The following discussion and analysis is based primarily on the consolidated
financial statements of Health Care REIT, 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, 2011, as updated by our Current
Report on Form 8-K filed on May 10, 2012, including factors identified under the
headings "Business," "Risk Factors," and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Executive Summary
Company Overview
Health Care REIT, Inc. is a real estate investment trust ("REIT") that has
been at the forefront of seniors housing and health care real estate since the
company was founded in 1970. We are an S&P 500 company headquartered in Toledo,
Ohio and our portfolio spans the full spectrum of seniors housing and health
care real estate, including seniors housing communities, skilled
nursing/post-acute facilities, medical office buildings, inpatient and
outpatient medical centers and life science facilities. 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 portfolio as of June 30, 2012:
Percentage
Investments of Number of # Beds/Units Investment per
Type of Property (in thousands) Investments Properties or Sq. Ft. metric(1) States
Seniors housing per
triple-net $ 4,364,994 27.4% 295 26,949 units $ 164,908 unit 40
Skilled
nursing/post-acute 3,550,120 22.4% 302 39,207 beds 91,227 per bed 28
Seniors housing per
operating(2) 3,425,514 21.6% 160 21,380 units 179,805 unit 22
Hospitals 912,743 5.8% 36 2,137 beds 427,114 per bed 16
Medical office sq. per sq.
buildings(2) 3,276,238 20.7% 210 12,918,616 ft. 265 ft. 29
Life science
buildings(2) 333,853 2.1% 7 n/a 1
Totals $ 15,863,462 100.0% 1,010 46
(1) Investment per metric was computed by using the total committed investment amount of $16,064,723,000, which includes net real estate
investments, our share of investments in unconsolidated entities and unfunded construction commitments for which initial funding has commenced
which amounted to $15,065,955,000, $797,507,000 and $201,261,000, respectively.
(2) Includes our share of investments in unconsolidated entities. Please see Note 7 to our unaudited financial statements for additional
information.
Health Care Industry
The demand for health care services, and consequently health care properties,
is projected to reach unprecedented levels in the near future. The Centers for
Medicare and Medicaid Services ("CMS") projects that national health
expenditures will rise to $3.5 trillion in 2015 or 18.2% of gross domestic
product ("GDP"). The average annual growth in national health expenditures for
2009 through 2019 is expected to be 6.3%, which is 0.2% faster than pre-health
care reform estimates.
While demographics are the primary driver of demand, economic conditions and
availability of services contribute to health care service utilization rates. We
believe the health care property market may be less susceptible to fluctuations
and economic downturns relative to other property sectors. Investor interest in
the market remains strong, especially in specific sectors such as medical office
buildings, regardless of the current stringent lending environment. As a REIT,
we believe we are situated to benefit from any turbulence in the capital markets
due to our access to capital.
The total U.S. population is projected to increase by 20.4% through 2030. The
elderly population aged 65 and over is projected to increase by 79.2% through
2030. The elderly are an important component of health care utilization,
especially independent living services, assisted living services, skilled
nursing services, inpatient and outpatient hospital services and physician
ambulatory care. Most health care services are provided within a health care
facility such as a hospital, a physician's office or a seniors housing facility.
Therefore, we believe there will be continued demand for companies, such as
ours, with expertise in health care real estate.
The following chart illustrates the projected increase in the elderly
population aged 65 and over:
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of Operations
[[Image Removed]]
Source: U.S. Census Bureau
Health care real estate investment opportunities tend to increase as demand
for health care services increases. We recognize the need for health care real
estate as it correlates to health care service demand. Health care providers
require real estate to house their businesses and expand their services. We
believe that investment opportunities in health care real estate will continue
to be present due to:
† The specialized nature of the industry, which enhances the credibility and
experience of our company;
† The projected population growth combined with stable or increasing health
care utilization rates, which ensures demand; and
† The on-going merger and acquisition activity.
Health Reform Laws
On March 23, 2010, President Obama signed into law the Patient Protection and
Affordable Care Act of 2010 (the "PPACA") and the Health Care and Education
Reconciliation Act of 2010, which amends the PPACA (collectively, the "Health
Reform Laws"). The Health Reform Laws contain various provisions that may
directly impact us or the operators and tenants of our properties. Some
provisions of the Health Reform Laws may have a positive impact on our
operators' or tenants' revenues, by, for example, increasing coverage of
uninsured individuals, while others may have a negative impact on the
reimbursement of our operators or tenants by, for example, altering the market
basket adjustments for certain types of health care facilities. The Health
Reform Laws also enhance certain fraud and abuse penalty provisions that could
apply to our operators and tenants, in the event of one or more violations of
the federal health care regulatory laws. In addition, there are provisions that
impact the health coverage that we and our operators and tenants provide to our
respective employees. We cannot predict whether the existing Health Reform
Laws, or future health care reform legislation or regulatory changes, will have
a material impact on our operators' or tenants' property or business. If the
operations, cash flows or financial condition of our operators and tenants are
materially adversely impacted by the Health Reform Laws or future legislation,
our revenue and operations may be adversely affected as well. On June 28, 2012,
The United States Supreme Court upheld the individual mandate of the Health
Reform Laws but partially invalidated the expansion of Medicaid. The ruling on
Medicaid expansion will allow States not to participate in the expansion - and
to forego funding for the Medicaid expansion - without losing their existing
Medicaid funding. Given that the federal government substantially funds the
Medicaid expansion, it is unclear whether any state will pursue this option,
although at least some appear to be considering this option at this time.
Despite the Supreme Court's decision to uphold the Health Reform Laws, the House
of Representatives voted to repeal the Health Reform Laws in full. We cannot
predict whether any of these or future attempts to repeal or amend the Health
Reform Laws will be successful, nor can we predict the impact that such a repeal
or amendment would have on our operators and tenants.
Impact to Reimbursement of the Operators and Tenants of Our Properties. The
Health Reform Laws provide for various changes to the reimbursement that our
operators and tenants may receive. One such change is a reduction to the market
basket adjustments for inpatient acute hospitals, long-term care hospitals,
inpatient rehabilitation facilities, home health agencies, psychiatric
hospitals, hospice care and outpatient hospitals. Since 2010, the otherwise
applicable percentage increase to the market basket for inpatient acute
hospitals has decreased. Beginning in 2012, inpatient acute hospitals will also
face a downward adjustment of the annual percentage increase to the market
basket rate by a "productivity adjustment." The productivity adjustment may
cause the annual percentage increase to be less than zero, which would mean that
inpatient acute hospitals could face payment rates for a fiscal year that are
less than the payment rates for the preceding year.
A similar productivity adjustment also applies to skilled nursing facilities
beginning in 2012, which means that the payment rates
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
for skilled nursing facilities may decrease from one year to the next. Long-term
care hospitals have faced a specified percentage decrease in their annual update
for discharges since 2010. Additionally, beginning in 2012, long-term care
hospitals will be subject to the productivity adjustments, which may decrease
the federal payment rates for long-term care hospitals. Similar productivity
adjustments and other adjustments to payment rates have applied to inpatient
rehabilitation facilities, psychiatric hospitals and outpatient hospitals since
2010.
The Health Reform Laws revise other reimbursement provisions that may affect our
business. For example, the Health Reform Laws reduce states' Medicaid
disproportionate share hospital ("DSH") allotments, starting in 2014 through
2020. These allotments would have provided additional funding for DSH hospitals
that are operators or tenants of our properties, and thus, any reduction might
negatively impact these operators or tenants.
Additionally, under the Health Reform Laws, beginning in fiscal year 2015,
Medicare payments will decrease to hospitals for treatment associated with
hospital acquired conditions. This decreased payment rate may negatively impact
our operators or tenants. To account for excess readmissions, the Health Reform
Laws also call for a reduction of 1% in payments for those hospitals with
higher-than-average risk-adjusted readmission rates beginning October 1, 2012,
2% beginning in fiscal year 2014, and 3% from fiscal year 2015 onward. These
reductions in payments to our operators or tenants may affect their ability to
make payments to us.
The Health Reform Laws additionally call for the creation of the Independent
Payment Advisory Board (the "Board"), which will be responsible for establishing
payment policies, including recommendations in the event that Medicare costs
exceed a certain threshold. Proposals for recommendations submitted by the Board
prior to December 31, 2018 may not include recommendations that would reduce
payments for hospitals, skilled nursing facilities, and physicians, among other
providers, prior to December 31, 2019. On March 22, 2012, the House of
Representatives approved legislation that would repeal the Board. While this
legislation was not passed by the Senate, if such a repeal were signed into law
in the future, reimbursement to our tenants and operators may be impacted. The
ultimate success of the repeal effort is likely to depend on the outcome of the
November elections.
The Health Reform Laws also create other mechanisms that could permit
significant changes to payment. For example, the Health Reform Laws establish
the Center for Medicare and Medicaid Innovation to test innovative payment and
service delivery models to reduce program expenditures through the use of
demonstration programs that can waive existing reimbursement methodologies. As
another example, on November 2, 2011, CMS published the final rule implementing
section 3022 of the Health Reform Laws, which contains provisions relating to
Medicare payment to providers and suppliers participating in Accountable Care
Organizations ("ACOs") under the Medicare Shared Servings Program. Under the
program, Medicare will share a percentage of savings with ACOs that meet certain
quality and saving requirements, thereby allowing providers to receive incentive
payments in addition to their traditional fee-for-service payments. Under the
program, more experienced providers may assume the risk of losses in exchange
for greater potential rewards: ACOs may share up to 50% of the savings under the
one-sided model and up to 60% of the savings under the two-sided model,
depending on their quality and performance. The amount of shared losses for
which an ACO is liable in the two-sided model may not exceed the following
percentages of its updated benchmark: 5% in the first performance year, 7.5% in
the second year, and 10% in the third year. These shared losses could affect the
ability of ACO operators or tenants to meet their financial obligations to us.
The Health Reform Laws also provide additional Medicaid funding to allow states
to carry out mandated expansion of Medicaid coverage to certain
financially-eligible individuals beginning in 2014, and also permit states to
expand their Medicaid coverage to these individuals as early as April 1, 2010,
if certain conditions are met. The Health Reform Laws also extend certain
payment rules related to long-term acute care hospitals found in the Medicare,
Medicaid, and SCHIP Extension Act of 2007 ("MMSEA").
Additionally, although the Health Reform Laws delayed implementation of the
Resource Utilization Group, Version Four ("RUG-IV"), which revises the payment
classification system for skilled nursing facilities, the Medicare and Medicaid
Extenders Act of 2010 repealed this delay retroactively to October 1, 2010. The
implementation of the RUG-IV classification may impact our tenants and operators
by revising the classifications of certain patients. The federal reimbursement
for certain facilities, such as skilled nursing facilities, incorporates
adjustments to account for facility case-mix. The Health Reform Laws also extend
certain payment rules related to long-term acute care hospitals found in the
MMSEA. The MMSEA delayed the implementation of a policy referred to as the "25%
threshold rule" that would limit the proportion of patients who can be admitted
from a co-located or host hospital during a cost reporting period and be paid
under the long-term care hospital prospective payment system. The Health Reform
Laws further extended the delay, which is scheduled to expire at various points
in calendar year 2012 depending on the start of the provider's cost reporting
period.
Finally, many other changes resulting from the Health Reform Laws, or
implementing regulations or guidance may negatively impact our operators and
tenants. We will continue to monitor and evaluate the Health Reform Laws and
implementing regulations and guidance to determine other potential effects of
the reform.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Impact of Fraud and Abuse Provisions. The Health Reform Laws revise health care
fraud and abuse provisions that will affect our operators and tenants.
