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EX-32.2 - EX-32.2 - WELLTOWER INC.Ex-32.2.htm
EX-32.1 - EX-32.1 - WELLTOWER INC.Ex-32.1.htm
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EX-31.1 - EX-31.1 - WELLTOWER INC.Ex-31.1.htm
EX-12 - EX-12 - WELLTOWER INC.Ex-12.htm
EX-10.4 - EX-10.4 - WELLTOWER INC.Ex-10.4.htm

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

 

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

or

 

 

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                      

Commission file number: 1-8923

WELLTOWER INC.

 

(Exact name of registrant as specified in its charter

 

 

 

Delaware

 

34-1096634

 

 

 

(State or other jurisdiction of

 incorporation or organization)

 

(I.R.S. Employer

 Identification No.)

 

 

 

4500 Dorr Street, Toledo, Ohio

 

43615

 

 

 

(Address of principal executive offices)

 

(Zip Code)

(419) 247-2800

(Registrant’s telephone number, including area code)  

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☑  No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

Large accelerated filer  

 

Accelerated filer o  

 

Non-accelerated filer   o

 (Do not check if a smaller reporting company)

 

Smaller reporting company o  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No  ☑

As of April 28, 2017, the registrant had 366,166,605 shares of common stock outstanding.  

 

 

 

 


TABLE OF CONTENTS

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements (Unaudited)

 

 

 

Consolidated Balance Sheets — March 31, 2017 and December 31, 2016

3

 

 

Consolidated Statements of Comprehensive Income — Three months ended March 31, 2017 and 2016

4

 

 

Consolidated Statements of Equity — Three months ended March 31, 2017 and 2016

6

 

 

Consolidated Statements of Cash Flows — Three months ended March 31, 2017 and 2016

7

 

 

Notes to Unaudited Consolidated Financial Statements

8

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

47

 

 

Item 4. Controls and Procedures

48

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

 

Item 1A. Risk Factors

48

 

49

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

49

 

 

Item 5. Other Information

49

 

 

Item 6. Exhibits

49

 

 

Signatures

50

 

  

 


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

CONSOLIDATED BALANCE SHEETS

WELLTOWER INC. AND SUBSIDIARIES

(In thousands)

 

 

 

 

 

 

March 31, 2017

 

December 31, 2016

 

 

 

 

  

(Unaudited)

 

(Note)

Assets:  

 

 

 

 

 

Real estate investments:  

 

 

 

 

 

 

Real property owned:  

 

 

 

 

 

 

 

Land and land improvements  

$

2,650,473

 

$

2,591,071

 

 

Buildings and improvements  

 

24,930,472

 

 

24,496,153

 

 

Acquired lease intangibles  

 

1,421,277

 

 

1,402,884

 

 

Real property held for sale, net of accumulated depreciation  

 

178,260

 

 

1,044,859

 

 

Construction in progress  

 

390,180

 

 

506,091

 

 

 

Gross real property owned  

 

29,570,662

 

 

30,041,058

 

 

Less accumulated depreciation and amortization  

 

(4,335,160)

 

 

(4,093,494)

 

 

 

Net real property owned  

 

25,235,502

 

 

25,947,564

 

Real estate loans receivable  

 

574,080

 

 

622,628

 

 

Less allowance for losses on loans receivable  

 

(6,196)

 

 

(6,563)

 

 

 

Net real estate loans receivable  

 

567,884

 

 

616,065

 

Net real estate investments  

 

25,803,386

 

 

26,563,629

Other assets:  

 

 

 

 

 

 

 

Investments in unconsolidated entities  

 

416,110

 

 

457,138

 

 

Goodwill  

 

68,321

 

 

68,321

 

 

Cash and cash equivalents  

 

380,360

 

 

419,378

 

 

Restricted cash  

 

42,777

 

 

187,842

 

 

Straight-line rent receivable

 

348,085

 

 

342,578

 

 

Receivables and other assets  

 

708,238

 

 

826,298

 

 

 

Total other assets  

 

1,963,891

 

 

2,301,555

Total assets  

$

27,767,277

 

$

28,865,184

 

 

 

 

  

 

 

 

 

 

Liabilities and equity  

 

 

 

 

 

Liabilities:  

 

 

 

