QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedSeptember 30, 2021
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period fromto
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)
(IRS 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)
Securities registered pursuant to Section 12(b) of the Act
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, $1.00 par value per share
WELL
New York Stock Exchange
4.800% Notes due 2028
WELL28
New York Stock Exchange
4.500% Notes due 2034
WELL34
New York Stock Exchange
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. Yesþ No ¨
Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted 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). Yesþ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
☐
Emerging growth company
☐
(Do not check if a smaller reporting company)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
As of October 29, 2021, the registrant had 435,274,528 shares of common stock outstanding.
Real property held for sale, net of accumulated depreciation
251,152
216,613
Construction in progress
562,487
487,742
Less accumulated depreciation and amortization
(6,634,061)
(6,104,297)
Net real property owned
29,307,802
27,565,709
Right of use assets, net
526,614
465,866
Real estate loans receivable, net of credit allowance
1,115,645
443,372
Net real estate investments
30,950,061
28,474,947
Other assets:
Investments in unconsolidated entities
977,955
946,234
Goodwill
68,321
68,321
Cash and cash equivalents
303,982
1,545,046
Restricted cash
58,663
475,997
Straight-line rent receivable
346,159
344,066
Receivables and other assets
774,884
629,031
Total other assets
2,529,964
4,008,695
Total assets
$
33,480,025
$
32,483,642
Liabilities and equity
Liabilities:
Unsecured credit facility and commercial paper
$
290,996
$
—
Senior unsecured notes
11,116,067
11,420,790
Secured debt
2,262,345
2,377,930
Lease liabilities
544,547
418,266
Accrued expenses and other liabilities
1,093,959
1,041,594
Total liabilities
15,307,914
15,258,580
Redeemable noncontrolling interests
389,195
343,490
Equity:
Common stock
436,640
418,691
Capital in excess of par value
22,148,859
20,823,145
Treasury stock
(108,478)
(104,490)
Cumulative net income
8,605,064
8,327,598
Cumulative dividends
(14,115,705)
(13,343,721)
Accumulated other comprehensive income (loss)
(103,177)
(148,504)
Total Welltower Inc. stockholders’ equity
16,863,203
15,972,719
Noncontrolling interests
919,713
908,853
Total equity
17,782,916
16,881,572
Total liabilities and equity
$
33,480,025
$
32,483,642
Note: The consolidated balance sheet at December 31, 2020 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.
3
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
WELLTOWER INC. AND SUBSIDIARIES
(In thousands, except per share data)
Three Months Ended
Nine Months Ended
September 30,
September 30,
2021
2020
2021
2020
Revenues:
Resident fees and services
$
835,617
$
740,956
$
2,299,972
$
2,360,488
Rental income
357,984
275,046
1,015,550
1,061,311
Interest income
39,864
16,750
97,891
48,060
Other income
6,332
4,122
19,438
14,092
Total revenues
1,239,797
1,036,874
3,432,851
3,483,951
Expenses:
Property operating expenses
729,400
634,717
1,989,383
1,977,262
Depreciation and amortization
267,754
255,532
753,065
795,704
Interest expense
122,522
124,851
368,005
393,215
General and administrative expenses
32,256
31,003
93,618
100,546
Loss (gain) on derivatives and financial instruments, net
(8,078)
1,395
(6,503)
10,480
Loss (gain) on extinguishment of debt, net
(5)
33,004
50,964
33,253
Provision for loan losses, net
(271)
2,857
7,309
11,351
Impairment of assets
1,490
23,313
48,750
126,291
Other expenses
3,575
11,544
26,256
37,247
Total expenses
1,148,643
1,118,216
3,330,847
3,485,349
Income (loss) from continuing operations before income taxes and other items
91,154
(81,342)
102,004
(1,398)
Income tax (expense) benefit
(4,940)
(2,003)
(6,662)
(9,678)
Income (loss) from unconsolidated entities
(15,832)
(5,981)
(10,759)
(8,341)
Gain (loss) on real estate dispositions, net
119,954
484,304
223,702
902,991
Income (loss) from continuing operations
190,336
394,978
308,285
883,574
Net income
190,336
394,978
308,285
883,574
Less: Net income (loss) attributable to noncontrolling interests(1)
10,673
69,393
30,819
68,459
Net income (loss) attributable to common stockholders
$
179,663
$
325,585
$
277,466
$
815,115
Average number of common shares outstanding:
Basic
428,031
417,027
420,955
414,822
Diluted
429,983
418,987
422,835
416,860
Earnings per share:
Basic:
Income (loss) from continuing operations
$
0.44
$
0.95
$
0.73
$
2.13
Net income (loss) attributable to common stockholders
$
0.42
$
0.78
$
0.66
$
1.96
Diluted:
Income (loss) from continuing operations
$
0.44
$
0.94
$
0.73
$
2.12
Net income (loss) attributable to common stockholders(2)
$
0.42
$
0.77
$
0.65
$
1.94
Dividends declared and paid per common share
$
0.61
$
0.61
$
1.83
$
2.09
(1)Includes amounts attributable to redeemable noncontrolling interests.
(2)Includes adjustment to the numerator for income (loss) attributable to OP unitholders.
4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
WELLTOWER INC. AND SUBSIDIARIES
(In thousands)
Three Months Ended
Nine Months Ended
September 30,
September 30,
2021
2020
2021
2020
Net income
$
190,336
$
394,978
$
308,285
$
883,574
Other comprehensive income (loss):
Foreign currency translation gain (loss)
(112,263)
143,353
(55,059)
(109,209)
Derivative and financial instruments designated as hedges gain (loss)
130,711
(145,512)
100,866
86,429
Total other comprehensive income (loss)
18,448
(2,159)
45,807
(22,780)
Total comprehensive income (loss)
208,784
392,819
354,092
860,794
Less: Total comprehensive income (loss) attributable
to noncontrolling interests(1)
4,350
76,847
31,299
59,991
Total comprehensive income (loss) attributable to common stockholders
$
204,434
$
315,972
$
322,793
$
800,803
(1) Includes amounts attributable to redeemable noncontrolling interests.
5
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
WELLTOWER INC. AND SUBSIDIARIES
(In thousands)
Nine Months Ended September 30, 2021
Common Stock
Capital in Excess of Par Value
Treasury Stock
Cumulative Net Income
Cumulative Dividends
Accumulated Other Comprehensive Income (Loss)
Noncontrolling Interests
Total
Balances at January 1, 2021
$
418,691
$
20,823,145
$
(104,490)
$
8,327,598
$
(13,343,721)
$
(148,504)
$
908,853
$
16,881,572
Comprehensive income:
Net income (loss)
71,546
(177)
71,369
Other comprehensive income (loss)
20,368
3,729
24,097
Total comprehensive income
95,466
Net change in noncontrolling interests
(14,250)
(20,266)
(34,516)
Amounts related to stock incentive plans, net of forfeitures
175
5,393
(2,029)
3,539
Net proceeds from issuance of common stock
(92)
(92)
Dividends paid:
Common stock dividends
(254,952)
(254,952)
Balances at March 31, 2021
$
418,866
$
20,814,196
$
(106,519)
$
8,399,144
$
(13,598,673)
$
(128,136)
$
892,139
$
16,691,017
Comprehensive income:
Net income (loss)
26,257
19,695
45,952
Other comprehensive income (loss)
188
2,919
3,107
Total comprehensive income
49,059
Net change in noncontrolling interests
(17,377)
15,630
(1,747)
Amounts related to stock incentive plans, net of forfeitures
51
4,504
(2,114)
2,441
Net proceeds from issuance of common stock
5,016
360,515
365,531
Dividends paid:
Common stock dividends
(255,472)
(255,472)
Balances at June 30, 2021
$
423,933
$
21,161,838
$
(108,633)
$
8,425,401
$
(13,854,145)
$
(127,948)
$
930,383
$
16,850,829
Comprehensive income:
Net income (loss)
179,663
10,470
190,133
Other comprehensive income (loss)
24,771
(6,196)
18,575
Total comprehensive income
208,708
Net change in noncontrolling interests
(4,013)
(14,944)
(18,957)
Amounts related to stock incentive plans, net of forfeitures
3
4,932
155
5,090
Net proceeds from issuance of common stock
12,704
986,102
998,806
Dividends paid:
Common stock dividends
(261,560)
(261,560)
Balances at September 30, 2021
$
436,640
$
22,148,859
$
(108,478)
$
8,605,064
$
(14,115,705)
$
(103,177)
$
919,713
$
17,782,916
6
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
WELLTOWER INC. AND SUBSIDIARIES
(In thousands)
Nine Months Ended September 30, 2020
Common Stock
Capital in Excess of Par Value
Treasury Stock
Cumulative Net Income
Cumulative Dividends
Accumulated Other Comprehensive Income (Loss)
Noncontrolling Interests
Total
Balances at January 1, 2020
$
411,005
$
20,190,119
$
(78,955)
$
7,353,966
$
(12,223,534)
$
(112,157)
$
966,183
$
16,506,627
Cumulative change in accounting principle (Note 2)
(5,212)
(5,212)
Balances at January 1, 2020 (as adjusted for change in accounting principle)
411,005
20,190,119
(78,955)
7,348,754
(12,223,534)
(112,157)
966,183
16,501,415
Comprehensive income:
Net income (loss)
310,284
18,988
329,272
Other comprehensive income (loss)
15,944
(21,955)
(6,011)
Total comprehensive income
323,261
Net change in noncontrolling interests
37,625
(29,662)
7,963
Amounts related to stock incentive plans, net of forfeitures
246
6,608
(8,020)
(1,166)
Net proceeds from issuance of common stock
6,975
583,890
590,865
Dividends paid:
Common stock dividends
(356,001)
(356,001)
Balances at March 31, 2020
$
418,226
$
20,818,242
$
(86,975)
$
7,659,038
$
(12,579,535)
$
(96,213)
$
933,554
$
17,066,337
Comprehensive income:
Net income (loss)
179,246
18,659
197,905
Other comprehensive income (loss)
(20,643)
6,298
(14,345)
Total comprehensive income
183,560
Net change in noncontrolling interests
7,299
(70,124)
(62,825)
Amounts related to stock incentive plans, net of forfeitures
28
7,404
832
8,264
Net proceeds from issuance of common stock
89
3,604
3,693
Repurchase of common stock
(7,656)
(7,656)
Dividends paid:
Common stock dividends
(254,846)
(254,846)
Balances at June 30, 2020
$
418,343
$
20,836,549
$
(93,799)
$
7,838,284
$
(12,834,381)
$
(116,856)
$
888,387
$
16,936,527
Comprehensive income:
Net income (loss)
325,585
67,650
393,235
Other comprehensive income (loss)
(9,613)
7,338
(2,275)
Total comprehensive income
390,960
Net change in noncontrolling interests
(7,894)
(110,147)
(118,041)
Amounts related to stock incentive plans, net of forfeitures
18
6,569
(223)
6,364
Net proceeds from issuance of common stock
(198)
(198)
Dividends paid:
Common stock dividends
(254,510)
(254,510)
Balances at September 30, 2020
$
418,361
$
20,835,026
$
(94,022)
$
8,163,869
$
(13,088,891)
$
(126,469)
$
853,228
$
16,961,102
7
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
WELLTOWER INC. AND SUBSIDIARIES
(In thousands)
Nine Months Ended
September 30,
2021
2020
Operating activities:
Net income
$
308,285
$
883,574
Adjustments to reconcile net income to net cash provided from (used in) operating activities:
Depreciation and amortization
753,065
795,704
Other amortization expenses
13,951
9,613
Provision for loan losses
7,309
11,351
Impairment of assets
48,750
126,291
Stock-based compensation expense
14,868
20,938
Loss (gain) on derivatives and financial instruments, net
(6,503)
10,480
Loss (gain) on extinguishment of debt, net
50,964
33,253
Loss (income) from unconsolidated entities
10,759
8,341
Rental income less than (in excess of) cash received
(9,607)
66,874
Amortization related to above (below) market leases, net
(2,045)
(1,373)
Loss (gain) on real estate dispositions, net
(223,702)
(902,991)
Distributions by unconsolidated entities
11,783
7,835
Increase (decrease) in accrued expenses and other liabilities
97,924
40,443
Decrease (increase) in receivables and other assets
(83,806)
(749)
Net cash provided from (used in) operating activities
991,995
1,109,584
Investing activities:
Cash disbursed for acquisitions, net of cash acquired
(2,735,206)
(393,374)
Cash disbursed for capital improvements to existing properties
(165,691)
(183,324)
Cash disbursed for construction in progress
(263,325)
(126,699)
Capitalized interest
(14,027)
(13,234)
Investment in loans receivable
(953,006)
(216,307)
Principal collected on loans receivable
250,415
14,345
Other investments, net of payments
(10,885)
(2,145)
Contributions to unconsolidated entities
(278,833)
(301,031)
Distributions by unconsolidated entities
238,066
41,884
Proceeds from (payments on) derivatives
2,312
(13,319)
Proceeds from sales of real property
941,708
3,522,949
Net cash provided from (used in) investing activities
(2,988,472)
2,329,745
Financing activities:
Net increase (decrease) under unsecured credit facility and commercial paper
290,996
(1,587,597)
Net proceeds from issuance of senior unsecured notes
1,208,241
1,588,549
Payments to extinguish senior unsecured notes
(1,533,752)
(566,248)
Net proceeds from the issuance of secured debt
2,693
44,921
Payments on secured debt
(118,854)
(538,091)
Net proceeds from the issuance of common stock
1,366,464
595,313
Repurchase of common stock
—
(7,656)
Payments for deferred financing costs and prepayment penalties
(72,251)
(35,925)
Contributions by noncontrolling interests(1)
84,073
14,267
Distributions to noncontrolling interests(1)
(108,912)
(298,369)
Cash distributions to stockholders
(770,457)
(864,115)
Other financing activities
(9,322)
(11,244)
Net cash provided from (used in) financing activities
338,919
(1,666,195)
Effect of foreign currency translation on cash and cash equivalents and restricted cash
(840)
(3,566)
Increase (decrease) in cash, cash equivalents and restricted cash
(1,658,398)
1,769,568
Cash, cash equivalents and restricted cash at beginning of period
2,021,043
385,765
Cash, cash equivalents and restricted cash at end of period
$
362,645
$
2,155,333
Supplemental cash flow information:
Interest paid
$
341,134
$
362,130
Income taxes paid (received), net
1,288
(485)
(1) Includes amounts attributable to redeemable noncontrolling interests.
8
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Business
Welltower Inc. (the "Company"), 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 interests in properties concentrated in major, high-growth markets in the United States (“U.S.”), Canada and the United Kingdom (“U.K.”), consisting of seniors housing and post-acute communities and outpatient medical properties.
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 (such as normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2021 are not necessarily an indication of the results that may be expected for the year ending December 31, 2021. 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, 2020.
Impact of COVID-19 Pandemic
The extent to which the COVID-19 pandemic impacts our operations and those of our operators and tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, the direct and indirect economic effects of the pandemic and containment measures, the impact of new variants, the effectiveness of vaccines, the overall pace of recovery, among others. The COVID-19 pandemic could have material and adverse effects on our financial condition, results of operations and cash flows in the future.
Our Seniors Housing Operating revenues are dependent on occupancy. Spot occupancy has steadily increased in recent months, with 96% of communities open for new admissions and nearly all communities allowing visitors, in-person tours and communal dining and activities. Rapid distribution and a high acceptance rate of COVID-19 vaccinations by residents within assisted living and memory care facilities in the U.S. and U.K. have resulted in a significant decrease in total resident case counts since mid-January across the portfolio. As of September 30, 2021, occupancy has increased approximately 440 bps to 76.7% since the pandemic-low of 72.3% on March 12, 2021. Monthly spot occupancy rates through September 30, 2021 are as follows:
December 2020
January 2021
February 2021
March 2021
April 2021
May 2021
June 2021
July 2021
August 2021
September 2021
Spot occupancy (1)
74.8
%
73.4
%
72.5
%
72.7
%
73.2
%
73.7
%
74.6
%
75.2
%
75.9
%
76.7
%
Sequential occupancy change(2)
(1.4)
%
(0.8)
%
0.1
%
0.5
%
0.5
%
0.9
%
0.6
%
0.8
%
0.8
%
(1) Spot occupancy represents approximate month end occupancy at our share for 591 properties in operation as of December 31, 2020, including unconsolidated properties but excluding acquisitions, executed dispositions, development conversions since this date as well as one property closed for redevelopment.
(2) Sequential occupancy changes are based on actual spot occupancy and may not recalculate due to rounding.
During the quarter ended September 30, 2021, the U.S. and U.K. portfolios reported spot occupancy gains of approximately 260 bps and 300 bps, respectively. Canada reported a spot occupancy gain of approximately 70 bps.
Property-level operating expenses associated with the COVID-19 pandemic relating to our Seniors Housing Operating portfolio, net of reimbursements including Provider Relief Funds and similar programs in the U.K. and Canada, resulted in a net benefit of approximately $2,092,000 and $24,883,000 for the three and nine months ended September 30, 2021, respectively, as compared to a net expense of $18,193,000 and $65,614,000 during the three and nine months ended September 30, 2020, respectively. These expenses were incurred as a result of the introduction of public health measures and other regulations affecting our properties, as well as additional health and safety measures adopted by us and our operators related to the COVID-19 pandemic, including increases in labor and property cleaning expenses and expenditures related to our efforts to procure personal protective equipment ("PPE") and supplies, net of reimbursements. Certain new expenses incurred since the start of the pandemic may continue on an ongoing basis as part of new health and safety protocols.
9
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In 2020 applications were made for amounts under Phase 2 and Phase 3 of the Provider Relief Fund related to our Seniors Housing Operating portfolio. During the nine months ended September 30, 2021, we received total Provider Relief Funds of approximately $40,975,000, which was recognized as a reduction to COVID-19 costs within property operating expenses.
Our Triple-net operators have experienced similar occupancy declines and operating costs as described above with respect to our Seniors Housing Operating properties. Additionally, long-term/post-acute care facilities are generally experiencing a higher degree of occupancy declines. These factors may continue to impact the ability of our Triple-net operators to make contractual rent payments to us in the future. Many of our Triple-net operators received funds under the Coronavirus Aid Relief and Economic Security Act (“CARES Act”) Paycheck Protection Program. In addition, operators of long-term/post-acute care facilities have generally received funds from Phase 1 of the Provider Relief Fund and operators of assisted living facilities have generally received funds from Phases 2 and 3 of the Provider Relief Fund.
During the nine months ended September 30, 2021, we collected approximately 94% of rent due from operators under Triple-net lease agreements (primarily seniors housing and post-acute care facilities). No significant rent deferrals or rent concessions have been made. We evaluate leases individually and recognize rent on a cash basis if collectability of substantially all contractual rent payments is not probable. To the extent the prolonged impact of the COVID-19 pandemic causes operators or tenants to seek further modifications of their lease agreements, we may recognize reductions in revenue and increases in uncollectible receivables.
During the nine months ended September 30, 2021, we have collected virtually all rent due from tenants in our Outpatient Medical portfolio, with uncollected amounts primarily attributable to local jurisdictions with COVID-19 related ordinances providing temporary rent relief to tenants. We evaluate leases individually and recognize rent on a cash basis if collectability of substantially all contractual rent payments is not probable.
New Accounting Standards
•In August 2020, the FASB issued ASU 2020-06, “Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40) Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”. This ASU simplifies accounting for convertible instruments and removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception. This ASU also simplifies the diluted earnings per share calculation in certain areas and provides updated disclosure requirements. The ASU is effective for public business entities beginning after December 15, 2021 including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the guidance and the impact it may have on our consolidated financial statements.
•In March 2020, the FASB issued an amendment to the reference rate reform standard which provides the option for a limited period of time to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on contract modifications and hedge accounting. An example of such reform is the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. Entities that make this optional expedient election would not have to remeasure the contracts at the modification date or reassess the accounting treatment if certain criteria are met and would continue applying hedge accounting for relationships affected by reference rate reform. The new standard was effective for us upon issuance and elections can be made through December 31, 2022. We are currently evaluating our options with regards to existing contracts and hedging relationships and the impact of adopting this update 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 and liabilities at cost on a relative fair value basis. Liabilities assumed and any associated noncontrolling interests are reflected at fair value. 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 acquisitions, including due diligence costs, fees for legal and valuation services, termination of pre-existing relationships computed based on the fair value of the assets acquired, lease termination fees and other acquisition-related costs. Transaction costs related to asset acquisitions are capitalized as a component of purchase price and all other non-capitalizable costs are reflected in other expenses on our Consolidated Statements of Comprehensive Income.
