Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - WELLTOWER INC.exhibit32-2.htm
EX-32.1 - EXHIBIT 32.1 - WELLTOWER INC.exhibit32-1.htm
EX-31.2 - EXHIBIT 31.2 - WELLTOWER INC.exhibit31-2.htm
EX-31.1 - EXHIBIT 31.1 - WELLTOWER INC.exhibit31-1.htm
EX-12 - EXHIBIT 12 - WELLTOWER INC.exhibit12.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, 2018

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, 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         Accelerated filer         Non-accelerated filer         Smaller reporting company         Emerging growth company

                                                                                        (Do not check if a smaller reporting company)

 

 

 

 

 

 

 

AAAAAADFASDF

 

 

 

 

 

 

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 o No  ☑

As of April 27, 2018, the registrant had 371,981,518 shares of common stock outstanding.  

 

 

 


TABLE OF CONTENTS

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements (Unaudited)

 

 

 

Consolidated Balance Sheets — March 31, 2018 and December 31, 2017

3

 

 

Consolidated Statements of Comprehensive Income — Three months ended March 31, 2018 and 2017

4

 

 

Consolidated Statements of Equity — Three months ended March 31, 2018 and 2017

6

 

 

Consolidated Statements of Cash Flows — Three months ended March 31, 2018 and 2017

7

 

 

Notes to Unaudited Consolidated Financial Statements

8

 

 

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

27

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

49

 

 

Item 4. Controls and Procedures

50

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

 

Item 1A. Risk Factors

50

 

50

 

 

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

50

 

 

Item 5. Other Information

50

 

 

Item 6. Exhibits

53

 

 

Signatures

54

 

  

 


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

CONSOLIDATED BALANCE SHEETS

WELLTOWER INC. AND SUBSIDIARIES

(In thousands)

 

 

 

 

 

 

March 31, 2018

 

December 31, 2017

 

 

 

 

  

(Unaudited)

 

(Note)

Assets:  

 

 

 

 

 

Real estate investments:  

 

 

 

 

 

 

Real property owned:  

 

 

 

 

 

 

 

Land and land improvements  

$

2,793,671

 

$

2,734,467

 

 

Buildings and improvements  

 

25,672,558

 

 

25,373,117

 

 

Acquired lease intangibles  

 

1,548,621

 

 

1,502,471

 

 

Real property held for sale, net of accumulated depreciation  

 

368,249

 

 

734,147

 

 

Construction in progress  

 

180,984

 

 

237,746

 

 

 

Gross real property owned  

 

30,564,083

 

 

30,581,948

 

 

Less accumulated depreciation and amortization  

 

(4,990,780)

 

 

(4,838,370)

 

 

 

Net real property owned  

 

25,573,303

 

 

25,743,578

 

Real estate loans receivable  

 

436,194

 

 

495,871

 

 

Less allowance for losses on loans receivable  

 

(68,372)

 

 

(68,372)

 

 

 

Net real estate loans receivable  

 

367,822

 

 

427,499

 

Net real estate investments  

 

25,941,125

 

 

26,171,077

Other assets:  

 

 

 

 

 

 

 

Investments in unconsolidated entities  

 

440,424

 

 

445,585

 

 

Goodwill  

 

68,321

 

 

68,321

 

 

Cash and cash equivalents  

 

202,824

 

 

243,777

 

 

Restricted cash  

 

61,295

 

 

65,526

 

 

Straight-line rent receivable

 

406,260

 

 

389,168

 

 

Receivables and other assets  

 

626,410

 

 

560,991

 

 

 

Total other assets  

 

1,805,534

 

 

1,773,368

Total assets  

$

27,746,659

 

$

27,944,445

 

 

 

 

  

 

 

 

 

 

Liabilities and equity  

 

 

 

 

 

Liabilities:  

 

 

 

 

 

 

 

Borrowings under primary unsecured credit facility  

$

865,000

 

$

719,000

 

 

Senior unsecured notes  

 

7,924,340

 

 

8,331,722

 

 

Secured debt  

 