 

 

 

 

Borrowings under primary unsecured credit facility  

$

522,000

 

$

645,000

 

 

Senior unsecured notes  

 

8,188,928

 

 

8,161,619

 

 

Secured debt  

 

2,669,787

 

 

3,477,699

 

 

Capital lease obligations  

 

73,470

 

 

73,927

 

 

Accrued expenses and other liabilities  

 

817,411

 

 

827,034

Total liabilities  

 

12,271,596

 

 

13,185,279

Redeemable noncontrolling interests  

 

385,418

  

  

398,433

Equity:  

 

 

 

 

 

 

 

Preferred stock  

 

718,750

 

 

1,006,250

 

 

Common stock  

 

365,187

 

 

363,071

 

 

Capital in excess of par value  

 

17,134,490

 

 

16,999,691

 

 

Treasury stock  

 

(62,306)

 

 

(54,741)

 

 

Cumulative net income  

 

5,130,593

 

 

4,803,575

 

 

Cumulative dividends  

 

(8,474,775)

 

 

(8,144,981)

 

 

Accumulated other comprehensive income (loss)  

 

(177,200)

 

 

(169,531)

 

 

Other equity  

 

1,464

 

 

3,059

 

 

 

Total Welltower Inc. stockholders’ equity  

 

14,636,203

 

 

14,806,393

 

 

Noncontrolling interests  

 

474,060

 

 

475,079

Total equity  

 

15,110,263

 

 

15,281,472

Total liabilities and equity  

$

27,767,277

 

$

28,865,184

 

NOTE: The consolidated balance sheet at December 31, 2016 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

 

See notes to unaudited consolidated financial statements

 

3


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

WELLTOWER INC. AND SUBSIDIARIES

(In thousands, except per share data)

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

2016

Revenues:

 

 

 

 

 

 

Rental income  

$

367,141

 

$

415,663

 

Resident fees and services

 

670,337

 

 

602,149

 

Interest income

 

20,748

 

 

25,188

 

Other income

 

4,072

 

 

4,050

 

 

Total revenues

 

1,062,298

 

 

1,047,050

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

Interest expense

 

118,597

 

 

132,960

 

Property operating expenses

 

510,169

 

 

449,636

 

Depreciation and amortization

 

228,276

 

 

228,696

 

General and administrative

 

31,101

 

 

45,691

 

Transaction costs

 

-

 

 

8,208

 

Loss (gain) on derivatives, net

 

1,224

 

 

-

 

Loss (gain) on extinguishment of debt, net

 

31,356

 

 

(24)

 

Impairment of assets

 

11,031

 

 

14,314

 

Other expenses

 

11,675

 

 

-

 

 

Total expenses

 

943,429

 

 

879,481

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

 

 

 

 

 

and income from unconsolidated entities

 

118,869

 

 

167,569

Income tax (expense) benefit

 

(2,245)

 

 

1,725

Income (loss) from unconsolidated entities

 

(23,106)

 

 

(3,820)

Income (loss) from continuing operations

 

93,518

 

 

165,474

Gain (loss) on real estate dispositions, net

 

244,092

 

 

-

Net income

 

337,610

 

 

165,474

Less:

Preferred stock dividends

 

14,379

 

 

16,352

Less:

Preferred stock redemption charge

 

9,769

 

 

-

Less:

Net income (loss) attributable to noncontrolling interests(1)

 

823

 

 

153

Net income (loss) attributable to common stockholders

$

312,639

 

$

148,969

 

 

 

 

 

 

 

 

Average number of common shares outstanding:

 

 

 

 

 

 

Basic

 

362,534

 

 

355,076

 

Diluted

 

364,652

 

 

356,051

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

Income (loss) from continuing operations attributable to common stockholders, including real estate dispositions

$

0.86

 

$

0.42

 

Net income (loss) attributable to common stockholders*

$

0.86

 

$

0.42

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

Income (loss) from continuing operations attributable to common stockholders, including real estate dispositions

$

0.86

 

$

0.42

 

Net income (loss) attributable to common stockholders*

$

0.86

 

$

0.42

 

 

 

 

 

 

 

 

Dividends declared and paid per common share

$

0.87

 

$

0.86

 

* Amounts may not sum due to rounding

(1) Includes amounts attributable to redeemable noncontrolling interests.