Specifically, the Health Reform Laws allow for up to treble damages under the
Federal False Claims Act for violations related to state-based health insurance
exchanges authorized by the Health Reform Laws, which will be implemented
beginning in 2014. The Health Reform Laws also impose new civil monetary
penalties for false statements or actions that lead to delayed inspections, with
penalties of up to $15,000 per day for failure to grant timely access and up to
$50,000 for a knowing violation. Additionally, the Health Reform Laws require
certain entities - including providers, suppliers, Medicaid managed care
organizations, Medicare Advantage organizations, and prescription drug program
sponsors - to report and return overpayments to the appropriate payer by the
later of (a) sixty (60) days after the date the overpayment was "identified," or
(b) the date that the "corresponding cost report" is due. The entity also must
notify the payer in writing of the reason for the overpayment. A violation of
these requirements may result in criminal liability, civil liability under the
FCA, and/or exclusion from the federal health care programs. On February 14,
2012, CMS published a proposed rule implementing the Health Reform Laws
requirement that health care providers and suppliers report and return
self-identified overpayments by the later of 60 days after the date the
overpayment was identified, or the date any corresponding cost report is due, if
applicable. The Health Reform Laws also amend the Federal Anti-Kickback Statute
to state that any items or services "resulting from" a violation of the
Anti-Kickback Statute constitutes a "false or fraudulent claim" under the
Federal False Claims Act. The Health Reform Laws also provide for additional
funding to investigate and prosecute health care fraud and abuse. Accordingly,
the increased penalties under the Health Reform Laws for fraud and abuse
violations may have a negative impact on our operators and tenants in the event
that the government brings an enforcement action or subjects them to penalties.
Further, as recently as February 2, 2011, CMS published final rulemaking to
implement the enhanced provider and supplier screening provisions called for in
the Health Reform Laws. Under the final rule, beginning March 25, 2011, all
enrolling and participating providers and suppliers are assessed an annual
administrative fee and are placed in one of three risk levels (limited,
moderate, and high) based on an assessment of the individual's or entity's
overall risk of fraud, waste and abuse. This rule also allows for the temporary
suspension of Medicare payments to providers or suppliers in the event CMS
receives credible information that an overpayment, fraud, or willful
misrepresentation has occurred. The Health Reform Laws granted the Secretary of
the Department of Health and Human Services significant discretionary authority
to suspend, exclude, or impose fines on providers and suppliers based on the
agency's determination that such a provider or supplier is "high-risk," and, as
a result, this final rulemaking has the potential to materially adversely affect
our operators and tenants who may be evaluated under the enhanced screening
process.
On November 2, 2011, CMS and OIG jointly published the final rule establishing
waivers of certain fraud and abuse laws to ACOs. These waivers include automatic
AKS, Stark, and CMP waivers that may be applied in certain situations and that
will apply uniformly to each ACO, ACO participant, and ACO provider/supplier.
Notably, the final rule states that CMS and OIG intend to closely monitor ACOs
through June 2013 to ensure that these waivers are not causing "undesirable
effects" and need to be narrowed to prevent fraud and abuse.
Additionally, provisions of Title VI of the Health Care Reform Laws are designed
to increase transparency and program integrity by skilled nursing facilities,
other nursing facilities and similar providers. Specifically, skilled nursing
facilities and other providers and suppliers will be required to institute
compliance and ethics programs. Additionally, the Health Reform Laws make it
easier for consumers to file complaints against nursing homes by mandating that
states establish complaint websites. The provisions calling for enhanced
transparency will increase the administrative burden and costs on these
providers.
Impact to the Health Care Plans Offered to Our Employees. The Health Reform Laws
affect employers that provide health plans to their employees. The new laws
change the tax treatment of the Medicare Part D retiree drug subsidy and extend
dependent coverage for dependents up to age 26, among other changes. We continue
to evaluate our health care plans for these changes as new reform laws are
enacted. These changes may affect our operators and tenants as well.
Medicare Program Reimbursement Changes
In recent months, CMS released a number of proposed and final rulemakings that
may potentially increase or decrease government reimbursement to our operators
and tenants. To the extent that any of these rulemakings decrease government
reimbursement to our operators and tenants, our revenue and operations may be
indirectly, adversely affected.
On August 1, 2011, CMS issued a final rule updating the long-term acute care
hospital prospective payment system for fiscal year 2012. Among other things,
the final rule increased payment rates for acute care hospitals by 1% and
long-term care hospitals by 1.8%. In the rule, CMS included a negative 2%,
rather than the proposed negative 3.15%, documentation and coding adjustment for
long-term care hospitals. On August 8, 2011, CMS released a final rulemaking for
the prospective payment system and consolidated billing for skilled nursing
facilities for fiscal year 2012, which included the 11.1%, or $3.87 billion,
decrease in RUG payments made to skilled nursing facilities previously
discussed. CMS announced that the reasons for this rate reduction were to
correct for the
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
unintended spike in payment levels, particularly those associated with higher
paying RUGs, and to align reimbursement with cost. As part of these changes,
effective October 1, 2011, all rate categories will be updated for the full
market basket; increase of 2.7%, less a 1% productivity adjustment required by
Section 3401(b) of the Health Reform Laws. On August 1, 2012, CMS published a
final rule for the inpatient prospective payment system, which sets forth acute
care and long-term care hospital payment rate changes for the 2013 fiscal year.
Specifically, CMS estimates that, for fiscal year 2013, the Medicare rates for
inpatient stays at acute care hospitals will increase by 2.8% for those
hospitals that successfully participate in the Hospital Inpatient Quality
Reporting Program, while those that do not successfully participate in that
program would receive a payment rate increase of 0.8%. CMS also implemented a
3.75% one-time budget neutrality adjustment to the long-term care hospital rate
that would be phased in over three years. The first year phase in of that
adjustment will be 1.3%, which would apply to payments or discharges on or after
December 29, 2012. CMS adopted a one-year extension of the existing moratorium
on the 25% threshold policy, through fiscal year 2013, beginning on or after
October 1, 2012 and before October 1, 2013. CMS clarified its regulations to
reflect an existing policy that the Inpatient Prospective Payment System
comparable per diem amount is capped at an amount comparable to what would have
been a full payment under the Inpatient Prospective Payment System and that cap
applies to short stay cases in long-term care hospitals with discharges
occurring on or after December 29, 2012. The legislative moratorium on new
long-term hospitals and satellite facilities are set to expire at the end of
2012. Additionally, on July 30, 2012, CMS released notices updating the payment
rates for inpatient rehabilitation facilities ("IRFs") and for skilled nursing
facilities ("SNFs"). For IRF discharges occurring on or after October 1, 2012
and on or before September 30, 2013, CMS is implementing a net 1.9% rate
increase. Effective October 1, 2012, CMS is implementing a net 1.8% rate
increase for SNFs.
CMS annually adjusts the Medicare Physician Fee Schedule payment rates based on
an update formula that includes application of the Sustainable Growth Rate
("SGR"). On November 1, 2011, CMS published the calendar year 2012 Physician Fee
Schedule final rule with comment period. Most notably, the final rule calls for
a negative 27.4% update for 2012 under the statutory SGR formula. In February
2012, Congress passed the Middle Class Tax Relief and Job Creation Act of 2012,
which blocks the cut through the end of 2012. Also discussed in the final rule
are at least two initiatives that could negatively impact the reimbursement
levels received by our operators and tenants. CMS is expanding its multiple
procedure payment reduction policy to the professional interpretation of advance
imaging services to recognize the overlapping activities that go into valuing
these services. In addition, the rule finalizes quality and cost measures that
will be used in establishing a new value-based modifier that would adjust
physician payments based on whether they are providing higher quality and more
efficient care. The Health Reform Laws require CMS to begin making payment
adjustments to certain physicians and physician groups on January 1, 2015, and
to apply the modifier to all physicians by January 1, 2017. The rule finalizes
calendar year 2013 as the initial performance year for purposes of adjusting
payments in calendar year 2015.
On November 1, 2011, CMS published a final rule with comment period for
outpatient care hospitals and ambulatory surgical centers. CMS estimates that
the cumulative effect of all changes to payment rates for calendar year 2012
will have a positive effect, resulting in a 1.9% estimated increase in Medicare
payments to providers paid under the hospital outpatient prospective payment
system. As required by the Health Reform Laws, the rule also provides for a
payment adjustment for designated cancer hospitals, resulting in an expected
increase in payments to cancer hospitals by 11.3%, and increases payment rates
to ambulatory surgical centers by 1.6%.
Finally, on November 21, 2011, the Joint Select Committee on Deficit Reduction,
which was created by the Budget Control Act of 2011, concluded its work and
issued a statement that it was not able to make a bipartisan agreement, thus
triggering the sequestration process. The sequestration process will result in
spending reductions starting in 2013, including Medicare cuts. Such cuts could
affect government reimbursement to our operators and tenants.
Capital Market Outlook
The capital markets remain supportive of our investment strategy. Year to
date we have raised $2.3 billion in aggregate through issuance of common and
preferred stock, unsecured debt and a Canadian denominated term loan. The
capital raised, in combination with cash on hand and borrowings under our
revolving credit facility, supported $1.9 billion in gross new investments
year-to-date. We expect attractive investment opportunities to remain available
through the balance of 2012 as we continue to leverage the benefits of our
relationship investment strategy.
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 fees/services, rent and interest income and portfolio
growth. To meet these objectives, we invest across the full spectrum of seniors
housing and health care real estate and diversify our investment portfolio by
property type, customer and geographic location.
Substantially all of our revenues and sources of cash flows from operations
are derived from operating lease rentals, resident fees
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
and services, and interest earned on outstanding loans receivable. These items
represent our primary source of liquidity to fund distributions and are
dependent upon our obligors' continued ability to make contractual payments to
us. To the extent that our obligors experience operating difficulties and are
unable to generate sufficient cash to make payments to us, there could be a
material adverse impact on our consolidated results of operations, liquidity
and/or financial condition. To mitigate this risk, we monitor our investments
through a variety of methods determined by the type of property and
operator/tenant. Our asset management process includes review of monthly
financial statements for each property, periodic review of obligor credit,
periodic property inspections and review of covenant compliance relating to
licensure, real estate taxes, letters of credit and other collateral. In
monitoring our portfolio, our personnel use a proprietary database to collect
and analyze property-specific data. Additionally, we conduct extensive research
to ascertain industry trends and risks. Through these asset management and
research efforts, we are typically able to intervene at an early stage to
address payment risk, and in so doing, support both the collectability of
revenue and the value of our investment.
In addition to our asset management and research efforts, we also structure
our investments to help mitigate payment risk. Operating leases and loans are
normally credit enhanced by guaranties and/or letters of credit. In addition,
operating leases are typically structured as master leases and loans are
generally cross-defaulted and cross-collateralized with other loans, operating
leases or agreements between us and the obligor and its affiliates.
For the six months ended June 30, 2012, rental income, resident fees and
services and interest income represented 62%, 36% and 2%, respectively, of total
gross revenues (including revenues from discontinued operations). Substantially
all of our operating leases are designed with either fixed or contingent
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.
Depending upon the availability and cost of external capital, we believe our
liquidity is sufficient to fund operations, meet debt service obligations (both
principal and interest), make dividend distributions and complete construction
projects in process. We also anticipate evaluating opportunities to finance
future investments. New investments are generally funded from temporary
borrowings under our unsecured line of credit arrangements, internally generated
cash and the proceeds from sales of real property. Our investments generate
internal cash from fees/services, rent and interest receipts and principal
payments on loans receivable. Permanent capital for future investments, which
replaces funds drawn under the unsecured line of credit arrangements, has
historically been provided through a combination of public and private offerings
of debt and equity securities and the incurrence or assumption of secured debt.
