WELL 10-Q Quarterly Report June 30, 2018 | Alphaminr
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WELLTOWER INC.
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10-Q 1 a2q1810-q.htm 10-Q Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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)
(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)
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 þ No ¨
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 þ 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 July 27, 2018 , the registrant had 372,027,784 shares of common stock outstanding.


TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets — June 30, 2018 and December 31, 2017
Consolidated Statements of Comprehensive Income — Three and six months ended June 30, 2018 and 2017
Consolidated Statements of Equity — Six months ended June 30, 2018 and 2017
Consolidated Statements of Cash Flows — Six months ended June 30, 2018 and 2017
Notes to Unaudited Consolidated Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 5. Other Information
Item 6. Exhibits
Signatures


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
WELLTOWER INC. AND SUBSIDIARIES
(In thousands)
June 30, 2018 (Unaudited)
December 31, 2017 (Note)
Assets:
Real estate investments:
Real property owned:
Land and land improvements
$
2,746,046

$
2,734,467

Buildings and improvements
25,443,106

25,373,117

Acquired lease intangibles
1,534,755

1,502,471

Real property held for sale, net of accumulated depreciation
547,321

734,147

Construction in progress
200,569

237,746

Gross real property owned
30,471,797

30,581,948

Less accumulated depreciation and amortization
(5,113,928
)
(4,838,370
)
Net real property owned
25,357,869

25,743,578

Real estate loans receivable
449,467

495,871

Less allowance for losses on loans receivable
(68,372
)
(68,372
)
Net real estate loans receivable
381,095

427,499

Net real estate investments
25,738,964

26,171,077

Other assets:
Investments in unconsolidated entities
450,027

445,585

Goodwill
68,321

68,321

Cash and cash equivalents
215,120

243,777

Restricted cash
57,263

65,526

Straight-line rent receivable
367,358

389,168

Receivables and other assets
721,929

560,991

Total other assets
1,880,018

1,773,368

Total assets
$
27,618,982

$
27,944,445

Liabilities and equity
Liabilities:
Borrowings under primary unsecured credit facility
$
540,000

$
719,000

Senior unsecured notes
8,373,774

8,331,722

Secured debt
2,450,483

2,608,976

Capital lease obligations
71,302

72,238

Accrued expenses and other liabilities
984,779

911,863

Total liabilities
12,420,338

12,643,799

Redeemable noncontrolling interests
398,157

375,194

Equity:
Preferred stock
718,498

718,503

Common stock
372,801

372,449

Capital in excess of par value
17,661,384

17,662,681

Treasury stock
(68,661
)
(64,559
)
Cumulative net income
5,932,035

5,316,580

Cumulative dividends
(10,142,162
)
(9,471,712
)
Accumulated other comprehensive income (loss)
(132,631
)
(111,465
)
Other equity
659

670

Total Welltower Inc. stockholders’ equity
14,341,923

14,423,147

Noncontrolling interests
458,564

502,305

Total equity
14,800,487

14,925,452

Total liabilities and equity
$
27,618,982

$
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.


3

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
WELLTOWER INC. AND SUBSIDIARIES
(In thousands, except per share data)
Three Months Ended June 30,
Six Months Ended June 30,
2018
2017
2018
2017
Revenues:
Rental income
$
333,601

$
355,599

$
676,970

$
722,741

Resident fees and services
763,345

677,040

1,499,279

1,347,377

Interest income
13,462

20,901

28,110

41,649

Other income
15,504

5,062

18,518

9,133

Total revenues
1,125,912

1,058,602


2,222,877


2,120,900

Expenses:
Interest expense
121,416

116,231

244,191

234,827

Property operating expenses
568,751

501,855

1,125,216

1,012,024

Depreciation and amortization
236,275

224,847

464,476

453,124

General and administrative
32,831

32,632

66,536

63,733

Loss (gain) on derivatives and financial instruments, net
(7,460
)
736

(14,633
)
1,960

Loss (gain) on extinguishment of debt, net
299

5,515

12,006

36,870

Impairment of assets
4,632

13,631

32,817

24,662

Other expenses
10,058

6,339

13,770

18,014

Total expenses
966,802

901,786

1,944,379

1,845,214

Income (loss) from continuing operations before income taxes
and income from unconsolidated entities
159,110

156,816

278,498

275,686

Income tax (expense) benefit
(3,841
)
8,448

(5,429
)
6,203

Income (loss) from unconsolidated entities
1,249

(3,978
)
(1,180
)
(27,084
)
Income (loss) from continuing operations
156,518

161,286

271,889

254,805

Gain (loss) on real estate dispositions, net
10,755

42,155

348,939

286,247

Net income
167,273

203,441

620,828

541,052

Less: Preferred stock dividends
11,676

11,680

23,352

26,059

Less: Preferred stock redemption charge
—

—

—

9,769

Less: Net income (loss) attributable to noncontrolling interests (1)
1,165

3,332

5,373

4,156

Net income (loss) attributable to common stockholders
$
154,432

$
188,429

$
592,103

$
501,068

Average number of common shares outstanding:
Basic
371,640

366,524

371,552

364,551

Diluted
373,075

368,149

373,186

366,423

Earnings per share:
Basic:
Income (loss) from continuing operations
$
0.42

$
0.44

$
0.73

$
0.70

Net income (loss) attributable to common stockholders
$
0.42

$
0.51

$
1.59

$
1.37

Diluted:
Income (loss) from continuing operations
$
0.42

$
0.44

$
0.73

$
0.70

Net income (loss) attributable to common stockholders
$
0.41

$
0.51

$
1.59

$
1.37

Dividends declared and paid per common share
$
0.87

$
0.87

$
1.74

$
1.74

(1) Includes amounts attributable to redeemable noncontrolling interests.


4

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
WELLTOWER INC. AND SUBSIDIARIES
(In thousands)
Three Months Ended June 30,
Six Months Ended June 30,
2018
2017
2018
2017
Net income
$
167,273

$
203,441

$
620,828

$
541,052

Other comprehensive income (loss):
Unrecognized gain (loss) on available-for-sale securities
—

(5,908
)
—

(16,477
)
Foreign currency translation gain (loss)
(50,123
)
27,713

(33,797
)
33,426

Total other comprehensive income (loss)
(50,123
)
21,805

(33,797
)
16,949

Total comprehensive income (loss)
117,150

225,246

587,031

558,001

Less: Total comprehensive income (loss) attributable
to noncontrolling interests (1)
(7,580
)
11,562

(7,258
)
15,198

Total comprehensive income (loss) attributable to common stockholders
$
124,730

$
213,684

$
594,289

$
542,803

(1) Includes amounts attributable to redeemable noncontrolling interests.


5

CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
WELLTOWER INC. AND SUBSIDIARIES
(In thousands)
Six Months Ended June 30, 2018
Accumulated
Preferred
Stock
Common
Stock
Capital in
Excess of
Par Value
Treasury
Stock
Cumulative
Net Income
Cumulative
Dividends
Other
Comprehensive
Income (Loss)
Other
Equity
Noncontrolling
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)
615,455

7,546

623,001

Other comprehensive income
(21,166
)
(12,631
)
(33,797
)
Total comprehensive income
589,204

Net change in noncontrolling interests
(27,979
)
(38,656
)
(66,635
)
Amounts related to stock incentive plans, net of forfeitures
168

16,886

(4,102
)
(11
)
12,941

Proceeds from issuance of common stock
184

9,791

9,975

Conversion of preferred stock
(5
)
5

—

Dividends paid:

Common stock dividends
(647,098
)
(647,098
)
Preferred stock dividends
(23,352
)
(23,352
)
Balances at end of period
$
718,498

$
372,801

$
17,661,384

$
(68,661
)
$
5,932,035

$
(10,142,162
)
$
(132,631
)
$
659

$
458,564

$
14,800,487

Six Months Ended June 30, 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)
536,896

5,302

542,198

Other comprehensive income
5,907

11,042

16,949

Total comprehensive income
559,147

Net change in noncontrolling interests
(4,247
)
(6,732
)
(10,979
)
Amounts related to stock incentive plans, net of forfeitures
337

11,803

(7,583
)
(1,896
)
2,661

Proceeds from issuance of common stock
6,026

417,506

423,532

Redemption of preferred stock
(287,500
)
9,760

(9,769
)
(287,509
)
Redemption of equity membership units
91

5,464

(11
)
5,544

Option compensation expense
10

10

Dividends paid:

Common stock dividends
(634,296
)
(634,296
)
Preferred stock dividends
(26,059
)
(26,059
)
Balances at end of period
$
718,750

$
369,525

$
17,439,977

$
(62,335
)
$
5,330,702

$
(8,805,336
)
$
(163,624
)
$
1,173

$
484,691

$
15,313,523



6

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
WELLTOWER INC. AND SUBSIDIARIES
(In thousands)
Six Months Ended June 30,
2018
2017
Operating activities:


Net income
$
620,828

$
541,052

Adjustments to reconcile net income to net cash provided from (used in) operating activities:
Depreciation and amortization
464,476

453,124

Other amortization expenses
7,984

7,789

Impairment of assets
32,817

24,662

Stock-based compensation expense
16,725

9,669

Loss (gain) on derivatives and financial instruments, net
(14,633
)
1,960

Loss (gain) on extinguishment of debt, net
12,006

36,870

Loss (income) from unconsolidated entities
1,180

27,084

Rental income less than (in excess of) cash received
13,544

(41,325
)
Amortization related to above (below) market leases, net
1,363

48

Loss (gain) on real estate dispositions, net
(348,939
)
(286,247
)
Distributions by unconsolidated entities
21

3,225

Increase (decrease) in accrued expenses and other liabilities
46,718

70,005

Decrease (increase) in receivables and other assets
(15,666
)
(3,807
)
Net cash provided from (used in) operating activities
838,424


844,109


Investing activities:
Cash disbursed for acquisitions
(595,596
)
(237,119
)
Cash disbursed for capital improvements to existing properties
(111,332
)
(93,147
)
Cash disbursed for construction in progress
(62,978
)
(149,046
)
Capitalized interest
(4,436
)
(7,488
)
Investment in real estate loans receivable
(48,291
)
(50,717
)
Principal collected on real estate loans receivable
91,427

36,500

Other investments, net of payments
(48,212
)
52,457

Contributions to unconsolidated entities
(32,768
)
(65,631
)
Distributions by unconsolidated entities
22,897

47,384

Proceeds from (payments on) derivatives
(27,678
)
19,665

Proceeds from sales of real property
947,218

1,203,782

Net cash provided from (used in) investing activities
130,251


756,640

Financing activities:
Net increase (decrease) under unsecured credit facilities
(179,000
)
(260,000
)
Proceeds from issuance of senior unsecured notes
545,074

—

Payments to extinguish senior unsecured notes
(450,000
)
—

Net proceeds from the issuance of secured debt
44,606

161,799

Payments on secured debt
(224,958
)
(1,020,129
)
Net proceeds from the issuance of common stock
10,188

424,451

Redemption of preferred stock
—

(287,500
)
Payments for deferred financing costs and prepayment penalties
(18,639
)
(52,838
)
Contributions by noncontrolling interests (1)
8,421

9,663

Distributions to noncontrolling interests (1)
(59,484
)
(38,143
)
Cash distributions to stockholders
(670,859
)
(660,355
)
Other financing activities
(5,639
)
(8,925
)
Net cash provided from (used in) financing activities
(1,000,290
)

(1,731,977
)
Effect of foreign currency translation on cash, cash equivalents and restricted cash
(5,305
)

11,649

Increase (decrease) in cash, cash equivalents and restricted cash
(36,920
)
(119,579
)
Cash, cash equivalents and restricted cash at beginning of period
309,303


607,220

Cash, cash equivalents and restricted cash at end of period
$
272,383

$
487,641

Supplemental cash flow information:
Interest paid
$
209,156

$
210,184

Income taxes paid (received), net
4,835

4,360

(1) Includes amounts attributable to redeemable noncontrolling interests.


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 six months ended June 30, 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 and it did not have a material impact on our consolidated financial statements.
•
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 six months ended June 30, 2018 , we recognized a gain of $14,633,000 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

•
As of 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 six months ended June 30, 2017 (in thousands):
As Reported
As Previously
Reported
Decrease (increase) in restricted cash
$
—

$
142,485

Net cash provided from (used in) investing activities
756,640

899,125

Increase (decrease) in balance (1)
(119,579
)
22,906

Balance at beginning of period (1)
607,220

419,378

Balance at end of period (1)
487,641

442,284

(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.

•
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 early adoption of this standard on April 1, 2018, did not result in a cumulative effect adjustment and all applicable changes for the company were prospectively made. Please refer to Note 11 of the consolidated financial statements for additional detail on this adoption.
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 ASU 2018-11, "Leases (Topic 842) Targeted Improvements" in July 2018, which provides 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 is 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.  ASU 2018-11 also provides a practical expedient that allows companies to use an optional transition method. Under the optional transition method, a cumulative adjustment to retained earnings during the period of adoption is recorded and prior periods would not require restatement. 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 amortization.  We expect to utilize the practical expedients in ASU 2018-11 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.
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

9
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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.
Triple-net Activity
Six Months Ended
(In thousands)
June 30, 2018
June 30, 2017
Land and land improvements
$
1,691

$
30,440

Buildings and improvements
—

188,569

Total assets acquired
1,691

219,009

Accrued expenses and other liabilities
(6
)
(20,855
)
Total liabilities assumed
(6
)
(20,855
)
Noncontrolling interests
—

(7,284
)
Non-cash acquisition related activity (1)
—

(54,989
)
Cash disbursed for acquisitions (2)
1,685

135,881

Construction in progress additions
38,238

76,245

Less:
Capitalized interest
(1,432
)
(3,215
)
Foreign currency translation
132

(3,044
)
Cash disbursed for construction in progress
36,938

69,986

Capital improvements to existing properties
8,569

15,269

Total cash invested in real property, net of cash acquired
$
47,192

$
221,136

(1) For the six months ended June 30, 2017 , $54,989,000 is related to the acquisition of assets previously financed as a real estate loan receivable.
(2) Primarily represents land acquired on an existing property during the six months ended June 30, 2018.


Seniors Housing Operating Activity
Six Months Ended
(In thousands)
June 30, 2018
June 30, 2017
Land and land improvements
$
47,865

$
10,590

Building and improvements
535,921

69,056

Acquired lease intangibles
68,084

3,596

Receivables and other assets
1,255

296

Total assets acquired (1)
653,125

83,538

Secured debt
(89,973
)
—

Accrued expenses and other liabilities
(14,686
)
(8,606
)
Total liabilities assumed
(104,659
)
(8,606
)
Noncontrolling interests
(9,818
)
(647
)
Non-cash acquisition related activity (2)
—

(31,546
)
Cash disbursed for acquisitions
538,648

42,739

Construction in progress additions
20,704

42,787

Less:
Capitalized interest
(1,783
)
(3,804
)
Foreign currency translation
1,176

3,060

Cash disbursed for construction in progress
20,097

42,043

Capital improvements to existing properties
76,237

60,129

Total cash invested in real property, net of cash acquired
$
634,982

$
144,911

(1) Excludes $2,442,000 and $400,000 o f unrestricted and restricted cash acquired during the six months ended June 30, 2018 and 2017 , respectively.
(2) Includes $6,349,000 related to the acquisition of assets previously financed as real estate loans receivable and $25,197,000 previously financed as an investment in an unconsolidated entity during the six months ended June 30, 2017 .