The following is a summary of our real property investment activity by segment for the periods presented (in thousands):
10
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended
September 30, 2021
September 30, 2020
Seniors Housing Operating
Triple-net
Outpatient Medical
Totals
Seniors Housing Operating
Triple-net
Outpatient Medical
Totals
Land and land improvements
$
264,706
$
48,099
$
45,350
$
358,155
$
15,758
$
—
$
43,252
$
59,010
Buildings and improvements
1,655,067
436,828
227,390
2,319,285
132,481
765
171,630
304,876
Acquired lease intangibles
142,439
—
17,333
159,772
10,810
—
23,823
34,633
Right of use assets, net
77,455
—
—
77,455
—
—
—
—
Total net real estate assets
2,139,667
484,927
290,073
2,914,667
159,049
765
238,705
398,519
Receivables and other assets
6,041
—
3,534
9,575
257
—
139
396
Total assets acquired (1)
2,145,708
484,927
293,607
2,924,242
159,306
765
238,844
398,915
Lease liabilities
(138,126)
—
—
(138,126)
—
—
—
—
Accrued expenses and other liabilities
(20,748)
(8,703)
(266)
(29,717)
(671)
—
(2,043)
(2,714)
Total liabilities acquired
(158,874)
(8,703)
(266)
(167,843)
(671)
—
(2,043)
(2,714)
Noncontrolling interests (2)
(2,597)
(2,056)
(16,540)
(21,193)
(2,827)
—
—
(2,827)
Cash disbursed for acquisitions
1,984,237
474,168
276,801
2,735,206
155,808
765
236,801
393,374
Construction in progress additions
190,672
60,251
29,448
280,371
75,617
33,021
33,593
142,231
Less: Capitalized interest
(9,658)
(2,092)
(2,277)
(14,027)
(7,760)
(2,569)
(2,905)
(13,234)
Accruals (3)
38
—
(3,057)
(3,019)
(1,376)
—
(922)
(2,298)
Cash disbursed for construction in progress
181,052
58,159
24,114
263,325
66,481
30,452
29,766
126,699
Capital improvements to existing properties
115,115
26,496
24,080
165,691
130,465
5,971
46,888
183,324
Total cash invested in real property, net of cash acquired
$
2,280,404
$
558,823
$
324,995
$
3,164,222
$
352,754
$
37,188
$
313,455
$
703,397
(1) Excludes $301,000 and $580,000 of unrestricted and restricted cash acquired during the nine months ended September 30, 2021 and September 30, 2020, respectively.
(2) Includes amounts attributable to both redeemable noncontrolling interests and noncontrolling interests.
(3) Represents non-cash accruals for amounts to be paid in future periods for properties that converted, off-set by amounts paid in the current period.
On July 30, 2021, we acquired a portfolio of 85 seniors housing properties owned by Holiday Retirement for $1,576,600,000, which are included in our Seniors Housing Operating segment. Atria Senior Living assumed operations of the portfolio following its acquisition of the Holiday Retirement management company pursuant to an incentive-based management agreement. As part of this transaction, a wholly owned subsidiary assumed the leasehold interest in a 26 property portfolio and subsequently purchased eight of the leased properties from the landlord. The lease, identified as an operating lease, expires in 2035 and was recognized as a right of use asset, net of above market lease intangibles, and lease liability. No rent will be paid in excess of net cash flow related to the remaining leasehold properties.
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):
Nine Months Ended
September 30, 2021
September 30, 2020
Development projects:
Seniors Housing Operating
$
58,844
$
93,188
Triple-net
22,990
59,201
Outpatient Medical
116,612
43,493
Total development projects
198,446
195,882
Expansion projects
—
48,600
Total construction in progress conversions
$
198,446
$
244,482
11
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. Real Estate Intangibles
The following is a summary of our real estate intangibles, excluding those related to ground leases or classified as held for sale, as of the dates indicated (dollars in thousands):
September 30, 2021
December 31, 2020
Assets:
In place lease intangibles
$
1,549,294
$
1,406,705
Above market tenant leases
54,542
52,621
Lease commissions
49,579
40,704
Gross historical cost
1,653,415
1,500,030
Accumulated amortization
(1,249,032)
(1,177,513)
Net book value
$
404,383
$
322,517
Weighted-average amortization period in years
8.3
10.5
Liabilities:
Below market tenant leases
$
75,083
$
77,851
Accumulated amortization
(43,484)
(40,871)
Net book value
$
31,599
$
36,980
Weighted-average amortization period in years
8.4
8.3
The following is a summary of real estate intangible amortization income (expense) for the periods presented (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Rental income related to (above)/below market tenant leases, net
$
384
$
327
$
1,241
$
1,252
Amortization related to in place lease intangibles and lease commissions
(32,872)
(28,948)
(76,083)
(98,241)
The future estimated aggregate amortization of intangible assets and liabilities is as follows for the periods presented (in thousands):
Assets
Liabilities
2021
$
36,111
$
1,962
2022
112,533
7,311
2023
70,483
5,179
2024
33,451
3,053
2025
23,099
2,524
Thereafter
128,706
11,570
Total
$
404,383
$
31,599
5. Dispositions, Real Property Held for Sale and Impairment
We periodically sell properties for various reasons, including favorable market conditions, the exercise of tenant purchase options or reduction of concentrations (i.e., property type, relationship or geography). At September 30, 2021, two Seniors Housing Operating, 20 Triple-net, and two Outpatient Medical properties with an aggregate real estate balance of $251,152,000 were classified as held for sale. In addition to the real property balances held for sale, net other assets and (liabilities) of $18,081,000 are included in the Consolidated Balance Sheets related to the held for sale properties. Expected gross sales proceeds related to the held for sale properties is approximately $293,526,000.
During the nine months ended September 30, 2021, we recorded $19,567,000 of impairment charges related to four Triple-net properties and one Outpatient Medical property classified as held for sale for which the carrying value exceeded the estimated fair value less cost to sell. Additionally, during the nine months ended September 30, 2021, we recorded $29,183,000 of impairment charges related to two Seniors Housing Operating properties and two Triple-net properties that were held for use in which the carrying value exceeded the estimated fair value. During the nine months ended September 30, 2020, we recorded $79,905,000 of impairment charges related to 13 Seniors Housing Operating properties and one Triple-net property classified as held for sale for which the carrying value exceeded the estimated fair value less cost to sell. Additionally, during the nine months ended September 30, 2020, we recorded $46,386,000 of impairment charges related to four Seniors Housing Operating properties and four Triple-net properties that were held for use in which the carrying value exceeded the estimated fair value.
12
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of our real property disposition activity for the periods presented (in thousands):
Nine Months Ended September 30,
2021
2020
Real estate dispositions:
Seniors Housing Operating
$
112,837
$
1,093,477
Triple-net
439,974
33,445
Outpatient Medical
159,000
1,394,971
Total dispositions
711,811
2,521,893
Gain (loss) on real estate dispositions, net
223,702
902,991
Net other assets/(liabilities) disposed
6,195
98,065
Proceeds from real estate dispositions
$
941,708
$
3,522,949
Operating results attributable to properties sold or classified as held for sale which do not meet the definition of discontinued operations are not reclassified on our Consolidated Statements of Comprehensive Income. The following represents the activity related to these properties for the periods presented (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Revenues:
Total revenues
$
7,103
$
7,471
(1)
$
58,302
$
262,951
Expenses:
Interest expense
32
1,737
1,471
10,039
Property operating expenses
925
33,330
7,942
150,501
Provision for depreciation
440
18,085
8,665
72,877
Total expenses
1,397
53,152
18,078
233,417
Income (loss) from real estate dispositions, net
$
5,706
$
(45,681)
$
40,224
$
29,534
(1) During the three months ended September 30, 2020, we reserved for straight-line rent receivable balances on properties operated by Genesis Healthcare. See also Note 9 for additional information.
6. Leases
We lease land, buildings, office space and certain equipment. Many of our leases include a renewal option to extend the term from one to 25 years or more. Renewal options that we are reasonably certain to exercise are recognized in our right-of-use assets and lease liabilities.
The components of lease expense were as follows for the period presented (in thousands):
Nine Months Ended
Classification
September 30, 2021
September 30, 2020
Operating lease cost: (1)
Real estate lease expense
Property operating expenses
$
16,430
$
17,397
Non-real estate investment lease expense
General and administrative expenses
3,461
3,673
Finance lease cost:
Amortization of leased assets
Property operating expenses
6,120
6,229
Interest on lease liabilities
Interest expense
4,950
4,693
Sublease income
Rental income
(5,972)
(3,130)
Total
$
24,989
$
28,862
(1) Includes short-term leases which are immaterial.
13
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Supplemental balance sheet information related to leases is as follows (in thousands):
Classification
September 30, 2021
December 31, 2020
Right of use assets:
Operating leases - real estate
Right of use assets, net
$
371,034
$
310,017
Finance leases - real estate
Right of use assets, net
155,580
155,849
Real estate right of use assets, net
526,614
465,866
Operating leases - non-real estate investments
Receivables and other assets
6,686
9,624
Total right of use assets, net
$
533,300
$
475,490
Lease liabilities:
Operating leases
$
434,303
$
311,164
Financing leases
110,244
107,102
Total
$
544,547
$
418,266
Substantially all of our operating leases in which we are the lessor contain 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. During the nine months ended September 30, 2021 and 2020, we reserved for previously recognized straight-line rent receivable balances of $49,241,000 and $146,508,000 through rental income, relating to leases for which collection of substantially all contractual lease payments was no longer deemed probable. Included in the 2020 amount was $91,025,000 related to Genesis Healthcare, whom noted substantial doubt as to their ability to continue as a going concern.
Leases in our Triple-net and Outpatient Medical portfolios typically include some form of operating expense reimbursement by the tenant. For the nine months ended September 30, 2021, we recognized $1,015,550,000 of rental income related to operating leases, of which $134,632,000 was for variable lease payments which primarily represents the reimbursement of operating costs such as common area maintenance expenses, utilities, insurance and real estate taxes. For the nine months ended September 30, 2020, we recognized $1,061,311,000 of rental income related to operating leases, of which $153,217,000 was for variable lease payments.
7. Loans Receivable
Loans receivable are recorded on our Consolidated Balance Sheets in real estate loans receivable, net of allowance for credit losses, or for non-real estate loans receivable, in receivables and other assets, net of allowance for credit losses. Real estate loans receivable consists of mortgage loans and other real estate loans which are primarily collateralized by a first, second or third mortgage lien, a leasehold mortgage on, or an assignment of the partnership interest in, the related properties, corporate guarantees and/or personal guarantees. Non-real estate loans are generally corporate loans with no real estate backing. Interest income on loans is recognized as earned based upon the principal amount outstanding subject to an evaluation of the risk of credit loss. Accrued interest receivable was $26,361,000 and $15,615,000 as of September 30, 2021 and December 31, 2020, respectively, and is included in receivables and other assets on the Consolidated Balance Sheets. The following is a summary of our loans receivable (in thousands):
September 30, 2021
December 31, 2020
Mortgage loans
$
957,114
$
299,430
Other real estate loans
174,078
152,739
Allowance for credit losses on real estate loans receivable
(15,547)
(8,797)
Real estate loans receivable, net of credit allowance
1,115,645
443,372
Non-real estate loans
362,077
455,508
Allowance for credit losses on non-real estate loans receivable
(151,255)
(215,239)
Non-real estate loans receivable, net of credit allowance
210,822
240,269
Total loans receivable, net of credit allowance
$
1,326,467
$
683,641
14
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of our loan activity for the periods presented (in thousands):
Nine Months Ended
September 30, 2021
September 30, 2020
Advances on loans receivable:
Investments in new loans
$
935,594
$
194,942
Draws on existing loans
17,412
21,365
Net cash advances on loans receivable
953,006
216,307
Receipts on loans receivable:
Loan payoffs
179,827
—
Principal payments on loans
70,588
14,345
Net cash receipts on loans receivable
250,415
14,345
Net cash advances (receipts) on loans receivable
$
702,591
$
201,962
During the quarter ended June 30, 2021, we provided £540 million (approximately $750,330,000 based on the Sterling/ U.S. Dollar exchange rate as of the date of funding) of senior loan financing and a £30 million delayed facility for working capital and capital expenditures to affiliates of Safanad, a global real estate and private equity firm, as part of the recapitalization of its investment in HC-One Group. The loan has a five-year term and is fully collateralized by the shares and assets of the HC-One Group, including its underlying property portfolio of owned assets across the U.K. As part of the transaction, we received equity warrants which provide us the right to participate in the capital appreciation of HC-One Group above a designated price upon liquidation. See Note 12 for additional details.
The allowance for credit losses on loans receivable is maintained at a level believed adequate to absorb potential losses in our loans receivable. The determination of the credit allowance is based on a quarterly evaluation of each of these loans, including general economic conditions and estimated collectability of loan payments. We evaluate the collectability of our loans receivable based on a combination of credit quality indicators, including, but not limited to, payment status, historical loan charge-offs, financial strength of the borrower and guarantors, and nature, extent, and value of the underlying collateral.
A loan is considered to have deteriorated credit quality when, based on current information and events, it is probable that we will be unable to collect all amounts due as scheduled according to the contractual terms of the loan agreement. For those loans we identified as having deteriorated credit quality, we determine the amount of credit loss on an individual basis. Placement on non-accrual status may be required. Consistent with this definition, all loans on non-accrual are deemed to have deteriorated credit quality. To the extent circumstances improve and the risk of collectability is diminished, we will return these loans to income accrual status. While a loan is on non-accrual status, any cash receipts are applied against the outstanding principal balance.
For the remaining loans we assess credit loss on a collective pool basis and use our historical loss experience for similar loans to determine the reserve for credit losses. The following is a summary of our loans by credit loss category (in thousands):
September 30, 2021
Loan category
Years of Origination
Loan Carrying Value
Allowance for Credit Loss
Net Loan Balance
No. of Loans
Deteriorated loans
2007 - 2018
$
178,301
$
(148,438)
$
29,863
3
Collective loan pool
2007-2016
201,939
(3,061)
198,878
17
Collective loan pool
2017
125,661
(1,127)
124,534
7
Collective loan pool
2018
23,263
(346)
22,917
2
Collective loan pool
2019
22,047
(334)
21,713
4
Collective loan pool
2020
46,335
(703)
45,632
6
Collective loan pool
2021
895,723
(12,793)
882,930
17
Total loans
$
1,493,269
$
(166,802)
$
1,326,467
56
In March 2020, we recognized a provision for loan losses of $6,898,000 to fully reserve for one Triple-net non-real estate loan receivable that was no longer deemed collectible. Aside from this specific reserve, the remainder of the provision for loan losses relates to the application of the historical loss experience on the collective loan pools. The following is a summary of the allowance for credit losses on loans receivable for the periods presented (in thousands):
15
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended
September 30, 2021
September 30, 2020
Balance at beginning of period
$
224,036
$
68,372
Adoption of ASU 2016-13
—
5,212
Provision for loan losses
7,309
11,351
Loan write-offs (1)
(64,075)
—
Foreign currency translation
(468)
(40)
Balance at end of period
$
166,802
$
84,895
(1) Includes $64,075,000 related to the Genesis Healthcare lease terminations for the nine months ended September 30, 2021. See Note 9 for further details.
The following is a summary of our deteriorated loans (in thousands):
Nine Months Ended
September 30, 2021
September 30, 2020
Balance of deteriorated loans at end of period (1)
$
178,301
$
249,314
Allowance for credit losses
(148,438)
(76,695)
Balance of deteriorated loans not reserved
$
29,863
$
172,619
Interest recognized on deteriorated loans (2)
$
3,171
$
13,847
(1) Current year amounts include $2,157,000 and $3,623,000 of loans on non-accrual as of September 30, 2021 and December 31, 2020, respectively. Prior year amounts include $10,686,000 and $2,534,000 as of September 30, 2020 and December 31, 2019, respectively.
(2) Represents cash interest recognized in the period.
8. Investments in Unconsolidated Entities
We participate in a number of joint ventures, which generally invest in seniors housing and health care real estate. Our share of the results of operations for these properties has 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)
September 30, 2021
December 31, 2020
Seniors Housing Operating
10% to 65%
$
771,337
$
653,057
Triple-net
10% to 25%
46,466
5,629
Outpatient Medical
15% to 50%
160,152
287,548
Total
$
977,955
$
946,234
(1) Includes ownership of investments classified as liabilities and excludes ownership of in substance real estate.
At September 30, 2021, the aggregate unamortized basis difference of our joint venture investments of $118,012,000 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 joint venture. This difference is being amortized over the remaining useful life of the related properties and included in the reported amount of income from unconsolidated entities.
As of September 30, 2021, we have made loans totaling $273,654,000 related to eight properties for the development and construction of certain properties which are classified as in substance real estate investments. We believe that such borrowers typically represent variable interest entities ("VIE" or "VIEs") in accordance with ASC 810 Consolidation. VIEs are required to be consolidated by their primary beneficiary ("PB") which is the enterprise that has both: (i) the power to direct the activities of the VIE that most significantly impacts the entity's economic performance; and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could be significant to the entity. We have concluded that we are not the PB of such borrowers, therefore, the loan arrangements were assessed based on among other factors, the amount and timing of expected residual profits, the estimated fair value of the collateral and the significance of the borrower's equity in the project. Based on these assessments, the arrangements have been classified as in substance real estate investments. We expect to fund an additional $16,667,000 related to these investments.
16
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
9. Credit Concentration
We use consolidated net operating income (“NOI”) as our credit concentration metric. See Note 18 for additional information and reconciliation. The following table summarizes certain information about our credit concentration for the nine months ended September 30, 2021, excluding our share of NOI in unconsolidated entities (dollars in thousands):
Concentration by relationship: (1)
Number of Properties
Total NOI
Percent of NOI (2)
ProMedica
205
$
168,832
12%
Sunrise Senior Living (3)
155
157,256
11%
Revera (3)
85
71,139
5%
Avery Healthcare
61
62,325
5%
Belmont Village
21
45,475
4%
Remaining portfolio
1,079
938,441
63%
Totals
1,606
$
1,443,468
100%
(1) ProMedica is in our Triple-net segment. Sunrise Senior Living, Revera and Belmont Village are in our Seniors Housing Operating segment. Avery Healthcare is in both the Triple-net and Seniors Housing Operating segments.
(2) NOI with our top five relationships comprised 36% of total NOI for the year ended December 31, 2020.
(3) Revera owns a controlling interest in Sunrise Senior Living.
During the quarter ended March 31, 2021, we entered into definitive agreements to substantially exit our operating relationship with Genesis Healthcare ("Genesis"). The status of these transactions is as follows:
•In April 2021, we contributed nine Triple-net properties operated by Genesis into an 80/20 joint venture with ProMedica and such properties were added to the existing master lease with ProMedica.
•As of September 30, 2021, operations have transitioned for 39 of the remaining properties, with three additional properties expected to transition before year end.
•We have entered into definitive agreements to sell 35 Genesis properties for $496 million to a joint venture with Aurora Health Network and Peace Capital. As of September 30, 2021, we have closed on the sale of 21 of these properties for proceeds of $331 million and the remaining 14 are classified as held for sale.
•We currently lease seven properties which we previously subleased to Genesis. We have entered into a forward sales agreement with Aurora Health Network that is intended to close simultaneously with the purchase option exercise in April 2023. We have transitioned the operations of these properties into a new lease agreement with a regional operator during the quarter ended June 30, 2021.
•To effectuate the transition of all 51 properties, we agreed to provide Genesis a lease termination fee of $86 million upon successful transition of all properties, which will be used to immediately repay indebtedness to us. The debt reduction associated with the lease termination fee was previously reserved as an allowance for credit losses on loans receivable.
•Additionally, upon achievement of certain restructuring milestones, we will reduce Genesis' indebtedness by an additional $170 million in exchange for an equity interest in Genesis. Upon conclusion of the aforementioned loan transactions, Genesis will have $167 million of indebtedness to us, exclusive of additional paid in kind interest, which will carry a maturity date of January 1, 2024. As of September 30, 2021, our total carrying value of Genesis loans receivable, net of allowances for credit losses, was $149,574,000.
10. Borrowings Under Credit Facilities and Commercial Paper Program
At September 30, 2021, we had a primary unsecured credit facility with a consortium of 34 banks that included a $4,000,000,000 unsecured revolving credit facility, a $500,000,000 unsecured term credit facility and a $250,000,000 Canadian-denominated unsecured term credit facility. The unsecured revolving credit facility is comprised of a $1,000,000,000 tranche that matures on June 4, 2023 (none outstanding at September 30, 2021) and a $3,000,000,000 tranche that matures on June 4, 2025 ($51,000,000 outstanding at September 30, 2021). Both tranches may be extended for two successive terms of six months at our option. The term credit facilities mature on July 19, 2023. 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 $1,250,000,000, 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 September 30, 2021). Borrowings under the unsecured revolving credit facility are subject to interest payable at the applicable margin over LIBOR interest rate. The applicable margin is based on our debt ratings and was 0.775% at September 30, 2021. In addition, we pay a facility fee quarterly to each bank based on the bank’s commitment amount. The facility fee depends on our debt ratings and was 0.15% at September 30, 2021.