 

See notes to unaudited consolidated financial statements

 

4


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

WELLTOWER INC. AND SUBSIDIARIES

(In thousands)

 

 

 

 

Three Months Ended March 31,

 

 

 

 

2017

 

2016

 

Net income

$

337,610

 

$

165,474

 

 

 

 

 

 

 

 

 

  

Other comprehensive income (loss):

 

 

 

 

 

 

 

Unrecognized gain (loss) on available for sale securities

 

(10,569)

 

 

(7,549)

 

 

Unrealized gains (losses) on cash flow hedges

 

-

 

 

483

 

 

Unrecognized actuarial gain (loss)

 

-

 

 

2

 

 

Foreign currency translation gain (loss)

 

5,713

 

 

1,372

 

Total other comprehensive income (loss)

 

(4,856)

 

 

(5,692)

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

332,754

 

 

159,782

 

Less: Total comprehensive income (loss) attributable to noncontrolling interests(1)

 

3,636

 

 

15,271

 

Total comprehensive income (loss) attributable to common stockholders

$

329,118

 

$

144,511

 

 

 

 

 

 

 

 

 

 

(1) Includes amounts attributable to redeemable noncontrolling interests.

 

 

See notes to unaudited consolidated financial statements

 

5


CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

WELLTOWER INC. AND SUBSIDIARIES

(In thousands)

 

 

Three Months Ended March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Preferred

Common

Excess of

Treasury

Cumulative

Cumulative

Comprehensive

Other

Noncontrolling

 

 

 

 

 

Stock

Stock

Par Value

Stock

Net Income

Dividends

Income (Loss)

Equity

Interests

Total

Balances at beginning of period

$

1,006,250

$

363,071

$

16,999,691

$

(54,741)

$

4,803,575

$

(8,144,981)

$

(169,531)

$

3,059

$

475,079

$

15,281,472

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

 

 

 

336,787

 

 

 

 

 

 

 

1,780

 

338,567

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,669)

 

 

 

2,813

 

(4,856)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

333,711

Net change in noncontrolling interests

 

 

 

  

 

932

 

 

 

 

 

 

 

 

 

 

 

(5,612)

 

(4,680)

Amounts related to stock incentive plans, net of forfeitures

 

 

 

336

 

6,903

 

(7,565)

 

 

 

 

 

 

 

(1,605)

 

 

 

(1,931)

Proceeds from issuance of common stock

 

 

 

1,780

 

117,204

 

 

 

 

 

 

 

 

 

 

 

 

 

118,984

Redemption of preferred stock

 

(287,500)

 

 

 

9,760

 

 

 

(9,769)

 

 

 

 

 

 

 

 

 

(287,509)

Option compensation expense

  

  

 

 

 

 

 

 

 

 

 

 

 

 

 

10

 

 

 

10

Dividends paid:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock dividends

 

 

 

 

 

 

 

 

 

 

 

(315,415)

 

 

 

 

 

 

 

(315,415)

 

Preferred stock dividends

 

 

 

 

 

 

 

 

 

 

 

(14,379)

 

 

 

 

 

 

 

(14,379)

Balances at end of period

$

718,750

$

365,187

$

17,134,490

$

(62,306)

$

5,130,593

$

(8,474,775)

$

(177,200)

$

1,464

$

474,060

$

15,110,263

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Preferred

Common

Excess of

Treasury

Cumulative

Cumulative

Comprehensive

Other

Noncontrolling

 

 

 

 

 

Stock

Stock

Par Value

Stock

Net Income

Dividends

Income (Loss)

Equity

Interests

Total

Balances at beginning of period

$

1,006,250

$

354,811

$

16,478,300

$

(44,372)

$

3,725,772

$

(6,846,056)

$

(88,243)

$

4,098

$

585,325

$

15,175,885

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

 

 

 

165,321

 

 

 

 

 

 

 

1,082

 

166,403

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

(20,810)

 

 

 

15,118

 

(5,692)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

160,711

Net change in noncontrolling interests

 

 

 

  

 

(5,717)

 

 

 

 

 

 

 

 

 

 

 

(121,325)

 

(127,042)

Amounts related to stock incentive plans, net of forfeitures

 