10
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Outpatient Medical Activity
Six Months Ended
(In thousands)
June 30, 2018
June 30, 2017
Land and land improvements
$
7,369

$
25,060

Buildings and improvements
42,673

62,038

Acquired lease intangibles
5,852

8,397

Receivables and other assets
1

118

Total assets acquired (1)
55,895

95,613

Secured debt
—

(25,824
)
Accrued expenses and other liabilities
(632
)
(2,210
)
Total liabilities assumed
(632
)
(28,034
)
Noncontrolling interests
—

(9,080
)
Cash disbursed for acquisitions
55,263

58,499

Construction in progress additions
11,319

31,830

Less:
Capitalized interest
(1,221
)
(1,343
)
Accruals (2)
(4,155
)
6,530

Cash disbursed for construction in progress
5,943

37,017

Capital improvements to existing properties
26,526

17,409

Total cash invested in real property
$
87,732

$
112,925

(1) Excludes $1,950,000 and $ 0 of unrestricted and restricted cash acquired during the six months ended June 30, 2018 and 2017 , respectively.
(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):
Six Months Ended
June 30, 2018
June 30, 2017
Development projects:
Triple-net
$
59,188

266,650
Seniors housing operating
37,215

3,634
Outpatient medical
11,358

63,036
Total development projects
107,761

333,320

Expansion projects
—

2,798

Total construction in progress conversions
$
107,761

$
336,118

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

June 30, 2018
December 31, 2017
Assets:
In place lease intangibles
$
1,380,504

$
1,352,139

Above market tenant leases
58,373

58,443

Below market ground leases
59,030

58,784

Lease commissions
36,848

33,105

Gross historical cost
1,534,755

1,502,471

Accumulated amortization
(1,150,396
)
(1,125,437
)
Net book value
$
384,359

$
377,034

Weighted-average amortization period in years
14.7

15.1

Liabilities:
Below market tenant leases
$
71,660

$
60,430

Above market ground leases
8,540

8,540

Gross historical cost
80,200

68,970

Accumulated amortization
(41,503
)
(39,629
)
Net book value
$
38,697

$
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 June 30,
Six Months Ended June 30,
2018
2017
2018
2017
Rental income related to above/below market tenant leases, net
$
(333
)
$
267

$
(684
)
$
571

Property operating expenses related to above/below market ground leases, net
(312
)
(307
)
(679
)
(619
)
Depreciation and amortization related to in place lease intangibles and lease commissions
(33,763
)
(35,439
)
(66,024
)
(74,741
)
The future estimated aggregate amortization of intangible assets and liabilities is as follows for the periods presented (in thousands):
Assets
Liabilities
2018
$
61,540

$
2,953

2019
83,254

5,546

2020
54,511

5,059

2021
22,985

4,559

2022
17,996

4,095

Thereafter
144,073

16,485

Total
$
384,359

$
38,697

5. Dispositions and Assets Held for Sale
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 June 30, 2018 , 35 triple-net, 18 seniors housing operating and two outpatient medical properties with an aggregate real estate balance of $ 547,321,000 were classified as held for sale. During the six months ended June 30, 2018 , we recorded impairment charges of $ 32,817,000 on certain held for sale 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):

12
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended
June 30, 2018
June 30, 2017
Real estate dispositions:
Triple-net
$
367,978

$
882,436

Seniors housing operating
2,200

13,845

Outpatient medical
223,069

—

Total dispositions
593,247

896,281

Gain (loss) on real estate dispositions, net
348,939

286,247

Net other assets/liabilities disposed
5,032

21,254

Proceeds from real estate dispositions
$
947,218

$
1,203,782

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 June 30,
Six Months Ended June 30,
2018
2017
2018
2017
Revenues:
Total revenues
$
35,236

$
60,241

$
78,459

$
135,348

Expenses:




Interest expense
120

1,540

264

4,266

Property operating expenses
22,364

22,365

45,516

46,606

Provision for depreciation
2,555

12,455

6,874

24,749

Total expenses
25,039

36,360

52,654

75,621

Income (loss) from real estate dispositions, net
$
10,197

$
23,881

$
25,805

$
59,727

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):
Six Months Ended
June 30, 2018
June 30, 2017
Triple-net
Seniors Housing Operating
Outpatient
Medical
Totals
Triple-net
Outpatient
Medical
Totals
Advances on real estate loans receivable:
Investments in new loans
$
8,281

$
11,806

$
7,022

$
27,109

$
10,037

$
—

$
10,037

Draws on existing loans
21,182

—

—

21,182

40,680

—

40,680

Net cash advances on real estate loans
29,463

11,806

7,022

48,291

50,717

—

50,717

Receipts on real estate loans receivable:
Loan payoffs
58,557

—

—

58,557

97,039

60,500

157,539

Principal payments on loans
32,870

—

—

32,870

798

—

798

Sub-total
91,427

—

—

91,427

97,837

60,500

158,337

Less: Non-cash activity (1)
—

—

—

—

(61,337
)
(60,500
)
(121,837
)
Net cash receipts on real estate loans
91,427

—

—

91,427

36,500

—

36,500

Net cash advances (receipts) on real estate loans
$
(61,964
)
$
11,806

$
7,022

$
(43,136
)
$
14,217

$
—

$
14,217

(1) Triple-net represents acquisitions of assets previously financed as real estate loans. Please see Note 3 for additional information. Outpatient medical represents a deed in lieu of foreclosure on a previously financed first mortgage property.

13
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

In 2016, we restructured real estate loans with Genesis HealthCare and recorded a loan loss charge in the amount of $ 6,935,000 on one of the loans as the present value of expected future cash flows was less than the carrying value of the loan.  In 2017, we recorded an additional loan loss charge of $ 62,966,000 relating to real estate loans with Genesis HealthCare based on an estimation of expected future cash flows discounted at the effective interest rate of the loans. At June 30, 2018 , the allowance for loan losses totals $ 68,372,000 and is deemed to be sufficient to absorb expected losses related to these loans.  At June 30, 2018 , we had no real estate loans with outstanding balances on non-accrual status and recorded no provision for loan losses during the six months ended June 30, 2018 .
The following is a summary of our impaired loans (in thousands):
Six Months Ended
June 30, 2018
June 30, 2017
Balance of impaired loans at end of period
$
214,871

$
289,473

Allowance for loan losses
68,372

5,811

Balance of impaired loans not reserved
$
146,499

$
283,662

Average impaired loans for the period
$
252,172

$
327,324

Interest recognized on impaired loans (1)
8,847

16,464

(1) Represents cash interest recognized in the period since loans were identified as impaired.

7. Investments in Unconsolidated Entities
We participate in a number of joint ventures, which generally invest in seniors housing and health care real estate.  The results of operations for these entities have been included in our consolidated results of operations from the date of acquisition by the joint ventures and are reflected in our Consolidated Statements of Comprehensive Income as income or loss from unconsolidated entities.  The following is a summary of our investments in unconsolidated entities (dollars in thousands):
Percentage Ownership (1)
June 30, 2018
December 31, 2017
Triple-net
10% to 49%
$
22,002

$
22,856

Seniors housing operating
10% to 50%
339,737

352,430

Outpatient medical
43%
88,288

70,299

Total
$
450,027

$
445,585

(1) Excludes in-substance real estate investments.

At June 30, 2018 , the aggregate unamortized basis difference of our joint venture investments of $ 107,508,000 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.
8. Credit Concentration
We use consolidated net operating income (“NOI”) as our credit concentration metric.  See Note 17 for additional information and reconciliation. The following table summarizes certain information about our credit concentration for the six months ended June 30, 2018 , excluding our share of NOI in unconsolidated entities (dollars in thousands):
Number of
Total
Percent of
Concentration by relationship: (1)
Properties
NOI
NOI (2)
Sunrise Senior Living (3)
161

$
165,935

15%
Brookdale Senior Living
137

83,467

8%
Revera (3)
98

78,233

7%
Genesis HealthCare
86

67,546

6%
Benchmark Senior Living
48

49,941

5%
Remaining portfolio
727

652,539

59%
Totals
1,257

$
1,097,661

100%
(1) Genesis Healthcare is in our triple-net segment.  Sunrise Senior Living and Revera are in our seniors housing operating segment.  Benchmark Senior Living and Brookdale Senior Living are in both our triple-net and seniors housing operating segments.
(2) NOI with our top five relationships comprised 41% of total NOI for the year ended December 31, 2017.
(3) Revera owns a controlling interest in Sunrise Senior Living.

14
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


9. Borrowings Under Credit Facilities and Related Items
At June 30, 2018 , we had a primary unsecured credit facility with a consortium of 29 banks that includes a $ 3,000,000,000 unsecured revolving credit facility, a $ 500,000,000 unsecured term credit facility and a $ 250,000,000 Canadian-denominated unsecured term credit facility.  We have an option, through an accordion feature, to upsize the unsecured revolving credit facility and the $ 500,000,000 unsecured term credit facility by up to an additional $ 1,000,000,000 , in the aggregate, and the $ 250,000,000 Canadian-denominated unsecured term credit facility by up to an additional $ 250,000,000 .  The primary unsecured credit facility also allows us to borrow up to $ 1,000,000,000 in alternate currencies (none outstanding at June 30, 2018 ).  Borrowings under the unsecured revolving credit facility are subject to interest payable at the applicable margin over LIBOR interest rate ( 2.99% at June 30, 2018 ). The applicable margin is based on our debt ratings and was 0.90% at June 30, 2018 .  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 June 30, 2018 .  The term credit facilities mature on May 13, 2021 . The revolving credit facility is scheduled to mature on May 13, 2020 and can be extended for two successive terms of six months each at our option.
The following information relates to aggregate borrowings under the primary unsecured revolving credit facility for the periods presented (dollars in thousands):
Three Months Ended June 30,
Six Months Ended June 30,
2018
2017
2018
2017
Balance outstanding at quarter end (1)
$
540,000

$
385,000

$
540,000

$
385,000

Maximum amount outstanding at any month end
$
685,000

$
640,000

$
865,000

$
1,010,000

Average amount outstanding (total of daily
principal balances divided by days in period)
$
562,747

$
561,626

$
463,978

$
678,343

Weighted average interest rate (actual interest
expense divided by average borrowings outstanding)
3.04
%
1.94
%
2.91
%
1.87
%
(1) As of June 30, 2018 , letters of credit in the aggregate amount of $22,365,000 have been issued, which reduces the borrowing capacity on the unsecured revolving credit facility.

10. Senior Unsecured Notes and Secured Debt
We may repurchase, redeem or refinance senior unsecured notes from time to time, taking advantage of favorable market conditions when available. We may purchase senior notes for cash through open market purchases, privately negotiated transactions, a tender offer or, in some cases, through the early redemption of such securities pursuant to their terms.   The senior unsecured notes are redeemable at our option, at any time in whole or from time to time in part, at a redemption price equal to the sum of (1) the principal amount of the notes (or portion of such notes) being redeemed plus accrued and unpaid interest thereon up to the redemption date and (2) any “make-whole” amount due under the terms of the notes in connection with early redemptions.   Redemptions and repurchases of debt, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. At June 30, 2018 , the annual principal payments due on these debt obligations were as follows (in thousands):
Senior
Unsecured Notes (1,2)
Secured
Debt (1,3)
Totals
2018
$
—

$
197,438

$
197,438

2019
600,000

476,109

1,076,109

2020 (4)
685,810

138,533

824,343

2021 (5,6)
1,140,259

340,621

1,480,880

2022
600,000

224,330

824,330

Thereafter (7,8)
5,435,685

1,085,047

6,520,732

Totals
$
8,461,754

$
2,462,078

$
10,923,832

(1) Amounts represent principal amounts due and do not include unamortized premiums/discounts, debt issuance costs, or other fair value adjustments as reflected on the balance sheet.
(2) Annual interest rates range from 2.6% to 6.5% .
(3) Annual interest rates range from 1.69% to 7.93% .  Carrying value of the properties securing the debt totaled $5,220,301,000 at June 30, 2018 .
(4) In November 2015 , one of our wholly-owned subsidiaries issued and we guaranteed $300,000,000 of Canadian-denominated 3.35% senior unsecured notes due 2020 (approximately $228,310,000 based on the Canadian/U.S. Dollar exchange rate on June 30, 2018 ).
(5) On May 13, 2016 , we refinanced the funding on a $250,000,000 Canadian-denominated unsecured term credit facility (approximately $190,259,000 based on the Canadian/U.S. Dollar exchange rate on June 30, 2018 ).  The loan matures on May 13, 2021 and bears interest at the Canadian Dealer Offered Rate plus 95 basis points ( 2.59% at June 30, 2018 ).

15
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(6) On May 13, 2016 , we refinanced the funding on a $500,000,000 unsecured term credit facility.  The loan matures on May 13, 2021 and bears interest at LIBOR plus 95 basis points ( 3.0% at June 30, 2018 ).
(7) On November 20, 2013 , we completed the sale of £550,000,000 (approximately $725,835,000 based on the Sterling/U.S. Dollar exchange rate in effect on June 30, 2018 ) of 4.8% senior unsecured notes due 2028 .
(8) On November 25, 2014 , we completed the sale of £500,000,000 (approximately $659,850,000 based on the Sterling/U.S. Dollar exchange rate in effect on June 30, 2018 ) of 4.5% senior unsecured notes due 2034 .
The following is a summary of our senior unsecured notes principal activity during the periods presented (dollars in thousands):
Six Months Ended
June 30, 2018
June 30, 2017
Weighted Avg.
Weighted Avg.
Amount
Interest Rate
Amount
Interest Rate
Beginning balance
$
8,417,447

4.306%
$
8,260,038

4.245%
Debt issued
550,000

4.250%
—

0.000%
Debt extinguished
(450,000
)
2.250%
—

0.000%
Foreign currency
(55,693
)
4.022%
83,101

4.320%
Ending balance
$
8,461,754

4.456%
$
8,343,139

4.276%
The following is a summary of our secured debt principal activity for the periods presented (dollars in thousands):
Six Months Ended
June 30, 2018
June 30, 2017
Weighted Avg.
Weighted Avg.
Amount
Interest Rate
Amount
Interest Rate
Beginning balance
$
2,618,408

3.761%
$
3,465,066

4.094%
Debt issued
44,606

3.384%
161,799

2.331%
Debt assumed
85,192

4.395%
23,094

6.670%
Principal payments
(28,385
)
3.912%
(32,206
)
4.378%
Debt extinguished
(196,573
)
5.658%
(987,923
)
5.370%
Foreign currency
(61,170
)
3.325%
44,859

3.116%
Ending balance
$
2,462,078

3.755%
$
2,674,689

3.669%
Our debt agreements contain various covenants, restrictions and events of default. Certain agreements require us to maintain certain financial ratios and minimum net worth and impose certain limits on our ability to incur indebtedness, create liens and make investments or acquisitions. As of June 30, 2018 , we were in compliance with all of the covenants under our debt agreements.
11. 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.  Our risk management program is designed to manage the exposure and volatility arising from these risks, and utilizes derivative financial instruments 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.
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.