17
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In January 2019, we established an unsecured commercial paper program. Under the terms of the program, we may issue unsecured commercial paper notes with maturities that vary, but do not exceed 397 days from the date of issue, up to a maximum aggregate face or principal amount outstanding at any time of $1,000,000,000. As of September 30, 2021, there was a balance of $239,996,000 outstanding on the commercial paper program ($240,000,000 in principal outstanding net of an unamortized discount of $4,000), which reduces the borrowing capacity of the unsecured revolving credit facility. The notes bear interest at various floating rates with a weighted average of 0.19% as of September 30, 2021 and a weighted average maturity of four days as of September 30, 2021.
The following information relates to aggregate borrowings under the unsecured revolving credit facility and commercial paper program for the periods presented (dollars in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Balance outstanding at quarter end
$
291,000
$
—
$
291,000
$
—
Maximum amount outstanding at any month end
$
990,000
$
—
$
990,000
$
2,100,000
Average amount outstanding (total of daily
principal balances divided by days in period)
$
470,935
$
—
$
255,114
$
663,895
Weighted average interest rate (actual interest
expense divided by average borrowings outstanding)
0.21
%
—
%
0.42
%
2.09
%
11. 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: (i) 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 (ii) 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 September 30, 2021, the annual principal payments due on these debt obligations were as follows (in thousands):
Senior
Unsecured Notes (1,2)
Secured
Debt (1,3)
Totals
2021
$
—
$
211,978
$
211,978
2022
—
481,702
481,702
2023 (4, 5)
697,270
504,855
1,202,125
2024
1,350,000
183,192
1,533,192
2025
1,260,000
178,544
1,438,544
Thereafter (6, 7, 8)
7,901,074
709,510
8,610,584
Totals
$
11,208,344
$
2,269,781
$
13,478,125
(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 Consolidated Balance Sheet.
(2) Annual interest rates range from 0.78% to 6.50%.
(3) Annual interest rates range from 0.02% to 7.93%. Carrying value of the properties securing the debt totaled $5,261,000,000 at September 30, 2021.
(4) Includes a $250,000,000 Canadian-denominated unsecured term credit facility (approximately $197,270,000 based on the Canadian/U.S. Dollar exchange rate on September 30, 2021). The loan matures on July 19, 2023 and bears interest at the Canadian Dealer Offered Rate plus 0.90% (1.33% at September 30, 2021).
(5) Includes a $500,000,000 unsecured term credit facility. The loan matures on July 19, 2023 and bears interest at LIBOR plus 0.90% (0.98% at September 30, 2021).
(6) Includes a $300,000,000 Canadian-denominated 2.95% senior unsecured notes due 2027 (approximately $236,724,000 based on the Canadian/U.S. Dollar exchange rate on September 30, 2021).
(7) Includes a £550,000,0004.80% senior unsecured notes due 2028 (approximately $740,850,000 based on the Sterling/U.S. Dollar exchange rate in effect on September 30, 2021).
(8) Includes a £500,000,0004.50% senior unsecured notes due 2034 (approximately $673,500,000 based on the Sterling/U.S. Dollar exchange rate in effect on September 30, 2021).
18
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of our senior unsecured notes principal activity during the periods presented (dollars in thousands):
Nine Months Ended
September 30, 2021
September 30, 2020
Weighted Avg.
Weighted Avg.
Amount
Interest Rate
Amount
Interest Rate
Beginning balance
$
11,509,533
3.67%
$
10,427,562
4.03%
Debt issued
1,250,000
2.50%
1,600,000
1.89%
Debt extinguished
(1,533,752)
2.42%
(566,248)
3.26%
Foreign currency
(17,437)
4.37%
(48,037)
4.14%
Ending balance
$
11,208,344
3.71%
$
11,413,277
3.67%
The following is a summary of our secured debt principal activity for the periods presented (dollars in thousands):
Nine Months Ended
September 30, 2021
September 30, 2020
Weighted Avg.
Weighted Avg.
Amount
Interest Rate
Amount
Interest Rate
Beginning balance
$
2,378,073
3.27%
$
2,993,342
3.63%
Debt issued
2,693
3.75%
44,921
2.58%
Debt extinguished
(70,144)
6.02%
(491,506)
2.61%
Principal payments
(48,710)
3.39%
(46,585)
3.60%
Foreign currency
7,869
2.97%
(30,984)
3.19%
Ending balance
$
2,269,781
3.10%
$
2,469,188
3.16%
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 September 30, 2021, we were in compliance in all material respects with the covenants under our debt agreements.
12. Derivative Instruments
We are exposed to, among other risks, the impact of changes in foreign currency exchange rates as a result of our non-U.S. investments and interest rate risk related to our capital structure. Our risk management program is designed to manage the exposure and volatility arising from these risks, and utilizes foreign currency forward contracts, cross currency swap contracts, interest rate swaps, interest rate locks and debt issued in foreign currencies to offset a portion of these risks.
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 deferred 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.
Cash Flow Hedges of Interest Rate Risk
We enter into interest rate swaps in order to maintain a capital structure containing targeted amounts of fixed and floating-rate debt and manage interest rate risk. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for our fixed-rate payments. These interest rate swap agreements were used to hedge the variable cash flows associated with variable-rate debt.
Periodically, we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments attributable to increases in the benchmark interest rate during the period leading up to the probable issuance of fixed-rate debt. We designate our interest rate locks as cash flow hedges. Gains and losses when we settle our interest rate locks are amortized into income over the life of the related debt, except where a material amount is deemed to be ineffective, which would be immediately reclassified to the Consolidated Statements of Comprehensive Income. Approximately $2,562,000 of losses, which are included in OCI, are expected to be reclassified into earnings in the next 12 months.
19
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Foreign Currency Forward Contracts and Cross Currency Swap Contracts Designated as Net Investment Hedges
We use foreign currency forward and cross currency forward swap contracts to hedge a portion of the net investment in foreign subsidiaries against fluctuations in foreign exchange rates. 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 nine months ended September 30, 2021 and 2020, we settled certain net investment hedges generating cash proceeds of $8,879,000 and $3,485,000, respectively. The balance of the cumulative translation adjustment will be reclassified to earnings if the hedged investment is sold or substantially liquidated.
Derivative Contracts Undesignated
We use foreign currency exchange contracts to manage existing exposures to foreign currency exchange risk. Gains and losses resulting from the changes in fair value of these instruments are recorded in interest expense on the Consolidated Statements of Comprehensive Income and are substantially offset by net revaluation impacts on foreign currency denominated balance sheet exposures. In addition, we have several interest rate cap contracts related to variable rate secured debt agreements. Gains and losses resulting from the changes in fair values of these instruments are also recorded in interest expense.
Equity Warrants
We received equity warrants through our lending activities further described in Note 7, which were accounted for as loan origination fees. The warrants provide us the right to participate in the capital appreciation of the underlying company above a designated price upon liquidation and contain net settlement terms qualifying as derivatives under ASC Topic 815. The warrants are classified within receivables and other assets on our Consolidated Balance Sheets. These warrants are measured at fair value with changes in fair value being recognized within gain (loss) on derivatives and financial instruments in our Consolidated Statements of Comprehensive Income.
The following presents the notional amount of derivatives and other financial instruments as of the dates indicated (in thousands):
September 30, 2021
December 31, 2020
Derivatives designated as net investment hedges:
Denominated in Canadian Dollars
$
625,000
$
625,000
Denominated in Pound Sterling
£
1,904,708
£
1,340,708
Financial instruments designated as net investment hedges:
Denominated in Canadian Dollars
$
250,000
$
250,000
Denominated in Pound Sterling
£
1,050,000
£
1,050,000
Interest rate swaps designated as cash flow hedges:
Denominated in U.S Dollars (1)
$
25,000
$
450,000
Derivative instruments not designated:
Interest rate caps denominated in U.S. Dollars
$
26,137
$
26,137
Forward sales contracts denominated in Canadian Dollars
$
80,000
$
80,000
Forward purchase contracts denominated in Pound Sterling
£
(37,408)
£
—
(1) At September 30, 2021 the maximum maturity date was November 1, 2023.
The following presents the impact of derivative instruments on the Consolidated Statements of Comprehensive Income for the periods presented (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
Description
Location
2021
2020
2021
2020
Gain (loss) on derivative instruments designated as hedges recognized in income
Interest expense
$
5,849
$
5,724
$
17,416
$
16,475
Gain (loss) on derivative instruments not designated as hedges recognized in income
Interest expense
$
241
$
(1,159)
$
(1,415)
$
(3,207)
Gain (loss) on equity warrants recognized in income
Gain (loss) on derivatives and financial instruments
$
9,216
$
—
$
9,216
$
—
Gain (loss) on derivative and financial instruments designated as hedges recognized in OCI
OCI
$
130,711
$
(145,512)
$
100,866
$
86,429
20
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
13. Commitments and Contingencies
At September 30, 2021, we had 13 outstanding letter of credit obligations totaling $28,366,000 and expiring between 2021 and 2022. At September 30, 2021, we had outstanding construction in progress of $562,487,000 and were committed to providing additional funds of approximately $1,072,343,000 to complete construction. Additionally, at September 30, 2021, we had outstanding investments classified as in substance real estate of $273,654,000 and were committed to provide additional funds of $16,667,000 (see Note 8 for additional information). Purchase obligations include $101,284,000 of contingent purchase obligations to fund capital improvements. Rents due from the tenant are increased to reflect the additional investment in the property.
14. Stockholders’ Equity
The following is a summary of our stockholders’ equity capital accounts as of the dates indicated:
September 30, 2021
December 31, 2020
Preferred Stock:
Authorized shares
50,000,000
50,000,000
Issued shares
—
—
Outstanding shares
—
—
Common Stock, $1.00 par value:
Authorized shares
700,000,000
700,000,000
Issued shares
437,049,822
419,124,469
Outstanding shares
435,273,885
417,400,602
Common Stock In July 2021, we entered into an amended and restated equity distribution agreement whereby we can offer and sell up to $2,500,000,000 aggregate amount of our common stock ("ATM Program"). The ATM Program also allows us to enter into forward sale agreements. As of September 30, 2021, we had $2,491,418,000 of remaining capacity under the ATM Program, which excludes forward sales agreements outstanding for the sale of 11,798,154 shares with maturity dates in 2022 which we expect to physically settle for cash proceeds of $993,881,000.
On May 1, 2020, our Board of Directors authorized a share repurchase program whereby we may repurchase up to $1 billion of common stock through December 31, 2021 (the "Repurchase Program"). Under this authorization, we are not required to purchase shares but may choose to do so in the open market or through private transactions at times and amounts based on our evaluation of market conditions and other factors. We expect to finance any share repurchases under the Repurchase Program using available cash and may use proceeds from borrowings or debt offerings. We did not repurchase any shares of our common stock during the nine months ended September 30, 2021.
The following is a summary of our common stock issuances during the nine months ended September 30, 2021 and 2020 (dollars in thousands, except shares and average price amounts):
Shares Issued
Average Price
Gross Proceeds
Net Proceeds
2020 Dividend reinvestment plan issuances
264,153
$
72.33
$
19,105
$
19,105
2020 Option exercises
251
47.81
12
12
2020 ATM Program issuances
6,799,978
86.48
588,072
576,196
2020 Stock incentive plans, net of forfeitures
185,994
—
—
2020 Totals
7,250,376
$
607,189
$
595,313
2021 ATM Program issuances
17,720,008
77.91
1,380,519
1,366,464
2021 Stock incentive plans, net of forfeitures
153,275
—
—
2021 Totals
17,873,283
$
1,380,519
$
1,366,464
Dividends The decrease in dividends is attributable to the declaration of a reduced cash dividend beginning with the quarter ending March 31, 2020. The following is a summary of our dividend payments (in thousands, except per share amounts):
Nine Months Ended
September 30, 2021
September 30, 2020
Per Share
Amount
Per Share
Amount
Common stock
$
1.83
$
771,984
$
2.09
$
865,357
21
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Accumulated Other Comprehensive IncomeThe following is a summary of accumulated other comprehensive income (loss) for the periods presented (in thousands):
September 30, 2021
December 31, 2020
Foreign currency translation
$
(677,331)
$
(621,792)
Derivative and financial instruments designated as hedges
574,154
473,288
Total accumulated other comprehensive income (loss)
$
(103,177)
$
(148,504)
15. 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, performance units and dividend equivalent rights. Vesting periods for options, deferred stock units and restricted shares generally range from three to four years. Options expire ten years from the date of grant. Stock-based compensation expense totaled $4,535,000 and $14,868,000 for the three and nine months ended September 30, 2021, respectfully, and $6,565,000 and $20,938,000 for the same periods in 2020.
16. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Numerator for basic earnings per share - net income (loss) attributable to common stockholders
$
179,663
$
325,585
$
277,466
$
815,115
Adjustment for net income (loss) attributable to OP units
(473)
(1,716)
(2,699)
(4,470)
Numerator for diluted earnings per share
$
179,190
$
323,869
$
274,767
$
810,645
Denominator for basic earnings per share - weighted average shares
428,031
417,027
420,955
414,822
Effect of dilutive securities:
Non-vested restricted shares
537
542
465
620
Redeemable OP units
1,396
1,396
1,396
1,396
Employee stock purchase program
19
22
19
22
Dilutive potential common shares
1,952
1,960
1,880
2,038
Denominator for diluted earnings per share - adjusted weighted average shares
429,983
418,987
422,835
416,860
Basic earnings per share
$
0.42
$
0.78
$
0.66
$
1.96
Diluted earnings per share
$
0.42
$
0.77
$
0.65
$
1.94
As of September 30, 2021, forward sales agreements outstanding for the sale of 11,798,154 shares of common stock were not included in the computation of diluted earnings per share because such forward sales were anti-dilutive to the three and nine month periods ended September 30, 2021.
17. Disclosure about Fair Value of Financial Instruments
Fair value is defined 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. A three-level valuation hierarchy exists for disclosures of fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Please see Note 2 to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020 for additional information. The three levels are defined below:
22
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
•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.
•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, Other Real Estate Loans and Non-real Estate Loans Receivable — The fair value of mortgage loans, other real estate loans and non-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 and Restricted Cash — The carrying amount approximates fair value.
Equity Securities — Equity securities are recorded at their fair value based on Level 1 publicly available trading prices.
Equity Warrants —The fair value of equity warrants is estimated using Level 3 inputs and includes data points such as enterprise value of the underlying HC-One Group real estate portfolio, marketability discount for private company warrants, dividend yield, volatility and risk-free rate. The enterprise value is driven by projected cash flows, weighted average cost of capital and a terminal capitalization rate.
Borrowings Under Primary Unsecured Credit Facility and Commercial Paper Program — The carrying amount of the primary unsecured credit facility and commercial paper program approximates fair value because the borrowings are interest rate adjustable.
Senior Unsecured Notes — The fair value of the senior unsecured notes payable was estimated based on Level 1 publicly available trading prices. The carrying amount of the 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, Interest Rate Swaps and Cross Currency Swaps — Foreign currency forward contracts, interest rate swaps and cross currency swaps are recorded in other assets or other liabilities on the balance sheet at fair value that is derived from observable market data, including yield curves and foreign exchange rates.
Redeemable OP Unitholder Interests — Our redeemable OP unitholder interests are recorded on the balance sheet at fair value using Level 2 inputs unless the fair value is below the initial amount in which case the redeemable OP unitholder interests are recorded at the initial amount adjusted for distributions to the unitholders and income or loss attributable to the unitholders. 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.
23
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The carrying amounts and estimated fair values of our financial instruments are as follows (in thousands):
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 September 30, 2021
Total
Level 1
Level 2
Level 3
Equity securities
$
1,922
$
1,922
$
—
$
—
Equity warrants
40,658
—
—
40,658
Foreign currency forward contracts, interest rate swaps and cross currency swaps, net asset (liability) (1)
(8,094)
—
(8,094)
—
Totals
$
34,486
$
1,922
$
(8,094)
$
40,658
(1) Please see Note 12 for additional information.
The following table summarizes the change in fair value for equity warrants using unobservable Level 3 inputs for the nine months ended September 30, 2021 (in thousands):
Nine Months Ended
September 30, 2021
Beginning balance
$
—
Warrants acquired
32,419
Mark-to-market adjustment
9,216
Foreign currency
(977)
Ending balance
$
40,658
The most significant assumptions utilized in the valuation of the equity warrants are the cash flows of the underlying HC-One Group enterprise, as well as the terminal capitalization rate of 11%.
24
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 that 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 or assumed. Asset impairments (if applicable, see Note 5 for impairments of real property and Note 7 for impairments of loans receivable) are also measured at fair value on a nonrecurring basis. 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 resides 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 loans receivable using projected payoff valuations based on the expected future cash flows and/or the estimated fair value of collateral, net of sales costs, if the repayment of the loan is expected to be provided solely by the collateral. We estimate the fair value of secured debt assumed in asset acquisitions using current interest rates at which similar borrowings could be obtained on the transaction date.
18. 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: Seniors Housing Operating, Triple-net and Outpatient Medical. Our Seniors Housing Operating properties include seniors apartments, assisted living, independent living/continuing care retirement communities, independent supportive living communities (Canada), care homes with and without nursing (U.K.) and combinations thereof that are owned and/or operated through RIDEA structures (see Note 19). Our Triple-net properties include the property types described above as well as long-term/post-acute care facilities. 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 Outpatient Medical properties are typically leased to multiple tenants and generally require a certain level of property management by us.
We evaluate performance based upon consolidated NOI of each segment. We define NOI as total revenues, including tenant reimbursements, less property operating expenses. We believe NOI provides investors relevant and useful information as 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 cash investments recorded in 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, 2020). 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. All inter-segment transactions are eliminated.