2,488,652

 

 

2,608,976

 

 

Capital lease obligations  

 

71,848

 

 

72,238

 

 

Accrued expenses and other liabilities  

 

948,618

 

 

911,863

Total liabilities  

 

12,298,458

 

 

12,643,799

Redeemable noncontrolling interests  

 

388,875

  

  

375,194

Equity:  

 

 

 

 

 

 

 

Preferred stock  

 

718,498

 

 

718,503

 

 

Common stock  

 

372,729

 

 

372,449

 

 

Capital in excess of par value  

 

17,667,674

 

 

17,662,681

 

 

Treasury stock  

 

(68,696)

 

 

(64,559)

 

 

Cumulative net income  

 

5,765,927

 

 

5,316,580

 

 

Cumulative dividends  

 

(9,807,114)

 

 

(9,471,712)

 

 

Accumulated other comprehensive income (loss)  

 

(91,253)

 

 

(111,465)

 

 

Other equity  

 

670

 

 

670

 

 

 

Total Welltower Inc. stockholders’ equity  

 

14,558,435

 

 

14,423,147

 

 

Noncontrolling interests  

 

500,891

 

 

502,305

Total equity  

 

15,059,326

 

 

14,925,452

Total liabilities and equity  

$

27,746,659

 

$

27,944,445

 

NOTE: The consolidated balance sheet at December 31, 2017 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,

 

 

 

2018

 

2017

Revenues:

 

 

 

 

 

 

Rental income  

$

343,369

 

$

367,141

 

Resident fees and services

 

735,934

 

 

670,337

 

Interest income

 

14,648

 

 

20,748

 

Other income

 

3,014

 

 

4,072

 

 

Total revenues

 

1,096,965

 

 

1,062,298

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

Interest expense

 

122,775

 

 

118,597

 

Property operating expenses

 

556,465

 

 

510,169

 

Depreciation and amortization

 

228,201

 

 

228,276

 

General and administrative

 

33,705

 

 

31,101

 

Loss (gain) on derivatives and financial instruments, net

 

(7,173)

 

 

1,224

 

Loss (gain) on extinguishment of debt, net

 

11,707

 

 

31,356

 

Impairment of assets

 

28,185

 

 

11,031

 

Other expenses

 

3,712

 

 

11,675

 

 

Total expenses

 

977,577

 

 

943,429

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

 

 

 

 

 

and income from unconsolidated entities

 

119,388

 

 

118,869

Income tax (expense) benefit

 

(1,588)

 

 

(2,245)

Income (loss) from unconsolidated entities

 

(2,429)

 

 

(23,106)

Income (loss) from continuing operations

 

115,371

 

 

93,518

Gain (loss) on real estate dispositions, net

 

338,184

 

 

244,092

Net income

 

453,555

 

 

337,610

Less:

Preferred stock dividends

 

11,676

 

 

14,379

Less:

Preferred stock redemption charge

 

-

 

 

9,769

Less:

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

 

4,208

 

 

823

Net income (loss) attributable to common stockholders

$

437,671

 

$

312,639

 

 

 

 

 

 

 

 

Average number of common shares outstanding:

 

 

 

 

 

 

Basic

 

371,426

 

 

362,534

 

Diluted

 

373,257

 

 

364,652

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

Income (loss) from continuing operations

$

0.31

 

$

0.26

 

Net income (loss) attributable to common stockholders

$

1.18

 

$

0.86

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

Income (loss) from continuing operations

$

0.31

 

$

0.26

 

Net income (loss) attributable to common stockholders

$

1.17

 

$

0.86

 

 

 

 

 

 

 

 

Dividends declared and paid per common share

$

0.87

 

$

0.87

 

 (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,

 

 

 

 

2018

 

2017

 

Net income

$

453,555

 

$

337,610

 

 

 

 

 

 

 

 

 

  

Other comprehensive income (loss):

 

 

 

 

 

 

 

Unrecognized gain (loss) on available for sale securities

 

-

 

 

(10,569)

 

 

Foreign currency translation gain (loss)

