable rate debt, including our primary unsecured credit facility, is reflected at fair value. At June 30, 2016, we had $2,207,045,000 outstanding under our variable rate debt. Assuming no changes in outstanding balances, a 1% increase in interest rates would result in increased annual interest expense of $22,070,000. At December 31, 2015, we had $2,236,733,000 outstanding under our variable rate debt. Assuming no changes in outstanding balances, a 1% increase in interest rates would have resulted in increased annual interest expense of $22,367,000.
We are subject to currency fluctuations that may, from time to time, affect our financial condition and results of operations. Increases or decreases in the value of the Canadian Dollar or Pounds Sterling relative to the U.S. Dollar impact the amount of net income we earn from our investments in Canada and the United Kingdom. Based solely on our results for the three months ended June 30, 2016, including the impact of existing hedging arrangements, if these exchange rates were to increase or decrease by 10%, our net income from these investments would increase or decrease, as applicable, by less than $350,000. We will continue to mitigate these underlying foreign currency exposures with non-U.S. denominated borrowings and gains and losses on derivative contracts. If we increase our international presence through investments in, or acquisitions or development of, seniors housing and health care properties outside the U.S., we may also decide to transact additional business or borrow funds in currencies other than U.S. Dollars, Canadian Dollars or Pounds Sterling. To illustrate the impact of changes in foreign currency markets, we performed a sensitivity analysis on our derivative portfolio whereby we modeled the change in net present values arising from a hypothetical 1% increase in foreign currency exchange rates to determine the instruments’ change in fair value. The following table summarizes the results of the analysis performed (dollars in thousands):
Carrying
Value
Foreign currency forward contracts(1)
68,818
2,731
117,452
1,915
Debt designated as hedges
1,581,879
13,000
1,728,979
1,650,697
15,731
1,846,431
14,915
(1) Amounts exclude cross currency hedge activity.
For additional information regarding fair values of financial instruments, see “Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” and Notes 11 and 16 to our unaudited consolidated financial statements.
Item 4.Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed by us in the reports we file with or submit to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. No changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
From time to time, there are various legal proceedings pending to which we are a party or to which some of our properties are subject arising in the normal course of business. We do not believe that the ultimate resolution of these proceedings will have a material adverse effect on our consolidated financial position or results of operations.
There have been no material changes from the risk factors identified under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015.
Issuer Purchases of Equity Securities
Period
Total Number of Shares Purchased(1)
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2)
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
April 1, 2016 through April 30, 2016
May 1, 2016 through May 31, 2016
107
70.30
June 1, 2016 through June 30, 2016
9,971
76.10
10,078
76.04
(1) During the three months ended June 30, 2016, the company acquired shares of common stock held by employees who tendered owned shares to satisfy tax withholding obligations.
(2) No shares were purchased as part of publicly announced plans or programs.
None.
10.1 Credit Agreement dated as of May 13, 2016 by and among Welltower Inc., the lenders listed therein, KeyBank National Association, as administrative agent, L/C issuer and a swingline lender, Bank of America, N.A. and JPMorgan Chase Bank, N.A., as co-syndication agents, Deutsche Bank Securities Inc., as documentation agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated, JPMorgan Chase Bank, N.A., KeyBanc Capital Markets Inc. and Deutsche Bank Securities Inc., as U.S. joint lead arrangers, Merrill Lynch, Pierce, Fenner & Smith Incorporated, JPMorgan Chase Bank, N.A., KeyBanc Capital Markets Inc. and RBC Capital Markets, as Canadian joint lead arrangers, and Merrill Lynch, Pierce, Fenner & Smith Incorporated and JPMorgan Chase Bank, N.A., as joint book runners (filed with the Securities and Exchange Commission as Exhibit 10.1 to the company’s Form 8-K filed May 16, 2016, and incorporated herein by reference thereto).
10.2 Welltower Inc. 2016 Long-Term Incentive Plan (filed with the Securities and Exchange Commission as Exhibit 10.1 to the company’s Form 8-K filed May 10, 2016, and incorporated herein by reference thereto).*
10.3 Welltower Inc. 2016-2018 Long-Term Incentive Program.*
10.4 Transition Agreement, dated as of June 30, 2016, by and between Erin C. Ibele and Welltower Inc.*
12 Statement Regarding Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends (Unaudited).
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.1 Certification pursuant to 18 U.S.C. Section 1350 by Chief Executive Officer.
32.2 Certification pursuant to 18 U.S.C. Section 1350 by Chief Financial Officer.
101.INS XBRL Instance Document**
101.SCH XBRL Taxonomy Extension Schema Document**
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document**
101.LAB XBRL Taxonomy Extension Label Linkbase Document**
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document**
101.DEF XBRL Taxonomy Extension Definition Linkbase Document**
*
**
Management Contract or Compensatory Plan or Arrangement
Attached as Exhibit 101 to this Quarterly Report on Form 10-Q are the following materials, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets at June 30, 2016 and December 31, 2015, (ii) the Consolidated Statements of Comprehensive Income for the six months ended June 30, 2016 and 2015, (iii) the Consolidated Statements of Equity for the six months ended June 30, 2016 and 2015, (iv) the Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015 and (v) the Notes to Unaudited Consolidated Financial Statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 2, 2016
By:
/s/ THOMAS J. DEROSA
Thomas J. DeRosa,
Chief Executive Officer
(Principal Executive Officer)
/s/ SCOTT A. ESTES
Scott A. Estes,
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ PAUL D. NUNGESTER, JR.
Paul D. Nungester, Jr.,
Senior Vice President and Controller
(Principal Accounting Officer)