25
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Summary information for the reportable segments (which excludes unconsolidated entities) is as follows (in thousands):
Three Months Ended September 30, 2021:
Seniors Housing Operating
Triple-net
Outpatient Medical
Non-segment / Corporate
Total
Resident fees and services
$
835,617
$
—
$
—
$
—
$
835,617
Rental income
—
200,641
157,343
—
357,984
Interest income
1,135
38,257
472
—
39,864
Other income
2,767
1,087
1,688
790
6,332
Total revenues
839,519
239,985
159,503
790
1,239,797
Property operating expenses
666,610
11,664
48,072
3,054
729,400
Consolidated net operating income
172,909
228,321
111,431
(2,264)
510,397
Depreciation and amortization
157,176
54,226
56,352
—
267,754
Interest expense
9,360
1,548
4,811
106,803
122,522
General and administrative expenses
—
—
—
32,256
32,256
Loss (gain) on derivatives and financial instruments, net
—
(8,078)
—
—
(8,078)
Loss (gain) on extinguishment of debt, net
—
—
(5)
—
(5)
Provision for loan losses, net
152
(323)
(100)
—
(271)
Impairment of assets
—
1,490
—
—
1,490
Other expenses
5,449
(4,248)
640
1,734
3,575
Income (loss) from continuing operations before income taxes and other items
772
183,706
49,733
(143,057)
91,154
Income tax (expense) benefit
—
—
—
(4,940)
(4,940)
Income (loss) from unconsolidated entities
(15,810)
5,038
(5,060)
—
(15,832)
Gain (loss) on real estate dispositions, net
(615)
81,712
38,857
—
119,954
Income (loss) from continuing operations
(15,653)
270,456
83,530
(147,997)
190,336
Net income (loss)
$
(15,653)
$
270,456
$
83,530
$
(147,997)
$
190,336
Total assets
$
17,741,955
$
9,317,352
$
6,247,215
$
173,503
$
33,480,025
Three Months Ended September 30, 2020:
Seniors Housing Operating
Triple-net
Outpatient Medical
Non-segment / Corporate
Total
Resident fees and services
$
740,956
$
—
$
—
$
—
$
740,956
Rental income
—
103,938
171,108
—
275,046
Interest income
113
15,877
760
—
16,750
Other income
996
1,113
836
1,177
4,122
Total revenues
742,065
120,928
172,704
1,177
1,036,874
Property operating expenses
567,704
12,567
52,728
1,718
634,717
Consolidated net operating income
174,361
108,361
119,976
(541)
402,157
Depreciation and amortization
133,224
58,157
64,151
—
255,532
Interest expense
12,728
2,070
4,287
105,766
124,851
General and administrative expenses
—
—
—
31,003
31,003
Loss (gain) on derivatives and financial instruments, net
—
1,395
—
—
1,395
Loss (gain) on extinguishment of debt, net
—
—
—
33,004
33,004
Provision for loan losses, net
86
372
2,399
—
2,857
Impairment of assets
12,778
10,535
—
—
23,313
Other expenses
6,488
2,805
781
1,470
11,544
Income (loss) from continuing operations before income taxes and other items
9,057
33,027
48,358
(171,784)
(81,342)
Income tax (expense) benefit
—
—
—
(2,003)
(2,003)
Income (loss) from unconsolidated entities
(7,678)
(423)
2,120
—
(5,981)
Gain (loss) on real estate dispositions, net
313,319
(619)
171,604
—
484,304
Income (loss) from continuing operations
314,698
31,985
222,082
(173,787)
394,978
Net income (loss)
$
314,698
$
31,985
$
222,082
$
(173,787)
$
394,978
26
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2021
Seniors Housing Operating
Triple-net
Outpatient Medical
Non-segment / Corporate
Total
Resident fees and services
$
2,299,972
$
—
$
—
$
—
$
2,299,972
Rental income
—
557,829
457,721
—
1,015,550
Interest income
3,110
86,040
8,741
—
97,891
Other income
5,388
3,539
8,336
2,175
19,438
Total revenues
2,308,470
647,408
474,798
2,175
3,432,851
Property operating expenses
1,804,939
37,132
140,430
6,882
1,989,383
Consolidated net operating income
503,531
610,276
334,368
(4,707)
1,443,468
Depreciation and amortization
420,797
165,299
166,969
—
753,065
Interest expense
31,331
5,134
12,733
318,807
368,005
General and administrative expenses
—
—
—
93,618
93,618
Loss (gain) on derivatives and financial instruments, net
—
(6,503)
—
—
(6,503)
Loss (gain) on extinguishment of debt, net
(1,537)
—
(5)
52,506
50,964
Provision for loan losses, net
222
10,549
(3,462)
—
7,309
Impairment of assets
22,317
24,222
2,211
—
48,750
Other expenses
12,617
4,845
2,450
6,344
26,256
Income (loss) from continuing operations before income taxes and other items
17,784
406,730
153,472
(475,982)
102,004
Income tax (expense) benefit
—
—
—
(6,662)
(6,662)
Income (loss) from unconsolidated entities
(23,514)
14,822
(2,067)
—
(10,759)
Gain (loss) on real estate dispositions, net
4,552
126,463
92,687
—
223,702
Income (loss) from continuing operations
(1,178)
548,015
244,092
(482,644)
308,285
Net income (loss)
$
(1,178)
$
548,015
$
244,092
$
(482,644)
$
308,285
Nine Months Ended September 30, 2020
Seniors Housing Operating
Triple-net
Outpatient Medical
Non-segment / Corporate
Total
Resident fees and services
$
2,360,488
$
—
$
—
$
—
$
2,360,488
Rental income
—
512,815
548,496
—
1,061,311
Interest income
305
46,068
1,687
—
48,060
Other income
6,050
3,393
2,681
1,968
14,092
Total revenues
2,366,843
562,276
552,864
1,968
3,483,951
Property operating expenses
1,771,088
39,432
165,024
1,718
1,977,262
Consolidated net operating income
595,755
522,844
387,840
250
1,506,689
Depreciation and amortization
419,161
173,989
202,554
—
795,704
Interest expense
43,191
7,668
13,421
328,935
393,215
General and administrative expenses
—
—
—
100,546
100,546
Loss (gain) on derivatives and financial instruments, net
—
10,480
—
—
10,480
Loss (gain) on extinguishment of debt, net
(492)
—
741
33,004
33,253
Provision for loan losses, net
86
18.69
8,895
—
2,370
18.69
—
11,351
Impairment of assets
91,424
34,867
—
—
126,291
Other expenses
13,463
6,818
8,244
8,722
37,247
Income (loss) from continuing operations before income taxes and other items
28,922
280,127
160,510
(470,957)
(1,398)
Income tax (expense) benefit
—
—
—
(9,678)
(9,678)
Income (loss) from unconsolidated entities
(25,489)
11,776
5,372
—
(8,341)
Gain (loss) on real estate dispositions, net
327,635
51,166
524,190
—
902,991
Income (loss) from continuing operations
331,068
343,069
690,072
(480,635)
883,574
Net income (loss)
$
331,068
$
343,069
$
690,072
$
(480,635)
$
883,574
27
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 the periods presented (dollars in thousands):
Three Months Ended
Nine Months Ended
September 30, 2021
September 30, 2020
September 30, 2021
September 30, 2020
Revenues:
Amount(1)
%
Amount
%
Amount(1)
%
Amount
%
United States
$
990,034
79.9
%
$
819,057
79.0
%
$
2,709,354
78.9
%
$
2,820,609
81.0
%
United Kingdom
146,308
11.8
%
110,281
10.6
%
405,938
11.8
%
337,601
9.7
%
Canada
103,455
8.3
%
107,536
10.4
%
317,559
9.3
%
325,741
9.3
%
Total
$
1,239,797
100.0
%
$
1,036,874
100.0
%
$
3,432,851
100.0
%
$
3,483,951
100.0
%
As of
September 30, 2021
December 31, 2020
Assets:
Amount
%
Amount
%
United States
$
27,132,959
81.0
%
$
26,658,659
82.1
%
United Kingdom
3,978,661
11.9
%
3,352,549
10.3
%
Canada
2,368,405
7.1
%
2,472,434
7.6
%
Total
$
33,480,025
100.0
%
$
32,483,642
100.0
%
(1) The United States, United Kingdom and Canada represent 74%, 13% and 13% of our resident fees and services revenue for the three and nine month periods ended September 30, 2021, respectively.
19.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 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, 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 nine months ended September 30, 2021 and 2020, 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 most of the subsidiary entities in the structure are treated as disregarded entities of the company for U.S. federal income tax purposes. Subsequent to 2014 we transferred certain subsidiaries to the United Kingdom, while some wholly-owned direct and indirect subsidiaries remain in Luxembourg and Jersey. The company reflects current and deferred tax liabilities for any such withholding taxes incurred from this holding company structure in its consolidated financial statements. Generally, given current statutes of limitations, we are subject to audit by the foreign, federal, state and local taxing authorities under applicable local laws.
28
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The CARES Act, among its economic stimulus provisions, includes a number of tax provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carrybacks, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. Certain of these provisions may impact the provision for taxes in our consolidated financial statements, including in particular the provision allowing for the carryback of net operating losses which would be applicable to our TRSs. We have made a reasonable estimate of the tax impact to us of the CARES Act in our consolidated financial statements, and while we do not believe that there will be further material impacts to the consolidated financial statements related to the CARES Act tax provisions, we will continue to evaluate the impact of the CARES Act and any guidance provided by the U.S. Treasury and the IRS on our consolidated financial statements. It is possible our estimates could differ materially from the actual tax impact to us of the CARES Act.
20.Variable Interest Entities
We have entered into joint ventures to own certain seniors housing and outpatient medical assets which are deemed to be VIEs. We have concluded that we are the primary beneficiary of these VIEs 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 VIEs in the aggregate (in thousands):
September 30, 2021
December 31, 2020
Assets:
Net real estate investments
$
451,723
$
454,333
Cash and cash equivalents
15,067
15,547
Receivables and other assets
7,999
11,171
Total assets (1)
$
474,789
$
481,051
Liabilities and equity:
Secured debt
$
164,010
$
165,671
Lease liabilities
3,648
1,325
Accrued expenses and other liabilities
12,939
14,997
Total equity
294,192
299,058
Total liabilities and equity
$
474,789
$
481,051
(1) Note that assets of the consolidated VIEs can only be used to settle obligations relating to such VIEs. Liabilities of the consolidated VIEs represent claims against the specific assets of the VIEs.
29
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is based primarily on the unaudited consolidated financial statements 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, 2020, 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
Company Overview
Welltower Inc. (NYSE:WELL), 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 interests in properties concentrated in major, high-growth markets in the United States (U.S.), Canada and the United Kingdom (U.K.), consisting of seniors housing and post-acute communities and outpatient medical properties.
The following table summarizes our consolidated portfolio for the three months ended September 30, 2021 (dollars in thousands):
Percentage of
Number of
Type of Property
NOI (1)
NOI
Properties
Seniors Housing Operating
$
172,909
33.8
%
690
Triple-net
228,321
44.5
%
619
Outpatient Medical
111,431
21.7
%
297
Totals
$
512,661
100.0
%
1,606
(1) Represents consolidated NOI and excludes our share of investments in unconsolidated entities. Entities in which we have a joint venture with a minority partner are shown at 100% of the joint venture amount. See Non-GAAP Financial Measures for additional information and reconciliation.
The COVID-19 pandemic has had and may continue to have material and adverse effects on our financial condition, results of operations and cash flows in the future. The extent to which the COVID-19 pandemic impacts our operations and those of our operators and tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the effectiveness of vaccines, the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic effects of the pandemic and containment measures, the overall pace of recovery, among others.
Our Seniors Housing Operating revenues are dependent on occupancy. Spot occupancy has steadily increased in recent months, with 96% of communities open for new admissions and nearly all communities allowing visitors, in-person tours and communal dining and activities. Rapid distribution and a high acceptance rate of COVID-19 vaccinations by residents within assisted living and memory care facilities in the U.S. and U.K. have resulted in a significant decrease in total resident case counts since mid-January across the portfolio.
We have incurred increased operational costs as a result of the introduction of public health measures and other regulations affecting our properties, as well as additional health and safety measures adopted by us and our operators related to the COVID-19 pandemic, including increases in labor, personal protective equipment and sanitation. We expect total Seniors Housing Operating expenses to remain elevated during the pandemic and potentially beyond as these additional health and safety measures become standard practice.
Our Triple-net operators are experiencing similar trends related to occupancy and operating costs as described above with respect to our Seniors Housing Operating properties. However, long-term/post-acute care facilities are generally experiencing a higher degree of occupancy declines. These factors may continue to impact the ability of our Triple-net operators to make contractual rent payments to us in the future. Many of our Triple-net operators received funds under the Coronavirus Aid Relief, and Economic Security Act (“CARES Act”) Paycheck Protection Program. In addition, operators of long-term/post-acute care facilities have generally received funds from Phase 1 of the Provider Relief Fund and operators of assisted living facilities have generally received funds from Phase 2 and Phase 3 of the Provider Relief Fund.
During the nine months ended September 30, 2021, we collected approximately 94% of rent due from operators under Triple-net lease agreements (primarily seniors housing and post-acute care facilities). No significant rent deferrals or rent concessions have been made during the nine months ended September 30, 2021. We evaluate leases individually and recognize rent on a cash basis if collectability of substantially all contractual rent payments is not probable. To the extent the prolonged impact of the COVID-19 pandemic causes operators or tenants to seek further modifications of their lease agreements, we may recognize reductions in revenue and increases in uncollectible receivables.
31
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
During the nine months ended September 30, 2021, we have collected virtually all rent due from tenants in our Outpatient Medical portfolio, with uncollected amounts primarily attributable to local jurisdictions with COVID-19 related ordinances providing temporary rent relief to tenants. We evaluate leases individually and recognize rent on a cash basis if collectability of substantially all contractual rent payments is not probable.
Business Strategy
Our primary objectives are to protect stockholder capital and enhance stockholder value. We seek to pay consistent cash dividends to stockholders and create opportunities to increase dividend payments to stockholders as a result of annual increases in NOI and portfolio growth. To meet these objectives, we invest across the full spectrum of seniors housing and health care real estate and diversify our investment portfolio by property type, relationship and geographic location.
Substantially all of our revenues are derived from operating lease rentals, resident fees and services and interest earned on outstanding loans receivable. These items represent our primary sources of liquidity to fund distributions and depend upon the continued ability of our obligors to make contractual rent and interest payments to us and the profitability of our operating properties. To the extent that our obligors/partners experience operating difficulties and become unable to generate sufficient cash to make payments or operating distributions to us, there could be a material adverse impact on our consolidated results of operations, liquidity and/or financial condition. To mitigate this risk, we monitor our investments through a variety of methods determined by the type of property. Our asset management process for seniors housing properties generally includes review of monthly financial statements and other operating data for each property, review of obligor/partner creditworthiness, property inspections and review of covenant compliance relating to licensure, real estate taxes, letters of credit and other collateral. Our internal property management division manages and monitors the outpatient medical portfolio with a comprehensive process including review of tenant relations, lease expirations, the mix of health service providers, hospital/health system relationships, property performance, capital improvement needs and market conditions among other things. We evaluate the operating environment in each property’s market to determine the likely trend in operating performance of the facility. When we identify unacceptable trends, we seek to mitigate, eliminate or transfer the risk. Through these efforts, we generally aim to intervene at an early stage to address any negative trends, and in so doing, support both the collectability of revenue and the value of our investment.
In addition to our asset management and research efforts, we also aim to structure our relevant investments to mitigate payment risk. Operating leases and loans are normally credit enhanced by guarantees and/or letters of credit. In addition, operating leases are typically structured as master leases and loans are generally cross-defaulted and cross-collateralized with other real estate loans, operating leases or agreements between us and the obligor and its affiliates.
For the nine months ended September 30, 2021, resident fees and services and rental income represented 67% and 30%, respectively, of total revenues. Substantially all of our operating leases are designed with escalating rent structures. Leases with fixed annual rental escalators are generally recognized on a straight-line basis over the initial lease period, subject to a collectability assessment. Rental income related to leases with contingent rental escalators is generally recorded based on the contractual cash rental payments due for the period. Our yield on loans receivable depends upon a number of factors, including the stated interest rate, the average principal amount outstanding during the term of the loan and any interest rate adjustments.
Our primary sources of cash include resident fees and services, rent and interest receipts, borrowings under our unsecured revolving credit facility and commercial paper program, public issuances of debt and equity securities, proceeds from investment dispositions and principal payments on loans receivable. Our primary uses of cash include dividend distributions, debt service payments (including principal and interest), real property investments (including acquisitions, capital expenditures, construction advances and transaction costs), loan advances, property operating expenses and general and administrative expenses. Depending upon the availability and cost of external capital, we believe our liquidity is sufficient to fund these uses of cash.
We also continuously evaluate opportunities to finance future investments. New investments are generally funded from temporary borrowings under our unsecured revolving credit facility and commercial paper program, internally generated cash and the proceeds from investment dispositions. Our investments generate cash from NOI and principal payments on loans receivable. Permanent financing for future investments, which replaces funds drawn under our unsecured revolving credit facility and commercial paper program, has historically been provided through a combination of the issuance of public debt and equity securities and the incurrence or assumption of secured debt.
Depending upon market conditions, we believe that new investments will be available in the future with spreads over our cost of capital that will generate appropriate returns to our stockholders. It is also likely that investment dispositions may occur in the future. To the extent that investment dispositions exceed new investments, our revenues and cash flows from operations could be adversely affected. We expect to reinvest the proceeds from any investment dispositions in new investments. To the extent that new investment requirements exceed our available cash on-hand, we expect to borrow under our unsecured revolving credit facility and commercial paper program. At September 30, 2021, we had $303,982,000 of cash and cash equivalents, $58,663,000 of restricted cash and $3,709,000,000 of available borrowing capacity under our unsecured revolving credit facility.
32
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Key Transactions
Capital The following summarizes key capital transactions that occurred during the nine months ended September 30, 2021:
•In March 2021, we completed the issuance of $750,000,000 senior unsecured notes bearing interest at 2.80% with a maturity date of June 2031.
•In April 2021, we repaid our $339,128,000 of our 3.75% senior unsecured notes due March 2023, $334,624,000 of our 3.95% senior unsecured notes due September 2023, and $15,000,000 of our term loan due April 2022.
•In June 2021, we closed on a new $4,700,000,000 unsecured credit facility with improved pricing across our line of credit and terminated the existing unsecured credit facility. The credit facility includes $4,000,000,000 of revolving credit capacity at a borrowing rate of 77.5 basis points over LIBOR, $500,000,000 of USD term loan capacity at a borrowing rate of 90.0 basis points over LIBOR and $250,000,000 CAD term loan capacity at 90.0 basis points over CDOR.
•In June 2021, we repaid the remaining $845,000,000 of our term loan due April 2022.
•In June 2021, we completed the issuance of $500,000,000 senior unsecured notes bearing interest at 2.05% with a maturity date of January 2029.
•In July 2021, we entered into an amended and restated ATM Program (as defined below) pursuant to which we may offer and sell up to $2,500,000,000 of common stock from time to time. Since the beginning of the year, we sold 29,518,162 shares of common stock under our current and previous ATM Programs via forward sale agreements which are expected to generate gross proceeds of approximately $2,374,401,000, of which 17,720,008 shares have been settled resulting in $1,380,519,000 of gross proceeds during the nine months ended September 30, 2021.
•During the nine months ended September 30, 2021, we extinguished $70,144,000 of secured debt at a blended average interest rate of 6.02%.
Investments The following summarizes our property acquisitions and joint venture investments completed during the nine months ended September 30, 2021 (dollars in thousands):
Properties
Book Amount (1)
Capitalization Rates (2)
Seniors Housing Operating
132
$
2,139,667
5.4
%
Triple-net
22
484,927
6.3
%
Outpatient Medical
10
290,073
5.5
%
Totals
164
$
2,914,667
5.6
%
(1) Represents amounts recorded in net real estate investments including fair value adjustments pursuant to U.S. GAAP. See Note 3 to our unaudited consolidated financial statements for additional information.
(2) Represents annualized contractual or projected net operating income to be received in cash divided by investment amounts.
Dispositions The following summarizes property dispositions completed during the nine months ended September 30, 2021 (dollars in thousands):
Properties
Proceeds (1)
Book Amount (2)
Capitalization Rates (3)
Seniors Housing Operating
12
$
118,590
$
112,837
4.8
%
Triple-net
46
569,664
439,974
7.5
%
Outpatient Medical
10
253,454
159,000
5.0
%
Totals
68
$
941,708
$
711,811
6.5
%
(1) Represents net proceeds received upon disposition, including any seller financing.
(2) Represents carrying value of net real estate assets at time of disposition. See Note 5 to our unaudited consolidated financial statements for additional information.
(3) Represents annualized contractual income that was being received in cash at date of disposition divided by stated purchase price.
Dividends Our Board of Directors declared a cash dividend for the quarter ended September 30, 2021 of $0.61 per share. On November 23, 2021, we will pay our 202nd consecutive quarterly cash dividend to stockholders of record on November 16, 2021.
33
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Key Performance Indicators, Trends and Uncertainties
We utilize several key performance indicators to evaluate the various aspects of our business. These indicators are discussed below and relate to operating performance, credit strength and concentration risk. Management uses these key performance indicators to facilitate internal and external comparisons to our historical operating results, in making operating decisions and for budget planning purposes.
Operating Performance We believe that net income and net income attributable to common stockholders (“NICS”) per the Consolidated Statements of Comprehensive Income are the most appropriate earnings measures. Other useful supplemental measures of our operating performance include funds from operations attributable to common stockholders (“FFO”) and consolidated net operating income (“NOI”); however, these supplemental measures are not defined by U.S. generally accepted accounting principles (“U.S. GAAP”). Please refer to the section entitled “Non-GAAP Financial Measures” for further discussion and reconciliations. These earnings measures are widely used by investors and analysts in the valuation, comparison and investment recommendations of companies. The following table reflects the recent historical trends of our operating performance measures for the periods presented (in thousands):
Three Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
June 30,
March 31,
2021
2021
2021
2020
2020
2020
2020
Net income (loss)
$
190,336
$
45,757
$
72,192
$
155,278
$
394,978
$
159,216
$
329,380
NICS
179,663
26,257
71,546
163,729
325,585
179,246
310,284
FFO
345,739
248,840
287,167
225,827
185,014
335,597
356,124
NOI
510,397
498,335
434,736
501,455
402,157
527,711
576,821
Credit Strength We measure our credit strength both in terms of leverage ratios and coverage ratios. The leverage ratios indicate how much of our balance sheet capitalization is related to long-term debt, net of cash and Internal Revenue Code Section 1031 deposits. The coverage ratios indicate our ability to service interest and fixed charges (interest and secured debt principal amortization). We expect to maintain capitalization ratios and coverage ratios sufficient to maintain a capital structure consistent with our current profile. The coverage ratios are based on earnings before interest, taxes, depreciation and amortization (“EBITDA”). Please refer to the section entitled “Non-GAAP Financial Measures” for further discussion and reconciliation of these measures. Leverage ratios and coverage ratios are widely used by investors, analysts and rating agencies in the valuation, comparison, investment recommendations and rating of companies. The following table reflects the recent historical trends for our credit strength measures for the periods presented:
Three Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
June 30,
March 31,
2021
2021
2021
2020
2020
2020
2020
Net debt to book capitalization ratio
43%
43%
42%
41%
41%
43%
44%
Net debt to undepreciated book capitalization ratio
35%
35%
34%
34%
34%
35%
37%
Net debt to market capitalization ratio
27%
26%
28%
30%
33%
36%
40%
Interest coverage ratio
4.81x
3.30x
3.56x
4.20x
6.23x
4.29x
5.42x
Fixed charge coverage ratio
4.22x
2.93x
3.16x
3.72x
5.52x
3.84x
4.88x
Concentration Risk We evaluate our concentration risk in terms of NOI by property mix, relationship mix and geographic mix. Concentration risk is a valuable measure in understanding what portion of our NOI could be at risk if certain sectors were to experience downturns. Property mix measures the portion of our NOI that relates to our various property types. Relationship mix measures the portion of our NOI that relates to our current top five relationships. Geographic mix measures the portion of our NOI that relates to our current top five states (or international equivalents). The following table reflects our recent historical trends of concentration risk by NOI for the periods indicated below:
34
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Three Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
June 30,
March 31,
2021
2021
2021
2020
2020
2020
2020
Property mix:(1)
Seniors Housing Operating
34%
32%
39%
32%
43%
34%
42%
Triple-net
45%
45%
36%
45%
27%
42%
34%
Outpatient Medical
21%
23%
25%
23%
30%
24%
24%
Relationship mix: (1, 2)
ProMedica
11%
12%
12%
11%
13%
10%
9%
Sunrise Senior Living (3)
9%
10%
14%
12%
15%
10%
14%
Revera (3)
5%
5%
5%
4%
6%
5%
6%
Avery Healthcare
4%
4%
5%
4%
5%
3%
3%
Belmont Village
3%
4%
2%
2%
3%
3%
3%
Remaining relationships
68%
65%
62%
67%
58%
69%
65%
Geographic mix:(1)
United Kingdom
14%
13%
10%
11%
12%
8%
9%
California
12%
12%
15%
12%
17%
14%
15%
Texas
9%
9%
7%
10%
12%
10%
7%
Canada
6%
7%
7%
5%
8%
6%
7%
New Jersey
5%
5%
7%
7%
(5)%
7%
8%
Remaining geographic areas
54%
54%
54%
55%
56%
55%
54%
(1) Excludes our share of investments in unconsolidated entities and non-segment/corporate NOI. Entities in which we have a joint venture with a minority partner are shown at 100% of the joint venture amount.