16
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

In the second quarter of 2018, we redesignated these derivative financial instruments that qualify as hedges of net investments in foreign operations using the spot method in order to more closely align the underlying economics of the hedged transactions. The changes in fair values and the excluded components of derivative instruments designated as net investment hedges are recognized as a cumulative translation adjustment component of OCI. The cross currency basis spread is recognized in interest expense on the Consolidated Statement of Comprehensive Income using the swap accrual process. Prior to the adoption of ASU 2017-12, all settlements and changes in fair values of these derivative instruments were recognized as a cumulative transaction adjustment component of OCI and there had been no ineffectiveness on these hedging relationships.
During the six months ended June 30, 2018 and 2017 , we settled certain net investment hedges necessitating cash payments of $ 27,774,000 and generating cash proceeds of $ 19,665,000 , 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 statement 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.
The following presents the notional amount of derivatives and other financial instruments as of the dates indicated (in thousands):
June 30, 2018
December 31, 2017
Derivatives designated as net investment hedges:
Denominated in Canadian Dollars
$
575,000

$
575,000

Denominated in Pounds Sterling
£
891,640

£
550,000

Financial instruments designated as net investment hedges:
Denominated in Canadian Dollars
$
250,000

$
250,000

Denominated in Pounds Sterling
£
1,050,000

£
1,050,000

Derivatives designated as cash flow hedges:
Denominated in Canadian Dollars
$
—

$
36,000

Derivative instruments not designated:
Denominated in U.S. Dollars
$
408,007

$
408,007

Forward purchase contracts denominated in Canadian Dollars
$
(500,000
)
$
—

Forward sales contracts denominated in Canadian Dollars
$
580,000

$
80,000

Forward purchase contracts denominated in Pounds Sterling
£
(350,000
)
£
—

Forward sales contracts denominated in Pounds Sterling
£
350,000

£
—


The following presents the impact of derivative instruments on the Consolidated Statements of Comprehensive Income for the periods presented (in thousands):
Three Months Ended June 30,
Six Months Ended June 30,
Location
2018
2017
2018
2017
Gain (loss) on derivative instruments designated as hedges recognized in income
Interest expense
$
4,091

$
1,732

$
3,822


$
4,189

Gain (loss) on derivative instruments not designated as hedges recognized in income
Interest expense
$
734

$
(703
)
$
2,453


$
(935
)
Gain (loss) on foreign exchange contracts and term loans designated as net investment hedge recognized in OCI
OCI
$
150,703

$
(97,539
)
$
88,005


$
(141,880
)

17
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

12. Commitments and Contingencies
At June 30, 2018 , we had 14 outstanding letter of credit obligations totaling $ 72,966,000 and expiring between 2018 and 2024 .  At June 30, 2018 , we had outstanding construction in progress of $ 200,569,000 and were committed to providing additional funds of approximately $ 369,576,000 to complete construction.  At June 30, 2018 , we had contingent purchase obligations totaling $ 9,317,000 .  These contingent purchase obligations relate to unfunded capital improvement obligations and contingent obligations on acquisitions. Rents due from the tenant are increased to reflect the additional investment in the property.
We evaluate our leases for operating versus capital lease treatment in accordance with ASC Topic 840 “Leases.”  A lease is classified as a capital lease if it provides for transfer of ownership of the leased asset at the end of the lease term, contains a bargain purchase option, has a lease term greater than 75% of the economic life of the leased asset, or if the net present value of the future minimum lease payments are in excess of 90% of the fair value of the leased asset. Certain leases contain bargain purchase options and have been classified as capital leases.  At June 30, 2018 , we had operating lease obligations of $ 1,115,108,000 relating to certain ground leases and company office space and capital lease obligations of $ 86,352,000 relating primarily to certain investment properties. Regarding ground leases, we have sublease agreements with certain of our operators that require the operators to reimburse us for our monthly operating lease obligations.  At June 30, 2018 , aggregate future minimum rentals to be received under these noncancelable subleases totaled $ 75,100,000 .
13. Stockholders’ Equity
The following is a summary of our stockholders’ equity capital accounts as of the dates indicated:
June 30, 2018
December 31, 2017
Preferred Stock:
Authorized shares
50,000,000

50,000,000

Issued shares
14,375,000

14,375,000

Outstanding shares
14,369,965

14,370,060

Common Stock, $1.00 par value:
Authorized shares
700,000,000

700,000,000

Issued shares
373,211,708

372,852,311

Outstanding shares
372,029,607

371,731,551

Preferred Stock. The following is a summary of our preferred stock activity during the periods indicated:
Six Months Ended
June 30, 2018
June 30, 2017
Weighted Avg.
Weighted Avg.
Shares
Dividend Rate
Shares
Dividend Rate
Beginning balance
14,370,060

6.500%
25,875,000

6.500%
Shares redeemed
—

0.000%
(11,500,000
)
6.500%
Shares converted
(95
)
6.500%
—

0.000%
Ending balance
14,369,965

6.500%
14,375,000

6.500%
During the six months ended June 30, 2017 , we recognized a charge of $ 9,769,000 in connection with the redemption of the Series J preferred stock.
Common Stock. The following is a summary of our common stock issuances during the six months ended June 30, 2018 and 2017 (dollars in thousands, except average price amounts):

18
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Shares Issued
Average Price
Gross Proceeds
Net Proceeds
2017 Dividend reinvestment plan issuances
2,836,216

$70.55
$
200,097

$
199,757

2017 Option exercises
202,190

50.88
10,288

10,288

2017 Equity shelf program issuances
2,986,574

72.30
215,917

214,406

2017 Redemption of equity membership units
91,180

—

—

2017 Stock incentive plans, net of forfeitures
159,709

—

—

2017 Totals
6,275,869

$
426,302

$
424,451

2018 Dividend reinvestment plan issuances
182,910

$55.40
$
10,133

$
10,133

2018 Option exercises
1,026

53.61
55

55

2018 Preferred stock conversions
83

—

—

2018 Stock incentive plans, net of forfeitures
114,037

—

—

2018 Totals
298,056

$
10,188

$
10,188

Dividends .  The increase in dividends is primarily attributable to increases in our common shares outstanding as described above.  The following is a summary of our dividend payments (in thousands, except per share amounts):
Six Months Ended
June 30, 2018
June 30, 2017
Per Share
Amount
Per Share
Amount
Common Stock
$
1.7400

$
647,098

$
1.7400

$
634,296

Series I Preferred Stock
1.6250

23,352

1.6250

23,360

Series J Preferred Stock
—

—

0.2347

2,699

Totals
$
670,450

$
660,355

Accumulated Other Comprehensive Income .  The following is a summary of accumulated other comprehensive income (loss) for the periods presented (in thousands):
Unrecognized gains (losses) related to:
Foreign Currency Translation
Available for Sale Securities
Actuarial Losses
Cash Flow Hedges
Total
Balance at December 31, 2017
$
(110,581
)
$
—

$
(884
)
$
—

$
(111,465
)
Other comprehensive income before reclassification adjustments
(21,166
)
—

—

—

(21,166
)
Net current-period other comprehensive income
(21,166
)
—

—

—

(21,166
)
Balance at June 30, 2018
$
(131,747
)
$
—

$
(884
)
$
—

$
(132,631
)
Balance at December 31, 2016
$
(173,496
)
$
5,120

$
(1,153
)
$
(2
)
$
(169,531
)
Other comprehensive income before reclassification adjustments
22,384

(16,477
)
—

—

5,907

Net current-period other comprehensive income
22,384

(16,477
)
—

—

5,907

Balance at June 30, 2017
$
(151,112
)
$
(11,357
)
$
(1,153
)
$
(2
)
$
(163,624
)

19
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


14. Stock Incentive Plans
Our 2016 Long-Term Incentive Plan (“2016 Plan”) authorizes up to 10,000,000 shares of common stock to be issued at the discretion of the Compensation Committee of the Board of Directors. Our non-employee directors, officers and key employees are eligible to participate in the 2016 Plan. The 2016 Plan allows for the issuance of, among other things, stock options, stock appreciation rights, restricted stock, deferred stock units, performance units and dividend equivalent rights. Vesting periods for options, deferred stock units and restricted shares generally range from three to five years . Options expire ten years from the date of grant.  Stock-based compensation expense totaled $ 5,167,000 and $ 16,725,000 for the three and six months ended June 30, 2018 , respectively, and $ 4,763,000 and $ 9,669,000 for the same periods in 2017 .
15. 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 June 30,
Six Months Ended June 30,
2018
2017
2018
2017
Numerator for basic and diluted earnings
per share - net income (loss) attributable
to common stockholders
$
154,432

$
188,429

$
592,103

$
501,068

Denominator for basic earnings per
share - weighted average shares
371,640

366,524

371,552

364,551

Effect of dilutive securities:
Employee stock options
14

50

15

60

Non-vested restricted shares
325

479

523

438

Redeemable shares
1,096

1,096

1,096

1,374

Dilutive potential common shares
1,435

1,625

1,634

1,872

Denominator for diluted earnings per
share - adjusted weighted average shares
373,075

368,149

373,186

366,423

Basic earnings per share
$
0.42

$
0.51

$
1.59

$
1.37

Diluted earnings per share
$
0.41

$
0.51

$
1.59

$
1.37

The Series I Cumulative Convertible Perpetual Preferred Stock was not included in the calculations as the effect of conversions into common stock was anti-dilutive.
16. Disclosure about Fair Value of Financial Instruments
U.S. GAAP provides authoritative guidance for measuring and disclosing fair value measurements of assets and liabilities.  The guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  The guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  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 additional information.  The guidance describes three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.
Mortgage Loans and Other Real Estate Loans Receivable — The fair value of mortgage loans and other real estate loans receivable is generally estimated by using Level 2 and Level 3 inputs such as discounting the estimated future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.


20
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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.
Borrowings Under Primary Unsecured Credit Facility — The carrying amount of the primary unsecured credit facility approximates fair value because the borrowings are interest rate adjustable.
Senior Unsecured Notes — The fair value of the 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 and Cross Currency Swaps — Foreign currency forward contracts and cross currency swaps are recorded in other assets or other liabilities on the balance sheet at fair market value.  Fair market value is determined using Level 2 inputs by estimating the future value of the currency pair based on existing exchange rates, comprised of current spot and traded forward points, and calculating a present value of the net amount using a discount factor based on observable traded interest rates.
Redeemable OP Unitholder Interests — Our redeemable unitholder interests are recorded on the balance sheet at fair value using Level 2 inputs.  The fair value is measured using the closing price of our common stock, as units may be redeemed at the election of the holder for cash or, at our option, one share of our common stock per unit, subject to adjustment in certain circumstances.
The carrying amounts and estimated fair values of our financial instruments are as follows (in thousands):
June 30, 2018
December 31, 2017
Carrying Amount
Fair Value
Carrying Amount
Fair Value
Financial assets:
Mortgage loans receivable
$
274,226

$
282,406

$
306,120

$
332,508

Other real estate loans receivable
106,869

110,486

121,379

125,480

Equity securities
21,903

21,903

7,269

7,269

Cash and cash equivalents
215,120
215,120
243,777

243,777

Restricted cash
57,263
57,263

65,526

65,526

Foreign currency forward contracts and cross currency swaps
104,729

104,729

15,604

15,604

Financial liabilities:
Borrowings under unsecured credit facilities
$
540,000

$
540,000

$
719,000

$
719,000

Senior unsecured notes
8,373,774
8,904,455

8,331,722

9,168,432

Secured debt
2,450,483
2,468,073

2,608,976

2,641,997

Foreign currency forward contracts and cross currency swaps
53,876

53,876

38,654

38,654

Redeemable OP unitholder interests
$
97,476

$
97,476

$
97,476

$
97,476

Items Measured at Fair Value on a Recurring Basis
The market approach is utilized to measure fair value for our financial assets and liabilities reported at fair value on a recurring basis.  The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The following summarizes items measured at fair value on a recurring basis (in thousands):

21
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Fair Value Measurements as of June 30, 2018
Total
Level 1
Level 2
Level 3
Equity securities
$
21,903

$
21,903

$
—

$
—

Foreign currency forward contracts and cross currency swaps, net asset (liability) (1)
50,853

—

50,853

—

Redeemable OP unitholder interests
97,476

—

97,476

—

Totals
$
170,232

$
21,903

$
148,329

$
—

(1) Please see Note 11 for additional information.
Items Measured at Fair Value on a Nonrecurring Basis
In addition to items that are measured at fair value on a recurring basis, we also have assets and liabilities in our balance sheet that are measured at fair value on a nonrecurring basis.  As these assets and liabilities are not measured at fair value on a recurring basis, they are not included in the tables above. Assets, liabilities and noncontrolling interests that are measured at fair value on a nonrecurring basis include those acquired/assumed. Asset impairments (if applicable, see Note 5 for impairments of real property and Note 6 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 business combinations and asset acquisitions using current interest rates at which similar borrowings could be obtained on the transaction date.
17. Segment Reporting
We invest in seniors housing and health care real estate. We evaluate our business and make resource allocations on our three operating segments: triple-net, seniors housing operating and outpatient medical.  Our triple-net properties include long-term/post-acute care facilities, assisted living facilities, independent living/continuing care retirement communities, care homes (United Kingdom), independent supportive living facilities (Canada), care homes with nursing (United Kingdom) and combinations thereof. Under the triple-net segment, we invest in seniors housing and health care real estate through acquisition and financing of primarily single tenant properties. Properties acquired are primarily leased under triple-net leases and we are not involved in the management of the property. Our seniors housing operating properties include the seniors housing communities referenced above that are owned and/or operated through RIDEA structures (see Note 18). Our outpatient medical properties are typically leased to multiple tenants and generally require a certain level of property management.
We evaluate performance based upon consolidated net operating income (“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 certain non-real estate investments and other income. Non-segment assets consist of corporate assets including cash, deferred loan expenses and corporate offices and equipment among others. Non-property specific revenues and expenses are not allocated to individual segments in determining NOI. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2 to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017 ). The results of operations for all acquisitions described in Note 3 are included in our consolidated results of operations from the acquisition dates and are components of the appropriate segments.  There are no intersegment sales or transfers.
Summary information for the reportable segments (which excludes unconsolidated entities) is as follows (in thousands):

22
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended June 30, 2018:

Triple-net

Seniors Housing Operating

Outpatient Medical

Non-segment / Corporate

Total
Rental income

$
197,961


$
—


$
135,640


$
—


$
333,601

Resident fees and services

—


763,345


—


—


763,345

Interest income

13,247


172


43


—


13,462

Other income (1)

13,212


1,650


144


498


15,504

Total revenues

224,420

765,167

135,827

498


1,125,912

Property operating expenses

136


525,662


42,953


—


568,751

Consolidated net operating income

224,284

239,505

92,874

498


557,161

Interest expense

3,800


16,971


1,656


98,989


121,416

Loss (gain) on derivatives and financial instruments, net

(7,460
)

—


—


—


(7,460
)
Depreciation and amortization

55,309


134,779


46,187


—


236,275

General and administrative

—


—


—


32,831


32,831

Loss (gain) on extinguishment of debt, net

—


299


—


—


299

Impairment of assets

2,420


2,212


—


—


4,632

Other expenses

957


6,167


2,095


839


10,058

Income (loss) from continuing operations before income taxes and income from unconsolidated entities

169,258

79,077

42,936

(132,161
)

159,110

Income tax (expense) benefit

(688
)

(2,617
)

(378
)

(158
)

(3,841
)
Income (loss) from unconsolidated entities

5,062


(5,204
)

1,391


—


1,249

Income (loss) from continuing operations

173,632

71,256

43,949

(132,319
)

156,518

Gain (loss) on real estate dispositions, net

10,759


(1
)

(3
)

—


10,755

Net income (loss)

$
184,391

$
71,255

$
43,946

$
(132,319
)

$
167,273

Total assets

$
8,735,524


$
13,785,165


$
4,886,011


$
212,282


$
27,618,982

(1) Includes $10,805,000 of lease termination fee income recognized in the triple-net segment.
Three Months Ended June 30, 2017:
Triple-net
Seniors Housing Operating
Outpatient Medical
Non-segment / Corporate
Total
Rental income
$
217,889

$
—

$
137,710

$
—

$
355,599

Resident fees and services
—

677,040

—

—

677,040

Interest income
20,901

—

—

—

20,901

Other income
2,557

1,049

1,217

239

5,062

Total revenues
241,347

678,089

138,927

239

1,058,602

Property operating expenses
—

459,111

42,744

—

501,855

Consolidated net operating income
241,347

218,978

96,183

239

556,747

Interest expense
2,515

15,403

2,122

96,191

116,231

Loss (gain) on derivatives and financial instruments, net
736

—

—

—

736

Depreciation and amortization
60,171

117,198

47,478

—

224,847

General and administrative
—

—

—

32,632

32,632

Loss (gain) on extinguishment of debt, net
—

2,524

2,991

—

5,515

Impairment of assets
4,846

8,785

—

—

13,631

Other expenses
2,181

1,165

1,310

1,683

6,339

Income (loss) from continuing operations before income taxes and income from unconsolidated entities
170,898

73,903

42,282

(130,267
)
156,816

Income tax (expense) benefit
(1,471
)
10,247

(351
)
23

8,448

Income (loss) from unconsolidated entities
3,867

(8,449
)
604

—

(3,978
)
Income (loss) from continuing operations
173,294

75,701

42,535

(130,244
)
161,286

Gain (loss) on real estate dispositions, net
42,155

—

—

—

42,155

Net income (loss)
$
215,449

$
75,701

$
42,535

$
(130,244
)
$
203,441


23
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2018
Triple-net
Seniors Housing Operating
Outpatient Medical
Non-segment / Corporate
Total
Rental income
$
404,792

$
—

$
272,178

$
—

$
676,970

Resident fees and services
—

1,499,279

—

—

1,499,279

Interest income
27,798

257

55

—

28,110

Other income
14,589

2,798

265

866

18,518

Total revenues
447,179

1,502,334

272,498

866

2,222,877

Property operating expenses
157

1,037,603

87,456

—

1,125,216

Consolidated net operating income
447,022

464,731

185,042

866

1,097,661

Interest expense
7,242

33,906

3,332

199,711

244,191

Loss (gain) on derivatives and financial instruments, net
(14,633
)
—

—

—

(14,633
)
Depreciation and amortization
111,341

260,548

92,587

—

464,476

General and administrative
—

—

—

66,536

66,536

Loss (gain) on extinguishment of debt, net
(32
)
110

11,928

—

12,006

Impairment of assets
28,304

4,513

—

—

32,817

Other expenses
2,077

5,979

2,693

3,021

13,770

Income (loss) from continuing operations before income taxes and income from unconsolidated entities
312,723