 

16,326

 

 

5,713

 

Total other comprehensive income (loss)

 

16,326

 

 

(4,856)

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

469,881

 

 

332,754

 

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

 

322

 

 

3,636

 

Total comprehensive income (loss) attributable to common stockholders

$

469,559

 

$

329,118

 

 

 

 

 

 

 

 

 

 

(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, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

718,503

$

372,449

$

17,662,681

$

(64,559)

$

5,316,580

$

(9,471,712)

$

(111,465)

$

670

$

502,305

$

14,925,452

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

 

 

 

449,347

 

 

 

 

 

 

 

5,191

 

454,538

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

20,212

 

 

 

(3,886)

 

16,326

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

470,864

Net change in noncontrolling interests

 

 

 

  

 

(13,157)

 

 

 

 

 

 

 

 

 

 

 

(2,719)

 

(15,876)

Amounts related to stock incentive plans, net of forfeitures

 

 

 

150

 

11,085

 

(4,137)

 

 

 

 

 

 

 

 

 

 

 

7,098

Proceeds from issuance of common stock

 

 

 

130

 

7,060

 

 

 

 

 

 

 

 

 

 

 

 

 

7,190

 Conversion of preferred stock

 

(5)

 

 

 

5

 

 

 

  

 

 

 

 

 

 

 

 

 

-

Dividends paid:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock dividends

 

 

 

 

 

 

 

 

 

 

 

(323,726)

 

 

 

 

 

 

 

(323,726)

 

Preferred stock dividends

 

 

 

 

 

 

 

 

 

 

 

(11,676)

 

 

 

 

 

 

 

(11,676)

Balances at end of period

$

718,498

$

372,729

$

17,667,674

$

(68,696)

$

5,765,927

$

(9,807,114)

$

(91,253)

$

670

$

500,891

$

15,059,326

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

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,

 

 

 

  

2018

 

2017

Operating activities:  

 

 

 

 

 

Net income  

$

453,555

 

$

337,610

Adjustments to reconcile net income to  

 

 

 

 

 

 

net cash provided from (used in) operating activities:  

 

 

 

 

 

 

 

Depreciation and amortization  

 

228,201

 

 

228,276

 

 

Other amortization expenses  

 

4,171

 

 

3,361

 

 

Impairment of assets  

 

28,185

 

 

11,031

 

 

Stock-based compensation expense  

 

11,557

 

 

4,906

 

 

Loss (gain) on derivatives and financial instruments, net  

 

(7,173)

 

 

1,224

 

 

Loss (gain) on extinguishment of debt, net  

 

11,707

 

 

31,356

 

 

Loss (income) from unconsolidated entities

 

2,429

 

 

23,106

 

 

Rental income less than (in excess of) cash received  

 

(21,406)

 

 

(18,141)

 

 

Amortization related to above (below) market leases, net  

 

718

 

 

8

 

 

Loss (gain) on real estate dispositions, net  

 

(338,184)

 

 

(244,092)

 

 

Distributions by unconsolidated entities

 

-

 

 

474

 

 

Increase (decrease) in accrued expenses and other liabilities  

 

(10,707)

 

 

19,478

 

 

Decrease (increase) in receivables and other assets  

 

5,591

 

 

(13,071)

Net cash provided from (used in) operating activities  

 

368,644

 

 

385,526

 

 

 

  

 

 

 

 

 

Investing activities:  

 

 

 

 

 

 

Cash disbursed for acquisitions  

 

(405,609)

 

 

(102,356)

 

Cash disbursed for capital improvements to existing properties

 

(46,547)

 

 

(42,115)

 

Cash disbursed for construction in progress

 

(22,735)

 

 

(69,334)

 

Capitalized interest  

 

(2,336)

 

 

(4,129)

 

Investment in real estate loans receivable  

 

(27,547)

 

 

(25,375)

 

Principal collected on real estate loans receivable  

 

90,731

 

 

8,792

 

Other investments, net of payments  

 

(49,279)

 

 

48,311

 

Contributions to unconsolidated entities  

 