(2) During the quarter ended June 30, 2021, we provided £540 million (approximately $750,330,000 based on the Sterling/ U.S. Dollar exchange rate as of the date of funding) of senior loan financing and a £30 million delayed facility for working capital and capital expenditures to affiliates of Safanad, a global real estate and private equity firm, as part of the recapitalization of its investment in HC-One Group. NOI related to this investment for the quarter ended September 30, 2021 was 5%.
(3) Revera owns a controlling interest in Sunrise Senior Living.
Lease Expirations The following table sets forth information regarding lease expirations for certain portions of our portfolio as of September 30, 2021 (dollars in thousands):
Expiration Year (1)
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
Thereafter
Triple-net:
Properties
55
36
2
14
28
48
17
14
15
12
356
Base rent (2)
$
7,903
$
2,913
$
2,482
$
11,431
$
6,147
$
71,469
$
32,526
$
16,953
$
32,248
$
42,651
$
380,526
% of base rent
1.3
%
0.5
%
0.4
%
1.9
%
1.0
%
11.8
%
5.4
%
2.8
%
5.3
%
7.0
%
62.6
%
Units/beds
4,422
4,260
173
1,372
2,911
4,919
2,047
1,053
1,129
1,438
36,664
% of Units/beds
7.3
%
7.1
%
0.3
%
2.3
%
4.8
%
8.1
%
3.4
%
1.7
%
1.9
%
2.4
%
60.7
%
Outpatient Medical:
Square feet
777,444
1,923,922
2,031,094
2,489,076
1,335,888
1,711,598
1,209,061
1,100,135
1,010,734
1,666,832
5,602,883
Base rent (2)
$
22,724
$
55,467
$
56,329
$
74,928
$
36,998
$
46,928
$
31,962
$
29,909
$
27,547
$
43,544
$
122,274
% of base rent
4.1
%
10.1
%
10.3
%
13.7
%
6.7
%
8.6
%
5.8
%
5.5
%
5.0
%
7.9
%
22.3
%
Leases
136
428
442
424
276
285
184
148
136
116
243
% of Leases
4.8
%
15.2
%
15.7
%
15.0
%
9.8
%
10.1
%
6.5
%
5.3
%
4.8
%
4.1
%
8.7
%
(1) Excludes investments in unconsolidated entities, developments, land parcels, loans receivable and sub-leases. Investments classified as held for sale are included in the current year.
(2) The most recent monthly cash base rent annualized. Base rent does not include tenant recoveries or amortization of above and below market lease intangibles or other non-cash income.
We evaluate our key performance indicators in conjunction with current expectations to determine if historical trends are indicative of future results. Our expected results may not be achieved and actual results may differ materially from our expectations. Factors that may cause actual results to differ from expected results are described in more detail in “Cautionary Statement Regarding Forward-Looking Statements” and other sections of this Quarterly Report on Form 10-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, 2020, under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
35
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Corporate Governance
Maintaining investor confidence and trust is important in today’s business environment. Our Board of Directors and management are strongly committed to policies and procedures that reflect the highest level of ethical business practices. Our corporate governance guidelines provide the framework for our business operations and emphasize our commitment to increase stockholder value while meeting all applicable legal requirements. These guidelines meet the listing standards adopted by the New York Stock Exchange and are available on the Internet at www.welltower.com/investors/governance. The information on our website is not incorporated by reference in this Quarterly Report on Form 10-Q, and our web address is included as an inactive textual reference only.
Liquidity and Capital Resources
Sources and Uses of Cash
Our primary sources of cash include resident fees and services, rent and interest receipts, borrowings under our unsecured revolving credit facility and commercial paper program, public issuances of debt and equity securities, proceeds from investment dispositions and principal payments on loans receivable. Our primary uses of cash include dividend distributions, debt service payments (including principal and interest), real property investments (including acquisitions, capital expenditures, construction advances and transaction costs), loan advances, property operating expenses and general and administrative expenses. These sources and uses of cash are reflected in our Consolidated Statements of Cash Flows and are discussed in further detail below. The following is a summary of our sources and uses of cash flows for the periods presented (dollars in thousands):
Nine Months Ended
Change
September 30, 2021
September 30, 2020
$
%
Cash, cash equivalents and restricted cash at beginning of period
$
2,021,043
$
385,765
$
1,635,278
424
%
Cash provided from (used in) operating activities
991,995
1,109,584
(117,589)
(11)
%
Cash provided from (used in) investing activities
(2,988,472)
2,329,745
(5,318,217)
(228)
%
Cash provided from (used in) financing activities
338,919
(1,666,195)
2,005,114
120
%
Effect of foreign currency translation
(840)
(3,566)
2,726
76
%
Cash, cash equivalents and restricted cash at end of period
$
362,645
$
2,155,333
$
(1,792,688)
(83)
%
Operating Activities The changes in net cash provided from operating activities are primarily attributable to declines in revenue as a result of decreased occupancy at our Seniors Housing Operating properties, straight-line receivable reserves related to Triple-net leases during the nine months ended September 30, 2021 and dispositions. Please see “Results of Operations” for discussion of net income fluctuations. For the nine months ended September 30, 2021 and 2020, cash flows provided from operations exceeded cash distributions to stockholders.
Investing Activities The changes in net cash provided from/used in investing activities are primarily attributable to net changes in real property investments and dispositions, loans receivable and investments in unconsolidated entities, which are summarized above in “Key Transactions” and Notes 3 and 5 of our unaudited consolidated financial statements. The following is a summary of cash used in non-acquisition capital improvement activities for the periods presented (dollars in thousands):
Nine Months Ended
Change
September 30, 2021
September 30, 2020
$
New development
$
263,325
$
126,699
$
136,626
Recurring capital expenditures, tenant improvements and lease commissions
53,471
61,047
(7,576)
Renovations, redevelopments and other capital improvements
112,220
122,277
(10,057)
Total
$
429,016
$
310,023
$
118,993
The change in new development is primarily due to the number and size of construction projects on-going during the relevant periods. Renovations, redevelopments and other capital improvements include expenditures to maximize property value, increase net operating income, maintain a market-competitive position and/or achieve property stabilization.
Financing Activities The changes in net cash provided from/used in financing activities are primarily attributable to changes related to our long-term debt arrangements, the issuances of common stock and dividend payments which are summarized above in "Key Transactions". Please refer to Notes 10, 11 and 14 of our unaudited consolidated financial statements for additional information.
36
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
In March 2021, we completed the issuance of $750,000,000 senior unsecured notes with a maturity date of June 2031. In June 2021, we completed the issuance of $500,000,000 senior unsecured notes with a maturity date of January 2029. Net proceeds from these debt issuances were used to redeem the remaining $339,128,000 of our 3.75% senior unsecured notes due 2023, $334,624,000 of our 3.95% senior unsecured notes due 2023, and $860,000,000 remaining on our term loan due April 2022. In June 2021, we closed on a new $4,700,000,000 unsecured credit facility. The credit facility includes $4,000,000,000 of revolving credit capacity. As of September 30, 2021, we have total near-term available liquidity of approximately $4.0 billion. However, we are unable to accurately predict the full impact that the pandemic will have on our results from operations, financial condition, liquidity and cash flows due to numerous factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2020, including factors identified under the heading “Risk Factors".
Off-Balance Sheet Arrangements
At September 30, 2021, we had investments in unconsolidated entities with our ownership generally ranging from 10% to 65%. We use financial derivative instruments to hedge interest rate and foreign currency exchange rate exposure. At September 30, 2021, we had 13 outstanding letter of credit obligations. Please see Notes 8, 12 and 13 to our unaudited consolidated financial statements for additional information.
Contractual Obligations
The following table summarizes our payment requirements under contractual obligations as of September 30, 2021 (in thousands):
Payments Due by Period
Contractual Obligations
Total
2021
2022-2023
2024-2025
Thereafter
Unsecured credit facility and commercial paper (1,2)
$
291,000
$
240,000
$
—
$
—
$
51,000
Senior unsecured notes and term credit facilities: (1)
U.S. Dollar senior unsecured notes
8,850,000
—
—
2,600,000
6,250,000
Canadian Dollar senior unsecured notes (2)
236,724
—
—
—
236,724
Pounds Sterling senior unsecured notes (2)
1,414,350
—
—
—
1,414,350
U.S. Dollar term credit facility
510,000
—
500,000
10,000
—
Canadian Dollar term credit facility (2)
197,270
—
197,270
—
—
Secured debt: (1,2)
Consolidated
2,269,781
211,978
986,557
361,736
709,510
Unconsolidated
1,204,775
37,622
254,876
633,778
278,499
Contractual interest obligations: (3)
Unsecured credit facility and commercial paper
7,756
422
3,315
3,315
704
Senior unsecured notes and term loans (2)
3,804,876
133,915
831,409
712,190
2,127,362
Consolidated secured debt (2)
257,041
17,305
99,855
57,554
82,327
Unconsolidated secured debt (2)
189,468
9,990
72,687
45,504
61,287
Financing lease liabilities (4)
208,905
3,828
77,946
3,255
123,876
Operating lease liabilities (4)
1,405,385
16,018
91,491
89,495
1,208,381
Purchase obligations (5)
1,190,293
200,892
840,308
134,346
14,747
Total contractual obligations
$
22,037,624
$
871,970
$
3,955,714
$
4,651,173
$
12,558,767
(1) Amounts represent principal amounts due and do not reflect unamortized premiums/discounts or other fair value adjustments as reflected on the balance sheet.
(2) Based on foreign currency exchange rates in effect as of balance sheet date.
(3) Based on variable interest rates in effect as of balance sheet date.
(4) See Note 6 to our unaudited consolidated financial statements for additional information.
(5) See Note 13 to our unaudited consolidated financial statements for additional information.
Capital Structure
Please refer to “Credit Strength” above for a discussion of our leverage and coverage ratio trends. Our debt agreements contain various covenants, restrictions and events of default. Certain agreements require us to maintain financial ratios and minimum net worth and impose certain limits on our ability to incur indebtedness, create liens and make investments or acquisitions. As of September 30, 2021, we were in compliance in all material respects with the covenants under our debt agreements. None of our debt agreements contain provisions for acceleration which could be triggered by our debt ratings. However, under our primary unsecured credit facility, the ratings on our senior unsecured notes are used to determine the fees and interest charged. We plan to manage the company to maintain compliance with our debt covenants and with a capital structure consistent with our current profile. Any downgrades in terms of ratings or outlook by any or all of the rating agencies could have a material adverse impact on our cost and availability of capital, which could have a material adverse impact on our consolidated results of operations, liquidity and/or financial condition.
37
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
On May 4, 2021, we filed with the Securities and Exchange Commission (the “SEC”) (1) an open-ended automatic or “universal” shelf registration statement on Form S-3 covering an indeterminate amount of future offerings of debt securities, common stock, preferred stock, depositary shares, warrants and units to replace our existing “universal” shelf registration statement filed with the SEC on May 17, 2018, and (2) a registration statement in connection with our enhanced dividend reinvestment plan (“DRIP”) under which we may issue up to 15,000,000 shares of common stock to replace our existing DRIP registration statement on Form S-3 filed with the SEC on May 17, 2018. As of October 29, 2021, 15,000,000 shares of common stock remained available for issuance under the DRIP registration statement. On July 30, 2021, we entered into (i) an amended and restated equity distribution agreement (the “EDA”) with each of Robert W. Baird & Co. Incorporated, Barclays Capital Inc., BMO Capital Markets Corp., BNP Paribas Securities Corp., BNY Mellon Capital Markets, LLC, BofA Securities, Inc., BOK Financial Securities, Inc., Capital One Securities Inc., Citigroup Global Markets Inc., Comerica Securities, Inc., Credit Agricole Securities (USA) Inc., Deutsche Bank Securities Inc., Fifth Third Securities, Inc., Goldman Sachs & Co. LLC, Hancock Whitney Investment Services, Inc., Jefferies LLC, J.P. Morgan Securities LLC, KeyBanc Capital Markets Inc., Loop Capital Markets LLC, Mizuho Securities USA LLC, Morgan Stanley & Co. LLC, MUFG Securities Americas Inc., RBC Capital Markets, LLC, Regions Securities LLC, Scotia Capital (USA) Inc., SMBC Nikko Securities America, Inc., Stifel, Nicolaus & Company, Incorporated, Synovus Securities, Inc., TD Securities (USA) LLC, Truist Securities, Inc. and Wells Fargo Securities, LLC relating to the offer and sale from time to time of up to $2,500,000,000 aggregate amount of our common stock and (ii) separate master forward sale confirmations with each of Bank of America, N.A., Bank of Montreal, The Bank of New York Mellon, Barclays Bank PLC, BNP Paribas, Citibank, N.A., Crédit Agricole Corporate and Investment Bank, Deutsche Bank AG, London Branch, Goldman Sachs & Co. LLC, Jefferies LLC, JPMorgan Chase Bank, National Association, KeyBanc Capital Markets Inc., Mizuho Markets Americas LLC, Morgan Stanley & Co. LLC, MUFG Securities EMEA plc, Royal Bank of Canada, The Bank of Nova Scotia, The Toronto-Dominion Bank, Truist Bank, London Branch and Wells Fargo Bank, National Association (together with the EDA, the “ATM Program”), amending and restating the ATM Program entered into on May 4, 2021 to, among other amendments, increase the total amount of shares of common stock that may be offered and sold under the ATM Program from $2,000,000,000 to $2,500,000,000, which amount excludes shares the Company has previously sold pursuant to the prior program. The ATM Program also allows us to enter into forward sale agreements. As of October 29, 2021, we had $2,491,418,000 of remaining capacity under the ATM Program, which excludes forward sales agreements outstanding for the sale of 11,798,154 shares or approximately $993,881,000 with maturity dates in 2022. We expect to physically settle the forward sales for cash proceeds. Depending upon market conditions, we anticipate issuing securities under our registration statements to invest in additional properties and to repay borrowings under our unsecured revolving credit facility and commercial paper program.
In connection with the filing of the new “universal” shelf registration statement, the Company also filed with the SEC two prospectus supplements that will continue offerings that were previously covered by prospectus supplements and the accompanying prospectus to the prior registration statement relating to: (i) the registration and possible issuance of up to 620,731 shares of the Company’s common stock (the “DownREIT Shares”), that may be issued from time to time if, and to the extent that, certain holders of Class A units (the “DownREIT Units”) of HCN G&L DownREIT, LLC, a Delaware limited liability company (the “DownREIT”), tender such DownREIT Units for redemption by the DownREIT, and HCN DownREIT Member, LLC, a majority-owned indirect subsidiary of the Company (including its permitted successors and assigns, the “Managing Member”), or a designated affiliate of the Managing Member, elects to assume the redemption obligations of the DownREIT and to satisfy all or a portion of the redemption consideration by issuing DownREIT Shares to the holders instead of or in addition to paying a cash amount; and (ii) the registration and possible issuance of up to 475,327 shares common stock (the “DownREIT II Shares”), that may be issued from time to time if, and to the extent that, certain holders of Class A units (the “DownREIT II Units,” and collectively with the DownREIT Units, the “Units”) of HCN G&L DownREIT II LLC, a Delaware limited liability company (the “DownREIT II”), tender such DownREIT II Units for redemption by the DownREIT II, and the Managing Member, or a designated affiliate of the Managing Member, elects to assume the redemption obligations of the DownREIT II and to satisfy all or a portion of the redemption consideration by issuing DownREIT II Shares to the holders instead of or in addition to paying a cash amount.
Results of Operations
Summary
Our primary sources of revenue include resident fees and services, rent and interest income. Our primary expenses include property operating expenses, depreciation and amortization, interest expense, general and administrative expenses and other expenses. We evaluate our business and make resource allocations on our three business segments: Seniors Housing Operating, Triple-net and Outpatient Medical. The primary performance measures for our properties are NOI and same store NOI ("SSNOI"), and other supplemental measures include FFO and EBITDA, which are further discussed below. Please see Non-GAAP Financial Measures for additional information and reconciliations. The following is a summary of our results of operations (dollars in thousands, except per share amounts):
38
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended
Change
Nine Months Ended
Change
September 30,
September 30,
September 30,
September 30,
2021
2020
Amount
%
2021
2020
Amount
%
Net income
$
190,336
$
394,978
$
(204,642)
(52)
%
$
308,285
$
883,574
$
(575,289)
(65)
%
NICS
179,663
325,585
(145,922)
(45)
%
277,466
815,115
(537,649)
(66)
%
FFO
345,739
185,014
160,725
87
%
881,746
876,735
5,011
1
%
EBITDA
585,552
777,364
(191,812)
(25)
%
1,436,017
2,082,171
(646,154)
(31)
%
NOI
510,397
402,157
108,240
27
%
1,443,468
1,506,689
(63,221)
(4)
%
SSNOI
387,722
405,100
(17,378)
(4)
%
1,159,875
1,255,386
(95,511)
(8)
%
Per share data (fully diluted):
NICS
$
0.42
$
0.77
$
(0.35)
(45)
%
$
0.65
$
1.94
$
(1.29)
(66)
%
FFO
$
0.80
$
0.44
$
0.36
82
%
$
2.09
$
2.10
$
(0.01)
—
%
Interest coverage ratio
4.81
x
6.23
x
(1.42)
x
(23)
%
3.89
x
5.31
x
(1.42)
x
(27)
%
Fixed charge coverage ratio
4.22
x
5.52
x
(1.30)
x
(24)
%
3.43
x
4.74
x
(1.31)
x
(28)
%
Seniors Housing Operating
The following is a summary of our SSNOI at Welltower's share for the Seniors Housing Operating segment (dollars in thousands):
QTD Pool
YTD Pool
Three Months Ended
Change
Nine Months Ended
Change
September 30, 2021
September 30, 2020
$
%
September 30, 2021
September 30, 2020
$
%
SSNOI (1)
$
144,044
$
166,145
$
(22,101)
(13.3)
%
$
445,953
$
546,853
$
(100,900)
(18.5)
%
(1) For the QTD and YTD Pools, amounts relate to 527 and 515 same store properties, respectively. Please see Non-GAAP Financial Measures for additional information and reconciliations.
The following is a summary of our results of operations for the Seniors Housing Operating segment (dollars in thousands):
Three Months Ended
Change
Nine Months Ended
Change
September 30,
September 30,
September 30,
September 30,
2021
2020
$
%
2021
2020
$
%
Revenues:
Resident fees and services
$
835,617
$
740,956
$
94,661
13
%
$
2,299,972
$
2,360,488
$
(60,516)
(3)
%
Interest income
1,135
113
1,022
904
%
3,110
305
2,805
920
%
Other income
2,767
996
1,771
178
%
5,388
6,050
(662)
(11)
%
Total revenues
839,519
742,065
97,454
13
%
2,308,470
2,366,843
(58,373)
(2)
%
Property operating expenses
666,610
567,704
98,906
17
%
1,804,939
1,771,088
33,851
2
%
NOI (1)
172,909
174,361
(1,452)
(1)
%
503,531
595,755
(92,224)
(15)
%
Other expenses:
Depreciation and amortization
157,176
133,224
23,952
18
%
420,797
419,161
1,636
—
%
Interest expense
9,360
12,728
(3,368)
(26)
%
31,331
43,191
(11,860)
(27)
%
Loss (gain) on extinguishment of debt, net
—
—
—
n/a
(1,537)
(492)
(1,045)
(212)
%
Provision for loan losses, net
152
86
66
77
%
222
86
136
158
%
Impairment of assets
—
12,778
(12,778)
(100)
%
22,317
91,424
(69,107)
(76)
%
Other expenses
5,449
6,488
(1,039)
(16)
%
12,617
13,463
(846)
(6)
%
172,137
165,304
6,833
4
%
485,747
566,833
(81,086)
(14)
%
Income (loss) from continuing operations before income taxes and other items
772
9,057
(8,285)
(91)
%
17,784
28,922
(11,138)
(39)
%
Income (loss) from unconsolidated entities
(15,810)
(7,678)
(8,132)
(106)
%
(23,514)
(25,489)
1,975
8
%
Gain (loss) on real estate dispositions, net
(615)
313,319
(313,934)
(100)
%
4,552
327,635
(323,083)
(99)
%
Income from continuing operations
(15,653)
314,698
(330,351)
(105)
%
(1,178)
331,068
(332,246)
(100)
%
Net income (loss)
(15,653)
314,698
(330,351)
(105)
%
(1,178)
331,068
(332,246)
(100)
%
Less: Net income (loss) attributable to noncontrolling interests
(2,178)
60,642
(62,820)
(104)
%
367
32,554
(32,187)
(99)
%
Net income (loss) attributable to common stockholders
$
(13,475)
$
254,056
$
(267,531)
(105)
%
$
(1,545)
$
298,514
$
(300,059)
(101)
%
(1) See Non-GAAP Financial Measures below.