Our primary sources of cash include rent and interest receipts, resident fees
and services, borrowings under the unsecured line of credit arrangements, public
and private offerings of debt and equity securities, proceeds from the sales of
real property 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 capital expenditures and
construction advances), loan advances, property operating expenses and general
and administrative expenses.
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. We anticipate the sale of real property
and the repayment of loans receivable totaling approximately $300,000,000 during
2012. It is possible that additional loan repayments or sales of real property
may occur in the future. To the extent that loan repayments and real property
sales exceed new investments, our revenues and cash flows from operations could
be adversely affected. We expect to reinvest the proceeds from any loan
repayments and real property sales in new investments. To the extent that new
investment requirements exceed our available cash on-hand, we expect to borrow
under our unsecured line of credit arrangements. At June 30, 2012, we had
$204,895,000 of cash and cash equivalents, $79,619,000 of restricted cash and
$1,612,000,000 of available borrowing capacity under our unsecured line of
credit arrangements.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Key Transactions in 2012
We have completed the following key transactions to date in 2012:
† our Board of Directors increased the quarterly cash dividend to $0.74 per
common share for 2012, as compared to the previous $0.715 per common share rate,
beginning with the February 2012 dividend payment;
† we completed the following capital transactions:
o issued 20,700,000 shares of common stock, generating approximately
$1,062,256,000 of proceeds in February;
o issued 11,500,000 shares of 6.5% Series J Cumulative Redeemable Preferred
Stock, generating approximately $277,688,000 of proceeds in March;
o redeemed $100,000,000 of 7.875% Series D and $175,000,000 of 7.625% Series F
Cumulative Redeemable Preferred Stock in April;
o issued $600,000,000 of 4.125% 7-year senior unsecured notes, generating
approximately $593,319,000 of proceeds in April;
o completed the redemption/conversion of $125,585,000 of 4.75% convertible
senior unsecured notes due 2026 in April and May;
o extinguished $229,207,000 of secured debt bearing a weighted-average
interest rate of 4.2% through June;
o announced redemption of $168,000,000 of 4.75% convertible senior unsecured
notes due 2027 in June;
o funded $250,000,000 Canadian denominated unsecured term loan (approximately
$249,000,000 USD) in July;
† we completed $1,902,478,000 of gross investments during the six months
ended June 30, 2012;
† we received $156,689,000 in proceeds on property sales and loan payoffs,
generating $33,219,000 in gains during the six months ended June 30, 2012;
† we completed our Canadian investment with Chartwell Seniors Housing REIT
on May 1, 2012; and
† we declassified our Board of Directors in May.
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 attributable to common
stockholders ("NICS") is the most appropriate earnings measure. Other useful
supplemental measures of our operating performance include funds from operations
("FFO") and net operating income from continuing operations ("NOI"); however,
these supplemental measures are not defined by U.S. generally accepted
accounting principles ("U.S. GAAP"). Please refer to the section entitled
"Non-GAAP Financial Measures" for further discussion and reconciliations of FFO
and NOI. These earnings measures and their relative per share amounts are widely
used by investors and analysts in the valuation, comparison and investment
recommendations of companies. The following table reflects the recent historical
trends of our operating performance measures for the periods presented (in
thousands, except per share data):
Three Months Ended
March 31, June 30, September 30, December 31, March 31, June 30,
2011 2011 2011 2011 2012 2012
Net income (loss)
attributable
to common
stockholders $ 23,372 $ 69,847 $ 36,607 $ 27,282 $ 39,307 $ 54,735
Funds from operations 71,053 149,553 150,376 154,398 163,857 157,931
Net operating income
from continuing
operations 178,019 269,794 269,763 284,711 301,871 316,779
Per share data (fully
diluted):
Net income (loss)
attributable
to common
stockholders $ 0.15 $ 0.39 $ 0.21 $ 0.15 $ 0.19 $ 0.25
Funds from
operations 0.46 0.84 0.85 0.83 0.81 0.73
32
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Concentration Risk. We evaluate our concentration risk in terms of asset mix,
investment mix, relationship mix and geographic mix. Concentration risk is a
valuable measure in understanding what portion of our investments could be at
risk if certain sectors were to experience downturns. Asset mix measures the
portion of our investments that are real property. In order to qualify as an
equity REIT, at least 75% of our real estate investments must be real property
whereby each property, which includes the land, buildings, improvements,
intangibles and related rights, is owned by us. Investment mix measures the
portion of our investments that relate to our various property types.
Relationship mix measures the portion of our investments that relate to our top
five relationships. Geographic mix measures the portion of our investments that
relate to our top five states. The following table reflects our recent
historical trends of concentration risk (including unconsolidated entities) for
the periods presented:
March 31, June 30, September 30, December 31, March 31, June 30,
2011 2011 2011 2011 2012 2012
Asset mix:
Real property 92% 94% 95% 95% 95% 93%
Real estate loans receivable 4% 3% 2% 2% 2% 2%
Investments in unconsolidated
entities 4% 3% 3% 3% 3% 5%
Investment mix:
Seniors housing triple-net 45% 56% 57% 53% 51% 49%
Seniors housing operating 22% 17% 16% 20% 20% 22%
Medical facilities 33% 27% 27% 27% 29% 29%
Relationship mix:
Genesis HealthCare, LLC 19% 19% 17% 16% 16%
Merrill Gardens, LLC 7% 6% 5% 8% 8% 7%
Benchmark Senior Living 9% 7% 7% 6% 6% 5%
Brandywine Senior Living, LLC 6% 5% 5% 5% 5% 5%
Senior Living Communities, LLC 6% 5% 5% 4% 4% 4%
Senior Star Living 5%
Remaining relationships 67% 58% 59% 60% 61% 63%
Geographic mix:
New Jersey 8% 9% 10% 9% 9%
Texas 8% 7% 7% 7% 9% 9%
California 10% 8% 8% 10% 10% 9%
Massachusetts 10% 9% 9% 8% 8% 7%
Florida 9% 7% 8% 7% 7% 7%
Washington 6%
Remaining states 57% 61% 59% 58% 57% 60%
33
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Credit Strength. We measure our credit strength both in terms of leverage
ratios and coverage ratios. Our leverage ratios include debt to book
capitalization and debt to market capitalization. The leverage ratios indicate
how much of our balance sheet capitalization is related to long-term debt. The
coverage ratios indicate our ability to service interest and fixed charges
(interest, secured debt principal amortization and preferred dividends). We
expect to maintain capitalization ratios and coverage ratios sufficient to
maintain compliance with our debt covenants. The coverage ratios are based on
adjusted earnings before interest, taxes, depreciation and amortization
("Adjusted EBITDA"), which is discussed in further detail, and reconciled to net
income, below in "Non-GAAP Financial Measures." Leverage ratios and coverage
ratios are widely used by investors, analysts and rating agencies in the
valuation, comparison, investment recommendations and rating of companies. The
following table reflects the recent historical trends for our credit strength
measures for the periods presented:
Three Months Ended
March 31, June 30, September 30, December 31, March 31, June 30,
2011 2011 2011 2011 2012 2012
Debt to book capitalization ratio 48% 49% 50% 50% 45% 48%
Debt to undepreciated book
capitalization ratio 45% 45% 47% 46% 41% 45%
Debt to market capitalization ratio 37% 38% 42% 38% 34% 36%
Interest coverage ratio 2.75x 3.34x 2.94x 2.86x 3.03x 3.21x
Fixed charge coverage ratio 2.22x 2.60x 2.29x 2.23x 2.33x 2.52x
Lease Expirations. The following table sets forth information regarding lease
expirations for certain portions of our portfolio as of June 30, 2012 (dollars
in thousands):
Expiration Year
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Thereafter
Seniors housing triple-net:
Properties 36 25 15 2 - 37 51 8 46 55 300
Base rent(1) $ 28,350 53,182 25,858 2,026 - 16,941 37,161 9,463 41,366 60,927 469,946
% of base rent 3.8% 7.1% 3.5% 0.3% 0.0% 2.3% 5.0% 1.3% 5.6% 8.2% 63.1%
Hospitals:
Properties - - - - - 3 - - 5 - 23
Base rent(1) $ - - - - - 2,350 - - - - 18,161
% of base rent 0.0% 0.0% 0.0% 0.0% 0.0% 11.5% 0.0% 0.0% 0.0% 0.0% 88.5%
Medical office buildings:
Square feet 277,177 614,441 625,833 692,232 922,967 966,632 526,119 597,753 557,687 807,365 4,519,587
Base rent(1) $ 6,136 13,952 13,336 15,495 21,046 23,294 12,337 14,625 14,300 20,812 110,471
% of base rent 2.3% 5.2% 5.0% 5.8% 7.9% 8.8% 4.6% 5.5% 5.4% 7.8% 41.6%
(1) The most recent monthly base rent including straight line for leases with fixed escalators or annual cash rents for leases with contingent escalators. Base rent does not include tenant recoveries
or amortization of above and below market lease intangibles.
We evaluate our key performance indicators in conjunction with current
expectations to determine if historical trends are indicative of future results.
Our expected results may not be achieved and actual results may differ
materially from our expectations. Factors that may cause actual results to
differ from expected results are described in more detail in "Forward-Looking
Statements and Risk Factors" 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, 2011, as
updated by our Current Report on Form 8-K filed on May 10, 2012, 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.
34
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Portfolio Update
Net operating income. The primary performance measure for our properties is
net operating income from continuing operations ("NOI") as discussed below in
"Non-GAAP Financial Measures." The following table summarizes our NOI for the
periods indicated (in thousands):
Three Months Ended
March 31, June 30, September 30, December 31, March 31, June 30,
2011 2011 2011 2011 2012 2012Net operating income from
continuing operations:
Seniors housing
triple-net $ 101,494 $ 170,946 $ 166,281 $ 175,184 $ 175,401 $ 183,522 Seniors housing operating 22,014 38,815
38,907 42,207 50,931 54,314
Medical facilities 53,979 59,655 64,268 67,267 75,304 78,700
Non-segment/corporate 532 378 307 53 235 243
Total $ 178,019 $ 269,794 $ 269,763 $ 284,711 $ 301,871 $ 316,779
Payment coverage. Payment coverage of our triple-net customers continues to
remain strong. The table below reflects our recent historical trends of payment
coverage. CBMF represents the ratio of our customers' earnings before interest,
taxes, depreciation, amortization, rent and management fees to contractual rent
or interest due us. CAMF represents the ratio of our customers' earnings before
interest, taxes, depreciation, amortization and rent (but after imputed
management fees) to contractual rent or interest due us.
Twelve months ended
March 31, 2010 March 31, 2011 March 31, 2012
CBMF CAMF CBMF CAMF CBMF CAMF
Seniors housing 1.48x 1.27x 1.47x 1.26x 1.34x 1.15x
Skilled nursing/post-acute 2.34x 1.72x 2.42x 1.80x 1.94x 1.49x
Hospitals 2.56x 2.23x 2.71x 2.42x 2.44x 2.09x
Weighted averages 2.03x 1.60x 2.05x 1.64x 1.76x 1.42x
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
our website at www.hcreit.com.