 

 

637

 

25,555

 

(6,899)

 

 

 

 

 

 

 

(115)

 

 

 

19,178

Proceeds from issuance of common stock

 

 

 

1,505

 

91,600

 

 

 

 

 

 

 

 

 

 

 

 

 

93,105

Option compensation expense

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

79

 

 

 

79

Dividends paid:

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock dividends

 

 

 

 

 

 

 

 

 

 

 

(305,770)

 

 

 

 

 

 

 

(305,770)

 

Preferred stock dividends

 

 

 

 

 

 

 

 

 

 

 

(16,352)

 

 

 

 

 

 

 

(16,352)

Balances at end of period

$

1,006,250

 

356,953

 

16,589,738

 

(51,271)

 

3,891,093

 

(7,168,178)

 

(109,053)

 

4,062

 

480,200

$

14,999,794

 

See notes to unaudited consolidated financial statements

 

6


CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

WELLTOWER INC. AND SUBSIDIARIES

(In thousands)

 

 

 

 

 

Three Months Ended

 

 

 

  

March 31,

 

 

 

  

2017

 

2016

Operating activities:  

 

 

 

 

 

Net income  

$

337,610

 

$

165,474

Adjustments to reconcile net income to  

 

 

 

 

 

 

net cash provided from (used in) operating activities:  

 

 

 

 

 

 

 

Depreciation and amortization  

 

228,276

 

 

228,696

 

 

Other amortization expenses  

 

3,361

 

 

1,118

 

 

Impairment of assets  

 

11,031

 

 

14,314

 

 

Stock-based compensation expense  

 

4,906

 

 

8,186

 

 

Loss (gain) on derivatives, net  

 

1,224

 

 

-

 

 

Loss (gain) on extinguishment of debt, net  

 

31,356

 

 

(24)

 

 

Loss (income) from unconsolidated entities

 

23,106

 

 

3,820

 

 

Rental income in excess of cash received  

 

(18,141)

 

 

(29,669)

 

 

Amortization related to above (below) market leases, net  

 

8

 

 

230

 

 

Loss (gain) on sales of properties, net  

 

(244,092)

 

 

-

 

 

Distributions by unconsolidated entities

 

474

 

 

174

 

 

Increase (decrease) in accrued expenses and other liabilities  

 

19,478

 

 

(13,526)

 

 

Decrease (increase) in receivables and other assets  

 

(13,071)

 

 

1,816

Net cash provided from (used in) operating activities  

 

385,526

 

 

380,609

 

 

 

  

 

 

 

 

 

Investing activities:  

 

 

 

 

 

 

Cash disbursed for acquisitions  

 

(102,356)

 

 

(171,482)

 

Cash disbursed for capital improvements to existing properties

 

(42,115)

 

 

(35,025)

 

Cash disbursed for construction in progress

 

(69,334)

 

 

(66,739)

 

Capitalized interest  

 

(4,129)

 

 

(3,037)

 

Investment in real estate loans receivable  

 

(25,375)

 

 

(27,251)

 

Other investments, net of payments  

 

48,311

 

 

(30,773)

 

Principal collected on real estate loans receivable  

 

8,792

 

 

93,774

 

Contributions to unconsolidated entities  

 

(13,073)

 

 

(12,784)

 

Distributions by unconsolidated entities  

 

24,161

 

 

11,747

 

Proceeds from (payments on) derivatives  

 

8,218

 

 

-

 

Decrease (increase) in restricted cash  

 

145,065

 

 

(394)

 

Proceeds from sales of real property  

 

1,087,074

 

 

-

Net cash provided from (used in) investing activities  

 

1,065,239

 

 

(241,964)

 

 

 

  

 

 

 

 

 

Financing activities:  

 

 

 

 

 

 

Net increase (decrease) under unsecured credit facilities  

 

(123,000)

 

 

(190,000)

 

Proceeds from issuance of senior unsecured notes  

 

-

 

 

688,560

 

Payments to extinguish senior unsecured notes  

 

-

 

 

(400,000)

 

Net proceeds from the issuance of secured debt  

 

12,536

 

 

75,136

 

Payments on secured debt  

 

(822,438)

 

 

(130,343)

 

Net proceeds from the issuance of common stock  

 