39
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Resident fees and services and property operating expenses increased for the three month period ended September 30, 2021 compared to the same period in the prior year primarily due to acquisitions, including the acquisition of the Holiday Retirement portfolio on July 30, 2021 for a total purchase price of $1.6 billion. These increases were partially offset by decreases in occupancy across the portfolio due to the COVID-19 pandemic and property dispositions. Spot occupancy remains below pre-pandemic levels, reaching a low of 72.3% on March 12, 2021 before making meaningful recovery in recent months resulting in occupancy of 76.7% as of September 30, 2021. Spot occupancy rates through September 30, 2021 are as follows:
December 2020
January 2021
February 2021
March 2021
April 2021
May 2021
June 2021
July 2021
August 2021
September 2021
Spot occupancy (1)
74.8
%
73.4
%
72.5
%
72.7
%
73.2
%
73.7
%
74.6
%
75.2
%
75.9
%
76.7
%
Sequential occupancy change(2)
(1.4)
%
(0.8)
%
0.2
%
0.5
%
0.5
%
0.9
%
0.6
%
0.8
%
0.8
%
(1) Spot occupancy represents approximate month end occupancy at our share for 591 properties in operation as of December 31, 2020, including unconsolidated properties but excluding acquisitions, executed dispositions, development conversions since this date as well as one property closed for redevelopment.
(2) Sequential occupancy changes are based on actual spot occupancy and may not recalculate due to rounding.
During the quarter ended September 30, 2021, the U.S. and U.K. portfolios reported spot occupancy gains of approximately 260 bps and 300 bps, respectively. Canada reported a spot occupancy gain of approximately 70 bps.
Property-level operating expenses associated with the COVID-19 pandemic relating to our Seniors Housing Operating portfolio, net of reimbursements including Provider Relief Funds and similar programs in the U.K. and Canada, resulted in a net benefit of approximately $2,092,000 and $24,883,000 for the three and nine months ended September 30, 2021, respectively, as compared to a net expense of $18,193,000 and $65,614,000 during the three and nine months ended September 30, 2020, respectively. These expenses were incurred as a result of the introduction of public health measures and other regulations affecting our properties, as well as additional health and safety measures adopted by us and our operators related to the COVID-19 pandemic, including increases in labor and property cleaning expenses and expenditures related to our efforts to procure personal protective equipment ("PPE") and supplies, net of reimbursements.
In 2020 applications were made for amounts under Phase 2 and Phase 3 of the Provider Relief Fund related to our Seniors Housing Operating portfolio. During the nine months ended September 30, 2021, we received total Provider Relief Funds of approximately $40,975,000, which was recognized as a reduction to COVID-19 costs within property operating expenses.
The fluctuations in depreciation and amortization are due to acquisitions, dispositions and transitions. To the extent that we acquire or dispose of additional properties in the future, these amounts will change accordingly.
During the nine months ended September 30, 2021, we recorded impairment charges of $22,317,000 related to two held for use properties in which the carrying values exceeded the estimated fair value. During the nine months ended September 30, 2020, we recorded impairment charges of $91,424,000 related to 13 held for sale properties and four held for use properties. Transaction costs related to asset acquisitions are capitalized as a component of the purchase price. Changes in the gain on sales of properties are related to the volume and timing of property sales and the sales prices. The fluctuation in other expenses is primarily due to the timing of noncapitalizable transaction costs associated with acquisitions and operator transitions.
During the nine months ended September 30, 2021, we completed one Seniors Housing Operating construction project representing $58,844,000 or 490,367 per unit. The following is a summary of our Seniors Housing Operating construction projects, excluding expansions, pending as of September 30, 2021 (dollars in thousands):
40
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Location
Units
Commitment
Balance
Est. Completion
Beckenham, UK
100
$
63,444
$
56,657
4Q21
Hendon, UK
102
74,759
64,138
1Q22
Barnet, UK
100
69,775
56,182
1Q22
Georgetown, TX
188
36,215
8,158
2Q22
New Rochelle, NY
72
42,669
11,113
3Q22
Pflugerville, TX
196
39,500
6,344
3Q22
Sachse, TX
193
38,054
7,221
3Q22
Lake Jackson, TX
130
32,020
3,154
3Q22
Princeton, NJ
80
29,780
23,602
3Q22
Berea, OH
120
14,934
8,083
4Q22
Painesville, OH
119
14,462
5,841
4Q22
Beaver, PA
116
14,184
4,754
4Q22
Weymouth, MA
165
77,545
9,125
3Q23
Charlotte, NC
328
96,416
23,696
1Q24
Gaithersburg, MD
302
173,500
20,525
2Q24
2,311
$
817,257
308,593
Toronto, ON
Project in planning stage
49,828
Brookline, MA
Project in planning stage
28,451
Washington, DC
Project in planning stage
27,363
Columbus, OH
Project in planning stage
12,629
Brookhaven, GA
Project in planning stage
9,385
Raleigh, NC
Project in planning stage
3,476
$
439,725
Interest expense represents secured debt interest expense which fluctuates based on the net effect and timing of assumptions, segment transitions, fluctuations in foreign currency rates, extinguishments and principal amortizations. The fluctuations in loss (gain) on extinguishment of debt is primarily attributable to the volume of extinguishments and terms of the related secured debt. The following is a summary of our Seniors Housing Operating segment property secured debt principal activity (dollars in thousands):
Three Months Ended
Nine Months Ended
September 30, 2021
September 30, 2020
September 30, 2021
September 30, 2020
Wtd. Avg.
Wtd. Avg.
Wtd. Avg.
Wtd. Avg.
Amount
Interest Rate
Amount
Interest Rate
Amount
Interest Rate
Amount
Interest Rate
Beginning balance
$
1,645,290
2.83
%
$
1,779,625
2.91
%
$
1,706,189
3.05
%
$
2,115,037
3.54
%
Debt issued
2,693
3.75
%
—
—
%
2,693
3.75
%
44,921
2.58
%
Debt extinguished
—
—
%
—
—
%
(66,593)
6.01
%
(306,238)
2.90
%
Principal payments
(13,172)
2.93
%
(12,249)
3.15
%
(37,418)
3.00
%
(36,025)
3.25
%
Foreign currency
(22,415)
2.75
%
22,609
2.94
%
7,525
2.85
%
(27,710)
3.15
%
Ending balance
$
1,612,396
2.83
%
$
1,789,985
2.91
%
$
1,612,396
2.83
%
$
1,789,985
2.91
%
Monthly averages
$
1,622,685
2.82
%
$
1,794,932
2.91
%
$
1,660,377
2.90
%
$
1,971,507
3.21
%
The majority of our Seniors Housing Operating properties are formed through partnership interests. Income from unconsolidated entities recognized during the nine months ended September 30, 2021 includes a gain on sale recognized from the sale of a home health business owned by one of our unconsolidated entities, offset by losses from unconsolidated entities largely attributable to depreciation and amortization of short-lived intangible assets related to certain investments in unconsolidated joint ventures. Net income attributable to noncontrolling interests represents our partners’ share of net income (loss) related to joint ventures. The decrease during the three and nine month periods ended September 30, 2020 relates primarily to our partners' share of gains on real estate dispositions partially offset by impairment charges recognized.
Triple-net
The following is a summary of our SSNOI at Welltower's share for the Triple-net segment (dollars in thousands):
QTD Pool
YTD Pool
Three Months Ended
Change
Nine Months Ended
Change
September 30, 2021
September 30, 2020
$
%
September 30, 2021
September 30, 2020
$
%
SSNOI (1)
$
142,690
$
142,697
$
(7)
—
%
$
425,014
$
429,651
$
(4,637)
(1.1)
%
(1) For the QTD and YTD Pools, amounts relate to 548 and 547 same store properties, respectively. Please see Non-GAAP Financial Measures for additional information and reconciliations.
41
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following is a summary of our results of operations for the Triple-net segment (dollars in thousands):
Three Months Ended
Change
Nine Months Ended
Change
September 30,
September 30,
September 30,
September 30,
2021
2020
$
%
2021
2020
$
%
Revenues:
Rental income
$
200,641
$
103,938
$
96,703
93
%
$
557,829
$
512,815
$
45,014
9
%
Interest income
38,257
15,877
22,380
141
%
86,040
46,068
39,972
87
%
Other income
1,087
1,113
(26)
(2)
%
3,539
3,393
146
4
%
Total revenues
239,985
120,928
119,057
98
%
647,408
562,276
85,132
15
%
Property operating expenses
11,664
12,567
(903)
(7)
%
37,132
39,432
(2,300)
(6)
%
NOI (1)
228,321
108,361
119,960
111
%
610,276
522,844
87,432
17
%
Other expenses:
Depreciation and amortization
54,226
58,157
(3,931)
(7)
%
165,299
173,989
(8,690)
(5)
%
Interest expense
1,548
2,070
(522)
(25)
%
5,134
7,668
(2,534)
(33)
%
Loss (gain) on derivatives and financial instruments, net
(8,078)
1,395
(9,473)
(679)
%
(6,503)
10,480
(16,983)
(162)
%
Provision for loan losses, net
(323)
372
(695)
(187)
%
10,549
8,895
1,654
19
%
Impairment of assets
1,490
10,535
(9,045)
(86)
%
24,222
34,867
(10,645)
(31)
%
Other expenses
(4,248)
2,805
(7,053)
(251)
%
4,845
6,818
(1,973)
(29)
%
44,615
75,334
(30,719)
(41)
%
203,546
242,717
(39,171)
(16)
%
Income (loss) from continuing operations before income taxes and other items
183,706
33,027
150,679
456
%
406,730
280,127
126,603
45
%
Income (loss) from unconsolidated entities
5,038
(423)
5,461
n/a
14,822
11,776
3,046
26
%
Gain (loss) on real estate dispositions, net
81,712
(619)
82,331
n/a
126,463
51,166
75,297
147
%
Income from continuing operations
270,456
31,985
238,471
746
%
548,015
343,069
204,946
60
%
Net income
270,456
31,985
238,471
746
%
548,015
343,069
204,946
60
%
Less: Net income (loss) attributable to noncontrolling interests
11,917
8,597
3,320
39
%
26,722
36,275
(9,553)
(26)
%
Net income attributable to common stockholders
$
258,539
$
23,388
$
235,151
n/a
$
521,293
$
306,794
$
214,499
70
%
(1) See Non-GAAP Financial Measures below.
Rental income has increased primarily due to the timing of the establishment of reserves for straight-line rent receivable balances relating to leases for which collection of substantially all contractual lease payments is no longer deemed probable. During the three and nine months ended September 30, 2021, we recorded reserves for previously recognized straight-line receivables of $0 and $49,241,000, respectively. During the three and nine month periods ended September 30, 2020, we recorded $112,398,000 and $146,508,000, respectively, which included $91,025,000 related to Genesis Healthcare whom noted substantial doubt as to their ability to continue as a going concern.
Certain of our leases contain annual rental escalators that are contingent upon changes in the Consumer Price Index and/or changes in the gross operating revenues of the tenant’s properties. These escalators are not fixed, so no straight-line rent is recorded; however, rental income is recorded based on the contractual cash rental payments due for the period. If gross operating revenues at our facilities and/or the Consumer Price Index do not increase, a portion of our revenues may not continue to increase. For the three months ended September 30, 2021, we had 16 leases with rental rate increases ranging from 1.75% to 7.34% in our Triple-net portfolio. Our Triple-net operators are experiencing similar impacts on occupancy and operating costs due to the COVID-19 pandemic as described above with respect to our Seniors Housing Operating properties. However, long-term/post-acute facilities are generally experienced a higher degree of occupancy declines which in some cases impacted the ability of our Triple-net operators to make contractual rent payments to us. However, many of our Triple-net operators received funds under the CARES Act Paycheck Protection Program. In addition, operators of long-term/post-acute facilities have generally received funds from Phase 1 of the Provider Relief Fund and operators of assisted living facilities have received funds from Phase 2 and Phase 3 of the Provider Relief Fund. During the nine months ended September 30, 2021, we collected approximately 94% of rent due from operators under Triple-net lease agreements (primarily seniors housing and post-acute care facilities). No significant rent deferrals or rent concessions have been made. We evaluate leases individually and recognize rent on a cash basis if collectability of substantially all contractual rent payments is not probable.
Depreciation and amortization fluctuate as a result of the acquisitions, dispositions and transitions of triple-net properties. To the extent we acquire or dispose of additional properties in the future, our provision for depreciation and amortization will change accordingly.
During the nine months ended September 30, 2021, we recognized a provision for loan losses under the current expected credit losses accounting standard, primarily related to the initial recognition of the £540 million of senior loan financing to affiliates of Safanad as part of the recapitalization of its investment in HC-One Group during the second quarter. The increase in interest income for the three and nine month periods ended September 30, 2021 is primarily driven by interest recognized on this loan funding. Additionally, during March 2020, we recognized a provision for loan losses of $6,898,000 to fully reserve for a non-real estate loans receivable that was no longer deemed collectible.
42
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
During the nine months ended September 30, 2021, we recorded impairment charges of $24,222,000 related to four held for sale properties and two held for use properties. During the nine months ended September 30, 2020, we recorded impairment charges of $34,867,000 related to one held for sale and four held for use properties. Changes in the gain on sales of properties are related to the volume and timing of property sales and the sales prices. Transaction costs related to asset acquisitions are capitalized as a component of purchase price. The fluctuation in other expenses is primarily due to noncapitalizable transaction costs from acquisitions and segment transitions.
During the nine months ended September 30, 2021, we completed one Triple-net construction project representing $22,990,000 or $280,366 per unit. The following is a summary of Triple-net construction projects, excluding expansions, pending as of September 30, 2021 (dollars in thousands):
Location
Units/Beds
Commitment
Balance
Est. Completion
Redhill, UK
76
$
21,417
$
17,794
1Q22
London, UK
82
43,462
22,691
2Q22
Wombourne, UK
66
16,164
9,394
2Q22
Leicester, UK
60
15,086
8,296
2Q22
Rugby, UK
76
20,627
6,868
4Q22
Raleigh, NC
191
154,256
35,129
2Q23
551
$
271,012
$
100,172
During the three months ended September 30, 2021, loss (gain) on derivatives and financial instruments, net is primarily attributable to the mark-to-market of the equity warrants received as part of the Safanad/HC-One transaction that closed in the second quarter. In addition, the mark-to-market adjustment on our Genesis Healthcare available-for-sale investment is reflected in all periods.
Interest expense represents secured debt interest expense and related fees. The change in secured debt interest expense is due to the net effect and timing of assumptions, segment transitions, fluctuations in foreign currency rates, extinguishments and principal amortizations. The following is a summary of our Triple-net secured debt principal activity for the periods presented (dollars in thousands):
Three Months Ended
Nine Months Ended
September 30, 2021
September 30, 2020
September 30, 2021
September 30, 2020
Wtd. Avg.
Wtd. Avg.
Wtd. Avg.
Wtd. Avg.
Amount
Interest Rate
Amount
Interest Rate
Amount
Interest Rate
Amount
Interest Rate
Beginning balance
$
122,566
4.91
%
$
289,321
3.27
%
$
123,652
4.91
%
$
306,038
3.60
%
Debt extinguished
—
—
%
(176,875)
2.03
%
—
—
%
(176,875)
2.03
%
Principal payments
(1,241)
5.16
%
(1,101)
5.16
%
(3,708)
5.16
%
(3,203)
5.16
%
Foreign currency
(1,034)
5.43
%
11,341
2.35
%
347
5.43
%
(3,274)
3.53
%
Ending balance
$
120,291
4.91
%
$
122,686
4.91
%
$
120,291
4.91
%
$
122,686
4.91
%
Monthly averages
$
121,051
4.91
%
$
164,836
4.19
%
$
122,582
4.91
%
$
242,312
3.69
%
A portion of our Triple-net properties were formed through partnerships. Income or loss from unconsolidated entities represents our share of net income or losses from partnerships where we are the noncontrolling partner. The increase in income from unconsolidated entities during the three months ended September 30, 2021 is primarily related to the reserves established on straight-line receivable balances at unconsolidated Genesis Healthcare entities in the prior year. Net income attributable to noncontrolling interests represents our partners’ share of net income relating to those partnerships where we are the controlling partner. The decrease during the nine months ended September 30, 2021, relates primarily to our partner's share of a gain on sale of certain properties in the prior year.
Outpatient Medical
The following is a summary of our SSNOI at Welltower's share for the Outpatient Medical segment (dollars in thousands):
QTD Pool
YTD Pool
Three Months Ended
Change
Nine Months Ended
Change
September 30, 2021
September 30, 2020
$
%
September 30, 2021
September 30, 2020
$
%
SSNOI (1)
$
100,988
$
96,258
$
4,730
4.9
%
$
288,908
$
278,882
$
10,026
3.6
%
(1) For the QTD and YTD Pools, amounts relate to 350 and 331 same store properties, respectively. Please see Non-GAAP Financial Measures for additional information and reconciliations.
43
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following is a summary of our results of operations for the Outpatient Medical segment for the periods presented (dollars in thousands):
Three Months Ended
Change
Nine Months Ended
Change
September 30,
September 30,
September 30,
September 30,
2021
2020
$
%
2021
2020
$
%
Revenues:
Rental income
$
157,343
$
171,108
$
(13,765)
(8)
%
$
457,721
$
548,496
$
(90,775)
(17)
%
Interest income
472
760
(288)
(38)
%
8,741
1,687
7,054
418
%
Other income
1,688
836
852
102
%
8,336
2,681
5,655
211
%
Total revenues
159,503
172,704
(13,201)
(8)
%
474,798
552,864
(78,066)
(14)
%
Property operating expenses
48,072
52,728
(4,656)
(9)
%
140,430
165,024
(24,594)
(15)
%
NOI (1)
111,431
119,976
(8,545)
(7)
%
334,368
387,840
(53,472)
(14)
%
Other expenses:
Depreciation and amortization
56,352
64,151
(7,799)
(12)
%
166,969
202,554
(35,585)
(18)
%
Interest expense
4,811
4,287
524
12
%
12,733
13,421
(688)
(5)
%
Loss (gain) on extinguishment of debt, net
(5)
—
(5)
n/a
(5)
741
(746)
(101)
%
Provision for loan losses, net
(100)
2,399
(2,499)
(104)
%
(3,462)
2,370
(5,832)
(246)
%
Impairment of assets
—
—
—
n/a
2,211
—
2,211
n/a
Other expenses
640
781
(141)
(18)
%
2,450
8,244
(5,794)
(70)
%
61,698
71,618
(9,920)
(14)
%
180,896
227,330
(46,434)
(20)
%
Income (loss) from continuing operations before income taxes and other items
49,733
48,358
1,375
3
%
153,472
160,510
(7,038)
(4)
%
Income (loss) from unconsolidated entities
(5,060)
2,120
(7,180)
(339)
%
(2,067)
5,372
(7,439)
(138)
%
Gain (loss) on real estate dispositions, net
38,857
171,604
(132,747)
(77)
%
92,687
524,190
(431,503)
(82)
%
Income from continuing operations
83,530
222,082
(138,552)
(62)
%
244,092
690,072
(445,980)
(65)
%
Net income (loss)
83,530
222,082
(138,552)
(62)
%
244,092
690,072
(445,980)
(65)
%
Less: Net income (loss) attributable to noncontrolling interests
934
154
780
506
%
3,733
(370)
4,103
n/a
Net income (loss) attributable to common stockholders
$
82,596
$
221,928
$
(139,332)
(63)
%
$
240,359
$
690,442
$
(450,083)
(65)
%
(1) See Non-GAAP Financial Measures.