159,675

74,502

(268,402
)
278,498

Income tax (expense) benefit
(1,824
)
(2,455
)
(806
)
(344
)
(5,429
)
Income (loss) from unconsolidated entities
10,883

(14,684
)
2,621

—

(1,180
)
Income (loss) from continuing operations
321,782

142,536

76,317

(268,746
)
271,889

Gain (loss) on real estate dispositions, net
134,156

4

214,779

—

348,939

Net income (loss)
$
455,938

$
142,540

$
291,096

$
(268,746
)
$
620,828


Six Months Ended June 30, 2017
Triple-net
Seniors Housing Operating
Outpatient Medical
Non-segment / Corporate
Total
Rental income
$
445,180

$
—

$
277,561

$
—

$
722,741

Resident fees and services
—

1,347,377

—

—

1,347,377

Interest income
41,580

69

—

—

41,649

Other income
4,321

2,510

1,830

472

9,133

Total revenues
491,081

1,349,956

279,391

472

2,120,900

Property operating expenses
—

921,536

90,488

—

1,012,024

Consolidated net operating income
491,081

428,420

188,903

472

1,108,876

Interest expense
8,025

31,219

4,413

191,170

234,827

Loss (gain) on derivatives and financial instruments, net
1,960

—

—

—

1,960

Depreciation and amortization
119,781

236,935

96,408

—

453,124

General and administrative
—

—

—

63,733

63,733

Loss (gain) on extinguishment of debt, net
29,083

3,414

4,373

—

36,870

Impairment of assets
4,846

14,191

5,625

—

24,662

Other expenses
7,190

2,943

1,671

6,210

18,014

Income (loss) from continuing operations before income taxes and income from unconsolidated entities
320,196

139,718

76,413

(260,641
)
275,686

Income tax (expense) benefit
(2,271
)
9,160

(686
)
—

6,203

Income (loss) from unconsolidated entities
9,505

(37,640
)
1,051

—

(27,084
)
Income (loss) from continuing operations
327,430

111,238

76,778

(260,641
)
254,805

Gain (loss) on real estate dispositions, net
273,236

13,011

—

—

286,247

Net income (loss)
$
600,666

$
124,249

$
76,778

$
(260,641
)
$
541,052



24
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
Six Months Ended
June 30, 2018
June 30, 2017
June 30, 2018
June 30, 2017
Revenues:
Amount
%
Amount
%
Amount
%
Amount
%
United States
$
895,734

79.5
%
$
851,943

80.5
%
$
1,759,523

79.1
%
$
1,710,611

80.7
%
United Kingdom
112,031

10.0
%
99,747

9.4
%
228,556

10.3
%
193,590

9.1
%
Canada
118,147

10.5
%
106,912

10.1
%
234,798

10.6
%
216,699

10.2
%
Total
$
1,125,912

100.0
%
$
1,058,602

100.0
%
$
2,222,877

100.0
%
$
2,120,900

100.0
%
As of
June 30, 2018
December 31, 2017
Assets:
Amount
%
Amount
%
United States
$
21,959,262

79.5
%
$
22,274,443

79.7
%
United Kingdom
3,208,929

11.6
%
3,239,039

11.6
%
Canada
2,450,791

8.9
%
2,430,963

8.7
%
Total
$
27,618,982

100.0
%
$
27,944,445

100.0
%
18. Income Taxes and Distributions
We elected to be taxed as a REIT commencing with our first taxable year.  To qualify as a REIT for federal income tax purposes, at least 90% of taxable income (excluding 100% of net capital gains) must be distributed to stockholders. REITs that do not distribute a certain amount of current year taxable income in the current year are also subject to a 4% federal excise tax. The main differences between undistributed net income for federal income tax purposes and financial statement purposes are the recognition of straight-line rent for reporting purposes, basis differences in acquisitions, recording of impairments, differing useful lives and depreciation and amortization methods for real property and the provision for loan losses for reporting purposes versus bad debt expense for tax purposes.
Under the provisions of the REIT Investment Diversification and Empowerment Act of 2007 (“RIDEA”), for taxable years beginning after July 30, 2008, a REIT may lease “qualified health care properties” on an arm’s-length basis to a taxable REIT subsidiary (“TRS”) if the property is operated on behalf of such TRS by a person who qualifies as an “eligible independent contractor.” Generally, the rent received from the TRS will meet the related party rent exception and will be treated as “rents from real property.”  A “qualified health care property” includes real property and any personal property that is, or is necessary or incidental to the use of, a hospital, nursing facility, assisted living facility, congregate care facility, qualified continuing care facility, or other licensed facility which extends medical or nursing or ancillary services to patients. We have entered into various joint ventures that were structured under RIDEA. Resident level rents and related operating expenses for these facilities are reported in the unaudited consolidated financial statements and are subject to federal and state income taxes as the operations of such facilities are included in TRS entities. Certain net operating loss carryforwards could be utilized to offset taxable income in future years.
Income taxes reflected in the financial statements primarily represents U.S. federal and state and local income taxes as well as non-U.S. income based or withholding taxes on certain investments located in jurisdictions outside the U.S.  The provision for income taxes for the six months ended June 30, 2018 and 2017 , 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.  The company reflects current and deferred tax liabilities for any such withholding taxes incurred as a result of this holding company structure in its consolidated financial statements. Generally, given current statutes of limitations, we are subject to audit by the Internal Revenue Service (“IRS”) for the year ended December 31, 2014 and subsequent years and by state taxing authorities for the year ended December 31, 2013 and subsequent years.  The company and its subsidiaries are also subject to audit by the Canada Revenue Agency and provincial authorities generally for periods subsequent to our initial investments in Canada in May 2012, by HM Revenue & Customs for periods subsequent to our initial investments in the United Kingdom in August 2012 and by Luxembourg taxing authorities generally for periods subsequent to our establishment of certain Luxembourg-based subsidiaries during 2014.

25
WELLTOWER INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



19. Variable Interest Entities
We have entered into joint ventures to own certain seniors housing and outpatient medical assets which are deemed to be variable interest entities (“VIE”).   We have concluded that we are the primary beneficiary of these 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):
June 30, 2018
December 31, 2017
Assets
Net real property owned
$
983,005

$
1,002,137

Cash and cash equivalents
21,360

12,308

Receivables and other assets
15,068

16,330

Total assets (1)
$
1,019,433

$
1,030,775

Liabilities and equity
Secured debt
$
468,104

$
471,103

Accrued expenses and other liabilities
15,210

14,832

Total equity
536,119

544,840

Total liabilities and equity
$
1,019,433

$
1,030,775

(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.

20. Subsequent Events
Acquisition of Quality Care Properties On July 26, 2018, we completed the acquisition of Quality Care Properties Inc. ("QCP"), with QCP shareholders receiving $20.75 of cash for each share of QCP common stock and all existing QCP debt was repaid. Prior to the acquisition, ProMedica Health System ("ProMedica") completed the acquisition of the operations of HCR ManorCare. Immediately following the acquisition of QCP, we formed an 80 / 20 joint venture with ProMedica to own the real estate associated with the 218 properties leased to ProMedica under a lease agreement with the following key terms: (i) 15 -year absolute triple-net master lease with three five -year renewal options; (ii) initial annual cash rent of $179 million with a year one escalator of 1.375% and 2.75% annual escalators thereafter; and (iii) full corporate guarantee of ProMedica. We drew on a $1.0 billion term loan facility to fund a portion of the acquisition cash consideration and other related expenses. The term loan facility matures two years from the closing. In addition to the term loan facility draw, we drew on our unsecured credit facility described below, in order to fund the acquisition. The aggregate consideration to acquire the QCP shares and repay outstanding QCP debt was approximately $3.8 billion, exclusive of transaction costs, ProMedica's joint venture contribution and cash acquired. Initial accounting for the transaction is incomplete as of August 2, 2018 due to the complexity of the transaction. Pro forma financial information has not been provided herein due to a lack of sufficient information at the time of filing. We intend to file the pro forma financial information as an amendment to our Current Report on Form 8-K filed July 27, 2018.

Unsecured Credit Facility In July 2018, we closed on a new $3.7 billion unsecured credit facility with improved pricing across both our line of credit and term loan facility and terminated the existing unsecured credit facility (see Note 9 for further information on the former facilities). The new credit facility includes $3.0 billion of revolving credit capacity at a borrowing rate of 82.5 basis points over LIBOR, $500 million of USD term loan capacity at a borrowing rate of 90.0 basis points over LIBOR and $250 million of CAD term loan capacity at 90.0 basis points over CIDOR.




26
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

EXECUTIVE SUMMARY
Company Overview
28
Business Strategy
28
Key Transactions
29
Key Performance Indicators, Trends and Uncertainties
30
Corporate Governance
32
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash
32
Off-Balance Sheet Arrangements
33
Contractual Obligations
34
Capital Structure
34
RESULTS OF OPERATIONS
Summary
35
Triple-net
35
Seniors Housing Operating
37
Outpatient Medical
39
Non-Segment/Corporate
41
OTHER
Non-GAAP Financial Measures
42
Critical Accounting Policies
49
Cautionary Statement Regarding Forward-Looking Statements
50

27
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, 2017, 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. Our capital programs, when combined with comprehensive planning, development and property management services, make us a single-source solution for acquiring, planning, developing, managing, repositioning and monetizing real estate assets.
The following table summarizes our consolidated portfolio for the three months ended June 30, 2018 (dollars in thousands):
Percentage of
Number of
Type of Property
NOI (1)
NOI
Properties
Triple-net
$
224,284

40.3
%
547

Seniors housing operating
239,505

43.0
%
455

Outpatient medical
92,874

16.7
%
255

Totals
$
556,663

100.0
%
1,257

(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.
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 are generally able to intervene at an early stage to address any negative trends, and in so doing, support both the collectability of revenue and the value of our investment.
In addition to our asset/property management and research efforts, we also structure our investments to help mitigate payment risk. Operating leases and loans are normally credit enhanced by guaranties and/or letters of credit. In addition, operating leases are typically structured as master leases and loans are generally cross-defaulted and cross-collateralized with other real estate loans, operating leases or agreements between us and the obligor and its affiliates.

28
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

For the six months ended June 30, 2018 , rental income and resident fees and services represented 30% and 67% , respectively, of total revenues.  Substantially all of our operating leases are designed with escalating rent structures. Leases with fixed annual rental escalators are generally recognized on a straight-line basis over the initial lease period, subject to a collectability assessment. Rental income related to leases with contingent rental escalators is generally recorded based on the contractual cash rental payments due for the period. Our yield on loans receivable depends upon a number of factors, including the stated interest rate, the average principal amount outstanding during the term of the loan and any interest rate adjustments.
Our primary sources of cash include rent and interest receipts, resident fees and services, borrowings under our primary unsecured credit facility, public issuances of debt and equity securities, proceeds from investment dispositions and principal payments on loans receivable. Our primary uses of cash include dividend distributions, debt service payments (including principal and interest), real property investments (including acquisitions, capital expenditures, construction advances and transaction costs), loan advances, property operating expenses and general and administrative expenses.  Depending upon the availability and cost of external capital, we believe our liquidity is sufficient to fund these uses of cash.
We also continuously evaluate opportunities to finance future investments.  New investments are generally funded from temporary borrowings under our primary unsecured credit facility, internally generated cash and the proceeds from investment dispositions. Our investments generate cash from NOI and principal payments on loans receivable. Permanent financing for future investments, which replaces funds drawn under our primary unsecured credit facility, has historically been provided through a combination of the issuance of public debt and equity securities and the incurrence or assumption of secured debt.
Depending upon market conditions, we believe that new investments will be available in the future with spreads over our cost of capital that will generate appropriate returns to our stockholders. It is also 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 primary unsecured credit facility. At June 30, 2018 , we had $215,120,000 of cash and cash equivalents, $57,263,000 of restricted cash and $2,437,635,000 of available borrowing capacity under our primary unsecured credit facility.
Key Transactions
Capital .   During the six months ended June 30, 2018 , we completed the issuance of $550,000,000 of 4.25% senior unsecured notes for net proceeds of approximately $545,074,000 , we extinguished $196,573,000 of secured debt at a blended average interest rate of 5.7% and we repaid our 2.25% $450,000,000 of senior unsecured notes at par on maturity on March 15, 2018.  In addition, we raised $10,133,000 through our dividend reinvestment program. During July 2018, we closed on a new $3.7 billion unsecured credit facility with improved pricing across both our line of credit and term loan facility and terminated the existing unsecured credit facility. The credit facility includes $3.0 billion of revolving credit capacity at a borrowing rate of 82.5 basis points over LIBOR, $500 million of USD term loan capacity at a borrowing rate of 90.0 basis points over LIBOR and $250 million of CAD term loan capacity at 90.0 basis points over CIDOR.

Investments .  The following summarizes our property acquisitions and joint venture investments completed during the six months ended June 30, 2018 (dollars in thousands):
Properties
Investment Amount (1)
Capitalization Rates (2)
Book Amount (3)
Seniors housing operating
11
$
599,647

6.7
%
$
653,125

Outpatient medical
3
47,739

6.0
%
55,895

Totals
14

$
647,386

6.7
%
$
709,020

(1) Represents stated pro rata purchase price including cash and any assumed debt but excludes fair value adjustments pursuant to U.S. GAAP.
(2) Represents annualized contractual or projected net operating income to be received in cash divided by investment amounts.
(3) Represents amounts recorded on our books including fair value adjustments pursuant to U.S. GAAP.  See Note 3 to our unaudited consolidated financial statements for additional information.
In July 2018, we acquired all of the outstanding shares of Quality Care Properties, Inc. and entered into a related joint venture with ProMedica Health System.  For more information, please see Note 20 to the unaudited consolidated financial statements.
Dispositions .  The following summarizes property dispositions made during the six months ended June 30, 2018 (dollars in thousands):

29
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Properties
Proceeds (1)
Capitalization Rates (2)
Book Amount (3)
Triple-net
30

$
514,826

7.7
%
$
367,978

Seniors housing operating
2

6,908

6.5
%
2,200

Outpatient medical
18

428,727

6.0
%
223,069

Totals
50

$
950,461

6.9
%
$
593,247

(1) Represents pro rata proceeds received upon disposition including any seller financing.
(2) Represents annualized contractual income that was being received in cash at date of disposition divided by disposition proceeds.
(3) Represents carrying value of net real estate assets at time of disposition. See Note 5 to our unaudited consolidated financial statements for additional information.
Dividends . Our Board of Directors announced the annual cash dividend of $3.48 per common share ($0.87 per share quarterly), consistent with 2017.  The dividend declared for the quarter ended June 30, 2018 represents the 189 th consecutive quarterly dividend payment.
Key Performance Indicators, Trends and Uncertainties
We utilize several key performance indicators to evaluate the various aspects of our business. These indicators are discussed below and relate to operating performance, concentration risk and credit strength. Management uses these key performance indicators to facilitate internal and external comparisons to our historical operating results, in making operating decisions and for budget planning purposes.
Operating Performance . We believe that net income and net income attributable to common stockholders (“NICS”) per the Statement of Comprehensive Income are the most appropriate earnings measures. Other useful supplemental measures of our operating performance include funds from operations attributable to common stockholders (“FFO”), consolidated net operating income (“NOI”) and same store NOI (“SSNOI”); however, these supplemental measures are not defined by U.S. generally accepted accounting principles (“U.S. GAAP”). Please refer to the section entitled “Non-GAAP Financial Measures” for further discussion and reconciliations. These earnings measures (and FFO per share amounts) are widely used by investors and analysts in the valuation, comparison and investment recommendations of companies. The following table reflects the recent historical trends of our operating performance measures for the periods presented (in thousands, except per share amounts):
Three Month Ended
March 31,
June 30,
September 30,
December 31,
March 31,
June 30,
2017
2017
2017
2017
2018
2018
Net income (loss)
$
337,610