(14,366)

 

 

(13,073)

 

Distributions by unconsolidated entities  

 

14,880

 

 

24,161

 

Proceeds from (payments on) derivatives  

 

(8,324)

 

 

8,218

 

Proceeds from sales of real property  

 

892,209

 

 

1,087,074

Net cash provided from (used in) investing activities  

 

421,077

 

 

920,174

 

 

 

  

 

 

 

 

 

Financing activities:  

 

 

 

 

 

 

Net increase (decrease) under unsecured credit facilities  

 

146,000

 

 

(123,000)

 

Payments to extinguish senior unsecured notes  

 

(450,000)

 

 

-

 

Net proceeds from the issuance of secured debt  

 

20,326

 

 

12,536

 

Payments on secured debt  

 

(197,655)

 

 

(822,438)

 

Net proceeds from the issuance of common stock  

 

7,214

 

 

119,651

 

Redemption of preferred stock  

 

-

 

 

(287,500)

 

Payments for deferred financing costs and prepayment penalties  

 

(14,341)

 

 

(36,674)

 

Contributions by noncontrolling interests(1)

 

5,734

 

 

2,667

 

Distributions to noncontrolling interests(1)

 

(12,564)

 

 

(20,014)

 

Acquisitions of noncontrolling interests

 

-

 

 

(38)

 

Cash distributions to stockholders  

 

(335,508)

 

 

(329,794)

 

Other financing activities

 

(4,555)

 

 

(8,022)

Net cash provided from (used in) financing activities  

 

(835,349)

 

 

(1,492,626)

Effect of foreign currency translation on cash, cash equivalents and restricted cash

 

444

 

 

2,843

Increase (decrease) in cash, cash equivalents and restricted cash  

 

(45,184)

 

 

(184,083)

Cash, cash equivalents and restricted cash at beginning of period  

 

309,303

 

 

607,220

Cash, cash equivalents and restricted cash at end of period  

$

264,119

 

$

423,137

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

Interest paid

$

104,246

 

$

109,438

 

Income taxes paid (received), net

 

(721)

 

 

3,349

 

 

 

 

 

 

 

 

 

(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.

  

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 three months ended March 31, 2018 are not necessarily an indication of the results that may be expected for the year ending December 31, 2018. 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, 2017.

     New Accounting Standards     

     We adopted the following accounting standards, each of which did not have a material impact on our consolidated financial statements:

·         In 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (ASC 606),” which 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.  We adopted ASC 606 on January 1, 2018 using the modified retrospective method of adoption.  This guidance did not have a significant impact on our consolidated financial statements.

We have evaluated our various revenue streams to identify whether they would be subject to the provisions of ASC 606 and any differences in timing, measurement or presentation of revenue recognition.  A significant source of our revenue is generated through leasing arrangements, which are specifically excluded from ASC 606.  Management contracts are present in our seniors housing operating and outpatient medical segments and represent agreements to provide asset and property management, leasing, marketing and other services.  Under ASC 606, the pattern and timing of recognition of income from these contracts is consistent with the prior accounting model. 

·         In 2017, the FASB issued ASU No. 2017-05, “Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.”  The standard clarifies that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset.  The standard also defines the term “in substance nonfinancial asset” and clarifies that an entity should identify each distinct nonfinancial asset or in substance nonfinancial asset promised to a counterparty and derecognize each asset when a counterparty obtains control over it.  We adopted Subtopic 610-20 using a modified retrospective approach on January 1, 2018.

·         In 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities,” which requires 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 is available for equity investments that do not have readily determinable fair values. This standard requires us to recognize gains and losses from changes in the fair value of our available-for-sale equity securities through the consolidated statement of comprehensive income rather than through accumulated other comprehensive income.  During the three months ended March 31, 2018, we recognized a gain of $7,173,000 in loss (gain) on derivatives and financial instruments, net on the consolidated statement of comprehensive income. There was no adjustment to accumulated other comprehensive income upon adoption at January 1, 2018 as accumulated losses were recognized as other-than-temporary impairment during the year ended December 31, 2017.