Liquidity and Capital Resources
Sources and Uses of Cash
Our primary sources of cash include rent and interest receipts, resident fees
and services, borrowings under the unsecured line of credit arrangements, public
and private offerings of debt and equity securities, proceeds from the sales of
real property 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 capital expenditures and
construction advances), loan advances 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):
35
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Six Months Ended Change
June 30, 2012 June 30, 2011 $ %
Cash and cash equivalents at
beginning of period $ 163,482 $ 131,570 $ 31,912 24%
Cash provided from operating
activities 351,038 241,598 109,440 45%
Cash used in investing
activities (1,227,842) (3,014,899) 1,787,057 -59%
Cash provided from financing
activities 918,217 2,970,489 (2,052,272) -69% Cash and cash equivalents at
end of period $ 204,895 $ 328,758 $ (123,863) -38%
Operating Activities. The change in net cash provided from operating
activities is primarily attributable to an increase in NOI. The following is a
summary of our straight-line rent and above/below market lease amortization
(dollars in thousands):
Six Months Ended Change
June 30, 2012 June 30, 2011 $ %
Gross straight-line rental income $ 23,930 $ 16,018
$ 7,912 49%
Cash receipts due to real property
sales (355) (815) 460 -56%
Prepaid rent receipts (2,782) (5,899) 3,117 -53%
Amortization related to below (above)
market leases, net 205 1,056 (851) -81%
$ 20,998 $ 10,360 $ 10,638 103%
Gross straight-line rental income represents the non-cash difference between
contractual cash rent due and the average rent recognized pursuant to U.S. GAAP
for leases with fixed rental escalators, net of collectability reserves. This
amount is positive in the first half of a lease term (but declining every year
due to annual increases in cash rent due) and is negative in the second half of
a lease term. The fluctuation is primarily attributable to the Genesis master
lease which began April 1, 2011.
Investing Activities. The changes in net cash used in investing activities are
primarily attributable to net changes in real property and real estate loans
receivable. The following is a summary of our investment and disposition
activities (dollars in thousands):
Six Months Ended
June 30, 2012 June 30, 2011
Properties Amount Properties Amount
Assets acquired: Seniors housing triple-net 24 $ 423,828
165 $ 2,849,603
Seniors housing operating 9 294,168
46 1,146,541
Medical office buildings 21 584,042
7 72,369
Total assets acquired 54 1,302,038 218 4,068,513
Less: Assumed debt (303,610) (721,632) Assumed other items, net (34,048) (167,911)
Cash disbursed for acquisitions 964,380 3,178,970
Construction in progress cash additions 130,887 162,434
Capital improvements to existing
properties 62,999 29,193
Total cash invested in real property 1,158,266 3,370,597
Real property dispositions:
Seniors housing triple-net 18 90,404 34 117,074
Medical facilities 5 33,066 4 35,238
Total dispositions 23 123,470 38 152,312
Add: Gains (losses) on sales of real
property 33,219 56,380
Proceeds from real property sales 156,689 208,692
Net cash investments in real property 31 $ 1,001,577 180 $ 3,161,905
36
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Six Months Ended
June 30, 2012 June 30, 2011
Seniors Seniors
Housing Medical Housing Medical
Triple-net Facilities Totals Triple-net Facilities Totals
Advances on real estate
loans receivable:
Investments in new loans $ 532 $ - $ 532 $ 11,807 $ - $ 11,807
Draws on existing loans 19,455 367 19,822 8,824 7,836 16,660
Net cash advances on
real estate loans 19,987 367 20,354 20,631 7,836 28,467
Receipts on real estate
loans receivable:
Loan payoffs - - - 129,860 - 129,860
Principal payments on
loans 11,613 1,248 12,861 5,164 3,372 8,536
Total receipts on real
estate loans 11,613 1,248 12,861 135,024 3,372 138,396
Net advances (receipts) on
real estate loans $ 8,374 $ (881) $ 7,493 $ (114,393) $ 4,464 $ (109,929)
Capitalization rates for acquisitions represent annualized contractual income
or projected income to be received in cash divided by investment amounts.
Capitalization rates for dispositions represent annualized contractual income
that was being received in cash at date of disposition divided by cash
proceeds. For the three months ended June 30, 2012, weighted-average
capitalization rates for acquisitions and dispositions were as follows:
Acquisitions Dispositions
Seniors housing triple-net 7.8% 10.9%
Seniors housing operating 7.4% n/a
Medical facilities 7.3% 0.0%
Financing Activities. The changes in net cash provided from or used in
financing activities are primarily attributable to changes related to our
long-term debt arrangements, proceeds from the issuance of common and preferred
stock and dividend payments.
For the six months ended June 30, 2012, we had a net decrease of $217,000,000
on our unsecured line of credit arrangement as compared to a net decrease of
$300,000,000 for the same period in 2011.
For the six months ended June 30, 2012 and 2011, we received proceeds from
issuance of senior unsecured notes of $593,319,000 and $1,381,086,000,
respectively. For the six months ended June 30, 2012, we made payments to
extinguish senior unsecured notes of $125,585,000. We did not extinguish any
senior notes during the six months ended June 30, 2011. See Note 10 for
additional information.
For the six months ended June 30, 2012 and 2011, we received proceeds from
the issuance of secured debt of $139,395,000 and $58,470,000, respectively,
offset by payments on secured debt of $254,175,000 and $13,081,000,
respectively. See Note 10 for additional information.
We may repurchase, redeem or refinance convertible and non-convertible 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 non-convertible 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.
Net proceeds from the issuance of preferred stock during the six months
ended June 30, 2012 and 2011 were $277,688,000 and $696,437,000, respectively.
Net cash used to redeem preferred stock was $275,000,000 for the six months
ended June 30, 2012. We did not redeem any preferred stock during the six
months ended June 30, 2011. See Note 13 for additional information.
The following is a summary of our common stock issuances for the six months
ended June 30, 2012 and 2011 (dollars in thousands, except average price
amounts):
37
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Shares Issued Average Price Gross Proceeds Net Proceeds
March 2011 public issuance 28,750,000 $ 49.25 $ 1,415,938 $ 1,358,694
2011 Dividend reinvestment
plan issuances 1,200,418 49.44 59,348 58,400
2011 Option exercises 116,782 37.69 4,401 4,401
2011 Totals 30,067,200 $ 1,479,687 $ 1,421,495
February 2012 public issuance 20,700,000 $ 53.50 $ 1,107,450 $ 1,062,256
2012 Dividend reinvestment
plan issuances 993,634 54.34 53,991 53,991
2012 Option exercises 104,574 38.42 4,018 4,018
2012 Senior note conversions 405,252
2012 Totals 22,203,460 $ 1,165,459 $ 1,120,265
In order to qualify as a REIT for federal income tax purposes, we must
distribute at least 90% of our taxable income (including 100% of capital gains)
to our stockholders. The increase in dividends is primarily attributable to an
increase in our common shares outstanding. The following is a summary of our
dividend payments (in thousands, except per share amounts):
Six Months Ended
June 30, 2012 June 30, 2011
Per Share Amount Per Share Amount
Common Stock $ 1.4800 $ 301,503 $ 1.4050 $ 228,565
Series D Preferred Stock 0.9844 2,013 0.9844 3,937
Series F Preferred Stock 0.9532 3,410 0.9532 6,672
Series H Preferred Stock 0.7500 500 1.4293 500
Series I Preferred Stock 1.6250 23,359 1.0382 14,924
Series J Preferred Stock 0.5778 6,644 - -
Totals $ 337,429 $ 254,598
Off-Balance Sheet Arrangements
During the year ended December 31, 2010, we entered into a joint venture
investment with Forest City Enterprises (NYSE:FCE.A and FCE.B). We acquired a
49% interest in a seven-building life science campus located at University Park
in Cambridge, Massachusetts, which is immediately adjacent to the campus of the
Massachusetts Institute of Technology. At June 30, 2012, our investment of
$176,579,000 is recorded as an investment in unconsolidated entities on the
balance sheet. During the quarter ended June 30, 2012, we entered into a joint
venture with Chartwell Seniors Housing REIT (TSX:CSH.UN). We acquired a 50%
interest in 39 seniors housing properties. In connection with this transaction,
we invested $223,134,000 of cash which was recorded as an investment in
unconsolidated entities on the balance sheet. In addition, at June 30, 2012, we
had other investments in unconsolidated entities with our ownership ranging from
10% to 50%. Please see Note 7 to our unaudited consolidated financial statements
for additional information.
We are exposed to various market risks, including the potential loss arising
from adverse changes in interest rates and movements in foreign currency
exchange rates. We may or may not elect to use financial derivative instruments
to hedge these risks. These decisions are principally based on the general
trends in these rates at the applicable dates, our perception of the future
volatility of these rates and our relative levels of variable rate debt and
foreign currency denominated investments. Please see Note 11 to our unaudited
consolidated financial statements for additional information.
At June 30, 2012, we had six outstanding letter of credit obligations
totaling $5,925,000 and expiring between 2012 and 2014. Please see Note 12 to
our unaudited consolidated financial statements for additional information.
38
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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, 2012 (in thousands):
Payments Due by Period
Contractual Obligations Total 2012 2013-2014 2015-2016 Thereafter
Unsecured line of credit
arrangements $ 393,000 $ 5,000 $ - $ 388,000 $ -
Senior unsecured notes(1) 4,939,342 244,939 300,000 950,000 3,444,403
Secured debt(1) 2,646,913 62,898 528,859 640,018 1,415,138
Contractual interest
obligations 3,222,471 198,561 721,610 602,879 1,699,421
Capital lease obligations 86,449 4,023 73,977 8,449 -
Operating lease
obligations 531,618 4,042 16,707 15,883 494,986
Purchase obligations 263,608 81,404 173,871 8,333 -
Other long-term
liabilities 5,935 - 475 1,900 3,560
Total contractual
obligations $ 12,089,336 $ 600,867 $ 1,815,499 $ 2,615,462 $ 7,057,508
(1) Amounts represent principal amounts due and do not reflect unamortized premiums/discounts or other fair value
adjustments as reflected on the balance sheet.
At June 30, 2012, we had an unsecured line of credit arrangement with a
consortium of 31 banks in the amount of $2.0 billion, which is scheduled to
expire on July 27, 2015. Borrowings under the agreement are subject to interest
payable in periods no longer than three months at either the agent bank's prime
rate of interest or the applicable margin over LIBOR interest rate, at our
option (1.60% at June 30, 2012). The applicable margin is based on certain of
our debt ratings and was 1.35% at June 30, 2012. In addition, we pay a facility
fee annually to each bank based on the bank's commitment amount. The facility
fee depends on certain of our debt ratings and was 0.25% at June 30, 2012.
Principal is due upon expiration of the agreement. In addition, at June 30,
2012, we had a $5,000,000 unsecured revolving demand note outstanding and
bearing interest at 1-month LIBOR plus 110 basis points.
We have $4,939,342,000 of senior unsecured notes principal outstanding with
fixed annual interest rates ranging from 3.00% to 8.00%, payable semi-annually.
Total contractual interest obligations on senior unsecured notes totaled
$2,369,264,000 at June 30, 2012. A total of $662,489,000 of our senior unsecured
notes are convertible notes that also contain put features. During the month of
June 2012, we provided notice of redemption to the holders of $168,086,000 of
convertible senior notes due 2027. See Note 19 for additional information.
We have consolidated secured debt with total outstanding principal of
$2,285,443,000, collateralized by owned properties, with fixed annual interest
rates ranging from 1.2% to 8.0%, payable monthly. The carrying values of the
properties securing the debt totaled $4,095,959,000 at June 30, 2012. Total
contractual interest obligations on consolidated secured debt totaled
$766,745,000 at June 30, 2012. Additionally, our share of non-recourse debt
associated with unconsolidated joint ventures (as reflected in the contractual
obligations table above) is $361,470,000 at June 30, 2012. Our share of
contractual interest obligations on our unconsolidated joint venture (as
reflected in the contractual obligations table above) secured debt is
$63,571,000 at June 30, 2012.