$
203,441

$
89,299

$
(89,743
)
$
453,555

$
167,273

NICS
312,639

188,429

74,043

(111,523
)
437,671

154,432

FFO
306,231

384,390

295,722

179,224

353,220

378,725

NOI
552,129

556,747

567,486

556,353

540,500

557,161

SSNOI
448,362

460,001

466,681

462,358

459,875

477,988

Per share data (fully diluted):
NICS
0.86

$
0.51

$
0.20

$
(0.30
)
$
1.17

$
0.41

FFO
0.84

1.04

0.80

0.48

0.95

1.02

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 IRC Section 1031 deposits. The coverage ratios indicate our ability to service interest and fixed charges (interest, secured debt principal amortization and preferred dividends). We expect to maintain capitalization ratios and coverage ratios sufficient to maintain a capital structure consistent with our current profile. The coverage ratios are based on earnings before interest, taxes, depreciation and amortization (“EBITDA”). Please refer to the section entitled “Non-GAAP Financial Measures” for further discussion and reconciliations 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:

30
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Three Months Ended
March, 31
June 30,
September 30,
December 31,
March 31,
June 30,
2017
2017
2017
2017
2018
2018
Net debt to book capitalization ratio
42%
41%
42%
43%
42%
42%
Net debt to undepreciated book
capitalization ratio
36%
35%
36%
36%
35%
36%
Net debt to market capitalization ratio
29%
27%
29%
31%
34%
31%
Interest coverage ratio
5.67x
4.60x
3.63x
2.35x
6.67x
4.34x
Fixed charge coverage ratio
4.53x
3.72x
2.97x
1.93x
5.49x
3.58x
Concentration Risk . We evaluate our concentration risk in terms of NOI by property mix, relationship mix and geographic mix. Concentration risk is a valuable measure in understanding what portion of our NOI could be at risk if certain sectors were to experience downturns.  Property mix measures the portion of our NOI that relates to our various property types. Relationship mix measures the portion of our NOI that relates to our top five relationships. Geographic mix measures the portion of our NOI that relates to our top five states (or international equivalents). The following table reflects our recent historical trends of concentration risk by NOI for the periods indicated below:
Three Months Ended
March 31,
June 30,
September 30,
December 31,
March 31,
June 30,
2017
2017
2017
2017
2018
2018
Property mix: (1)
Triple-net
45%
44%
43%
42%
41%
40%
Seniors housing operating
38%
39%
40%
41%
42%
43%
Outpatient medical
17%
17%
17%
17%
17%
17%
Relationship mix: (1)
Sunrise Senior Living (2)
14%
14%
14%
14%
15%
15%
Brookdale Senior Living
7%
7%
7%
7%
7%
8%
Revera (2)
7%
7%
7%
7%
7%
7%
Genesis HealthCare
9%
9%
9%
7%
6%
6%
Benchmark Senior Living
4%
5%
5%
4%
4%
5%
Remaining relationships
59%
58%
58%
61%
61%
59%
Geographic mix: (1)
California
13%
14%
13%
13%
14%
14%
United Kingdom
9%
9%
9%
9%
10%
9%
Canada
8%
8%
8%
8%
9%
8%
Texas
7%
7%
7%
8%
8%
8%
New Jersey
7%
8%
8%
8%
8%
7%
Remaining geographic areas
56%
54%
55%
54%
51%
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) Revera owns a controlling interest in Sunrise Senior Living.
Lease Expirations. The following table sets forth information regarding lease expirations for certain portions of our portfolio as of June 30, 2018 (dollars in thousands):

31
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Expiration Year (1)
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
Thereafter
Triple-net:
Properties
150

—

—

3

7

7

4

50

55

20

233

Base rent (2)
$
204,547

$
—

$
—

$
4,495

$
3,589

$
—

$
10,842

$
65,251

$
99,230

$
37,085

$
375,973

% of base rent
25.5
%
—
%
—
%
0.6
%
0.4
%
—
%
1.4
%
8.1
%
12.4
%
4.6
%
47.0
%
Units/beds
13,897

—

—

571

769

1,115

692

3,893

5,867

2,501

21,552

% of Units/beds
27.3
%
—
%
—
%
1.1
%
1.5
%
2.2
%
1.4
%
7.7
%
11.5
%
4.9
%
42.4
%
Outpatient medical:










Square feet
455,724

1,149,774

1,341,407

1,579,551

1,721,178

1,205,516

1,161,620

728,037

1,184,766

405,253

4,751,125

Base rent (2)
$
11,820

$
31,589

$
36,508

$
42,780

$
45,367

$
32,458

$
33,681

$
20,780

$
29,875

$
11,515

$
112,893

% of base rent
2.9
%
7.7
%
8.9
%
10.5
%
11.1
%
7.9
%
8.2
%
5.1
%
7.3
%
2.8
%
27.6
%
Leases
165

307

319

295

303

260

133

122

137

80

193

% of Leases
7.1
%
13.3
%
13.8
%
12.7
%
13.1
%
11.2
%
5.7
%
5.3
%
5.9
%
3.5
%
8.4
%
(1) Excludes investments in unconsolidated entities. Investments classified as held for sale are included in the current year.
(2) The most recent monthly base rent annualized, including straight-line for leases with fixed escalators or annual cash rents for leases with contingent escalators.  Base rent does not include tenant recoveries or amortization of above and below market lease intangibles.
We evaluate our key performance indicators in conjunction with current expectations to determine if historical trends are indicative of future results. Our expected results may not be achieved and actual results may differ materially from our expectations. Factors that may cause actual results to differ from expected results are described in more detail in “Cautionary Statement Regarding Forward-Looking Statements” and other sections of this Quarterly Report on Form 10-Q. Management regularly monitors economic and other factors to develop strategic and tactical plans designed to improve performance and maximize our competitive position. Our ability to achieve our financial objectives is dependent upon our ability to effectively execute these plans and to appropriately respond to emerging economic and company-specific trends. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2017 , under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of these risk factors.
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
As of December 31, 2017, we adopted Accounting Standards Update (“ASU”) No. 2016-18, “Restricted Cash,” and ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments.”  See Note 2 to the unaudited consolidated financial statements for further information.
Sources and Uses of Cash
Our primary sources of cash include rent and interest receipts, resident fees and services, borrowings under our primary unsecured credit facility, public issuances of debt and equity securities, proceeds from investment dispositions and principal payments on loans receivable. Our primary uses of cash include dividend distributions, debt service payments (including principal and interest), real property investments (including acquisitions, capital expenditures, construction advances and transaction costs), loan advances, property operating expenses, and general and administrative expenses. These sources and uses of cash are reflected in our Consolidated Statements of Cash Flows and are discussed in further detail below.  The following is a summary of our sources and uses of cash flows (dollars in thousands):

32
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Six Months Ended
Change
June 30, 2018
June 30, 2017
$
%
Cash, cash equivalents and restricted cash at beginning of period
$
309,303

$
607,220

$
(297,917
)
-49
%
Cash provided from (used in) operating activities
838,424

844,109

(5,685
)
-1
%
Cash provided from (used in) investing activities
130,251

756,640

(626,389
)
-83
%
Cash provided from (used in) financing activities
(1,000,290
)
(1,731,977
)
731,687

-42
%
Effect of foreign currency translation
(5,305
)
11,649

(16,954
)
n/a

Cash, cash equivalents and restricted cash at end of period
$
272,383

$
487,641

$
(215,258
)
-44
%
Operating Activities . The change in net cash provided from operating activities was immaterial.  Please see “Results of Operations” for discussion of net income fluctuations. For the six months ended June 30, 2018 and 2017 , cash flow 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 changes in acquisition and dispositions, 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 (dollars in thousands):
Six months ended
Change
June 30,
June 30,
2018
2017
$
%
New development
$
62,978

$
149,046

$
(86,068
)
-58
%
Recurring capital expenditures, tenant improvements and lease commissions
35,116

28,668

6,448

22
%
Renovations, redevelopments and other capital improvements
76,216

64,479

11,737

18
%
Total
$
174,310

$
242,193

$
(67,883
)
-28
%
The change in new development is primarily due to the number and size of construction projects on-going during the relevant periods.  Renovations, redevelopments and other capital improvements include expenditures to maximize property value, increase net operating income, maintain a market-competitive position and/or achieve property stabilization.  Generally, these expenditures have increased as a result of acquisitions, primarily in our seniors housing operating segment.
Financing Activities .  The changes in net cash provided from/used in financing activities are primarily attributable to changes related to our long-term debt arrangements, the issuance/redemption of common and preferred stock, and dividend payments. Please refer to Notes 9, 10 and 13 of our unaudited consolidated financial statements for additional information.
Off-Balance Sheet Arrangements
At June 30, 2018 , we had investments in unconsolidated entities with our ownership interests ranging from 10% to 50%. Please see Note 7 to our unaudited consolidated financial statements for additional information.  We use financial derivative instruments to hedge interest rate and foreign currency exchange rate exposure. Please see Note 11 to our unaudited consolidated financial statements for additional information.  At June 30, 2018 , we had 14 outstanding letter of credit obligations. Please see Note 12 to our unaudited consolidated financial statements for additional information.








33
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Contractual Obligations
The following table summarizes our payment requirements under contractual obligations as of June 30, 2018 (in thousands):
Payments Due by Period
Contractual Obligations
Total
2018
2019-2020
2021-2022
Thereafter
Unsecured revolving credit facility (1)
$
540,000

$
—

$
—

$
540,000

$
—

Senior unsecured notes and term credit facilities: (2,7)

U.S. Dollar senior unsecured notes
6,150,000

—

1,050,000

1,050,000

4,050,000

Canadian Dollar senior unsecured notes (3)
228,310

—

228,310

—

—

Pounds Sterling senior unsecured notes (3)
1,385,685

—

—

—

1,385,685

U.S. Dollar term credit facility
507,500

—

7,500

500,000

—

Canadian Dollar term credit facility (3)
190,259

—

—

190,259

—

Secured debt: (2,3)

Consolidated
2,462,078

197,438

614,642

564,951

1,085,047

Unconsolidated
749,995

20,084

110,952

38,030

580,929

Contractual interest obligations: (4)

Unsecured revolving credit facility
56,532

8,076

32,304

16,152

—

Senior unsecured notes and term loans (3)
3,194,525

221,794

713,991

555,523

1,703,217

Consolidated secured debt (3)
487,588

46,880

151,660

108,243

180,805

Unconsolidated secured debt (3)
204,531

14,362

52,616

44,226

93,327

Capital lease obligations (5)
86,352

2,087

8,346

8,346

67,573

Operating lease obligations (5)
1,115,108

8,937

35,737

34,255

1,036,179

Purchase obligations (5,7)
378,893

168,366

210,527

—

—

Other long-term liabilities (6)
1,966

737

1,229

—

—

Total contractual obligations
$
17,739,322

$
688,761

$
3,217,814

$
3,649,985

$
10,182,762

(1) Relates to unsecured revolving credit facility with an aggregate commitment of $3,000,000,000. See Note 9 and Note 20 to our unaudited consolidated financial statements for additional information.
(2) Amounts represent principal amounts due and do not reflect unamortized premiums/discounts or other fair value adjustments as reflected on the balance sheet.
(3) Based on foreign currency exchange rates in effect as of balance sheet date.
(4) Based on variable interest rates in effect as of balance sheet date.
(5) See Note 12 to our unaudited consolidated financial statements for additional information.
(6) Primarily relates to payments to be made under a supplemental executive retirement plan for one former executive officer.
(7) Excludes acquisition of Quality Care Properties as discussed in Note 20 to our unaudited consolidated financial statements.
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 June 30, 2018 , we were in compliance with all of the covenants under our debt agreements. None of our debt agreements contain provisions for acceleration which could be triggered by our debt ratings. However, under our primary unsecured credit facility, the ratings on our senior unsecured notes are used to determine the fees and interest charged.  We plan to manage the company to maintain compliance with our debt covenants and with a capital structure consistent with our current profile. Any downgrades in terms of ratings or outlook by any or all of the rating agencies could have a material adverse impact on our cost and availability of capital, which could in turn have a material adverse impact on our consolidated results of operations, liquidity and/or financial condition.
On May 17, 2018, we filed with the Securities and Exchange Commission (1) an open-ended automatic or “universal” shelf registration statement covering an indeterminate amount of future offerings of debt securities, common stock, preferred stock, depositary shares, warrants and units and (2) a registration statement in connection with our enhanced dividend reinvestment plan (“DRIP”) under which we may issue up to 15,000,000 shares of common stock. As of July 27, 2018 , 14,979,702 shares of common stock remained available for issuance under the DRIP registration statement. We have entered into separate equity distribution agreements with each of Morgan Stanley & Co. LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman Sachs & Co. LLC, UBS Securities LLC and Wells Fargo Securities, LLC relating to the offer and sale from time to time of up to $1,000,000,000 aggregate amount of our common stock (“Equity Shelf Program”).  The Equity Shelf Program also allows us to enter into forward sale agreements.  We expect that, if entered into, we will physically settle each forward sale agreement on one

34
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

or more dates on or prior to the maturity date of that particular forward sale agreement, in which case we will expect to receive per share cash proceeds at settlement equal to the forward sale price under the relevant forward sale agreement.  However, we may also elect to cash settle or net share settle a forward sale agreement.  As of July 27, 2018 , we had $784,083,000 of remaining capacity under the Equity Shelf Program and there were no outstanding forward sales agreements. We are in the process of updating the registration statement for the Equity Shelf Program during the third quarter. Depending upon market conditions, we anticipate issuing securities under our registration statements to invest in additional properties and to repay borrowings under our primary unsecured credit facility.
Results of Operations
Summary
Our primary sources of revenue include rent, resident fees and services and interest income. Our primary expenses include interest expense, depreciation and amortization, property operating expenses, general and administrative expenses and other expenses. We evaluate our business and make resource allocations on our three business segments: triple-net, seniors housing operating and outpatient medical. The primary performance measures for our properties are NOI and SSNOI, which are discussed below.  Please see 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):
Three Months Ended
Change
Six Months Ended
Change
June 30,

June 30,
June 30,
June 30,
2018

2017
Amount
%
2018
2017
Amount
%
Net income
$
167,273

$
203,441

$
(36,168
)
-18
%
$
620,828

$
541,052

$
79,776

15
%
NICS
154,432

188,429

(33,997
)
-18
%
592,103

501,068

91,035

18
%
FFO
378,725

384,390

(5,665
)
-1
%
731,945

690,623

41,322

6
%
EBITDA
528,805

536,071

(7,266
)
-1
%
1,334,924

1,222,800

112,124

9
%
NOI
557,161

556,747

414

—
%
1,097,661

1,108,876

(11,215
)
-1
%
SSNOI
477,988

460,001

17,987

4
%
937,863

908,363

29,500

3
%
Per share data (fully diluted):
NICS
$
0.41

$
0.51

$
(0.10
)
-20
%
$
1.59

$
1.37

$
0.22

16
%
FFO
$
1.02

$
1.04

$
(0.02
)
-2
%
$
1.96

$
1.88

$
0.08

4
%
Interest coverage ratio
4.34
x
4.60
x
(0.26
)x
-6
%
5.50
x
5.14
x
0.36
x
7
%
Fixed charge coverage ratio
3.58
x
3.72
x
(0.14
)x
-4
%
4.53
x
4.13
x
0.40
x
10
%
Triple-net
The following is a summary of our NOI and SSNOI for the triple-net segment (dollars in thousands):
Three Months Ended
Change
Six Months Ended
Change
June 30,
June 30,
June 30,
June 30,
2018
2017
$
%
2018
2017
$
%
NOI
$
224,284

$
241,347

$
(17,063
)
-7
%
$
447,022

$
491,081

$
(44,059
)
-9
%
Non SSNOI attributable to same store properties
(3,446
)
(8,557
)
5,111

-60
%
(12,321
)
(17,956
)
5,635

-31
%
NOI attributable to non same store properties (1)
(38,523
)
(64,203
)
25,680

-40
%
(85,294
)
(137,750
)
52,456

-38
%
SSNOI (2)
$
182,315

$
168,587

$
13,728

8
%
$
349,407

$
335,375

$
14,032

4
%
(1) Change is primarily due to the acquisition of 17 properties, the transitioning/restructuring of 15 properties, and the conversion of 16 construction projects into revenue-generating properties subsequent to January 1, 2017 and 35 held for sale properties at June 30, 2018 .
(2) Relates to 463 same store properties.