Rental income has decreased due primarily to significant dispositions that closed during 2020. Certain of our leases contain annual rental escalators that are contingent upon changes in the Consumer Price Index. These escalators are not fixed, so no straight-line rent is recorded; however, rental income is recorded based on the contractual cash rental payments due for the period. If the Consumer Price Index does not increase, a portion of our revenues may not continue to increase. Our leases could renew above or below current rental rates, resulting in an increase or decrease in rental income. For the three months ended September 30, 2021, our consolidated outpatient medical portfolio signed 55,028 square feet of new leases and 326,222 square feet of renewals. The weighted-average term of these leases was seven years, with a rate of $42.91 per square foot and tenant improvement and lease commission costs of $22.4 per square foot. Substantially all of these leases contain an annual fixed or contingent escalation rent structure ranging from 1.0% to 3.5%.
We have collected virtually all rent due through the nine months ended September 30, 2021, with uncollected amounts primarily attributable to local jurisdictions with COVID-19 related ordinances providing temporary rent relief to tenants. We evaluate leases individually and recognize rent on a cash basis if collectability of substantially all contractual rent payments is not probable.
The increase in interest income for the nine months ended September 30, 2021 is due primarily to a $178,207,000 first mortgage loan initiated in August 2020 which was subsequently repaid in full in June of 2021, resulting in the reversal of the previously established allowance for credit losses.
The fluctuation in property operating expenses and depreciation and amortization are primarily attributable to the significant dispositions that occurred in 2020. To the extent that we acquire or dispose of additional properties in the future, these amounts will change accordingly. During the nine months ended September 30, 2021, we recognized an impairment charge of $2,211,000 related to one held for sale property. Changes in gains/losses on sales of properties are related to volume of property sales and the sales prices. Transaction costs related to asset acquisitions are capitalized as a component of purchase price. The fluctuation in other expenses is primarily due to noncapitalizable transaction costs.
During the nine months ended September 30, 2021, we completed two Outpatient Medical construction project representing $116,612,000 or $642 per square foot. The following is a summary of the Outpatient Medical construction projects, excluding expansions, pending as of September 30, 2021 (dollars in thousands):
44
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Location
Square Feet
Commitment
Balance
Est. Completion
College Station, TX
25,200
$
9,025
$
5,581
4Q21
Norman, OK
47,082
21,792
2,308
3Q22
Tyler, TX
85,214
35,369
7,837
4Q22
157,496
$
66,186
$
15,726
Total interest expense represents secured debt interest expense. The change in secured debt interest expense is primarily due to the net effect and timing of assumptions, extinguishments and principal amortizations. The following is a summary of our outpatient medical secured debt principal activity (dollars in thousands):
Three Months Ended
Nine Months Ended
September 30, 2021
September 30, 2020
September 30, 2021
September 30, 2020
Wtd. Avg.
Wtd. Avg.
Wtd. Avg.
Wtd. Avg.
Amount
Interest Rate
Amount
Interest Rate
Amount
Interest Rate
Amount
Interest Rate
Beginning balance
$
543,272
3.52
%
$
559,043
3.59
%
$
548,229
3.55
%
$
572,267
3.97
%
Debt extinguished
(3,551)
6.25
%
—
—
%
(3,551)
6.25
%
(8,393)
4.40
%
Principal payments
(2,627)
4.42
%
(2,526)
4.62
%
(7,584)
4.45
%
(7,357)
4.63
%
Ending balance
$
537,094
3.50
%
$
556,517
3.58
%
$
537,094
3.50
%
$
556,517
3.58
%
Monthly averages
$
539,158
3.51
%
$
557,773
3.58
%
$
543,293
3.53
%
$
565,331
3.77
%
A portion of our Outpatient Medical properties were formed through partnerships. Income or loss from unconsolidated entities represents our share of net income or losses from partnerships where we are the noncontrolling partner. During the three months ended September 30, 2021, the loss from unconsolidated entities is largely attributable to depreciation and amortization of short-lived intangible assets related to certain investments in unconsolidated joint ventures. Net income attributable to noncontrolling interests represents our partners’ share of net income or loss relating to those partnerships where we are the controlling partner.
Non-Segment/Corporate
The following is a summary of our results of operations for the Non-Segment/Corporate activities for the periods presented (dollars in thousands):
Three Months Ended
Change
Nine Months Ended
Change
September 30,
September 30,
September 30,
September 30,
2021
2020
$
%
2021
2020
$
%
Revenues:
Other income
$
790
$
1,177
$
(387)
(33)
%
$
2,175
$
1,968
$
207
11
%
Total revenue
790
1,177
(387)
(33)
%
2,175
1,968
207
11
%
Property operating expenses
3,054
1,718
1,336
78
%
6,882
1,718
5,164
301
%
NOI (1)
(2,264)
(541)
(1,723)
(318)
%
(4,707)
250
(4,957)
n/a
Expenses:
Interest expense
106,803
105,766
1,037
1
%
318,807
328,935
(10,128)
(3)
%
General and administrative expenses
32,256
31,003
1,253
4
%
93,618
100,546
(6,928)
(7)
%
Loss (gain) on extinguishment of debt, net
—
33,004
(33,004)
(100)
%
52,506
33,004
19,502
59
%
Other expenses
1,734
1,470
264
18
%
6,344
8,722
(2,378)
(27)
%
140,793
171,243
(30,450)
(18)
%
471,275
471,207
68
—
%
Loss from continuing operations before income taxes and other items
(143,057)
(171,784)
28,727
17
%
(475,982)
(470,957)
(5,025)
(1)
%
Income tax (expense) benefit
(4,940)
(2,003)
(2,937)
(147)
%
(6,662)
(9,678)
3,016
31
%
Loss from continuing operations
(147,997)
(173,787)
25,790
15
%
(482,644)
(480,635)
(2,009)
—
%
Net loss attributable to common stockholders
$
(147,997)
$
(173,787)
$
25,790
15
%
$
(482,644)
$
(480,635)
$
(2,009)
—
%
(1) See Non-GAAP Financial Measures.
Property operating expenses represent insurance costs related to our captive insurance company formed as of July 1, 2020 which acts as a direct insurer of property level insurance coverage for our portfolio.
The following is a summary of our Non-Segment/Corporate interest expense for the periods presented (dollars in thousands):
45
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Three Months Ended
Change
Nine Months Ended
Change
September 30,
September 30,
September 30,
September 30,
2021
2020
$
%
2021
2020
$
%
Senior unsecured notes
$
100,156
$
100,354
$
(198)
—
%
$
300,292
$
302,029
$
(1,737)
(1)
%
Unsecured credit facility and commercial paper program
1,799
1,156
643
56
%
4,736
14,140
(9,404)
(67)
%
Loan expense
4,848
4,256
592
14
%
13,779
12,766
1,013
8
%
Totals
$
106,803
$
105,766
$
1,037
1
%
$
318,807
$
328,935
$
(10,128)
(3)
%
The change in interest expense on senior unsecured notes is due to the net effect of issuances and extinguishments, as well as the movement in foreign exchange rates and related hedge activity. Please refer to Note 11 for additional information. The change in interest expense on our unsecured revolving credit facility and commercial paper program is due primarily to the net effect and timing of draws, paydowns and variable interest rate changes. Please refer to Note 10 for additional information regarding our unsecured revolving credit facility and commercial paper program. The loss on extinguishment recognized during the nine months ended September 30, 2021 is due primarily to the early extinguishment of $339,128,000 of our 3.75% senior unsecured notes due March 2023 and $334,624,000 of our 3.95% senior unsecured notes due September 2023. The loss on extinguishment recognized during the nine months ended September 30, 2020 is due primarily to the early extinguishment of $160,872,000 of our 3.75% senior unsecured notes due March 2023 and $265,376,000 of of our 3.95% senior unsecured notes due September 2023.
General and administrative expenses as a percentage of consolidated revenues for the three months ended September 30, 2021 and 2020 were 2.60% and 2.99%, respectively. The provision for income taxes primarily relates to state taxes, foreign taxes and taxes based on income generated by entities that are structured as TRSs. The fluctuation in the provision for income taxes is primarily related to a revaluation of deferred taxes due to a change in the U.K. tax rate and an adjustment to a deferred tax liability due to the recognition of an impairment charge.
Other
Non-GAAP Financial Measures
We believe that net income and net income attributable to common stockholders (“NICS”), as defined by U.S. GAAP, are the most appropriate earnings measurements. However, we consider FFO, NOI, SSNOI, EBITDA and Adjusted EBITDA to be useful supplemental measures of our operating performance. Historical cost accounting for real estate assets in accordance with U.S. GAAP implicitly assumes that the value of real estate assets diminishes predictably over time as evidenced by the provision for depreciation. However, since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient. In response, the National Association of Real Estate Investment Trusts (“NAREIT”) created funds from operations attributable to common stockholders (“FFO”) as a supplemental measure of operating performance for REITs that excludes historical cost depreciation from net income. FFO, as defined by NAREIT, means NICS, computed in accordance with U.S. GAAP, excluding gains (or losses) from sales of real estate and impairment of depreciable assets, plus depreciation and amortization, and after adjustments for unconsolidated entities and noncontrolling interests.
Consolidated net operating income (“NOI”) is used to evaluate the operating performance of our properties. We define NOI as total revenues, including tenant reimbursements, less property operating expenses. Property operating expenses represent costs associated with managing, maintaining and servicing tenants for our properties. These expenses include, but are not limited to, property-related payroll and benefits, property management fees paid to operators, marketing, housekeeping, food service, maintenance, utilities, property taxes and insurance. General and administrative expenses represent costs unrelated to property operations. These expenses include, but are not limited to, payroll and benefits, professional services, office expenses and depreciation of corporate fixed assets. Same store NOI (“SSNOI”) is used to evaluate the operating performance of our properties using a consistent population which controls for changes in the composition of our portfolio. We believe the drivers of property level NOI for both consolidated properties and unconsolidated properties are generally the same and therefore, we evaluate SSNOI based on our ownership interest in each property ("Welltower Share"). To arrive at Welltower's Share, NOI is adjusted by adding our minority ownership share related to unconsolidated properties and by subtracting the minority partners' noncontrolling ownership interests for consolidated properties. We do not control investments in unconsolidated properties and while we consider disclosures at Welltower Share to be useful, they may not accurately depict the legal and economic implications of our joint venture arrangements and should be used with caution. As used herein, same store is generally defined as those revenue-generating properties in the portfolio for the relevant year-over-year reporting periods. Acquisitions and development conversions are included in SSNOI five full quarters or seven full quarter after acquisition or being placed into service for the QTD Pool and YTD Pool, respectively. Land parcels, loans and sub-leases, as well as any properties sold or classified as held for sale during the respective periods are excluded from SSNOI. Redeveloped properties (including major refurbishments of a Seniors Housing Operating property where 20% or more of units are simultaneously taken out of
46
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
commission for 30 days or more or Outpatient Medical properties undergoing a change in intended use) are excluded from SSNOI until five full quarters or seven full quarters post completion of the redevelopment for the QTD Pool and YTD Pool, respectively. Properties undergoing operator transitions and/or segment transitions are also excluded from SSNOI until five full quarters or seven full quarters post completion of the transition for the QTD Pool and YTD Pool, respectively. In addition, properties significantly impacted by force majeure, acts of God, or other extraordinary adverse events are excluded from SSNOI until five full quarters or seven full quarters after the properties are placed back into service for the QTD Pool and YTD Pool, respectively. SSNOI excludes non-cash NOI and includes adjustments to present consistent ownership percentages and to translate Canadian properties and U.K. properties using a consistent exchange rate. We believe NOI and SSNOI provide investors relevant and useful information because they measure the operating performance of our properties at the property level on an unleveraged basis. We use NOI and SSNOI to make decisions about resource allocations and to assess the property level performance of our properties.
EBITDA is defined as earnings (net income) before interest, taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA excluding unconsolidated entities and including adjustments for stock-based compensation expense, provision for loan losses, gains/losses on extinguishment of debt, gains/loss/impairments on properties, gains/losses on derivatives and financial instruments, other expense, other impairment charges and other adjustments deemed appropriate. We believe that EBITDA and Adjusted EBITDA, along with net income, are important supplemental measures because they provide additional information to assess and evaluate the performance of our operations. We primarily use these measures to determine our interest coverage ratio, which represents EBITDA and Adjusted EBITDA divided by total interest, and our fixed charge coverage ratio, which represents EBITDA and Adjusted EBITDA divided by fixed charges. Fixed charges include total interest and secured debt principal amortization. Covenants in our unsecured senior notes and primary credit facility contain financial ratios based on a definition of EBITDA and Adjusted EBITDA that is specific to those agreements. Our leverage ratios are defined as the proportion of net debt to total capitalization and include book capitalization, undepreciated book capitalization and market capitalization. Book capitalization represents the sum of net debt (defined as total long-term debt, excluding operating lease liabilities, less cash and cash equivalents and any IRC Section 1031 deposits), total equity and redeemable noncontrolling interests. Undepreciated book capitalization represents book capitalization adjusted for accumulated depreciation and amortization. Market capitalization represents book capitalization adjusted for the fair market value of our common stock.
Our supplemental reporting measures and similarly entitled financial measures are widely used by investors, equity and debt analysts and rating agencies in the valuation, comparison, rating and investment recommendations of companies. Management uses these financial measures to facilitate internal and external comparisons to our historical operating results and in making operating decisions. Additionally, these measures are utilized by the Board of Directors to evaluate management. None of our supplemental measures represent net income or cash flow provided from operating activities as determined in accordance with U.S. GAAP and should not be considered as alternative measures of profitability or liquidity. Finally, the supplemental measures, as defined by us, may not be comparable to similarly entitled items reported by other real estate investment trusts or other companies.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The table below reflects the reconciliation of FFO to NICS, the most directly comparable U.S. GAAP measure, for the periods presented. Noncontrolling interest and unconsolidated entity amounts represent adjustments to reflect our share of depreciation and amortization, gains/loss on real estate dispositions and impairment of assets. Amounts are in thousands except for per share data.
Three Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
June 30,
March 31,
FFO Reconciliation:
2021
2021
2021
2020
2020
2020
2020
Net income attributable to common stockholders
$
179,663
$
26,257
$
71,546
$
163,729
$
325,585
$
179,246
$
310,284
Depreciation and amortization
267,754
240,885
244,426
242,733
255,532
265,371
274,801
Impairment of assets
1,490
23,692
23,568
9,317
23,313
75,151
27,827
Loss (gain) on real estate dispositions, net
(119,954)
(44,668)
(59,080)
(185,464)
(484,304)
(155,863)
(262,824)
Noncontrolling interests
(11,095)
(16,591)
(12,516)
(20,579)
48,559
(42,539)
(9,409)
Unconsolidated entities
27,881
19,265
19,223
16,091
16,329
14,231
15,445
FFO
$
345,739
$
248,840
$
287,167
$
225,827
$
185,014
$
335,597
$
356,124
Average diluted shares outstanding
429,983
419,305
419,079
418,753
418,987
419,121
412,420
Per diluted share data:
Net income attributable to common stockholders(1)
$
0.42
$
0.06
$
0.17
$
0.39
$
0.77
$
0.42
$
0.75
FFO
$
0.80
$
0.59
$
0.69
$
0.54
$
0.44
$
0.80
$
0.86
(1) Includes adjustment to the numerator for income (loss) attributable to OP unitholders.
Nine Months Ended
September 30,
September 30,
FFO Reconciliations:
2021
2020
Net income attributable to common stockholders
$
277,466
$
815,115
Depreciation and amortization
753,065
795,704
Impairment of assets
48,750
126,291
Loss (gain) on real estate dispositions, net
(223,702)
(902,991)
Noncontrolling interests
(40,202)
(3,389)
Unconsolidated entities
66,369
46,005
FFO
$
881,746
$
876,735
Average diluted common shares outstanding:
422,835
416,860
Per diluted share data:
Net income attributable to common stockholders(1)
$
0.65
$
1.94
FFO
$
2.09
$
2.10
(1) Includes adjustment to the numerator for income (loss) attributable to OP unitholders.
48
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Three Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
June 30,
March 31,
NOI Reconciliations:
2021
2021
2021
2020
2020
2020
2020
Net income (loss)
$
190,336
$
45,757
$
72,192
$
155,278
$
394,978
$
159,216
$
329,380
Loss (gain) on real estate dispositions, net
(119,954)
(44,668)
(59,080)
(185,464)
(484,304)
(155,863)
(262,824)
Loss (income) from unconsolidated entities
15,832
7,976
(13,049)
(258)
5,981
(1,332)
3,692
Income tax expense (benefit)
4,940
(2,221)
3,943
290
2,003
2,233
5,442
Other expenses
3,575
11,687
10,994
33,088
11,544
19,411
6,292
Impairment of assets
1,490
23,692
23,568
9,317
23,313
75,151
27,827
Provision for loan losses, net
(271)
6,197
1,383
83,085
2,857
1,422
7,072
Loss (gain) on extinguishment of debt, net
(5)
55,612
(4,643)
13,796
33,004
249
—
Loss (gain) on derivatives and financial instruments, net
(8,078)
(359)
1,934
569
1,395
1,434
7,651
General and administrative expenses
32,256
31,436
29,926
27,848
31,003
34,062
35,481
Depreciation and amortization
267,754
240,885
244,426
242,733
255,532
265,371
274,801
Interest expense
122,522
122,341
123,142
121,173
124,851
126,357
142,007
Consolidated net operating income (NOI)
$
510,397
$
498,335
$
434,736
$
501,455
$
402,157
$
527,711
$
576,821
NOI by segment:
Seniors Housing Operating
$
172,909
$
160,188
$
170,434
$
159,797
$
174,361
$
178,137
$
243,257
Triple-net
228,321
226,314
155,641
225,277
108,361
220,056
194,427
Outpatient Medical
111,431
113,577
109,360
117,231
119,976
129,143
138,721
Non-segment/corporate
(2,264)
(1,744)
(699)
(850)
(541)
375
416
Total NOI
$
510,397
$
498,335
$
434,736
$
501,455
$
402,157
$
527,711
$
576,821
Nine Months Ended
September 30, 2021
September 30, 2020
NOI Reconciliations:
Net income (loss)
$
308,285
$
883,574
Loss (gain) on real estate dispositions, net
(223,702)
(902,991)
Loss (income) from unconsolidated entities
10,759
8,341
Income tax expense (benefit)
6,662
9,678
Other expenses
26,256
37,247
Impairment of assets
48,750
126,291
Provision for loan losses, net
7,309
11,351
Loss (gain) on extinguishment of debt, net
50,964
33,253
Loss (gain) on derivatives and financial instruments, net
(6,503)
10,480
General and administrative expenses
93,618
100,546
Depreciation and amortization
753,065
795,704
Interest expense
368,005
393,215
Consolidated net operating income (NOI)
$
1,443,468
$
1,506,689
NOI by segment:
Seniors Housing Operating
$
503,531
$
595,755
Triple-net
610,276
522,844
Outpatient Medical
334,368
387,840
Non-segment/corporate
(4,707)
250
Total NOI
$
1,443,468
$
1,506,689
49
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
QTD Pool
YTD Pool
SSNOI Property Reconciliations:
Seniors Housing Operating
Triple-net
Outpatient Medical
Total
Seniors Housing Operating
Triple-net
Outpatient Medical
Total
Consolidated properties
690
619
297
1,606
690
619
297
1,606
Unconsolidated properties
91
39
79
209
91
39
79
209
Total properties
781
658
376
1,815
781
658
376
1,815
Recent acquisitions/development conversions(1)
(160)
(36)
(13)
(209)
(170)
(37)
(32)
(239)
Under development
(33)
(5)
(3)
(41)
(33)
(5)
(3)
(41)
Under redevelopment(2)
(8)
(1)
(2)
(11)
(10)
(1)
(2)
(13)
Current held for sale
(2)
(20)
(2)
(24)
(2)
(20)
(2)
(24)
Land parcels, loans and subleases
(11)
(21)
(6)
(38)
(11)
(21)
(6)
(38)
Transitions(3)
(38)
(25)
—
(63)
(38)
(25)
—
(63)
Other(4)
(2)
(2)
—
(4)
(2)
(2)
—
(4)
Same store properties
527
548
350
1,425
515
547
331
1,393
(1) Acquisitions and development conversions will enter the QTD Pool and YTD Pool after five full quarters and seven full quarters after acquisition or certificate of occupancy, respectively.
(2) Redevelopment properties will enter the QTD Pool and YTD Pool after five full quarters and seven full quarters of operations post redevelopment completion, respectively.
(3) Transitioned properties will enter the QTD Pool and YTD Pool after five full quarters and seven full quarters of operations with the new operator in place or under the new structure, respectively.
(4) Represents properties that are either closed or being closed.