8


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

·          During the three months ended December 31, 2017, we adopted ASU No. 2016-18, “Restricted Cash,” and ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments.”  ASU No. 2016-18 requires an entity to reconcile and explain the period over period change in total cash, cash equivalents and restricted cash within its consolidated statement of cash flows and ASU 2016-15 provides guidance clarifying how certain cash receipts and cash payments should be classified.  We adopted these accounting standards retrospectively and, accordingly, certain line items in the consolidated statement of cash flows have been reclassified to conform to the current presentation.  The following table summarizes the change in cash flows as reported and as previously reported prior to the adoption of these standards for the three months ended March 31, 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As Previously

 

 

 

As Reported

 

 

Reported

 

Cash disbursed for acquisitions

 

$

(102,356)

 

$

(102,356)

 

Decrease (increase) in restricted cash

 

 

-

 

 

145,065

 

Net cash provided from (used in) investing activities

 

 

920,174

 

 

1,065,239

 

Increase (decrease) in balance(1)

 

 

(184,083)

 

 

(39,018)

 

Balance at beginning of period(1)

 

 

607,220

 

 

419,378

 

Balance at end of period(1)

 

 

423,137

 

 

380,360

 

 

 

 

 

 

 

 

 

(1) Amounts in As Reported column include cash and cash equivalents and restricted cash as required.  Amounts in the As Previously Reported column reflect only cash and cash equivalents.

 

 

 

 

 

 

 

 

      The following ASUs have been issued but not yet adopted:    

·          In 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which requires lessees to recognize assets and liabilities on their consolidated balance sheet related to the rights and obligations created by most leases, while continuing to recognize expenses on their consolidated statements of comprehensive income 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.  The FASB issued an Exposure Draft in January 2018 proposing to amend ASU 2016-02, which would provide lessors with a practical expedient, by class of underlying assets, to not separate non-lease components from the related lease components and, instead, to account for those components as a single lease component, if certain criteria are met.  ASU 2016-02 and the Exposure Draft are effective for us beginning January 1, 2019, with early adoption 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 consolidated financial statements.  We are currently evaluating the impact of this guidance on our consolidated financial statements from both the lessee and lessor perspective.  We believe that adoption will likely have a material impact to our consolidated financial statements for the recognition of certain operating leases as right-of-use assets and lease liabilities and related amortizations.  We expect to utilize the practical expedients proposed in the Exposure Draft as part of our adoption of this guidance.

 

·         In 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 August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities,” which expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. It also includes certain targeted improvements to simplify the application of current guidance related to hedge accounting. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. We expect to adopt this guidance during the three months ended June 30, 2018 and are currently evaluating the impact the effects this standard will have on our consolidated financial statements.

   

3. Real Property Acquisitions and Development

 

     The total purchase price for all properties acquired has been allocated to the tangible and identifiable intangible assets, liabilities and noncontrolling interests based upon their relative fair values in accordance with our accounting policies. The results of operations

9


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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.  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, 2017 for information regarding our foreign currency policies.  

   

     Triple-net Activity

 

 

Three Months Ended

 

(In thousands)

March 31, 2018

March 31, 2017

 

Land and land improvements

 

$

1,691

 

$

4,017

 

Buildings and improvements

 

 

235

 

 

37,241

 

 

Total assets acquired

 

 

1,926

 

 

41,258

 

Accrued expenses and other liabilities  

 

 

(6)

 

 

-

 

 

Total liabilities assumed

 

 

(6)

 

 

-

 

 

Cash disbursed for acquisitions(1)

 

 

1,920

 

 

41,258

 

Construction in progress additions

 

 

15,850

 

 

46,754

 

Less:

Capitalized interest

 

 

(847)

 

 

(2,028)

 

 

Foreign currency translation

 

 

-

 

 

(164)

 

Cash disbursed for construction in progress

 

 

15,003

 

  

44,562

 

Capital improvements to existing properties

 

 

2,351

 

 

10,495

 

 

Total cash invested in real property, net of cash acquired

 

$

19,274

 

$

96,315

 

 

 

 

 

 

 

 

 

 

(1) Primarily reprsents land acquired on an existing property during the three months ended March 31, 2018.