119,651

 

 

93,433

 

Redemption of preferred stock  

 

(287,500)

 

 

-

 

Payments for deferred financing costs and prepayment penalties  

 

(36,674)

 

 

(1,217)

 

Contributions by noncontrolling interests(1)

 

2,667

 

 

126,142

 

Distributions to noncontrolling interests(1)

 

(20,014)

 

 

(76,222)

 

Acquisitions of noncontrolling interests

 

(38)

 

 

-

 

Cash distributions to stockholders  

 

(329,794)

 

 

(322,122)

 

Other financing activities

 

(8,022)

 

 

(7,294)

Net cash provided from (used in) financing activities  

 

(1,492,626)

 

 

(143,927)

Effect of foreign currency translation on cash and cash equivalents

 

2,843

 

 

323

Increase (decrease) in cash and cash equivalents  

 

(39,018)

 

 

(4,959)

Cash and cash equivalents at beginning of period  

 

419,378

 

 

360,908

Cash and cash equivalents at end of period  

$

380,360

 

$

355,949

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

Interest paid

$

109,438

 

$

134,872

 

Income taxes paid

 

3,349

 

 

2,431

 

 

 

 

 

 

 

 

 

(1) Includes amounts attributable to redeemable noncontrolling interests.

 

See notes to unaudited consolidated financial statements

 

7


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

1. Business

 

     Welltower Inc., an S&P 500 company headquartered in Toledo, Ohio, is driving the transformation of health care infrastructure. The company invests with leading seniors housing operators, post-acute providers and health systems to fund the real estate and infrastructure needed to scale innovative care delivery models and improve people’s wellness and overall health care experience.  Welltower™, a real estate investment trust (“REIT”), owns interests in properties concentrated in major, high-growth markets in the United States, Canada and the United Kingdom, consisting of seniors housing and post-acute communities and outpatient medical properties.  Founded in 1970, we were the first real estate investment trust to invest exclusively in health care facilities.

  

2. Accounting Policies and Related Matters

     Basis of Presentation

     The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2017 are not necessarily an indication of the results that may be expected for the year ending December 31, 2017. 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, 2016.

     New Accounting Standards     

     In May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services.  ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted beginning after December 15, 2016.  A reporting entity may apply the new standard using either a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or a full retrospective approach.  We are currently evaluating the impact that the adoption of the standard will have on our consolidated financial statements and have not yet determined the method by which we will adopt the new standard.  A significant source of our revenue is generated through leasing arrangements, which are specifically excluded from the new standard.  We expect that the new standard will affect our accounting policies related to non-lease revenue, including certain fees in our RIDEA joint ventures, common area maintenance in our outpatient medical properties and real estate sales.  Under ASU 2014-09, revenue recognition for real estate sales is mainly based on the transfer of control versus current guidance of continuing involvement.  We expect that the new guidance will result in more transactions qualifying as sales of real estate and being recognized at an earlier date than under the current guidance.

     In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities,” which will require entities to measure their investments at fair value and recognize any changes in fair value in net income unless the investments qualify for the new practicability exception.  The practicability exception will be available for equity investments that do not have readily determinable fair values. ASU 2016-01 is effective for fiscal years and interim periods within those years, beginning after December 15, 2017.  We are currently evaluating the impact that the standard will have on our consolidated financial statements.

     In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which requires lessees to recognize assets and liabilities on their balance sheet related to the rights and obligations created by most leases, while continuing to recognize expenses on their income statements over the lease term.  It will also require disclosures designed to give financial statement users information regarding amount, timing, and uncertainty of cash flows arising from leases.  ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted.  Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements.  We are currently evaluating the impact of this standard on our consolidated financial statements.  We believe that the adoption of this standard will likely have a material impact to our consolidated balance sheet for the recognition of certain operating leases as right-of-use assets and lease liabilities.  We are in the process of analyzing our lease portfolio and evaluating systems to comply with the standard’s retrospective adoption requirements

     In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting”.  ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted.  We adopted ASU 2016-09 on January 1, 2017.  The standard allows companies to make a policy election as to whether

8


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

they will include an estimate of awards expected to be forfeited or whether they will account for forfeitures as they occur.  We have elected to account for forfeitures as they occur. This election had an immaterial impact on our consolidated financial statements.  The standard also requires an employer to classify as a financing activity in the statement of cash flow the cash paid to a tax authority when shares are withheld to satisfy the employer’s statutory income tax withholding obligation.  This standard is required to be applied on a retrospective basis and resulted in an increase in net cash provided by operating activities and a decrease in net cash used in financing activities of $6,897,000 for the three months ended March 31, 2016.  Upon adoption, no other provisions of ASU 2016-09 had an effect on our unaudited consolidated financial statements or related footnote disclosures.