At June 30, 2012, we had operating lease obligations of $531,618,000 relating
primarily to ground leases at certain of our properties and office space leases
and capital lease obligations of $86,449,000 relating to certain leased
investment properties that contain bargain purchase options.
Purchase obligations include unfunded construction commitments and contingent
purchase obligations. At June 30, 2012, we had outstanding construction
financings of $170,785,000 for leased properties and were committed to providing
additional financing of approximately $201,261,000 to complete construction. At
June 30, 2012, we had contingent purchase obligations totaling $62,347,000.
These contingent purchase obligations relate to unfunded capital improvement
obligations and contingent obligations on acquisitions. Upon funding, rents due
from the tenant are increased to reflect the additional investment in the
property.
Other long-term liabilities relate to our Supplemental Executive Retirement
Plan ("SERP"). We have a SERP, a non-qualified defined benefit pension plan,
which provides certain executive officers with supplemental deferred retirement
benefits. The SERP provides an opportunity for participants to receive
retirement benefits that cannot be paid under our tax-qualified plans because of
the restrictions imposed by ERISA and the Internal Revenue Code of 1986, as
amended. Benefits are based on compensation and length of service and the SERP
is unfunded. Benefit payments are expected to total $2,375,000 during the next
five fiscal years and $3,560,000 thereafter. We use a December 31 measurement
date for the SERP. The accrued liability on our balance sheet for the SERP was
$6,031,000 and $5,623,000 at June 30, 2012 and December 31, 2011, respectively.
39
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Capital Structure
As of June 30, 2012, we had total equity of $8,227,793,000 and a total debt
balance of $7,603,545,000, which represents a debt to total book capitalization
ratio of 48%. Our ratio of debt to market capitalization was 36% at June 30,
2012. For the three months ended June 30, 2012, our interest coverage ratio was
3.21x and our fixed charge coverage ratio was 2.52x. Also, at June 30, 2012, we
had $204,895,000 of cash and cash equivalents, $79,619,000 of restricted cash
and $1,612,000,000 of available borrowing capacity under our unsecured line of
credit arrangement.
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,
2012, we were in compliance with all of the covenants under our debt agreements.
Please refer to the section entitled "Non-GAAP Financial Measures" for further
discussion. None of our debt agreements contain provisions for acceleration
which could be triggered by our debt ratings. However, under our unsecured line
of credit arrangement, 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 4, 2012, we filed an open-ended automatic or "universal" shelf
registration statement with the Securities and Exchange Commission covering an
indeterminate amount of future offerings of debt securities, common stock,
preferred stock, depositary shares, warrants and units. As of July 31, 2012, we
had an effective registration statement on file in connection with our enhanced
dividend reinvestment plan under which we may issue up to 10,000,000 shares of
common stock. As of July 31, 2012, 4,898,591 shares of common stock remained
available for issuance under this registration statement. We have entered into
separate Equity Distribution Agreements with UBS Securities LLC, RBS Securities
Inc., KeyBanc Capital Markets Inc. and Credit Agricole Securities (USA) Inc.
relating to the offer and sale from time to time of up to $630,015,000 aggregate
amount of our common stock ("Equity Shelf Program"). As of July 31, 2012, we had
$457,112,000 of remaining capacity under the Equity Shelf Program. Depending
upon market conditions, we anticipate issuing securities under our registration
statements to invest in additional properties and to repay borrowings under our
unsecured lines of credit arrangements.
Results of Operations
Our primary sources of revenue include rent, interest income and resident
fees and services. Our primary expenses include interest expense, depreciation
and amortization, property operating expenses, transaction costs and general and
administrative expenses. These revenues and expenses are reflected in our
Consolidated Statements of Comprehensive Income and are discussed in further
detail below. 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,
2012 2011 Amount % 2012 2011 Amount %
Net income (loss)
attributable to
common stockholders $ 54,735 $ 69,847 $ (15,112) -22% $ 94,037 $ 93,219 $ 818 1%
Funds from operations 157,931 149,553 8,378 6% 321,783 220,606 101,177 46%
EBITDA 308,047 282,245 25,802 9% 588,119 448,282 139,837 31%
Net operating income
from continuing
operations 316,779 269,794 46,985 17% 618,650 447,813 170,837 38%
Same store cash NOI 158,583 153,955 4,629 3% 315,529 306,131 9,398 3%
Per share data (fully
diluted):
Net income (loss)
attributable to
common stockholders $ 0.25 $ 0.39 $ (0.14) -36% $ 0.45 $ 0.56 $ (0.11) -20%
Funds from operations 0.73 0.84 (0.11) -13% 1.55 1.33 0.22 17%
Interest coverage
ratio 3.21x 3.34x -0.13x -4% 3.12x 3.10x 0.02x 1%
Fixed charge coverage
ratio 2.52x 2.60x -0.08x -3% 2.42x 2.44x -0.02x -1%
40
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
We evaluate our business and make resource allocations on our three business
segments: seniors housing triple-net, seniors housing operating and medical
facilities. Please see Note 17 to our unaudited consolidated financial
statements for additional information.
Seniors Housing Triple-net
The following is a summary of our results of operations for the seniors
housing triple-net segment (dollars in thousands):
Three Months Ended Change Six Months Ended Change
June 30, June 30, June 30, June 30,
2012 2011 $ % 2012 2011 $ %
Revenues:
Rental income $ 176,777 $ 155,413 $ 21,364 14% $ 345,456 $ 247,021 $ 98,435 40%
Interest income 5,984 11,036 (5,052) -46% 11,861 20,415 (8,554) -42%
Other income 761 4,497 (3,736) -83% 1,606 5,004 (3,398) -68%
Net operating
income from
continuing
operations 183,522 170,946 12,576 7% 358,923 272,440 86,483 32%
Other expenses:
Interest expense 1,599 829 770 93% 3,380 199 3,181 1598%
Loss (gain) on
derivatives 96 - 96 n/a 96 - 96 n/a
Depreciation and
amortization 54,578 44,402 10,176 23% 105,752 71,019 34,733 49%
Transaction costs 23,683 12,692 10,991 87% 25,205 16,699 8,506 51%
Loss (gain) on
extinguishment of
debt 2,238 - 2,238 n/a 2,238 - 2,238 n/a
82,194 57,923 24,271 42% 136,671 87,917 48,754 55%
Income from continuing
operations before income
taxes and income (loss)
from unconsolidated
entities 101,328 113,023 (11,695) -10% 222,252 184,523 37,729 20%
Income tax expense (91) - (91) n/a (770) - (770) n/a
Income (loss) from
unconsolidated entities (4) - (4) n/a (2) - (2) n/a
Income from continuing
operations 101,233 113,023 (11,790) -10% 221,480 184,523 36,957 20%
Discontinued operations:
Gain on sales of
properties 32,362 28,186 4,176 15% 32,362 54,342 (21,980) -40%
Impairment of assets - - - n/a - (202) 202 -100%
Income from
discontinued
operations, net 6,950 7,985 (1,035) -13% 12,642 15,087 (2,445) -16%
Discontinued
operations, net 39,312 36,171 3,141 9% 45,004 69,227 (24,223) -35%
Net income 140,545 149,194 (8,649) -6% 266,484 253,750 12,734 5%
Less: Net income
attributable to
noncontrolling interests 109 (40) 149 n/a (7) (115) 108 -94%
Net income attributable
to common stockholders $ 140,654 $ 149,154 $ (8,500) -6% $ 266,477 $ 253,635 $ 12,842 5%
The increase in rental income is primarily attributable to acquisitions and the
conversion of newly constructed seniors housing triple-net properties subsequent
to June 30, 2011 from which we receive rent. Certain of our leases contain
annual rental escalators that are contingent upon changes in the Consumer Price
Index and/or changes in the gross operating revenues of the tenant's
properties. These escalators are not fixed, so no straight-line rent is
recorded; however, rental income is recorded based on the contractual cash
rental payments due for the period. If gross operating revenues at our
facilities and/or the Consumer Price Index do not increase, a portion of our
revenues may not continue to increase. Sales of real property would offset
revenue increases and, to the
41
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
extent that they exceed new acquisitions, could result in decreased revenues.
Our leases could renew above or below current rent rates, resulting in an
increase or decrease in rental income. For the three months ended June 30,
2012, we had no lease renewals but we had 24 leases with rental rate increasers
ranging from 0.20% to 0.50% in our seniors housing triple-net portfolio.
Interest income declined primarily due to non-recurring income earned in
connection with loan payoffs in the prior year.
Interest expense for the six months ended June 30, 2012 and 2011 represents
secured debt interest expense offset by interest allocated to discontinued
operations. The change in secured debt interest expense is due to the net
effect and timing of assumptions, extinguishments and principal amortizations.
The following is a summary of our seniors housing triple-net property secured
debt principal activity (dollars in thousands):
Three Months Ended Six Months Ended
June 30, 2012 June 30, 2011 June 30, 2012 June 30, 2011
Wtd. Avg. Wtd. Avg. Wtd. Avg. Wtd. Avg.
Amount Interest Rate Amount Interest Rate Amount Interest Rate Amount Interest Rate
Beginning
balance $ 257,824 5.146% $ 178,780 5.236% $ 259,000 5.105% $ 172,862 5.265%
Debt assumed 56,337 4.945% 83,507 4.837% 56,337 4.967% 90,120 4.819%
Debt
extinguished (111,595) 4.801% - 0.000% (111,595) 4.801% - 0.000%
Principal
payments (665) 5.408% (1,088) 5.529% (1,841) 5.410% (1,783) 5.566%
Ending
balance $ 201,901 5.278% $ 261,199 5.109% $ 201,901 5.278% $ 261,199 5.109%
Monthly
averages $ 196,590 5.273% $ 240,876 5.133% $ 226,108 5.181% $ 212,580 5.176%
In connection with the secured debt extinguishments, we recognized losses of
$2,238,000 for the three and six months ended June 30, 2012. In addition, we
recognized a $96,000 loss on derivatives due to certain interest rate swap
agreements during the three and six months ended June 30, 2012.
Depreciation and amortization increased as a result of acquisitions and the
conversion of newly constructed investment properties subsequent to June 30,
2011. To the extent that we acquire or dispose of additional properties in the
future, our provision for depreciation and amortization will change
accordingly. Transaction costs were incurred in connection with acquisitions
that occurred during the relevant periods.
During the six months ended June 30, 2012, we sold 18 seniors housing triple-net
properties and recognized gains of $32,362,000. Also, at June 30, 2012, we had
36 seniors housing triple-net properties that satisfied the requirements for
held for sale treatment. The following illustrates the reclassification impact
as a result of classifying the properties sold subsequent to January 1, 2011 or
held for sale at June 30, 2012 as discontinued operations for the periods
presented. Please refer to Note 5 to our unaudited consolidated financial
statements for further discussion.