35
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
Six Months Ended
Change
June 30,
June 30,
June 30,
June 30,
2018
2017
$
%
2018
2017
$
%
Revenues:
Rental income
$
197,961

$
217,889

$
(19,928
)
-9
%
$
404,792

$
445,180

$
(40,388
)
-9
%
Interest income
13,247

20,901

(7,654
)
-37
%
27,798

41,580

(13,782
)
-33
%
Other income
13,212

2,557

10,655

417
%
14,589

4,321

10,268

238
%
Total revenues
224,420

241,347

(16,927
)
-7
%
447,179

491,081

(43,902
)
-9
%
Property operating expenses
136

—

136

n/a

157

—

157

n/a

NOI (1)
224,284

241,347

(17,063
)
-7
%
447,022

491,081

(44,059
)
-9
%
Other expenses:


Interest expense
3,800

2,515

1,285

51
%
7,242

8,025

(783
)
-10
%
Loss (gain) on derivatives and financial instruments, net
(7,460
)
736

(8,196
)
n/a

(14,633
)
1,960

(16,593
)
n/a

Depreciation and amortization
55,309

60,171

(4,862
)
-8
%
111,341

119,781

(8,440
)
-7
%
Loss (gain) on extinguishment of debt, net
—

—

—

n/a

(32
)
29,083

(29,115
)
n/a

Impairment of assets
2,420

4,846

(2,426
)
-50
%
28,304

4,846

23,458

484
%
Other expenses
957

2,181

(1,224
)
-56
%
2,077

7,190

(5,113
)
-71
%
Total other expenses
55,026

70,449

(15,423
)
-22
%
134,299

170,885

(36,586
)
-21
%
Income from continuing operations before income taxes and income (loss) from unconsolidated entities
169,258

170,898

(1,640
)
-1
%
312,723

320,196

(7,473
)
-2
%
Income tax (expense) benefit
(688
)
(1,471
)
783

-53
%
(1,824
)
(2,271
)
447

-20
%
Income (loss) from unconsolidated entities
5,062

3,867

1,195

31
%
10,883

9,505

1,378

14
%
Income from continuing operations
173,632

173,294

338

—
%
321,782

327,430

(5,648
)
-2
%
Gain (loss) on real estate dispositions, net
10,759

42,155

(31,396
)
-74
%
134,156

273,236

(139,080
)
-51
%
Net income
184,391

215,449

(31,058
)
-14
%
455,938

600,666

(144,728
)
-24
%
Less: Net income (loss) attributable to noncontrolling interests
1,253

970

283

29
%
3,216

1,573

1,643

104
%
Net income attributable to
common stockholders
$
183,138

$
214,479

$
(31,341
)
-15
%
$
452,722

$
599,093

$
(146,371
)
-24
%
(1) See Non-GAAP Financial Measures.
The decrease in rental income is primarily attributable to the disposition of properties exceeding new acquisitions as well as the reduction in the Genesis annual cash rent obligation due to the restructuring of the master lease as of January 1, 2018.  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 June 30, 2018 , we had 11 leases with rental rate increasers ranging from 0.14% to 0.34% in our triple-net portfolio. The decrease in interest income is primarily related to the volume of loan payoffs during 2017 and 2018. The increase in other income is primarily due to $10,805,000 of net lease termination fees recognized during the three months ended June 30, 2018.
Depreciation and amortization primarily decreased as a result of the disposition of triple-net properties exceeding new acquisitions. To the extent that we acquire or dispose of additional properties in the future, our provision for depreciation and amortization will change accordingly.
During the six months ended June 30, 2018 and 2017 , we recorded impairment charges on certain held for sale triple-net properties as the carrying values exceeded the estimated fair value less costs to sell. Changes in the gain on sales of properties are related to the volume of property sales and the sales prices. Transaction costs related to asset acquisitions are capitalized as a component of purchase price. The decrease in other expenses is primarily due to fewer noncapitalizable transaction costs from acquisitions.

36
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

During the six months ended June 30, 2018 , we completed one triple-net construction project totaling $59,188,000 or $510,241 per bed/unit.  The following is a summary of triple-net construction projects , excluding expansions, pending as of June 30, 2018 (dollars in thousands):
Location
Units/Beds
Commitment
Balance
Est. Completion
Exton, PA
120

$
34,175

$
26,710

3Q18
Westerville, OH
90

22,800

5,647

3Q19
StoryPoint, KY
162

34,600

4,210

1Q20
Droitwich, UK
70

16,714

4,721

1Q20
442

$
108,289

$
41,288

Interest expense for the six months ended June 30, 2018 and 2017 represents secured debt interest expense and related fees.  The change in interest expense is due to the net effect and timing of assumptions, segment transitions, fluctuations in foreign currency rates, extinguishments and principal amortizations. The fluctuation in loss (gain) on derivatives and financial instruments is primarily attributable to the mark-to-market adjustment recorded on the Genesis HealthCare available-for-sale investment in accordance with the adoption of ASU No. 2016-01 described in Note 2 to our unaudited consolidated financial statements.  The fluctuation in losses/gains on debt extinguishment is attributable to the large volume of extinguishments in the first quarter of 2017.  The following is a summary of our triple-net secured debt principal activity (dollars in thousands):
Three Months Ended
Six Months Ended
June 30, 2018
June 30, 2017
June 30, 2018
June 30, 2017
Wtd. Avg.
Wtd. Avg.
Wtd. Avg.
Wtd. Avg.
Amount
Interest Rate
Amount
Interest Rate
Amount
Interest Rate
Amount
Interest Rate
Beginning balance
$
347,342

3.500
%
$
339,270

3.549
%
$
347,474

3.546
%
$
594,199

4.580
%
Principal payments
(1,055
)
5.573
%
(1,066
)
5.563
%
(2,071
)
5.490
%
(3,597
)
5.723
%
Debt extinguished
—

0.000
%
—

0.000
%
(4,107
)
4.940
%
(255,553
)
5.923
%
Foreign currency
(12,254
)
2.717
%
7,662

2.833
%
(7,263
)
3.594
%
10,817

2.823
%
Ending balance
$
334,033

3.526
%
$
345,866

3.532
%
$
334,033

3.526
%
$
345,866

3.532
%
Monthly averages
$
340,332

3.370
%
$
342,670

3.534
%
$
343,820

3.435
%
$
451,143

4.144
%
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 related to unconsolidated investments.  Net income attributable to noncontrolling interest represents our partners’ share of net income relating to those partnerships where we are the controlling partner.
Seniors Housing Operating
The following is a summary of our NOI and SSNOI for the seniors housing operating segment (dollars in thousands):
Three Months Ended
Change
Six Months Ended
Change
June 30,
June 30,
June 30,
June 30,
2018
2017
$
%
2018
2017
$
%
NOI
$
239,505

$
218,978

$
20,527

9
%
$
464,731

$
428,420

$
36,311

8
%
Non SSNOI attributable to same store properties
311

558

(247
)
-44
%
623

874

(251
)
-29
%
NOI attributable to non same store properties (1)
(29,819
)
(9,025
)
(20,794
)
230
%
(48,688
)
(17,755
)
(30,933
)
174
%
SSNOI (2)
$
209,997

$
210,511

$
(514
)
—
%
$
416,666

$
411,539

$
5,127

1
%
(1) Change is primarily due to the acquisition of 25 properties subsequent to January 1, 2017 and the transition of 14 properties from triple-net to seniors housing operating.
(2) Relates to 395 same store properties.
The following is a summary of our seniors housing operating results of operations (dollars in thousands):

37
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Three Months Ended
Change
Six Months Ended
Change
June 30,
June 30,
June 30,
June 30,
2018
2017
$
%
2018
2017
$
%
Revenues:
Resident fees and services
$
763,345

$
677,040

$
86,305

13
%
$
1,499,279

$
1,347,377

$
151,902

11
%
Interest income
172

—

172

n/a

257

69

188

272
%
Other income
1,650

1,049

601

57
%
2,798

2,510

288

11
%
Total revenues
765,167

678,089

87,078

13
%
1,502,334

1,349,956

152,378

11
%
Property operating expenses
525,662

459,111

66,551

14
%
1,037,603

921,536

116,067

13
%
NOI (1)
239,505

218,978

20,527

9
%
464,731

428,420

36,311

8
%
Other expenses:


Interest expense
16,971

15,403

1,568

10
%
33,906

31,219

2,687

9
%
Depreciation and amortization
134,779

117,198

17,581

15
%
260,548

236,935

23,613

10
%
Loss (gain) on extinguishment of debt, net
299

2,524

(2,225
)
-88
%
110

3,414

(3,304
)
-97
%
Impairment of assets
2,212

8,785

(6,573
)
-75
%
4,513

14,191

(9,678
)
-68
%
Other expenses
6,167

1,165

5,002

429
%
5,979

2,943

3,036

103
%
Total other expenses
160,428

145,075

15,353

11
%
305,056

288,702

16,354

6
%
Income (loss) from continuing operations
before income taxes and income (loss) from unconsolidated entities
79,077

73,903

5,174

7
%
159,675

139,718

19,957

14
%
Income tax benefit (expense)
(2,617
)
10,247

(12,864
)
n/a

(2,455
)
9,160

(11,615
)
n/a

Income (loss) from unconsolidated entities
(5,204
)
(8,449
)
3,245

-38
%
(14,684
)
(37,640
)
22,956

-61
%
Income from continuing operations
71,256

75,701

(4,445
)
-6
%
142,536

111,238

31,298

28
%
Gain (loss) on real estate dispositions, net
(1
)
—

(1
)
n/a

4

13,011

(13,007
)
-100
%
Net income (loss)
71,255

75,701

(4,446
)
-6
%
142,540

124,249

18,291

15
%
Less: Net income (loss) attributable to
noncontrolling interests
(766
)
781

(1,547
)
n/a

(1,664
)
191

(1,855
)
n/a

Net income (loss) attributable to
common stockholders
$
72,021

$
74,920

$
(2,899
)
-4
%
$
144,204

$
124,058

$
20,146

16
%
(1) See Non-GAAP Financial Measures.
Fluctuations in revenues and property operating expenses are primarily a result of acquisitions and the movement of U.S. and foreign currency exchange rates. The fluctuations in depreciation and amortization are due to acquisitions and variations in amortization of short-lived intangible assets. To the extent that we acquire or dispose of additional properties in the future, these amounts will change accordingly.
During the six months ended June 30, 2018 and 2017 , we recorded impairment charges on certain held for sale properties as the carrying value exceeded the estimated fair value less costs to sell.  Changes in the gain/loss on sale of properties are related to the volume of property sales and sales prices. Transaction costs related to asset acquisitions are capitalized as a component of purchase price. The increase in other expenses is primarily due to more noncapitalizable transactions costs from acquisitions.
During the six months ended June 30, 2018 , we completed one seniors housing operating construction project representing $37,215,000 or $395,904 per unit. The following is a summary of our seniors housing operating construction projects, excluding expansions, pending as of June 30, 2018 (dollars in thousands):
Location
Units
Commitment
Balance
Est. Completion
Bushey, UK
95

$
53,778

$
47,518

3Q18
Wandsworth, UK
98

77,796

34,503

1Q20
193

$
131,574

$
82,021

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 seniors housing operating property secured debt principal activity (dollars in thousands):

38
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Three Months Ended
Six Months Ended
June 30, 2018
June 30, 2017
June 30, 2018
June 30, 2017
Wtd. Avg.
Wtd. Avg.
Wtd. Avg.
Wtd. Avg.
Amount
Interest Rate
Amount
Interest Rate
Amount
Interest Rate
Amount
Interest Rate
Beginning balance
$
1,931,401

3.679
%
$
2,033,152

3.663
%
$
1,988,700

3.661
%
$
2,463,249

3.936
%
Debt issued
24,280

3.057
%
149,264

2.519
%
44,606

3.384
%
161,799

2.331
%
Debt assumed
—

0.000
%
—

0.000
%
85,192

4.395
%
—

0.000
%
Principal payments
(12,062
)
3.569
%
(11,893
)
3.530
%
(24,001
)
3.559
%
(23,151
)
3.606
%
Debt extinguished
(13,165
)
3.567
%
(156,422
)
4.084
%
(131,175
)
4.853
%
(594,954
)
4.990
%
Foreign currency
(21,039
)
3.298
%
26,884

3.222
%
(53,907
)
3.289
%
34,042

3.209
%
Ending balance
$
1,909,415

3.726
%
$
2,040,985

3.556
%
$
1,909,415

3.726
%
$
2,040,985

3.556
%
Monthly averages
$
1,922,640

3.710
%
$
1,997,433

3.633
%
$
1,932,618

3.675
%
$
2,086,474

3.679
%
The majority of our seniors housing operating properties are formed through partnership interests.  Net income attributable to noncontrolling interests represents our partners’ share of net income (loss) related to joint ventures. The fluctuations in income (loss) from unconsolidated entities is primarily due to the recognition of goodwill and intangible asset impairments as well as income tax expense adjustments during the six month period ended June 30, 2017 .
Outpatient Medical
The following is a summary of our NOI and SSNOI for the outpatient medical segment (dollars in thousands):
Three Months Ended
Change
Six Months Ended
Change
June 30,
June 30,
June 30,
June 30,
2018
2017
$
%
2018
2017
$
%
NOI
$
92,874

$
96,183

$
(3,309
)
-3
%
$
185,042

$
188,903

$
(3,861
)
-2
%
Non SSNOI on same store properties
(894
)
(2,315
)
1,421

-61
%
(1,780
)
(4,143
)
2,363

-57
%
NOI attributable to non same store properties (1)
(6,304
)
(12,965
)
6,661

-51
%
(11,472
)
(23,311
)
11,839

-51
%
SSNOI (2)
$
85,676

$
80,903

$
4,773

6
%
$
171,790

$
161,449

$
10,341

6
%
(1) Change is primarily due to acquisitions of 15 properties and the conversion of 11 construction projects into revenue-generating properties subsequent to January 1, 2017.
(2) Relates to 219 same store properties.
The following is a summary of our results of operations for the outpatient medical segment (dollars in thousands):

39
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Three Months Ended
Change
Six Months Ended
Change
June 30,
June 30,
June 30,
June 30,
2018
2017
$
%
2018
2017
$
%
Revenues:
Rental income
$
135,640

$
137,710

$
(2,070
)
-2
%
$
272,178

$
277,561

$
(5,383
)
-2
%
Interest income
43

—

43

n/a

55

—

55

n/a

Other income
144

1,217

(1,073
)
-88
%
265

1,830

(1,565
)
-86
%
Total revenues
135,827

138,927

(3,100
)
-2
%
272,498

279,391

(6,893
)
-2
%
Property operating expenses
42,953

42,744

209

—
%
87,456

90,488

(3,032
)
-3
%
NOI (1)
92,874

96,183

(3,309
)
-3
%
185,042

188,903

(3,861
)
-2
%
Other expenses:



Interest expense
1,656

2,122

(466
)
-22
%
3,332

4,413

(1,081
)
-24
%
Depreciation and amortization
46,187

47,478

(1,291
)
-3
%
92,587

96,408

(3,821
)
-4
%
Impairment of assets
—

—

—

n/a

—

5,625

(5,625
)
-100
%
Loss (gain) on extinguishment of debt, net
—

2,991

(2,991
)
-100
%
11,928

4,373

7,555

173
%
Other expenses
2,095

1,310

785

60
%
2,693

1,671

1,022

61
%
Total other expenses
49,938

53,901

(3,963
)
-7
%
110,540

112,490

(1,950
)
-2
%
Income (loss) from continuing operations
before income taxes and income (loss) from unconsolidated entities

42,936

42,282

654

2
%
74,502

76,413

(1,911
)
-3
%
Income tax (expense) benefit
(378
)
(351
)
(27
)
8
%
(806
)
(686
)
(120
)
17
%
Income from unconsolidated entities
1,391