     In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments”.  This standard requires a new forward-looking “expected loss” model to be used for receivables, held-to-maturity debt, loans, and other instruments.  ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, and early adoption is permitted for fiscal years beginning after December 15, 2018.  We are currently evaluating the impact that the standard will have on our consolidated financial statements

     In January 2017, the FASB issued ASU No. 2017-01, “Clarifying the Definition of a Business”.  This standard changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business.  ASU 2017-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted.  A reporting entity must apply ASU 2017-01 using a prospective approach.  We adopted ASU 2017-01 on January 1, 2017 and as a result, have classified our real estate acquisitions completed during the three months ended March 31, 2017 as asset acquisitions rather than business combinations due to the fact that substantially all of the fair value of the gross assets acquired were concentrated in a single asset or group of similar identifiable assets. We have recorded identifiable assets acquired, liabilities assumed and any noncontrolling interests associated with any asset acquisitions at cost on a relative fair value basis and have capitalized transaction costs incurred.

  

3. Real Property Acquisitions and Development

 

     The total purchase price for all properties acquired has been allocated to the tangible and identifiable intangible assets, liabilities and noncontrolling interests based upon their relative fair values in accordance with our accounting policies. The results of operations for these acquisitions have been included in our consolidated results of operations since the date of acquisition and are a component of the appropriate segments.  Transaction costs primarily represent costs incurred with acquisitions, including due diligence costs, fees for legal and valuation services and termination of pre-existing relationships computed based on the fair value of the assets acquired, lease termination fees and other acquisition-related costs.  Effective January 1, 2017, with our adoption of ASU 2017-01, 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. Certain of our subsidiaries’ functional currencies are the local currencies of their respective countries. See Note 2 to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016 for information regarding our foreign currency policies.  

 

    Triple-net Activity

 

 

Three Months Ended

 

(In thousands)

March 31, 2017

March 31, 2016

 

Land and land improvements

 

$

4,017

 

$

15,331

 

Buildings and improvements

 

 

37,241

 

 

114,235

 

Acquired lease intangibles

 

 

-

 

 

1,623

 

 

Total assets acquired

 

 

41,258

 

 

131,189

 

Accrued expenses and other liabilities  

 

 

-

 

 

(809)

 

 

Total liabilities assumed

 

 

-

 

 

(809)

 

Non-cash acquisition related activity(1)

 

 

-

 

 

(28,621)

 

 

Cash disbursed for acquisitions

 

 

41,258

 

 

101,759

 

Construction in progress additions

 

 

46,754

 

 

43,835

 

Less:

Capitalized interest

 

 

(2,028)

 

 

(1,684)

 

 

Foreign currency translation

 

 

(164)

 

 

(583)

 

Cash disbursed for construction in progress

 

 

44,562

 

  

41,568

 

Capital improvements to existing properties

 

 

10,495

 

 

7,438

 

 

Total cash invested in real property, net of cash acquired

 

$

96,315

 

$

150,765

 

 

 

 

 

 

 

 

 

 

(1) Includes $25,691,000 related to the acquisition of assets previously financed as real estate loans receivable and $2,871,000 related to the acquisition of assets previously financed as an investment in an unconsolidated entity.