   

     Seniors Housing Operating Activity

 

 

Three Months Ended

 

(In thousands)

March 31, 2018

March 31, 2017

 

Land and land improvements

 

$

35,193

 

$

4,304

 

Building and improvements

 

 

372,562

 

 

44,075

 

Acquired lease intangibles

 

 

48,805

 

 

1,741

 

Receivables and other assets

 

 

265

 

 

74

 

  

Total assets acquired(1)

 

 

456,825

 

 

50,194

 

Secured debt

 

 

(89,973)

 

 

-

 

Accrued expenses and other liabilities  

 

 

(12,808)

 

 

(2,755)

 

 

Total liabilities assumed

 

 

(102,781)

 

 

(2,755)

 

Noncontrolling interests

 

 

(5,618)

 

 

(647)

 

Non-cash acquisition related activity(2)

 

 

-

 

 

(14,148)

 

 

Cash disbursed for acquisitions

 

 

348,426

 

 

32,644

 

Construction in progress additions

 

 

10,562

 

 

8,062

 

Less:

Capitalized interest

 

 

(891)

 

 

(1,707)

 

 

Foreign currency translation

 

 

(5,032)

 

 

691

 

Cash disbursed for construction in progress

 

 

4,639

 

  

7,046

 

Capital improvements to existing properties

 

 

31,325

 

 

24,254

 

 

Total cash invested in real property, net of cash acquired

 

$

384,390

 

$

63,944

 

 

 

 

 

 

 

 

 

 

(1) Excludes $2,155,000 and $400,000 of unrestricted and restricted cash acquired during the three months ended March 31, 2018 and 2017, 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 during the three months ended March 31, 2017.

10


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

     Outpatient Medical Activity

 

 

Three Months Ended

 

(In thousands)

March 31, 2018

 

March 31, 2017

 

Land and land improvements

 

$

7,369

 

$

2,895

 

Buildings and improvements

 

 

42,673

 

 

23,310

 

Acquired lease intangibles

 

 

5,852

 

 

3,496

 

Receivables and other assets

 

 

1

 

 

3

 

  

Total assets acquired(1)

 

 

55,895

 

  

29,704

 

Accrued expenses and other liabilities

 

 

(632)

 

 

(1,250)

 

 

Total liabilities assumed  

 

 

 (632)  

 

 

 (1,250)  

 

 

Cash disbursed for acquisitions

 

 

55,263

 

 

28,454

 

Construction in progress additions

 

 

2,803

 

 

14,921

 

Less:

Capitalized interest

 

 

(598)

 

 

(717)

 

 

Accruals(2)

 

 

888

 

 

3,522

 

Cash disbursed for construction in progress

 

 

3,093

 

  

17,726

 

Capital improvements to existing properties

 

 

12,871

 

 

7,366

 

 

Total cash invested in real property

 

$

71,227

 

$

53,546

 

 

 

 

 

 

 

 

 

 

(1) Excludes $1,950,000 of unrestricted and restricted cash acquired during the three months ended March 31, 2018.

(2) 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.

 

      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, 2018

 

March 31, 2017

 

Development projects:

 

 

 

 

 

 

 

 

 

 

Triple-net

  

 

$

49,759

 

 

$

157,460

 

 

Seniors housing operating

 

 

 

36,218

 

 

 

3,634

 

 

Outpatient medical

 

 

 

-

 

 

 

25,910

 

Total development projects

 

 

 

85,977

 

 

 

187,004

Total construction in progress conversions

  

 

$

85,977

 

 

$

187,004

 

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):

11


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

March 31, 2018

 

December 31, 2017

Assets:

  

 

 

 

 

 

 

In place lease intangibles

  

$

1,395,920

 

$

1,352,139

 

Above market tenant leases

  

 

58,402

 

 

58,443

 

Below market ground leases

  

 

59,030

 