604

787

130
%
2,621

1,051

1,570

149
%
Income from continuing operations
43,949

42,535

1,414

3
%
76,317

76,778

(461
)
-1
%
Gain (loss) on real estate dispositions, net
(3
)
—

(3
)
n/a

214,779

—

214,779

n/a

Net income (loss)
43,946

42,535

1,411

3
%
291,096

76,778

214,318

279
%
Less: Net income (loss) attributable to
noncontrolling interests
678

1,582

(904
)
-57
%
3,821

2,392

1,429

60
%
Net income (loss) attributable to
common stockholders
$
43,268

$
40,953

$
2,315

6
%
$
287,275

$
74,386

$
212,889

286
%
(1) See Non-GAAP Financial Measures.
The decrease in rental income is primarily attributable to dispositions partially offset by the acquisitions of new properties and the conversion of newly constructed outpatient medical properties from which we receive rent. Certain of our leases contain annual rental escalators that are contingent upon changes in the Consumer Price Index. These escalators are not fixed, so no straight-line rent is recorded; however, rental income is recorded based on the contractual cash rental payments due for the period. If the Consumer Price Index does not increase, a portion of our revenues may not continue to increase. Sales of real property would offset revenue increases and, to the extent that they exceed new acquisitions, could result in decreased revenues. Our leases could renew above or below current rental rates, resulting in an increase or decrease in rental income.  For the three months ended June 30, 2018 , our consolidated outpatient medical portfolio signed 94,252 square feet of new leases and 198,461 square feet of renewals.  The weighted-average term of these leases was six years, with a rate of $38.12 per square foot and tenant improvement and lease commission costs of $20.48 per square foot. Substantially all of these leases contain an annual fixed or contingent escalation rent structure ranging from 0% to 4%.
The fluctuation in property operating expenses is primarily attributable to dispositions partially offset by acquisitions and construction conversions of new outpatient medical facilities for which we incur certain property operating expenses. The fluctuations in depreciation and amortization are primarily due to dispositions and variations in amortization of short-lived intangible assets. To the extent that we acquire or dispose of additional properties in the future, these amounts will change accordingly. During the six months ended June 30, 2017, we recorded impairment charges related to certain held for sale properties as the carrying values exceeded the estimated fair values less costs to sell. Changes in the gain/loss on sale of properties are related to the volume of property sales and sales prices.
During the six months ended June 30, 2018 , we completed one outpatient medical construction project representing $11,358,000 or $294 per square foot. The following is a summary of the outpatient medical construction projects, excluding expansions, pending as of June 30, 2018 (dollars in thousands):

40
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Location
Square Feet
Commitment
Balance
Est. Completion
Brooklyn, NY
140,955

$
105,177

$
52,438

3Q19
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 fluctuation in losses/gains on debt extinguishment is primarily attributable to the prepayment penalties paid on certain extinguishments in the first quarter of 2018.  The following is a summary of our outpatient medical secured debt principal activity (dollars in thousands):
Three Months Ended
Six Months Ended
June 30, 2018
June 30, 2017
June 30, 2018
June 30, 2017
Wtd. Ave
Wtd. Ave
Wtd. Ave
Wtd. Ave
Amount
Interest Rate
Amount
Interest Rate
Amount
Interest Rate
Amount
Interest Rate
Beginning balance
$
217,697

4.141
%
$
289,824

4.509
%
$
279,951

4.720
%
$
404,079

4.846
%
Debt assumed
—

0.000
%
23,094

6.670
%
—

0.000
%
23,094

6.670
%
Principal payments
(690
)
5.897
%
(2,688
)
7.076
%
(1,653
)
6.076
%
(4,839
)
6.816
%
Debt extinguished
—

0.000
%
(25,312
)
6.439
%
(61,291
)
7.431
%
(137,416
)
5.990
%
Ending balance
$
217,007

4.348
%
$
284,918

4.617
%
$
217,007

4.348
%
$
284,918

4.617
%
Monthly averages
$
217,352

4.270
%
$
275,048

4.490
%
$
226,493

4.298
%
$
305,530

4.572
%
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 related to certain unconsolidated property investments. Net income attributable to noncontrolling interests represents our partners’ share of net income 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 (dollars in thousands):
Three Months Ended
Change
Six Months Ended
Change
June 30,
June 30,
June 30,
June 30,
2018
2017
$
%
2018
2017
$
%
Revenues:
Other income
$
498

$
239

$
259

108
%
$
866

$
472

$
394

83
%
Expenses:


Interest expense
98,989

96,191

2,798

3
%
199,711

191,170

8,541

4
%
General and administrative
32,831

32,632

199

1
%
66,536

63,733

2,803

4
%
Other expenses
839

1,683

(844
)
-50
%
3,021

6,210

(3,189
)
-51
%
Total expenses
132,659

130,506

2,153

2
%
269,268

261,113

8,155

3
%
Loss from continuing operations before
income taxes
(132,161
)
(130,267
)
(1,894
)
1
%
(268,402
)
(260,641
)
(7,761
)
3
%
Income tax (expense) benefit
(158
)
23

(181
)
n/a

(344
)
—

(344
)
n/a

Loss from continuing operations
(132,319
)
(130,244
)
(2,075
)
2
%
(268,746
)
(260,641
)
(8,105
)
3
%
Less: Preferred stock dividends
11,676

11,680

(4
)
—
%
23,352

26,059

(2,707
)
-10
%
Less: Preferred stock redemption charge
—

—

—

n/a

—

9,769

(9,769
)
-100
%
Net loss attributable to common stockholders
$
(143,995
)
$
(141,924
)
$
(2,071
)
1
%
$
(292,098
)
$
(296,469
)
$
4,371

-1
%
The following is a summary of our non-segment/corporate interest expense (dollars in thousands):

41
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Three Month Ended
Change
Six Months Ended
Change
June 30,
June 30,
June 30,
June 30,
2018
2017
$
%
2018
2017
$
%
Senior unsecured notes
$
89,986

$
88,556

$
1,430

2
%
$
183,399

$
175,147

$
8,252

5
%
Secured debt
32

55

(23
)
-42
%
70

115

(45
)
-39
%
Primary unsecured credit facility
5,768

4,236

1,532

36
%
9,782

9,273

509

5
%
Loan expense
3,203

3,344

(141
)
-4
%
6,460

6,635

(175
)
-3
%
Totals
$
98,989

$
96,191

$
2,798

3
%
$
199,711

$
191,170

$
8,541

4
%
The change in interest expense on senior unsecured notes is primarily due to the net effect of issuances and extinguishments, as well as the movement of foreign exchange rates and related hedge activity. Loan expense represents the amortization of deferred loan costs incurred in connection with the issuance and amendments of debt. Loan expense changes are due to amortization of charges for costs incurred in connection with senior unsecured note issuances.  The change in interest expense on the primary unsecured credit facility is due primarily to the net effect and timing of draws, paydowns and variable interest rate changes.  Please refer to Note 9 of our unaudited consolidated financial statements for additional information regarding our primary unsecured credit facility.
General and administrative expenses as a percentage of consolidated revenues for the three months ended June 30, 2018 and 2017 were 2.92% and 3.08%, respectively. Other expenses primarily represent severance-related costs associated with the departure of certain executive officers and key employees.
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 seniors housing operating and medical facility 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 under a consistent population which eliminates changes in the composition of our portfolio.  As used herein, same store is generally defined as those revenue-generating properties in the portfolio for the reporting period subsequent to January 1, 2017.  Land parcels, loans, and sub-leases as well as any properties acquired, developed/redeveloped, transitioned, sold or classified as held for sale during that period are excluded from the same store amounts.  We believe NOI and SSNOI provide investors relevant and useful information because they measure the operating performance of our properties at the property level on an unleveraged basis. We use NOI and SSNOI to make decisions about resource allocations and to assess the property level performance of our properties.
EBITDA stands for earnings (net income) before interest, taxes, depreciation and amortization. We believe that EBITDA, along with net income and cash flow provided from operating activities, is an important supplemental measure because it provides additional information to assess and evaluate the performance of our operations. We primarily utilize EBITDA to measure our interest coverage ratio, which represents EBITDA divided by total interest, and our fixed charge coverage ratio, which represents EBITDA divided by fixed charges. Fixed charges include total interest, secured debt principal amortization and preferred dividends. Covenants in our senior unsecured notes contain financial ratios based on a definition of EBITDA that is specific to those agreements. Failure to satisfy these covenants could result in an event of default that could have a material adverse impact on our cost and

42
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

availability of capital, which could in turn have a material adverse impact on our consolidated results of operations, liquidity and/or financial condition. Due to the materiality of these debt agreements and the financial covenants, we have disclosed Adjusted EBITDA, which represents EBITDA as defined above excluding unconsolidated entities and adjusted for items per our covenant. We use Adjusted EBITDA to measure our adjusted fixed charge coverage ratio, which represents Adjusted EBITDA divided by fixed charges on a trailing twelve months basis. Fixed charges include total interest (excluding capitalized interest and non-cash interest expenses), secured debt principal amortization and preferred dividends. Our covenant requires an adjusted fixed charge coverage ratio of at least 1.50 times.
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.


























43
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following tables reflect the reconciliations of NOI and SSNOI to net income, the most directly comparable U.S. GAAP measure, for the periods presented.  Dollars are in thousands.
Three Months Ended
March 31,
June 30,
September 30,
December 31,
March 31,
June 30,
NOI Reconciliations:
2017
2017
2017
2017
2018
2018
Net income (loss)
$
337,610

$
203,441

$
89,299

$
(89,743
)
$
453,555

$
167,273

Loss (gain) on real estate dispositions, net
(244,092
)
(42,155
)
(1,622
)
(56,381
)
(338,184
)
(10,755
)
Loss (income) from unconsolidated entities
23,106

3,978

(3,408
)
59,449

2,429

(1,249
)
Income tax expense (benefit)
2,245

(8,448
)
669

25,663

1,588

3,841

Other expenses
11,675

6,339

99,595

60,167

3,712

10,058

Impairment of assets
11,031

13,631

—

99,821

28,185

4,632

Provision for loan losses
—

—

—

62,966

—

—

Loss (gain) on extinguishment of debt, net
31,356

5,515

—

371

11,707

299

Loss (gain) on derivatives and financial instruments, net
1,224

736

324

—

(7,173
)
(7,460
)
General and administrative expenses
31,101

32,632

29,913

28,365

33,705

32,831

Depreciation and amortization
228,276

224,847

230,138

238,458

228,201

236,275

Interest expense
118,597

116,231

122,578

127,217

122,775

121,416

Consolidated net operating income (NOI)
$
552,129

$
556,747

$
567,486

$
556,353

$
540,500

$
557,161

NOI by segment:





Triple-net
$
249,735

$
241,347

$
244,916

$
231,083

$
222,738

$
224,284

Seniors housing operating
209,442

218,978

225,100

226,509

225,226

239,505

Outpatient medical
92,719

96,183

96,772

98,393

92,168

92,874

Non-segment/corporate
233

239

698

368

368

498

Total NOI
$
552,129

$
556,747

$
567,486

$
556,353

$
540,500

$
557,161

Six Months Ended
June 30,
June 30,
2017
2018
NOI Reconciliations:

Net income (loss)
$
541,052

$
620,828

Loss (gain) on real estate dispositions, net
(286,247
)
(348,939
)
Loss (income) from unconsolidated entities
27,084

1,180

Income tax expense (benefit)
(6,203
)
5,429

Other expenses
18,014

13,770

Impairment of assets
24,662

32,817

Loss (gain) on extinguishment of debt, net
36,870

12,006

Loss (gain) on derivatives and financial instruments, net
1,960

(14,633
)
General and administrative expenses
63,733

66,536

Depreciation and amortization
453,124

464,476

Interest expense
234,827

244,191

Consolidated net operating income (NOI)
$
1,108,876

$
1,097,661

NOI by segment:
Triple-net
$
491,081

$
447,022

Seniors housing operating
428,420

464,731

Outpatient medical
188,903

185,042

Non-segment/corporate
472

866

Total NOI
$
1,108,876

$
1,097,661



44
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Three Months Ended
March 31,
June 30,
September 30,
December 31,
March 31,
June 30,
SSNOI Reconciliations:
2017
2017
2017
2017
2018
2018
NOI:
Triple-net
$
249,735

$
241,347

$
244,916

$
231,083

$
222,738

$
224,284

Seniors housing operating
209,442

218,978

225,100

226,509

225,226

239,505

Outpatient medical
92,719

96,183

96,772

98,393

92,168

92,874

Total
551,896

556,508

566,788

555,985

540,132

556,663

Adjustments:
Triple-net:
Non SSNOI on same store properties
(9,399
)
(8,557
)
(8,366
)
(7,733
)
(8,875
)
(3,446
)
NOI attributable to non same store properties
(73,547
)
(64,203
)
(65,771
)
(53,766
)
(46,771
)
(38,523
)
Subtotal
(82,946
)
(72,760
)
(74,137
)
(61,499
)
(55,646
)
(41,969
)
Seniors housing operating:
Non SSNOI on same store properties
316

558

288

424

312

311

NOI attributable to non same store properties
(8,730
)
(9,025
)
(10,810
)
(16,245
)
(18,869
)
(29,819
)
Subtotal
(8,414
)
(8,467
)
(10,522
)
(15,821
)
(18,557
)
(29,508
)
Outpatient medical:
Non SSNOI on same store properties
(1,828
)
(2,315
)
(1,451
)
(1,743
)
(886
)
(894
)
NOI attributable to non same store properties
(10,346
)
(12,965
)
(13,997
)
(14,564
)
(5,168
)
(6,304
)
Subtotal
(12,174
)
(15,280
)
(15,448
)
(16,307
)
(6,054
)
(7,198
)
SSNOI:
Properties
Triple-net
463

166,789

168,587

170,779

169,584

167,092

182,315

Seniors housing operating
395

201,028

210,511

214,578

210,688

206,669

209,997

Outpatient medical
219

80,545

80,903

81,324

82,086

86,114

85,676

Total
1,077

$
448,362


$
460,001


$
466,681


$
462,358


$
459,875


$
477,988

SSNOI Property Reconciliation:
Total properties
1,257

Acquisitions
(57
)
Developments
(30
)
Held for sale
(55
)
Transitions/restructurings
(29
)
Other (1)
(9
)
Same store properties
1,077

(1) Includes eight land parcels and one loan.
Six Months Ended
June 30,
June 30,
SSNOI Reconciliations:
2017
2018
NOI:
Triple-net
$
491,081

$
447,022

Seniors housing operating
428,420

464,731

Outpatient medical
188,903

185,042

Total
1,108,404

1,096,795

Adjustments:
Triple-net:
Non SSNOI on same store properties
(17,956
)
(12,321
)
NOI attributable to non same store properties
(137,750
)
(85,294
)
Subtotal
(155,706
)
(97,615
)
Seniors housing operating:
Non SSNOI on same store properties
874

623

NOI attributable to non same store properties
(17,755
)
(48,688
)
Subtotal
(16,881
)
(48,065
)
Outpatient medical:
Non SSNOI on same store properties
(4,143
)
(1,780
)
NOI attributable to non same store properties
(23,311
)
(11,472
)
Subtotal
(27,454
)
(13,252
)
SSNOI:
Properties
Triple-net
463

335,375

349,407

Seniors housing operating
395

411,539

416,666

Outpatient medical
219

161,449

171,790

Total
1,077

$
908,363

$
937,863


45
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.  Amounts are in thousands except for per share data.
Three Months Ended
March 31,
June 30,
September 30,
December 31,
March 31,
June 30,
FFO Reconciliations:
2017
2017
2017
2017
2018
2018
NICS
$
312,639

$
188,429

$
74,043

$
(111,523
)
$
437,671

$
154,432

Depreciation and amortization
228,276

224,847

230,138

238,458

228,201

236,275

Impairment of assets
11,031

13,631

—

99,821

28,185

4,632

Loss (gain) on real estate dispositions, net
(244,092
)
(42,155
)
(1,622
)
(56,381
)
(338,184
)
(10,755
)
Noncontrolling interests
(18,107
)
(16,955
)
(16,826
)
(8,131
)
(16,353
)
(17,692
)
Unconsolidated entities
16,484

16,593

9,989

16,980

13,700

11,833

FFO
$
306,231

$
384,390

$
295,722

$
179,224

$
353,220

$
378,725

Average common shares outstanding:
Basic
362,534

366,524

369,089

370,485

371,426

371,640

Diluted for NICS purposes
364,652

368,149

370,740

370,485

373,257

373,075

Diluted for FFO purposes
364,652

368,149

370,740

372,145

373,257

373,075

Per share data:
NICS
Basic
$
0.86

$
0.51

$
0.20

$
(0.30
)
$
1.18

$
0.42

Diluted
0.86

0.51

0.20

(0.30
)
1.17

0.41

FFO
Basic
$
0.84

$
1.05

$
0.80

$
0.48

$
0.95

$
1.02

Diluted
0.84

1.04

0.80

0.48

0.95

1.02

Six months ended
June 30,
June 30,
FFO Reconciliations:
2017
2018
NICS
$
501,068

$
592,103

Depreciation and amortization
453,124

464,476

Impairment of assets
24,662

32,817

Loss (gain) on real estate dispositions, net
(286,247
)
(348,939
)
Noncontrolling interests
(35,061
)
(34,045
)
Unconsolidated entities
33,077