QTD Pool
YTD Pool
Three Months Ended
Nine Months Ended
SSNOI Reconciliations:
September 30, 2021
September 30, 2020
September 30, 2021
September 30, 2020
Seniors Housing Operating:
Consolidated NOI
$
172,909
$
174,361
$
503,531
$
595,755
NOI attributable to unconsolidated investments
10,548
12,323
33,757
40,554
NOI attributable to noncontrolling interests
(15,602)
(11,306)
(48,168)
(40,803)
NOI attributable to non-same store properties
(23,506)
(9,723)
(52,643)
(51,989)
Non-cash NOI attributable to same store properties
(85)
(1,064)
11,332
(2,994)
Currency and ownership adjustments (1)
(220)
1,554
(1,856)
6,330
SSNOI at Welltower Share
144,044
166,145
445,953
546,853
Triple-net:
Consolidated NOI
228,321
108,361
610,276
522,844
NOI attributable to unconsolidated investments
4,891
(1,288)
14,666
8,978
NOI attributable to noncontrolling interests
(13,204)
(14,328)
(35,253)
(43,702)
NOI attributable to non-same store properties
(70,250)
32,109
(187,531)
(56,754)
Non-cash NOI attributable to same store properties
(7,073)
16,160
22,807
(7,075)
Currency and ownership adjustments (1)
5
1,683
49
5,360
SSNOI at Welltower Share
142,690
142,697
425,014
429,651
Outpatient Medical:
Consolidated NOI
111,431
119,976
334,368
387,840
NOI attributable to unconsolidated investments
4,604
3,006
14,316
6,530
NOI attributable to noncontrolling interests
(4,828)
(4,561)
(12,584)
(11,923)
NOI attributable to non-same store properties
(8,623)
(8,521)
(40,300)
(55,880)
Non-cash NOI attributable to same store properties
(1,892)
(3,590)
(5,993)
(9,762)
Currency and ownership adjustments (1)
296
(10,052)
(899)
(37,923)
SSNOI at Welltower Share
100,988
96,258
288,908
278,882
SSNOI at Welltower Share:
Seniors Housing Operating
144,044
166,145
445,953
546,853
Triple-net
142,690
142,697
425,014
429,651
Outpatient Medical
100,988
96,258
288,908
278,882
Total
$
387,722
$
405,100
$
1,159,875
$
1,255,386
(1) Includes adjustments to reflect consistent property ownership percentages, to translate Canadian properties at a USD/CAD rate of 1.2684 and to translate U.K. properties at a GBP/USD rate of 1.38.
50
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The tables below reflects the reconciliation of EBITDA to net income, the most directly comparable U.S. GAAP measure, for the periods presented. Dollars are in thousands.
Three Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
June 30,
March 31,
EBITDA Reconciliations:
2021
2021
2021
2020
2020
2020
2020
Net income (loss)
$
190,336
$
45,757
$
72,192
$
155,278
$
394,978
$
159,216
$
329,380
Interest expense
122,522
122,341
123,142
121,173
124,851
126,357
142,007
Income tax expense (benefit)
4,940
(2,221)
3,943
290
2,003
2,233
5,442
Depreciation and amortization
267,754
240,885
244,426
242,733
255,532
265,371
274,801
EBITDA
$
585,552
$
406,762
$
443,703
$
519,474
$
777,364
$
553,177
$
751,630
Interest Coverage Ratio:
Interest expense
$
122,522
$
122,341
$
123,142
$
121,173
$
124,851
$
126,357
$
142,007
Non-cash interest expense
(5,461)
(3,972)
(2,991)
(1,739)
(3,973)
(1,914)
(8,125)
Capitalized interest
4,669
4,862
4,496
4,238
3,947
4,541
4,746
Total interest
121,730
123,231
124,647
123,672
124,825
128,984
138,628
EBITDA
$
585,552
$
406,762
$
443,703
$
519,474
$
777,364
$
553,177
$
751,630
Interest coverage ratio
4.81
x
3.30
x
3.56
x
4.20
x
6.23
x
4.29
x
5.42
x
Fixed Charge Coverage Ratio:
Total interest
$
121,730
$
123,231
$
124,647
$
123,672
$
124,825
$
128,984
$
138,628
Secured debt principal payments
17,040
15,715
15,955
16,122
15,876
15,183
15,526
Total fixed charges
138,770
138,946
140,602
139,794
140,701
144,167
154,154
EBITDA
$
585,552
$
406,762
$
443,703
$
519,474
$
777,364
$
553,177
$
751,630
Fixed charge coverage ratio
4.22
x
2.93
x
3.16
x
3.72
x
5.52
x
3.84
x
4.88
x
Nine Months Ended
September 30,
September 30,
EBITDA Reconciliations:
2021
2020
Net income (loss)
$
308,285
$
883,574
Interest expense
368,005
393,215
Income tax expense (benefit)
6,662
9,678
Depreciation and amortization
753,065
795,704
EBITDA
$
1,436,017
$
2,082,171
Interest Coverage Ratio:
Interest expense
$
368,005
$
393,215
Non-cash interest expense
(12,424)
(14,012)
Capitalized interest
14,027
13,234
Total interest
369,608
392,437
EBITDA
$
1,436,017
$
2,082,171
Interest coverage ratio
3.89
x
5.31
x
Fixed Charge Coverage Ratio:
Total interest
$
369,608
$
392,437
Secured debt principal payments
48,710
46,585
Total fixed charges
418,318
439,022
EBITDA
$
1,436,017
$
2,082,171
Fixed charge coverage ratio
3.43
x
4.74
x
51
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The table below reflects the reconciliation of Adjusted EBITDA to net income, the most directly comparable U.S. GAAP measure, for the periods presented. Dollars are in thousands.
Twelve Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
June 30,
March 31,
Adjusted EBITDA Reconciliations:
2021
2021
2021
2020
2020
2020
2020
Net income
$
463,563
$
668,205
$
781,664
$
1,038,852
$
1,123,710
$
1,376,664
$
1,367,488
Interest expense
489,178
491,507
495,523
514,388
524,863
537,355
552,334
Income tax expense (benefit)
6,952
4,015
8,469
9,968
4,846
6,811
6,177
Depreciation and amortization
995,798
983,576
1,008,062
1,038,437
1,058,348
1,075,261
1,057,942
EBITDA
1,955,491
2,147,303
2,293,718
2,601,645
2,711,767
2,996,091
2,983,941
Loss (income) from unconsolidated entities
10,501
650
(8,658)
8,083
(49,079)
(58,322)
(47,941)
Stock-based compensation expense (1)
22,248
24,278
26,811
28,318
25,485
24,229
24,601
Loss (gain) on extinguishment of debt, net
64,760
97,769
42,406
47,049
35,865
68,685
68,436
Loss (gain) on real estate dispositions, net
(409,166)
(773,516)
(884,711)
(1,088,455)
(915,055)
(1,001,001)
(843,456)
Impairment of assets
58,067
79,890
131,349
135,608
126,389
121,172
55,960
Provision for loan losses, net
90,394
93,522
88,747
94,436
11,351
8,494
7,072
Loss (gain) on derivatives and financial instruments, net
(5,934)
3,539
5,332
11,049
5,411
5,260
5,739
Other expenses (1)
52,960
60,985
68,939
64,171
52,630
46,971
48,327
Leasehold interest adjustment (2)
(640)
—
—
—
—
—
—
Casualty losses, net of recoveries (3)
998
—
—
—
—
—
—
Other impairment (4)
49,241
161,639
163,481
146,508
146,508
34,110
32,268
Adjusted EBITDA
$
1,888,920
$
1,896,059
$
1,927,414
$
2,048,412
$
2,151,272
$
2,245,689
$
2,334,947
Adjusted Interest Coverage Ratio:
Interest expense
$
489,178
$
491,507
$
495,523
$
514,388
$
524,863
$
537,355
$
552,334
Capitalized interest
18,265
17,543
17,222
17,472
18,102
18,303
17,691
Non-cash interest expense
(14,163)
(12,675)
(10,617)
(15,751)
(14,746)
(12,761)
(11,599)
Total interest
493,280
496,375
502,128
516,109
528,219
542,897
558,426
Adjusted EBITDA
$
1,888,920
$
1,896,059
$
1,927,414
$
2,048,412
$
2,151,272
$
2,245,689
$
2,334,947
Adjusted interest coverage ratio
3.83
x
3.82
x
3.84
x
3.97
x
4.07
x
4.14
x
4.18
x
Adjusted Fixed Charge Coverage Ratio:
Total interest
$
493,280
$
496,375
$
502,128
$
516,109
$
528,219
$
542,897
$
558,426
Secured debt principal payments
64,832
63,668
63,136
62,707
60,562
57,807
56,308
Total fixed charges
558,112
560,043
565,264
578,816
588,781
600,704
614,734
Adjusted EBITDA
$
1,888,920
$
1,896,059
$
1,927,414
$
2,048,412
$
2,151,272
$
2,245,689
$
2,334,947
Adjusted fixed charge coverage ratio
3.38
x
3.39
x
3.41
x
3.54
x
3.65
x
3.74
x
3.80
x
(1) Certain severance-related costs are included in stock-based compensation and excluded from other expenses.
(2) Represents $13,214,000 of revenues and $12,574,000 of property operating expenses associated with a leasehold portfolio interest relating to 26 properties assumed by a wholly-owned affiliate in conjunction with the Holiday Retirement transaction. Subsequent to the initial transaction, we purchased eight of the leased properties and one of the properties was sold by the landlord and removed from the lease. No rent will be paid in excess of net cash flow relating to the leasehold properties and therefore, the net impact has been excluded from Adjusted EBITDA.
(3) Represents casualty losses net of any insurance recoveries.
(4) Represents reserve for straight-line rent receivable balances relating to leases placed on cash recognition.
Our leverage ratios include book capitalization, undepreciated book capitalization and market capitalization. Book capitalization represents the sum of net debt (defined as total long-term debt less cash and cash equivalents and any IRC Section 1031 deposits), total equity and redeemable noncontrolling interests. Undepreciated book capitalization represents book capitalization adjusted for accumulated depreciation and amortization. Market capitalization represents book capitalization adjusted for the fair market value of our common stock. Our leverage ratios are defined as the proportion of net debt to total capitalization. The table below reflects the reconciliation of our leverage ratios to our balance sheets for the periods presented. Amounts are in thousands, except share price.
52
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
As of
September 30,
June 30,
March 31,
December 31,
September 30,
June 30,
March 31,
2021
2021
2021
2020
2020
2020
2020
Book capitalization:
Unsecured credit facility and commercial paper
$
290,996
$
—
$
—
$
—
$
—
$
—
$
844,985
Long-term debt obligations (1)
13,488,656
13,572,816
14,618,713
13,905,822
13,889,030
14,543,485
13,228,433
Cash and cash equivalents (2)
(307,385)
(763,921)
(2,513,156)
(1,968,765)
(2,096,571)
(1,766,819)
(303,423)
Total net debt
13,472,267
12,808,895
12,105,557
11,937,057
11,792,459
12,776,666
13,769,995
Total equity and noncontrolling interests(3)
18,172,111
17,243,208
17,046,932
17,225,062
17,291,155
17,263,672
17,495,696
Book capitalization
$
31,644,378
$
30,052,103
$
29,152,489
$
29,162,119
$
29,083,614
$
30,040,338
$
31,265,691
Net debt to book capitalization ratio
43%
43%
42%
41%
41%
43%
44%
Undepreciated book capitalization:
Total net debt
$
13,472,267
$
12,808,895
$
12,105,557
$
11,937,057
$
11,792,459
$
12,776,666
$
13,769,995
Accumulated depreciation and amortization
6,634,061
6,415,676
6,212,432
6,104,297
6,002,775
6,001,177
5,910,979
Total equity and noncontrolling interests(3)
18,172,111
17,243,208
17,046,932
17,225,062
17,291,155
17,263,672
17,495,696
Undepreciated book capitalization
$
38,278,439
$
36,467,779
$
35,364,921
$
35,266,416
$
35,086,389
$
36,041,515
$
37,176,670
Net debt to undepreciated book capitalization ratio
35%
35%
34%
34%
34%
35%
37%
Market capitalization:
Common shares outstanding
435,274
422,562
417,520
417,401
417,305
417,302
417,391
Period end share price
$
82.40
$
83.10
$
71.63
$
64.62
$
55.09
$
51.75
$
45.78
Common equity market capitalization
$
35,866,578
$
35,114,902
$
29,906,958
$
26,972,453
$
22,989,332
$
21,595,379
$
19,108,160
Total net debt
13,472,267
12,808,895
12,105,557
11,937,057
11,792,459
12,776,666
13,769,995
Noncontrolling interests(3)
1,308,908
1,322,762
1,248,054
1,252,343
1,183,281
1,215,532
1,362,913
Market capitalization
$
50,647,753
$
49,246,559
$
43,260,569
$
40,161,853
$
35,965,072
$
35,587,577
$
34,241,068
Net debt to market capitalization ratio
27%
26%
28%
30%
33%
36%
40%
(1) Amounts include senior unsecured notes, secured debt and lease liabilities related to financing leases, as reflected on our Consolidated Balance Sheets. Operating lease liabilities related to the ASC 842 adoption are excluded.
(2) Inclusive of IRC Section 1031 deposits, if any.
(3) Includes amounts attributable to both redeemable noncontrolling interests and noncontrolling interests as reflected on our Consolidated Balance Sheets.
Critical Accounting Policies
Our 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, 2020 for further information regarding significant accounting policies that impact us. There have been no material changes to these policies in 2021.
53
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q may contain “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. When Welltower uses words such as “may,” “will,” “intend,” “should,” “believe,” “expect,” “anticipate,” “project,” “pro forma,” “estimate” or similar expressions that do not relate solely to historical matters, Welltower is making forward-looking statements. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that may cause Welltower’s actual results to differ materially from Welltower’s expectations discussed in the forward-looking statements. This may be a result of various factors, including, but not limited to: the duration and scope of the COVID-19 pandemic; uncertainty regarding the implementation and impact of the CARES Act and future stimulus or other COVID-19 relief legislation; the impact of the COVID-19 pandemic on occupancy rates and on the operations of Welltower and its operators/tenants; actions governments take in response to the COVID-19 pandemic, including the introduction of public health measures and other regulations affecting Welltower’s properties and the operations of Welltower and its operators/tenants; the effects of health and safety measures adopted by Welltower and its operators/tenants related to the COVID-19 pandemic; increased operational costs as a result of health and safety measures related to COVID-19; the impact of the COVID-19 pandemic on the business and financial condition of operators/tenants and their ability to make payments to Welltower; disruptions to Welltower's property acquisition and disposition activity due to economic uncertainty caused by COVID-19; general economic uncertainty in key markets as a result of the COVID-19 pandemic and a worsening of global economic conditions or low levels of economic growth; the status of capital markets, including availability and cost of capital; uncertainty from the expected discontinuance of LIBOR and the transition to any other interest rate benchmark; issues facing the health care industry, including compliance with, and changes to, regulations and payment policies, responding to government investigations and punitive settlements and operators’/tenants’ difficulty in cost effectively obtaining and maintaining adequate liability and other insurance; changes in financing terms; competition within the health care and seniors housing industries; negative developments in the operating results or financial condition of operators/tenants, including, but not limited to, their ability to pay rent and repay loans; Welltower’s ability to transition or sell properties with profitable results; the failure to make new investments or acquisitions as and when anticipated; natural disasters and other acts of God affecting Welltower’s properties; Welltower’s ability to re-lease space at similar rates as vacancies occur; Welltower’s ability to timely reinvest sale proceeds at similar rates to assets sold; operator/tenant or joint venture partner bankruptcies or insolvencies; the cooperation of joint venture partners; government regulations affecting Medicare and Medicaid reimbursement rates and operational requirements; liability or contract claims by or against operators/tenants; unanticipated difficulties and/or expenditures relating to future investments or acquisitions; environmental laws affecting Welltower’s properties; changes in rules or practices governing Welltower’s financial reporting; the movement of U.S. and foreign currency exchange rates; Welltower’s ability to maintain Welltower’s qualification as a REIT; key management personnel recruitment and retention; and other risks described in Welltower’s reports filed from time to time with the SEC. Other important factors are identified in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, including factors identified under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Finally, the Company undertakes no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events or otherwise, or to update the reasons why actual results could differ from those projected in any forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various market risks, including the potential loss arising from adverse changes in interest rates and foreign currency exchange rates. We seek to mitigate the underlying foreign currency exposures with gains and losses on derivative contracts hedging these exposures. We seek to mitigate the effects of fluctuations in interest rates by matching the terms of new investments with new long-term fixed rate borrowings to the extent possible. We may or may not elect to use financial derivative instruments to hedge interest rate exposure. These decisions are principally based on our policy to match our variable rate investments with comparable borrowings, but are also based on the general trend in interest rates at the applicable dates and our perception of the future volatility of interest rates. This section is presented to provide a discussion of the risks associated with potential fluctuations in interest rates and foreign currency exchange rates.
We historically borrow on our unsecured revolving credit facility and commercial paper program to acquire, construct or make loans relating to health care and seniors housing properties. Then, as market conditions dictate, we will issue equity or long-term fixed rate debt to repay the borrowings under our unsecured revolving credit facility and commercial paper program. We are subject to risks associated with debt financing, including the risk that existing indebtedness may not be refinanced or that the terms of refinancing may not be as favorable as the terms of current indebtedness. The majority of our borrowings were completed under indentures or contractual agreements that limit the amount of indebtedness we may incur. Accordingly, in the event that we are unable to raise additional equity or borrow money because of these limitations, our ability to acquire additional properties may be limited.
54
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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):
September 30, 2021
December 31, 2020
Principal
Change in
Principal
Change in
balance
fair value
balance
fair value
Senior unsecured notes
$
10,501,074
$
(766,189)
$
9,943,501
$
(761,581)
Secured debt
1,520,584
(46,312)
1,702,196
(57,756)
Totals
$
12,021,658
$
(812,501)
$
11,645,697
$
(819,337)
Our variable rate debt, including our unsecured revolving credit facility and commercial paper program, is reflected at fair value. At September 30, 2021, we had $1,747,413,000 outstanding related to our variable rate debt. Assuming no changes in outstanding balances, a 1% increase in interest rates would result in increased annual interest expense of $17,475,000. At December 31, 2020, we had $2,241,909,000 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 $22,420,000.
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 British 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 September 30, 2021, 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 $15,000,000. 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 British 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):
September 30, 2021
December 31, 2020
Carrying
Change in
Carrying
Change in
Value
fair value
Value
fair value
Foreign currency exchange contracts
$
8,078
$
19,544
$
61,851
$
12,731
Debt designated as hedges
1,611,620
16,116
1,630,542
16,305
Totals
$
1,619,698
$
35,660
$
1,692,393
$
29,036
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 12 and 17 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.
55
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, there are various legal proceedings pending against us that arise in the ordinary course of our business. Management does not believe that the resolution of any of these legal proceedings either individually or in the aggregate will have a material adverse effect on our business, results of operations or financial condition. Further, from time to time, we are party to certain legal proceedings for which third parties, such as tenants, operators and/or managers are contractually obligated to indemnify, defend and hold us harmless. In some of these matters, the indemnitors have insurance for the potential damages. In other matters, we are being defended by tenants and other obligated third parties and these indemnitors may not have sufficient insurance, assets, income or resources to satisfy their defense and indemnification obligations to us. The unfavorable resolution of such legal proceedings could, individually or in the aggregate, materially adversely affect the indemnitors’ ability to satisfy their respective obligations to us, which, in turn, could have a material adverse effect on our business, results of operations or financial condition. It is management’s opinion that there are currently no such legal proceedings pending that will, individually or in the aggregate, have such a material adverse effect. Despite management’s view of the ultimate resolution of these legal proceedings, we may have significant legal expenses and costs associated with the defense of such matters. Further, management cannot predict the outcome of these legal proceedings and if management’s expectation regarding such matters is not correct, such proceedings could have a material adverse effect on our business, results of operations or financial condition.
Item 1A.Risk Factors
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, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended September 30, 2021, we acquired shares of our common stock held by employees who tendered shares to satisfy tax withholding obligations upon the vesting of previously issued restricted stock awards. Specifically, the number of shares of common stock acquired from employees and the average prices paid per share for each month in the third quarter ended September 30, 2021 are as shown in the table below.
On May 1, 2020, our Board of Directors authorized a share repurchase program whereby we may repurchase up to $1 billion of common stock through December 31, 2021 (the "Repurchase Program"). Under this authorization, we are not required to purchase shares but may choose to do so in the open market or through private transactions at times and amounts based on our evaluation of market conditions and other factors. We expect to finance any share repurchases under the Repurchase Program using available cash and may use proceeds from borrowings or debt offerings. We did not repurchase any shares of our common stock during the three months ended September 30, 2021.
Issuer Purchases of Equity Securities
Period
Total Number of Shares Purchased
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Repurchase Program
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Repurchase Program
XBRL Instance Document. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline XBRL
*
Management contract or Compensatory Plan or Arrangement.
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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 under signed thereunto duly authorized.
WELLTOWER INC.
Date:
November 5, 2021
By:
/s/ SHANKH MITRA
Shankh Mitra,
Chief Executive Officer and Chief Investment Officer (Principal Executive Officer)
Date:
November 5, 2021
By:
/s/ TIMOTHY G. MCHUGH
Timothy G. McHugh,
Executive Vice President and Chief Financial Officer (Principal Financial Officer)