 

58,784

 

Lease commissions

  

 

35,269

 

 

33,105

 

Gross historical cost

  

 

1,548,621

 

 

1,502,471

 

Accumulated amortization

  

 

(1,149,223)

 

 

(1,125,437)

 

Net book value

  

$

399,398

 

$

377,034

 

 

  

 

 

 

 

 

 

Weighted-average amortization period in years

  

 

14.4

 

 

15.1

 

 

  

 

 

 

 

 

Liabilities:

  

 

 

 

 

 

 

Below market tenant leases

  

$

71,706

 

$

60,430

 

Above market ground leases

  

 

8,540

 

 

8,540

 

Gross historical cost

  

 

80,246

 

 

68,970

 

Accumulated amortization

  

 

(40,400)

 

 

(39,629)

 

Net book value

  

$

39,846

 

$

29,341

 

 

  

 

 

 

 

 

 

Weighted-average amortization period in years

  

 

16.0

 

 

20.1

 

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

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

  

 

2018

 

2017

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

 

$

(351)

 

$

304

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

 

 

367

 

 

(312)

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

 

 

(32,261)

 

 

(39,302)

 

 

 

 

 

 

 

 

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

 

 

 

Assets

 

 

Liabilities

2018

 

$

94,521

 

$

4,470

2019

 

 

74,771

 

 

5,582

2020

 

 

47,871

 

 

5,085

2021

 

 

20,985

 

 

4,597

2022

 

 

17,770

 

 

4,132

Thereafter

 

 

143,480

 

 

15,980

Total

 

$

399,398

 

$

39,846

 

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, relationship or geography). At March 31, 2018, 36 triple-net, seven seniors housing operating and two outpatient medical properties with an aggregate real estate balance of $368,249,000 were classified as held for sale. During the three months ended March 31, 2018, we recorded impairment charges of $28,185,000 on certain held for sale seniors

12


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

housing operating, triple-net and outpatient medical properties for which the carrying values exceeded the fair values, less estimated costs to sell if applicable. The following is a summary of our real property disposition activity for the periods presented (in thousands):

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 2018

March 31, 2017

Real estate dispositions:

 

 

 

 

 

 

 

Triple-net

 

$

323,667

 

$

808,204

 

Seniors housing operating

 

 

2,200

 

 

13,845

 

Outpatient medical

 

 

223,069

 

 

-

 

Total dispositions

 

 

548,936

 

 

822,049

Gain (loss) on real estate dispositions, net

 

 

338,184

 

 

244,092

 

Net other assets/liabilities disposed

 

 

5,089

 

 

20,933

Proceeds from real estate dispositions

 

$

892,209

 

$

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,

 

 

 

2018

 

2017

Revenues:

 

 

 

 

 

 

 

Rental income

 

$

13,886

 

$

43,787

Expenses:

 

  

 

 

 

 

 

Interest expense

 

  

127

 

 

2,707

 

Property operating expenses

 

  

7,256

 

 

8,521

 

Provision for depreciation

 

  

1,741

 

 

9,813

 

Total expenses

 

 

9,124

 

 

21,041

Income (loss) from real estate dispositions, net

 

$

4,762

 

$

22,746

 

 

 

 

 

 

 

 

 

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, 2017 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):

  

13


WELLTOWER INC.

  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

Three Months Ended

 

 

March 31, 2018

 

March 31, 2017

 

 

 

 

 

Senior

 

 

 

 

 

 

 

 

 

 

Senior

 

 

 

 

 

 

 

 

 

 

Housing

 

Outpatient

 

 

 

 

 

 

Housing

 

Outpatient

 

 

 

 

 

Triple-net

 

Operating

 

Medical

 

Totals

 

Triple-net

 

Operating

 

Medical

 

Totals

Advances on real estate loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in new loans

$

1,172

 

$

11,806

 

$

2,458

 

$

15,436

 

$

7,828

 

$

-

 

$

-

 

$

7,828

 

Draws on existing loans

 

12,111

 

 

-

 

 

-

 

 

12,111