25,533

FFO
$
690,623

$
731,945

Average common shares outstanding:
Basic
364,551

371,552

Diluted
366,423

373,186

Per share data:
NICS
Basic
$
1.37

$
1.59

Diluted
1.37

1.59

FFO
Basic
$
1.89

$
1.97

Diluted
1.88

1.96




46
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The table 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
March 31,
June 30,
September 30,
December 31,
March 31,
June 30,
EBITDA Reconciliations:
2017
2017
2017
2017
2018
2018
Net income (loss)
$
337,610

$
203,441

$
89,299

$
(89,743
)
$
453,555

$
167,273

Interest expense
118,597

116,231

122,578

127,217

122,775

121,416

Income tax expense (benefit)
2,245

(8,448
)
669

25,663

1,588

3,841

Depreciation and amortization
228,276

224,847

230,138

238,458

228,201

236,275

EBITDA
$
686,728

$
536,071

$
442,684

$
301,595

$
806,119

$
528,805

Interest Coverage Ratio:
Interest expense
$
118,597

$
116,231

$
122,578

$
127,217

$
122,775

$
121,416

Non-cash interest expense
(1,679
)
(2,946
)
(3,199
)
(2,534
)
(4,179
)
(1,716
)
Capitalized interest
4,129

3,358

2,545

3,456

2,336

2,100

Total interest
121,047

116,643

121,924

128,139

120,932

121,800

EBITDA
$
686,728

$
536,071

$
442,684

$
301,595

$
806,119

$
528,805

Interest coverage ratio
5.67
x
4.60
x
3.63
x
2.35
x
6.67
x
4.34
x
Fixed Charge Coverage Ratio:
Total interest
$
121,047

$
116,643

$
121,924

$
128,139

$
120,932

$
121,800

Secured debt principal payments
16,249

15,958

15,300

16,572

14,247

14,139

Preferred dividends
14,379

11,680

11,676

11,676

11,676

11,676

Total fixed charges
151,675

144,281

148,900

156,387

146,855

147,615

EBITDA
$
686,728

$
536,071

$
442,684

$
301,595

$
806,119

$
528,805

Fixed charge coverage ratio
4.53
x
3.72
x
2.97
x
1.93
x
5.49
x
3.58
x
Six Months Ended
June 30,
June 30,
EBITDA Reconciliations:
2017
2018
Net income (loss)
$
541,052

$
620,828

Interest expense
234,827

244,191

Income tax expense (benefit)
(6,203
)
5,429

Depreciation and amortization
453,124

464,476

EBITDA
$
1,222,800

$
1,334,924

Interest Coverage Ratio:
Interest expense
$
234,827

$
244,191

Non-cash interest expense
(4,626
)
(5,895
)
Capitalized interest
7,488

4,436

Total interest
237,689

242,732

EBITDA
$
1,222,800

$
1,334,924

Interest coverage ratio
5.14
x
5.50
x
Fixed Charge Coverage Ratio:
Total interest
$
237,689

$
242,732

Secured debt principal payments
32,206

28,385

Preferred dividends
26,059

23,352

Total fixed charges
295,954

294,469

EBITDA
$
1,222,800

$
1,334,924

Fixed charge coverage ratio
4.13
x
4.53
x



47
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 Month Ended
Adjusted EBITDA
March 31,
June 30,
September 30,
December 31,
March 31,
June 30,
Reconciliations:
2017
2017
2017
2017
2018
2018
Net income
$
1,254,208

$
1,246,899

$
981,458

$
540,613

$
656,551

$
620,384

Interest expense
506,982

490,886

483,765

484,622

488,800

493,986

Income tax expense (benefit)
(15,158
)
(23,093
)
(22,119
)
20,128

19,471

31,761

Depreciation and amortization
900,822

899,100

911,180

921,720

921,645

933,072

EBITDA
2,646,854

2,613,792

2,354,284

1,967,083

2,086,467

2,079,203

Loss (income) from unconsolidated entities
29,643

31,662

26,505

83,125

62,448

57,221

Transaction costs
34,702

29,545

9,704

—

—

—

Stock-based compensation expense (1)
25,588

23,321

24,710

19,102

25,753

26,158

Loss (gain) on extinguishment of debt, net
48,593

54,074

54,074

37,241

17,593

12,377

Loss (gain) on real estate dispositions, net
(608,139
)
(648,763
)
(488,034
)
(344,250
)
(438,342
)
(406,942
)
Impairment of assets
33,923

47,554

37,849

124,483

141,637

132,638

Provision for loan losses
10,215

10,215

10,215

62,966

62,966

62,966

Loss (gain) on derivatives and financial instruments, net
(1,225
)
(489
)
2,351

2,284

(6,113
)
(14,309
)
Other expenses (1)
19,396

23,997

122,211

176,395

167,524

171,243

Additional other income
(16,664
)
(4,853
)
(4,853
)
—

—

(10,805
)
Adjusted EBITDA
$
2,222,886

$
2,180,055

$
2,149,016

$
2,128,429

$
2,119,933

$
2,109,750

Adjusted Fixed Charge Coverage Ratio:
Interest expense
$
506,982

$
490,886

$
483,765

$
484,622

$
488,800

$
493,986

Capitalized interest
18,035

17,087

14,866

13,489

11,696

10,437

Non-cash interest expense
(3,958
)
(5,386
)
(8,041
)
(10,359
)
(12,858
)
(11,628
)
Total interest
521,059

502,587

490,590

487,752

487,638

492,795

Adjusted EBITDA
$
2,222,886

$
2,180,055

$
2,149,016

$
2,128,429

$
2,119,933

$
2,109,750

Adjusted interest coverage ratio
4.27
x
4.34
x
4.38
x
4.36
x
4.35
x
4.28
x
Total interest
$
521,059

$
502,587

$
490,590

$
487,752

$
487,638

$
492,795

Secured debt principal payments
72,073

68,935

66,084

64,078

62,077

60,258

Preferred dividends
63,434

58,762

54,086

49,410

46,707

46,704

Total fixed charges
656,566

630,284

610,760

601,240

596,422

599,757

Adjusted EBITDA
$
2,222,886

$
2,180,055

$
2,149,016

$
2,128,429

$
2,119,933

$
2,109,750

Adjusted fixed charge coverage ratio
3.39
x
3.46
x
3.52
x
3.54
x
3.55
x
3.52
x
(1) Certain severance-related costs are included in stock-based compensation and excluded from other expenses.
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.

48
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

As of
March 31,
June 30,
September 30,
December 31,
March 31,
June 30,
2017
2017
2017
2017
2018
2018
Book capitalization:
Borrowings under primary unsecured
credit facility
$
522,000

$
385,000

$
420,000

$
719,000

$
865,000

$
540,000

Long-term debt obligations (1)
10,932,185

10,994,946

11,101,592

11,012,936

10,484,840

10,895,559

Cash & cash equivalents (2)
(380,360
)
(442,284
)
(250,776
)
(249,620
)
(202,824
)
(215,120
)
Total net debt
11,073,825

10,937,662

11,270,816

11,482,316

11,147,016

11,220,439

Total equity and noncontrolling interests (3)
15,495,681

15,702,399

15,631,412

15,300,646

15,448,201

15,198,644

Book capitalization
$
26,569,506

$
26,640,061

$
26,902,228

$
26,782,962

$
26,595,217

$
26,419,083

Net debt to book capitalization ratio
42
%
41
%
42
%
43
%
42
%
42
%
Undepreciated book capitalization:
Total net debt
$
11,073,825

$
10,937,662

$
11,270,816

$
11,482,316

$
11,147,016

$
11,220,439

Accumulated depreciation and amortization
4,335,160

4,568,408

4,826,418

4,838,370

4,990,780

5,113,928

Total equity and noncontrolling interests (3)
15,495,681

15,702,399

15,631,412

15,300,646

15,448,201

15,198,644

Undepreciated book capitalization
$
30,904,666

$
31,208,469

$
31,728,646

$
31,621,332

$
31,585,997

$
31,533,011

Net debt to undepreciated book
capitalization ratio
36
%
35
%
36
%
36
%
35
%
36
%
Market capitalization:
Common shares outstanding
364,564

368,878

370,342

371,732

371,971

372,030

Period end share price
$
70.82

$
74.85

$
70.28

$
63.77

$
54.43

$
62.69

Common equity market capitalization
$
25,818,422

$
27,610,518

$
26,027,636

$
23,705,350

$
20,246,382

$
23,322,561

Total net debt
11,073,825

10,937,662

11,270,816

11,482,316

11,147,016

11,220,439

Noncontrolling interests (3)
859,478

873,567

901,487

877,499

889,766

856,721

Preferred stock
718,750

718,750

718,503

718,503

718,498

718,498

Enterprise value
$
38,470,475

$
40,140,497

$
38,918,442

$
36,783,668

$
33,001,662

$
36,118,219

Net debt to market capitalization ratio
29
%
27
%
29
%
31
%
34
%
31
%
(1) Amounts include senior unsecured notes, secured debt and capital lease obligations as reflected on our Consolidated Balance Sheet.
(2) Inclusive of IRC Section 1031 deposits, if any.
(3) Includes all noncontrolling interests (redeemable and permanent) as reflected on our consolidated balance sheet.
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, 2017 for further information regarding significant accounting policies that impact us.  There have been no material changes to these policies in 2018 .

49
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q may contain “forward-looking” statements as defined in the Private Securities Litigation Reform Act of 1995. When the company uses words such as “may,” “will,” “intend,” “should,” “believe,” “expect,” “anticipate,” “project,” “estimate” or similar expressions that do not relate solely to historical matters, it is making forward-looking statements. In particular, these forward-looking statements include, but are not limited to, those relating to the company’s opportunities to acquire, develop or sell properties; the company’s ability to close its anticipated acquisitions, investments or dispositions on currently anticipated terms or within currently anticipated timeframes; the expected performance of the company’s operators/tenants and properties; the company’s expected occupancy rates; the company’s ability to declare and to make distributions to shareholders; the company’s investment and financing opportunities and plans; the company’s continued qualification as a real estate investment trust (“REIT”); the company’s ability to access capital markets or other sources of funds; and the company’s ability to meet its earnings guidance. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that may cause the company’s actual results to differ materially from the company’s expectations discussed in the forward-looking statements. This may be a result of various factors, including, but not limited to: the status of the economy; the status of capital markets, including availability and cost of capital; issues facing the health care industry, including compliance with, and changes to, regulations and payment policies, responding to government investigations and punitive settlements and operators’/tenants’ difficulty in cost-effectively obtaining and maintaining adequate liability and other insurance; changes in financing terms; competition within the health care and seniors housing industries; negative developments in the operating results or financial condition of operators/tenants, including, but not limited to, their ability to pay rent and repay loans; the company’s ability to transition or sell properties with profitable results; the failure to make new investments or acquisitions as and when anticipated; natural disasters and other acts of God affecting the company’s properties; the company’s ability to re-lease space at similar rates as vacancies occur; the company’s ability to timely reinvest sale proceeds at similar rates to assets sold; operator/tenant or joint venture partner bankruptcies or insolvencies; the cooperation of joint venture partners; government regulations affecting Medicare and Medicaid reimbursement rates and operational requirements; liability or contract claims by or against operators/tenants; unanticipated difficulties and/or expenditures relating to future investments or acquisitions; environmental laws affecting the company’s properties; changes in rules or practices governing the company’s financial reporting; the movement of U.S. and foreign currency exchange rates; the company’s ability to maintain its qualification as a REIT; and key management personnel recruitment and retention.  Other important factors are identified in the company’s Annual Report on Form 10-K for the year ended December 31, 2017 , 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.

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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 primary unsecured credit facility to acquire, construct or make loans relating to health care and seniors housing properties. Then, as market conditions dictate, we will issue equity or long-term fixed rate debt to repay the borrowings under our primary unsecured credit facility.  We are subject to risks associated with debt financing, including the risk that existing indebtedness may not be refinanced or that the terms of refinancing may not be as favorable as the terms of current indebtedness. The majority of our borrowings were completed under indentures or contractual agreements that limit the amount of indebtedness we may incur. Accordingly, in the event that we are unable to raise additional equity or borrow money because of these limitations, our ability to acquire additional properties may be limited.
A change in interest rates will not affect the interest expense associated with our fixed rate debt. Interest rate changes, however, will affect the fair value of our fixed rate debt. Changes in the interest rate environment upon maturity of this fixed rate debt could have an effect on our future cash flows and earnings, depending on whether the debt is replaced with other fixed rate debt, variable rate debt or equity or repaid by the sale of assets. To illustrate the impact of changes in the interest rate markets, we performed a sensitivity analysis on our fixed rate debt instruments whereby we modeled the change in net present values arising from a hypothetical 1% increase in interest rates to determine the instruments’ change in fair value. The following table summarizes the analysis performed as of the dates indicated (in thousands):
June 30, 2018
December 31, 2017
Principal
Change in
Principal
Change in
balance
fair value
balance
fair value
Senior unsecured notes
$
7,763,996

$
(482,781
)
$
7,710,219

$
(500,951
)
Secured debt
1,604,410

(57,861
)
1,749,958

(63,492
)
Totals
$
9,368,406

$
(540,642
)
$
9,460,177

$
(564,443
)
Our variable rate debt, including our primary unsecured credit facility, is reflected at fair value. At June 30, 2018 , we had $2,095,427,000 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 $20,954,000 .  At December 31, 2017, we had $2,294,678,000 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 $22,947,000 .
We are subject to currency fluctuations that may, from time to time, affect our financial condition and results of operations. Increases or decreases in the value of the Canadian Dollar or Pounds Sterling relative to the U.S. Dollar impact the amount of net income we earn from our investments in Canada and the United Kingdom. Based solely on our results for the three months ended June 30, 2018 , 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 $7,000,000.  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 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):
June 30, 2018
December 31, 2017
Carrying
Change in
Carrying
Change in
Value
fair value
Value
fair value
Foreign currency forward contracts
$
50,853

$
16,763

$
23,238

$
12,929

Debt designated as hedges
1,575,944

15,759

1,620,273

16,203

Totals
$
1,626,797

$
32,522

$
1,643,511

$
29,132


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For additional information regarding fair values of financial instruments, see “Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” and Notes 11 and 16 to our unaudited consolidated financial statements.
Item 4. Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed by us in the reports we file with or submit to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. No changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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, 2017 .
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Period
Total Number of Shares Purchased (1)
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
April 1, 2018 through April 30, 2018
—

$
—

May 1, 2018 through May 31, 2018
2,369

54.84

June 1, 2018 through June 30, 2018
238

59.05

Totals
2,607

$
55.23

(1) During the three months ended June 30, 2018, the company acquired shares of common stock held by employees who tendered owned shares to satisfy tax withholding obligations.
(2) No shares were purchased as part of publicly announced plans or programs.
Item 5. Other Information
None.

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Item 6. Exhibits
12
31.1
31.2
32.1
32.2
101.INS
XBRL Instance Document*
101.SCH
XBRL Taxonomy Extension Schema Document*
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document*
101.LAB
XBRL Taxonomy Extension Label Linkbase Document*
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document*
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document*
* Attached as Exhibit 101 to this Quarterly Report on Form 10-Q are the following materials, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets at June 30, 2018 and December 31, 2017 , (ii) the Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2018 and 2017 , (iii) the Consolidated Statements of Equity for the six months ended June 30, 2018 and 2017 , (iv) the Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017 and (v) the Notes to Unaudited Consolidated Financial Statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
WELLTOWER INC.
Date: August 2, 2018
By:
/s/ THOMAS J. DEROSA
Thomas J. DeRosa,
Chief Executive Officer
(Principal Executive Officer)
Date: August 2, 2018
By:
/s/ JOHN A. GOODEY
John A. Goodey,
Executive Vice President & Chief Financial Officer
(Principal Financial Officer)
Date: August 2, 2018
By:
/s/ JOSHUA T. FIEWEGER
Joshua T. Fieweger,
Vice President & Controller
(Principal Accounting Officer)

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