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
Rental income $ 9,790 $ 13,834 $ 19,749 $ 27,967
Expenses:
Interest expense 1,794 2,808 3,543 5,499
Provision for depreciation 1,046 3,041 3,564
7,381
Income from discontinued
operations, net $ 6,950 $ 7,985 $ 12,642 $ 15,087
42
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Seniors Housing Operating
As discussed in Note 3 to our unaudited consolidated financial statements, we
completed additional acquisitions within our seniors housing operating
partnerships during the six months ended June 30, 2012. The results of
operations for these partnerships have been included in our consolidated results
of operations from the dates of acquisition. The seniors housing operating
partnerships were formed using the structure authorized by the REIT Investment
Diversification and Empowerment Act of 2007 ("RIDEA"). When considering new
partnerships utilizing the RIDEA structure, we look for opportunities with
best-in-class operators with a strong seasoned leadership team, high-quality
real estate in attractive markets, growth potential above the rent escalators in
our triple-net lease seniors housing portfolio, and alignment of economic
interests with our operating partner. Our seniors housing operating
partnerships offer us the opportunity for external growth because we have the
right to fund future seniors housing investment opportunities sourced by our
operating partners. The following is a summary of our seniors housing operating
results of operations (dollars in thousands):
Three Months Ended Change Six Months Ended Change
June 30, June 30, June 30, June 30,
2012 2011 $ % 2012 2011 $ %
Resident fees and services $ 165,654$ 123,149$ 42,505 35% $ 323,828$ 194,435$ 129,393 67%
Property operating expenses
111,340 84,334
27,006 32% 218,583 133,606 84,977 64%
Net operating income from
continuing operations 54,314 38,815 15,499 40% 105,245 60,829 44,416 73%
Other expenses:
Interest expense 16,227 12,974 3,253 25% 32,062 19,501 12,561 64%
Loss (gain) on derivatives (2,772) - (2,772) n/a (2,217) - (2,217) n/a
Depreciation and
amortization 37,745 38,176 (431) -1% 77,518 58,307 19,211 33%
Transaction costs 2,821 488 2,333 478% 4,399 32,557 (28,158) -86%
Loss (gain) on
extinguishment of debt (1,179) - (1,179) n/a (1,179) - (1,179) n/a
52,842 51,638 1,204 2% 110,583 110,365 218 0%
Income (loss) from continuing
operations before income taxes
and income (loss) from
unconsolidated entities 1,472 (12,823) 14,295 -111% (5,338) (49,536) 44,198 -89%
Income tax expense (92) - (92) n/a (751) - (751) n/a
Income (loss) from
unconsolidated entities (598) (561) (37) 7% (928) (1,126) 198 -18%
Net income (loss) 782 (13,384) 14,166 -106% (7,017) (50,662) 43,645 -86%
Less: Net income (loss)
attributable to noncontrolling
interests (706) (1,203) 497 -41% (2,011) (2,685) 674 -25%
Net income (loss) attributable
to common stockholders $ 1,488 $ (12,181) $ 13,669 -112% $ (5,006) $ (47,977) $ 42,971 -90%
Fluctuations in revenues, property operating expenses, loss from unconsolidated
entities, and loss attributable to noncontrolling interests are primarily a
result of acquisitions subsequent to June 30, 2011. The fluctuations in
depreciation and amortization are due to acquisitions offset by 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.
Interest expense represents secured debt interest expense. The following is a
summary of our seniors housing operating property secured debt principal
activity (dollars in thousands):
43
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended Six Months Ended
June 30, 2012 June 30, 2011 June 30, 2012 June 30, 2011
Weighted Avg. Weighted Avg. Weighted Avg. Weighted Avg.
Amount Interest Rate Amount Interest Rate Amount Interest Rate Amount Interest Rate
Beginning
balance $ 1,410,175 5.072% $ 1,042,900 5.373% $ 1,318,647 5.125% $ 487,705 5.323%
Debt issued 28,395 5.426% 58,470 5.780% 139,395 4.434% 58,470 5.780%
Debt assumed 8,316 5.690% - 0.000% 8,316 5.690% 557,217 5.420%
Debt
extinguished (64,282) 2.495% - 0.000% (79,990) 2.644% - 0.000%
Principal
payments (4,672) 5.070% (2,251) 5.818% (8,435) 5.042% (4,273) 5.931%
Ending
balance $ 1,377,933 5.203% $ 1,099,119 5.394%
$ 1,377,933 5.203% $ 1,099,119 5.394%
Monthly
averages $ 1,378,686 5.204% $ 1,097,367 5.392%
$ 1,402,994 5.127% $ 1,069,306 5.382%
In connection with secured debt extinguishments, we recognized gains of
$1,179,000 during the three and six months ended June 30, 2012.
On February 15, 2012, we entered into a forward exchange contract to purchase
$250,000,000 Canadian Dollars at a fixed rate in the future. The forward
contract was used to limit exposure to fluctuations in the Canadian Dollar to
U.S. Dollar exchange rate associated with our initial cash investment funded for
the Chartwell transaction discussed in Note 7 to our unaudited consolidated
financial statements. During the quarter ended June 30, 2012, we recognized
$2,772,000 of realized gain associated with the forward contract.
Transaction costs were incurred in connection with acquisitions that occurred
during the relevant periods. Transaction costs generally include due diligence
costs and fees for legal and valuation services, charges associated with the
termination of pre-existing relationships computed based on the fair value of
the assets acquired and lease termination fees.
44
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Medical Facilities
The following is a summary of our results of operations for the medical
facilities segment (dollars in thousands):
Three Months Ended Change Six Months Ended Change
June 30, June 30, June 30, June 30,
2012 2011 $ % 2012 2011 $ %
Revenues:
Rental income $ 101,290 $ 72,833 $ 28,457 39% $ 195,752 $ 136,988 $ 58,764 43%
Interest income 1,895 1,830 65 4% 4,159 4,160 (1) 0%
Other income 478 466 12 3% 1,082 2,251 (1,169) -52%
103,663 75,129 28,534 38% 200,993 143,399 57,594 40%
Property operating
expenses 24,963 15,474 9,489 61% 46,989 29,765 17,224 58%
Net operating income
from continuing
operations 78,700 59,655 19,045 32% 154,004 113,634 40,370 36%
Other expenses:
Interest expense 8,666 7,200 1,466 20% 18,904 13,981 4,923 35%
Depreciation and
amortization 39,594 24,677 14,917 60% 73,551 47,613 25,938 54%
Transaction costs 2,187 558 1,629 292% 4,666 547 4,119 753%
Provision for loan
losses - 168 (168) -100% - 416 (416) -100%
Loss (gain) on
extinguishment of
debt (483) - (483) n/a (483) - (483) n/a
49,964 32,603 17,361 53% 96,638 62,557 34,081 54%
Income from continuing
operations before income
taxes and income from
unconsolidated entities 28,736 27,052 1,684 6% 57,366 51,077 6,289 12%
Income tax expense (40) (41) 1 -2% (173) (153) (20) 13%
Income from
unconsolidated entities 2,058 1,532 526 34% 3,919 3,640 279 8%
Income from continuing
operations 30,754 28,543 2,211 8% 61,112 54,564 6,548 12%
Discontinued operations:
Gain (loss) on sales
of properties 88 2,038 (1,950) -96% 857 2,038 (1,181) -58%
Income (loss) from
discontinued
operations, net 33 (348) 381 n/a (145) (1,187) 1,042 -88%
Discontinued
operations, net 121 1,690 (1,569) -93% 712 851 (139) -16%
Net income (loss) 30,875 30,233 642 2% 61,824 55,415 6,409 12%
Less: Net income (loss)
attributable to
noncontrolling interests (6) 171 (177) n/a 128 1,336 (1,208) -90%
Net income (loss)
attributable to common
stockholders $ 30,881 $ 30,062 $ 819 3% $ 61,696 $ 54,079 $ 7,617 14%
The increases in rental income, property operating expenses and depreciation and
amortization are primarily attributable to the acquisitions and construction
conversions of medical facilities subsequent to June 30, 2011 from which we
receive rent. Certain of our leases contain annual rental escalators that are
contingent upon changes in the Consumer Price Index (CPI). 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 CPI does not increase, a portion of our revenues may not continue to
increase. Sales of real property would offset revenue increases and, to the
extent that they exceed new acquisitions, could result in decreased revenues.
Our leases could renew above or below current rent rates, resulting in an
increase or decrease in rental income. For the three months ended June 30,
2012, our consolidated medical office building portfolio signed 67,701 square
feet of new leases and 167,945 square feet of renewals. The weighted average
term of these leases was six years, with a rate of $23.20 per square foot and
tenant improvement and lease commission costs of $13.64 per square foot.
Substantially all of these leases contain an annual fixed rent escalation
structure ranging from 1.5% to 3.0%. For the three months ended June 30, 2012,
we had no lease renewals and three leases' with rent increases ranging from 2.0%
to 2.6% in our hospital portfolio. Other income is attributable to third party
management fee income.
45
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Interest expense for the six months ended June 30, 2012 and 2011 represents
secured debt interest expense offset by interest allocated to discontinued
operations. 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 medical facilities secured
debt principal activity (dollars in thousands):
Three Months Ended Six Months Ended
June 30, 2012 June 30, 2011 June 30, 2012 June 30, 2011
Weighted Avg. Weighted Avg. Weighted Avg. Weighted Avg.
Amount Interest Rate Amount Interest Rate Amount Interest Rate Amount Interest Rate
Beginning
balance $ 657,622 5.959% $ 460,553 5.996% $ 520,026 5.981% $ 463,477 6.005%
Debt assumed 62,045 5.866% 42,551 6.166% 220,335 5.861% 42,551 6.166%
Debt
extinguished (20,269) 5.997% - 0.000% (37,622) 5.858% - 0.000%
Principal
payments (3,944) 6.323% (3,464) 6.355% (7,287) 6.183% (6,388) 6.218%
Ending
balance $ 695,454 5.947% $ 499,640 6.008% $ 695,452 5.947% $ 499,640 6.008%
Monthly
averages $ 671,328 5.952% $ 483,946 5.997% $ 653,779 5.955% $ 474,781 5.997%
In connection with secured debt extinguishments, we recognized gains of $483,000
for the three and six months ended June 30, 2012. Transaction costs generally
include due diligence costs and fees for legal and valuation services. Income
tax expense is primarily related to third party management fee income. Income
from unconsolidated entities represents our share of net income related to our
joint venture investments with Forest City Enterprises (effective February 2010)
and a strategic medical office partnership (effective January 2011).
During the six months ended June 30, 2012, we sold five medical facilities for
net gains of $857,000. The following illustrates the reclassification impact as
a result of classifying the properties sold subsequent to January 1, 2011 as
discontinued operations for the periods presented. Please refer to Note 5 to
our unaudited consolidated financial statements for further discussion.
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
Rental income $ 43 $ 2,109 $ 291 $ 4,275
Expenses:
Interest expense - 481 - 991
Property operating expenses 10 1,219
436 2,970
Provision for depreciation - 757 - 1,501
Income (loss) from discontinued
operations, net $ 33 $ (348) $ (145) $ (1,187)
Net income attributable to noncontrolling interests primarily relates to
certain properties that are consolidated in our operating results but where we
have less than a 100% ownership interest. The decrease in net income
attributable to noncontrolling interests is primarily due to the buyout of a
joint venture partnership during the three months ended March 31, 2011.
46
--------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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,
2012 2011 $ % 2012 2011 $ %
Revenues:
Other income $ 243 $ 378 $ (135) -36% $ 478 $ 910 $ (432) -47%
Expenses:
Interest expense 68,476 60,481 7,995 13% 132,595 103,932 28,663 28%
General and
administrative 25,870 19,562 6,308 32% 53,621 37,276 16,345 44%
94,346 80,043 14,303 18% 186,216 141,208 45,008 32%
Loss from continuing
operations before income
taxes (94,103) (79,665) (14,438) 18% (185,738) (140,298) (45,440) 32%
Income tax expense (1,224) (170) (1,054) 620% (1,224) (187) (1,037) 555%
Income from continuing
operations (95,327) (79,835) (15,492) 19% (186,962) (140,485) (46,477) 33%
Net loss (95,327) (79,835) (15,492) 19% (186,962) (140,485) (46,477) 33% Preferred stock
Less: dividends 16,719 17,353 (634) -4% 35,926 26,033 9,893 38%
Preferred stock
Less: redemption charge 6,242 - 6,242 n/a 6,242 - 6,242 n/a
Net loss attributable to
common stockholders $ (118,288) $ (97,188) $ (21,100) 22% $ (229,130) $ (166,518) $ (62,612) 38%
Other income primarily represents income from non-real estate activities such
as interest earned on temporary investments of cash reserves.