  

9


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

     Seniors Housing Operating Activity

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

(In thousands)

March 31, 2017

March 31, 2016

 

Land and land improvements

 

$

4,304

 

$

3,440

 

Building and improvements

 

 

44,075

 

 

48,218

 

Acquired lease intangibles

 

 

1,741

 

 

1,942

 

Receivables and other assets

 

 

74

 

 

36

 

  

Total assets acquired(1)

 

 

50,194

 

 

53,636

 

Accrued expenses and other liabilities  

 

 

(2,755)

 

 

(11)

 

 

Total liabilities assumed

 

 

(2,755)

 

 

(11)

 

Noncontrolling interests

 

 

(647)

 

 

(549)

 

Non-cash acquisition related activity(2)

 

 

(14,148)

 

 

-

 

 

Cash disbursed for acquisitions

 

 

32,644

 

 

53,076

 

Construction in progress additions

 

 

8,062

 

 

4,033

 

Less:

Capitalized interest

 

 

(1,707)

 

 

(565)

 

 

Foreign currency translation

 

 

691

 

 

(1,107)

 

Cash disbursed for construction in progress

 

 

7,046

 

  

2,361

 

Capital improvements to existing properties

 

 

24,254

 

 

16,808

 

 

Total cash invested in real property, net of cash acquired

 

$

63,944

 

$

72,245

 

 

 

 

 

 

 

 

 

 

(1) Excludes $400,000 and $113,000 of cash acquired during the three months ended March 31, 2017 and 2016, respectively.

(2) Includes $6,349,000 related to the acquisition of assets previously financed as real estate loans receivable and $7,799,000 previously financed as an investment in an unconsolidated entity.

 

 

 

 

 

 

 

 

 

      Outpatient Medical Activity

 

 

Three Months Ended

 

(In thousands)

March 31, 2017

 

March 31, 2016

 

Land and land improvements

 

$

2,895

 

$

-

 

Buildings and improvements

 

 

23,310

 

 

17,637

 

Acquired lease intangibles

 

 

3,496

 

 

-

 

Receivables and other assets

 

 

3

 

 

-

 

  

Total assets acquired

 

 

29,704

 

  

17,637

 

Accrued expenses and other liabilities

 

 

(1,250)

 

 

(990)

 

 

Total liabilities assumed  

 

 

 (1,250)  

 

 

 (990)  

 

 

Cash disbursed for acquisitions

 

 

28,454

 

 

16,647

 

Construction in progress additions

 

 

14,921

 

 

28,934

 

Less:

Capitalized interest

 

 

(717)

 

 

(788)

 

 

Accruals(1)

 

 

3,522

 

 

(5,336)

 

Cash disbursed for construction in progress

 

 

17,726

 

  

22,810

 

Capital improvements to existing properties

 

 

7,366

 

 

10,779

 

 

Total cash invested in real property

 

$

53,546

 

$

50,236

 

 

 

 

 

 

 

 

 

 

(1) Represents the change in non-cash consideration accruals for amounts to be paid in periods other than the period in which the construction projects converted to operations.

 

 

 

 

 

 

 

 

 

  

10


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

     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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31, 2017

 

March 31, 2016

 

Development projects:

 

 

 

 

 

 

 

 

 

 

Triple-net

  

 

$

157,460

 

 

$

-

 

 

Seniors housing operating

 

 

 

3,634

 

 

 

-

 

 

Outpatient medical

 

 

 

25,910

 

 

 

35,363

 

Total development projects

 

 

 

187,004

 

 

 

35,363

Total construction in progress conversions

  

 

$

187,004

 

 

$

35,363

 

 

 

 

 

 

 

 

 

 

 

4. Real Estate Intangibles

 

     The following is a summary of our real estate intangibles, excluding those classified as held for sale, as of the dates indicated (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

December 31, 2016

Assets:

  

 

 

 

 

 

 

In place lease intangibles

  

$

1,267,280

 

$

1,252,143

 

Above market tenant leases

  

 

63,184

 

 

61,700

 

Below market ground leases

  

 

62,224

 

 

61,628

 

Lease commissions

  

 

28,589

 

 

27,413

 

Gross historical cost

  

 

1,421,277

 

 

1,402,884

 

Accumulated amortization

  

 

(1,010,364)

 

 

(966,714)

 

Net book value

  

$

410,913

 

$

436,170

 

 

  

 

 

 

 

 

 

Weighted-average amortization period in years

  

 

14.4

 

 

13.7

 

 

  

 

 

 

 

 

Liabilities:

  

 

 

 

 

 

 

Below market tenant leases

  

$

90,745

 

$

89,468

 

Above market ground leases

  

 

8,107

 

 

8,107

 

Gross historical cost

  