The following is a summary of our non-segment/corporate interest expense
(dollars in thousands):
Three Months Ended Change Six Months Ended Change
June 30, June 30, June 30, June 30,
2012 2011 $ % 2012 2011 $ %
Senior
unsecured
notes $ 64,803 $ 59,442 $ 5,361 9% $ 124,104 $ 103,901 $ 20,203 19%
Secured debt 142 147 (5) -3% 264 276 (12) -4%
Unsecured
lines of
credit 2,525 688 1,837 267% 6,639 1,961 4,678 239%
Capitalized
interest (2,139) (2,313) 174 -8% (4,558) (6,979) 2,421 -35%
SWAP savings (40) (40) - 0% (80) (80) - 0%
Loan expense 3,185 2,557 628 25% 6,226 4,853 1,373 28%
Totals $ 68,476 $ 60,481 $ 7,995 13% $ 132,595 $ 103,932 $ 28,663 28%
The change in interest expense on senior unsecured notes is due to the net
effect of issuances and extinguishments. The following is a summary of our
senior unsecured note principal activity (dollars in thousands):
47
--------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended Six Months Ended
June 30, 2012 June 30, 2011 June 30, 2012 June 30, 2011
Weighted Avg. Weighted Avg. Weighted Avg. Weighted Avg.
Amount Interest Rate Amount Interest Rate Amount Interest Rate Amount Interest Rate
Beginning
balance $ 4,464,905 5.133% $ 4,464,930 5.133%$ 4,464,927 5.133% $ 3,064,930 5.129%
Debt issued 600,000 4.125%
- 0.000% 600,000 4.125% 1,400,000 5.143%
Debt
redeemed (125,563) 4.750% - 0.000% (125,585) 4.750% - 0.000%
Ending
balance $ 4,939,342 5.021% $ 4,464,930 5.133% $ 4,939,342 5.021% $ 4,464,930 5.133%
Monthly
averages $ 5,002,083 5.017% $ 4,464,930 5.133% $ 4,987,624 5.016% $ 3,864,930 5.133%
The change in interest expense on the unsecured line of credit arrangements is
due primarily to the net effect and timing of draws, paydowns and variable
interest rate changes. The following is a summary of our unsecured line of
credit arrangements (dollars in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2012 2011 2012 2011
Balance outstanding at quarter
end $ 393,000 $ - $ 393,000 $ -
Maximum amount outstanding at
any month end $ 393,000 $ 20,000 $ 897,000 $ 495,000
Average amount outstanding
(total of daily
principal balances divided by
days in period) $ 122,209 $ 253 $ 301,456 $ 158,856
Weighted average interest rate
(actual interest
expense divided by average
borrowings outstanding) 1.65% n/a 1.65% 2.17%
We capitalize certain interest costs associated with funds used to finance
the construction of properties owned directly by us. The amount capitalized is
based upon the balances outstanding during the construction period using the
rate of interest that approximates our cost of financing. Our interest expense
is reduced by the amount capitalized.
Please see Note 11 to our unaudited consolidated financial statements for a
discussion of our interest rate swap agreements and their impact on interest
expense. Loan expense represents the amortization of deferred loan costs
incurred in connection with the issuance and amendments of debt.
General and administrative expenses as a percentage of consolidated revenues
(including revenues from discontinued operations) for the three months ended
June 30, 2012 and 2011 were 5.71% and 5.29%, respectively. The change from
prior year is primarily related to the increasing revenue base as a result of
our seniors housing operating partnerships.
The following is a summary of our preferred stock activity (dollars in
thousands):
Three Months Ended Six Months Ended
June 30, 2012 June 30, 2011 June 30, 2012 June 30, 2011
Weighted Avg. Weighted Avg. Weighted Avg. Weighted Avg.
Shares Dividend Rate Shares Dividend Rate Shares Dividend Rate Shares Dividend Rate
Beginning balance 37,224,854 6.855% 25,724,854 7.013% 25,724,854 7.013% 11,349,854 7.663%
Shares issued
- 0.000% -
0.000% 11,500,000 6.500% 14,375,000 6.500%
Shares redeemed (11,000,000) 7.716%
- 0.000% (11,000,000) 7.716% - 0.000%
Ending balance 26,224,854 6.493% 25,724,854 7.013% 26,224,854 6.493% 25,724,854 7.013%
Monthly averages 29,891,521 6.643% 25,724,854 7.013% 28,629,616 6.805% 19,564,140 7.175%
In connection with the preferred stock redemptions, we recognized charges of
$6,242,000 for the three and six months ended June 30, 2012.
48
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Non-GAAP Financial Measures
We believe that net income, as defined by U.S. GAAP, is the most appropriate
earnings measurement. However, we consider FFO to be a useful supplemental
measure 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 FFO as a
supplemental measure of operating performance for REITs that excludes historical
cost depreciation from net income. FFO, as defined by NAREIT, means net income,
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.
Net operating income from continuing operations ("NOI") is used to evaluate
the operating performance of our properties. We define NOI as total revenues,
including tenant reimbursements, less property level operating expenses, which
exclude depreciation and amortization, general and administrative expenses,
impairments and interest expense. Property operating expenses represent costs
associated with managing, maintaining and servicing tenants for our seniors
housing operating and medical facility properties. These expenses include, but
are not limited to, property-related payroll and benefits, property management
fees, marketing, housekeeping, food service, maintenance, utilities, property
taxes and insurance. General and administrative expenses represent costs
unrelated to property operations or transaction costs. These expenses include,
but are not limited to, payroll and benefits, professional services, office
expenses and depreciation of corporate fixed assets. Same store cash NOI
("SSCNOI") is used to evaluate the cash-based operating performance of our
properties under a consistent population which eliminates changes in the
composition of our portfolio. As used herein, same store is defined as those
revenue-generating properties in the portfolio for the reporting period January
1, 2011 to June 30, 2012. Properties acquired, developed or classified in
discontinued operations during that period are excluded from the same store
amounts. We believe NOI and SSCNOI 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 SSCNOI to make
decisions about resource allocations and to assess the property level
performance of our properties.
EBITDA stands for earnings before interest, taxes, depreciation and
amortization. We believe that EBITDA, along with net income and cash flow
provided from operating activities, is an important supplemental measure because
it provides additional information to assess and evaluate the performance of our
operations. We primarily utilize EBITDA to measure our interest coverage ratio,
which represents EBITDA divided by total interest, and our fixed charge coverage
ratio, which represents EBITDA divided by fixed charges. Fixed charges include
total interest, secured debt principal amortization and preferred dividends.
A covenant in our $2 billion unsecured line of credit arrangement contains a
financial ratio based on a definition of EBITDA that is specific to that
agreement. Failure to satisfy this covenant could result in an event of default
that could have a material adverse impact on our cost and availability of
capital, which could in turn have a material adverse impact on our consolidated
results of operations, liquidity and/or financial condition. Due to the
materiality of this debt agreement and the financial covenant, we have disclosed
Adjusted EBITDA, which represents EBITDA as defined above and adjusted for
stock-based compensation expense, provision for loan losses and gain/loss on
extinguishment of debt. 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. Effective July 27, 2011, our
covenant requires an adjusted fixed charge ratio of at least 1.50 times.
Other than Adjusted EBITDA, our supplemental reporting measures and similarly
entitled financial measures are widely used by investors, equity and debt
analysts and rating agencies in the valuation, comparison, rating and investment
recommendations of companies. Management uses these financial measures to
facilitate internal and external comparisons to our historical operating results
and in making operating decisions. Additionally, these measures are utilized by
the Board of Directors to evaluate management. Adjusted EBITDA is used solely to
determine our compliance with a financial covenant in our primary line of credit
arrangement and is not being presented for use by investors for any other
purpose. None of our supplemental measures represent net income or cash flow
provided from operating activities as determined in accordance with U.S. GAAP
and should not be considered as alternative measures of profitability or
liquidity. Finally, the supplemental measures, as defined by us, may not be
comparable to similarly entitled items reported by other real estate investment
trusts or other companies.
49
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The tables below reflect the reconciliation of FFO to net income attributable
to common stockholders, the most directly comparable U.S. GAAP measure, for the
periods presented. The provisions for depreciation and amortization include
provisions for depreciation and amortization from discontinued operations.
Noncontrolling interest amounts represent the noncontrolling interests' share of
transaction costs and depreciation and amortization. Unconsolidated entity
amounts represent our share of unconsolidated entities' 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 Reconciliation: 2011 2011 2011 2011 2012 2012
Net income (loss)
attributable to
common stockholders $ 23,372 $ 69,847 $ 36,607 $ 27,282 $ 39,307 $ 54,735
Depreciation and
amortization 74,768 111,053 115,640 122,144 127,422 132,963
Impairment of assets 202 - - 11,992 - -
Gain on sales of
properties (26,156) (30,224) (185) (4,594) (769) (32,450)
Noncontrolling interests (4,160) (4,487) (4,706) (5,318) (4,990) (5,190)
Unconsolidated entities 3,027 3,364 3,020 2,892 2,887 7,873
Funds from operations $ 71,053 $ 149,553 $ 150,376 $ 154,398 $ 163,857 $ 157,931
Average common shares
outstanding:
Basic 154,945 176,445 177,272 185,913 199,661 213,498
Diluted 155,485 177,487 177,849 186,529 201,658 215,138
Per share data:
Net income attributable
to
common stockholders
Basic $ 0.15 $ 0.40 $ 0.21 $ 0.15 $ 0.20 $ 0.26
Diluted 0.15 0.39 0.21 0.15 0.19 0.25
Funds from operations
Basic $ 0.46 $ 0.85 $ 0.85 $ 0.83 $ 0.82 $ 0.74
Diluted 0.46 0.84 0.85 0.83 0.81 0.73
Six Months Ended
June 30, June 30,
FFO Reconciliation: 2011 2012
Net income attributable to
common stockholders $ 93,219 $ 94,037
Depreciation and amortization 185,821 260,385
Impairment of assets 202 -Loss (gain) on sales of properties (56,380) (33,219)
Noncontrolling interests
(8,647) (10,179)
Unconsolidated entities 6,391 10,759
Funds from operations $ 220,606 $ 321,783
Average common shares outstanding:
Basic 165,755 206,612
Diluted 166,458 208,237
Per share data:
Net income attributable to
common stockholders
Basic $ 0.56 $ 0.46
Diluted 0.56 0.45
Funds from operations
Basic $ 1.33 $ 1.56
Diluted 1.33 1.55
50
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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. Interest
expense and the provisions for depreciation and amortization include
discontinued operations. Dollars are in thousands.