 

98,852

 

 

97,575

 

Accumulated amortization

  

 

(54,354)

 

 

(52,134)

 

Net book value

  

$

44,498

 

$

45,441

 

 

  

 

 

 

 

 

 

Weighted-average amortization period in years

  

 

15.1

 

 

15.2

 

 

 

 

 

 

 

 

     The following is a summary of real estate intangible amortization for the periods presented (in thousands):

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

  

 

2017

 

2016

Rental income related to above/below market tenant leases, net

 

$

304

 

$

81

Property operating expenses related to above/below market ground leases, net

 

 

(312)

 

 

(311)

Depreciation and amortization related to in place lease intangibles and lease commissions

 

 

(39,302)

 

 

(34,454)

 

 

 

 

 

 

 

 

11


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

     The future estimated aggregate amortization of intangible assets and liabilities is as follows for the periods presented (in thousands):

 

 

 

Assets

 

 

Liabilities

2017

 

$

105,454

 

$

4,959

2018

 

 

77,561

 

 

6,106

2019

 

 

37,948

 

 

5,685

2020

 

 

24,169

 

 

5,208

2021

 

 

20,191

 

 

4,720

Thereafter

 

 

145,590

 

 

17,820

Total

 

$

410,913

 

$

44,498

 

5. Dispositions, Assets Held for Sale and Discontinued Operations

We periodically sell properties for various reasons, including favorable market conditions, the exercise of tenant purchase options or reduction of concentrations (e.g., property type, operator or geography). During the three months ended March 31, 2017 and 2016, we recorded impairment charges on certain held-for-sale seniors housing operating and outpatient medical properties as the fair values less estimated costs to sell exceeded our carrying values. The following is a summary of our real property disposition activity for the periods presented (in thousands):

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 2017

March 31, 2016

Real estate dispositions:

 

 

 

 

 

 

 

Triple-net

 

$

808,204

 

$

-

 

Seniors housing operating

 

 

13,845

 

 

-

 

Total dispositions

 

 

822,049

 

 

-

Gain (loss) on real estate dispositions, net

 

 

244,092

 

 

-

 

Net other assets/liabilities disposed

 

 

20,933

 

 

-

Proceeds from real estate dispositions

 

$

1,087,074

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Dispositions and Assets Held for Sale

     Pursuant to our adoption of ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”, operating results attributable to properties sold subsequent to or classified as held for sale after January 1, 2014 and which do not meet the definition of discontinued operations are no longer reclassified on our Consolidated Statements of Comprehensive Income.  The following represents the activity related to these properties for the periods presented (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

 

2017

 

2016

Revenues:

 

 

 

 

 

 

 

Rental income

 

$

16,734

 

$

5,477

Expenses:

 

  

 

 

 

 

 

Interest expense

 

  

1,301

 

 

851

 

Property operating expenses

 

  

1,855

 

 

1,362

 

Provision for depreciation

 

  

245

 

 

820

 

Total expenses

 

 

3,401

 

 

3,033

Income (loss) from real estate dispositions, net

 

$

13,333

 

$

2,444

 

 

 

 

 

 

 

 

  

12


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

6. Real Estate Loans Receivable

     Please see Note 2 to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016 for discussion of our accounting policies for real estate loans receivable and related interest income. 

     The following is a summary of our real estate loan activity for the periods presented (in thousands):

  

 

 

 

Three Months Ended

 

 

 

March 31, 2017

 

March 31, 2016

 

 

 

 

 

Outpatient

 

 

 

 

 

 

Outpatient

 

 

 

 

 

 

Triple-net

 

Medical

 

Totals

 

Triple-net

 

Medical

 

Totals

Advances on real estate loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in new loans

 

$

7,828

 

$

-

 

$

7,828

 

$

8,013

 

$

-

 

$

8,013

 

Draws on existing loans

 

 

17,547

 

 

-

 

 

17,547

 

 

19,206

 

 

32

 

 

19,238

 

Net cash advances on real estate loans

 

 

25,375

 

 

-

 

 

25,375

 

 

27,219

 

 

32

 

 

27,251

Receipts on real estate loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan payoffs

 

 

14,474

 

 

60,500

 

 

74,974

 

 

104,068

 

 

12,290