Three Months Ended
March 31, June 30, September 30, December 31, March 31, June 30,EBITDA Reconciliation: 2011 2011 2011 2011 2012 2012
Net income $ 31,810 $ 86,208 $ 52,353 $ 42,343 $ 57,458 $ 76,875
Interest expense 59,330 84,773 87,811 90,084 93,722 96,762
Income tax expense 129 211 223 825 1,470 1,447
Depreciation and
amortization 74,768 111,053 115,640 122,144 127,422 132,963
EBITDA $ 166,037 $ 282,245 $ 256,027 $ 255,396 $ 280,072 $ 308,047
Interest Coverage
Ratio:
Interest expense $ 59,330 $ 84,773 $ 87,811 $ 90,084 $ 93,722 $ 96,762
Non-cash interest
expense (3,716) (2,698) (3,714) (3,777) (3,693) (2,849)
Capitalized interest 4,665 2,313 3,111 3,074 2,420 2,140
Total interest 60,279 84,388 87,208 89,381 92,449 96,053
EBITDA $ 166,037 $ 282,245 $ 256,027 $ 255,396 $ 280,072 $ 308,047
Interest coverage
ratio 2.75x 3.34x 2.94x 2.86x 3.03x 3.21x
Fixed Charge Coverage
Ratio:
Total interest $ 60,279 $ 84,388 $ 87,208 $ 89,381 $ 92,449 $ 96,053
Secured debt principal
payments 5,906 7,011 7,204 7,683 8,529 9,567
Preferred dividends 8,680 17,353 17,234 17,234 19,207 16,719
Total fixed
charges 74,865 108,752 111,646 114,298 120,185 122,339
EBITDA $ 166,037 $ 282,245 $ 256,027 $ 255,396 $ 280,072 $ 308,047
Fixed charge
coverage ratio 2.22x 2.60x 2.29x 2.23x 2.33x 2.52x
Six Months Ended
June 30, June 30,
EBITDA Reconciliation: 2011 2012
Net income $ 118,018 $ 134,329
Interest expense 144,103 190,484
Income tax expense 340 2,918
Depreciation and amortization 185,821 260,385
EBITDA $ 448,282 $ 588,116
Interest Coverage Ratio:
Interest expense $ 144,103 $ 190,484
Non-cash interest expense (6,414) (6,542)
Capitalized interest 6,979 4,558
Total interest 144,668 188,500
EBITDA $ 448,282 $ 588,116
Interest coverage ratio 3.10x 3.12x
Fixed Charge Coverage Ratio:
Total interest $ 144,668 $ 188,500
Secured debt principal payments 12,917 18,096
Preferred dividends
26,033 35,926
Total fixed charges 183,618 242,522
EBITDA $ 448,282 $ 588,116
Fixed charge coverage ratio 2.44x 2.43x
51
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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.
Interest expense and the provisions for depreciation and amortization include
discontinued operations. Dollars are in thousands.
Twelve Months Ended
March 31, June 30, September 30, December 31, March 31, June 30,
Adjusted EBITDA
Reconciliation: 2011 2011 2011 2011 2012 2012
Net income $ 129,001 $ 164,146 $ 216,407 $ 212,716 $ 238,363 $ 229,029
Interest expense 190,305 237,528 280,354 321,998 356,390 368,379
Income tax expense 407 430 601 1,388 2,729 3,965
Depreciation and
amortization 233,731 297,333 360,580 423,605 476,259 498,169
Stock-based compensation
expense 9,866 10,350 11,106 10,786 16,552 16,177
Provision for loan losses 29,932 30,100 1,314 2,010 1,762 1,595
Loss (gain) on
extinguishment of debt 16,134 9,099 - (979) (979) (403)
Adjusted EBITDA $ 609,376 $ 748,986 $ 870,362 $ 971,524 $ 1,091,076 $ 1,116,911
Adjusted Fixed Charge
Coverage Ratio:
Interest expense $ 190,305 $ 237,528 $ 280,354 $ 321,998 $ 356,390 $ 368,379
Capitalized interest 18,381 15,418 14,873 13,164 10,919 10,745
Non-cash interest expense (14,820) (13,859) (13,315) (13,905) (13,882) (14,033)
Secured debt principal
payments 19,180 21,866 25,051 27,804 30,427 32,983
Preferred dividends 24,816 36,685 48,572 60,501 71,028 70,394
Total fixed charges 237,862 297,638 355,535 409,562 454,882 468,468
Adjusted EBITDA $ 609,376 $ 748,986 $ 870,362 $ 971,524 $ 1,091,076 $ 1,116,911
Adjusted fixed charge
coverage ratio 2.56x 2.52x 2.45x 2.37x 2.40x 2.38x
52
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following tables reflect the reconciliation of NOI and SSCNOI to net
income attributable to common stockholders, the most directly comparable U.S.
GAAP measure, for the periods presented. Amounts are in thousands.
Three Months Ended
March 31, June 30, September 30, December 31, March 31, June 30,
NOI Reconciliation: 2011 2011 2011 2011 2012 2012
Total revenues:
Seniors housing
triple-net $ 101,494 $ 170,946 $ 166,281 $ 175,184 $ 175,401 $ 183,522
Seniors housing operating 71,286 123,149 125,125 136,525 158,174 165,654
Medical facilities 68,270 75,129 81,416 85,689 97,330 103,663
Non-segment/corporate 532 378 307 53 235 243
Total revenues 241,582 369,602 373,129 397,451 431,140 453,082
Property operating expenses:
Seniors housing operating 49,272 84,334 86,218 94,318 107,243 111,340
Medical facilities 14,291 15,474 17,148 18,422 22,026 24,963
Total property
operating
expenses 63,563 99,808 103,366 112,740 129,269 136,303
Net operating income:
Seniors housing
triple-net 101,494 170,946 166,281 175,184 175,401 183,522
Seniors housing operating 22,014 38,815 38,907 42,207 50,931 54,314
Medical facilities 53,979 59,655 64,268 67,267 75,304 78,700
Non-segment/corporate 532 378 307 53 235 243
Net operating
income from
continuing
operations 178,019 269,794 269,763 284,711 301,871 316,779
Reconciling items:
Interest expense (56,129) (81,484) (85,250) (87,782) (91,973) (94,968)
Loss (gain) on
derivatives - - - - (555) 2,676
Depreciation and
amortization (69,684) (107,255) (112,512) (118,862) (124,904) (131,917)
General and
administrative (17,714) (19,562) (19,735) (20,190) (27,751) (25,870)
Transaction costs (36,065) (13,738) (6,739) (13,682) (5,579) (28,691)
Loss (gain) on
extinguishment of debt - - - 979 - (576)
Provision for loan losses (248) (168) (132) (1,463) - -
Income tax benefit
(expense) (129) (211) (223) (825) (1,470) (1,447)
Income from
unconsolidated entities 1,543 971 1,642 1,616 1,532 1,456
Income (loss) from
discontinued operations,
net 32,217 37,861 5,539 (2,159) 6,288 39,433
Preferred dividends (8,680) (17,353) (17,234) (17,234) (19,207) (16,719)
Preferred stock
redemption charge - - - - - (6,242)
Loss (income)
attributable to
noncontrolling interests 242 992 1,488 2,173 1,055 821
(154,647) (199,947) (233,156) (257,429) (262,564) (262,044)
Net income (loss)
attributable to common
stockholders $ 23,372 $ 69,847 $ 36,607 $ 27,282 $ 39,307 $ 54,735
53
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended
March 31, June 30, March 31, June 30,
2011 2011 2012 2012
Same Store Cash NOI Reconciliation:
Net operating income from continuing
operations:
Seniors housing triple-net 101,494 $ 170,946 175,401 $ 183,522
Seniors housing operating 22,014
38,815 50,931 54,314
Medical facilities 53,979 59,655 75,304 78,700
Total 177,487 269,416 301,636 316,536
Adjustments: Seniors housing triple-net:
Non-cash NOI on same
store properties (3,287) (2,642) (1,638) (1,353)
NOI attributable to
non same store
properties (15,360) (83,867) (88,217) (94,879)
Subtotal (18,647) (86,509) (89,855) (96,232)
Seniors housing operating:
Non-cash NOI on same
store properties - - - -
NOI attributable to
non same store
properties (736) (16,670) (28,020) (31,171)
Subtotal (736) (16,670) (28,020) (31,171) Medical facilities:
Non-cash NOI on same
store properties (2,392) (2,397) (1,957) (1,924)
NOI attributable to
non same store
properties (3,535) (9,885) (24,858) (28,625)
Subtotal (5,927) (12,282) (26,815) (30,549)
Same store cash net operating
income: Properties
Seniors housing triple-net 323 82,847 84,437 85,546 87,290
Seniors housing operating 65 21,278
22,145 22,911 23,143
Medical facilities 161 48,052 47,373 48,489 48,151
Total 549 152,177 $ 153,955 156,946 $ 158,584
54
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Six Months Ended
June 30, June 30,
NOI Reconciliation: 2011 2012
Total revenues: Seniors housing triple-net $ 272,440 $ 358,923
Seniors housing operating 194,435 323,828
Medical facilities 143,399 200,993
Non-segment/corporate 910 478
Total revenues 611,184 884,222Property operating expenses:
Seniors housing operating 133,606 218,583
Medical facilities 29,765 46,989
Total property operating
expenses 163,371 265,572Net operating income:
Seniors housing triple-net 272,440 358,923
Seniors housing operating 60,829 105,245
Medical facilities 113,634 154,004
Non-segment/corporate 910 478
Net operating income from
continuing operations 447,813 618,650Reconciling items:
Interest expense (137,613) (186,941)
Loss (gain) on derivatives - 2,121
Depreciation and amortization (176,939) (256,821)
General and administrative (37,276) (53,621)
Transaction costs (49,803) (34,270)
Loss (gain) on extinguishment of debt - (576)
Provision for loan losses (416) -
Income tax benefit (expense) (340) (2,918)
Income from unconsolidated entities 2,514 2,989
Income (loss) from discontinued
operations, net 70,078 45,716
Preferred dividends (26,033) (35,926)
Preferred stock redemption charge - (6,242)
Loss (income) attributable to
noncontrolling interests 1,234 1,876
(354,594) (524,613)
Net income (loss) attributable to common
stockholders $ 93,219 $ 94,037
55
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Critical Accounting Policies
Our 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 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 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, 2011, as updated by our Current Report on Form 8-K filed on May 10,
2012, for further information regarding significant accounting policies that
impact us. There have been no material changes to these policies in 2012.
Forward-Looking Statements and Risk Factors
This Quarterly Report on Form 10-Q may contain "forward-looking" statements as
defined in the Private Securities Litigation Reform Act of 1995. These
forward-looking statements concern and are based upon, among other things, the
possible expansion of the company's portfolio; the sale of facilities; the
performance of its operators/tenants and facilities; its ability to enter into
agreements with viable new tenants for vacant space or for facilities that the
company takes back from financially troubled tenants, if any; its occupancy
rates; its ability to acquire, develop and/or manage facilities; its ability to
make distributions to stockholders; its policies and plans regarding
investments, financings and other matters; its ability to manage the risks
associated with international expansion and operations; its tax status as a real
estate investment trust; its critical accounting policies; its ability to
appropriately balance the use of debt and equity; its ability to access capital
markets or other sources of funds; and its ability to meet its earnings
guidance. When the company uses words such as "may," "will," "intend," "should,"
"believe," "expect," "anticipate," "project," "estimate" or similar expressions,
it is making forward-looking statements. Forward-looking statements are not
guarantees of future performance and involve risks and uncertainties. The
company's expected results may not be achieved, and actual results may differ
materially from expectations. 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, seniors housing and life science 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 facilities with
profitable results; the failure to make new investments as and when anticipated;
acts of God affecting the company's facilities; 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; regulatory approval and market
acceptance of the products and technologies of life science tenants; liability
or contract claims by or against operators/tenants; unanticipated difficulties
and/or expenditures relating to future acquisitions; environmental laws
affecting the company's facilities; changes in rules or practices governing the
company's financial reporting; the movement of U.S. and Canadian exchange rates;
and legal and operational matters, including real estate investment trust
qualification 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, 2011, as updated by our Current Report on Form 8-K
filed on May 10, 2012, 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 assumes no
obligation to update or revise any forward-looking statements or to update the
reasons why actual results could differ from those projected in any
forward-looking statements.
56
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