# Healthpeak Properties, Inc.: Form 10-Q for the period ended Mar 31, 2019

- Company: [Healthpeak Properties, Inc.](/companies/doc.md) (CIK 765880)
- Form: 10-Q
- Filed: 2019-05-02
- Accepted by EDGAR: May 2, 2019, 16:22 ET
- Period: 2019-03-31
- Accession: 0001628280-19-005690
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/765880/000162828019005690/hcp-10q3312019.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/765880/000162828019005690/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-01-01 to 2019-03-31 | $126.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2019-01-01 to 2019-03-31 | $168.9m | us-gaap:CostOfGoodsAndServicesSold |
| Interest expense | 3 months, 2019-01-01 to 2019-03-31 | $49.3m | us-gaap:InterestExpense |
| Income tax | 3 months, 2019-01-01 to 2019-03-31 | −$3.5m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-01-01 to 2019-03-31 | $61.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-01-01 to 2019-03-31 | $0.13 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-01-01 to 2019-03-31 | $0.13 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-01-01 to 2019-03-31 | 479,131,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2019-01-01 to 2019-03-31 | $158.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Dividends paid | 3 months, 2019-01-01 to 2019-03-31 | $177.3m | us-gaap:PaymentsOfDividends |
| Share repurchases | 3 months, 2019-01-01 to 2019-03-31 | $2.9m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2019-03-31 | $120.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2019-03-31 | $12.90bn | us-gaap:Assets |
| Total liabilities | at 2019-03-31 | $6.50bn | us-gaap:Liabilities |
| Long-term debt | at 2019-03-31 | $5.67bn | us-gaap:LongTermDebt |
| Shareholders' equity | at 2019-03-31 | $5.84bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 64,161 characters.

*All references in this report to “HCP,” “we,” “us” or “our” mean HCP, Inc., together with its consolidated subsidiaries. Unless the context suggests otherwise, references to “HCP, Inc.” mean the parent company without its subsidiaries.*

### Cautionary Language Regarding Forward-Looking Statements

Statements in this Quarterly Report on Form 10-Q that are not historical factual statements are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include, among other things, statements regarding our and our officers’ intent, belief or expectation as identified by the use of words such as “may,” “will,” “project,” “expect,” “believe,” “intend,” “anticipate,” “seek,” “forecast,” “plan,” “potential,” “estimate,” “could,” “would,” “should” and other comparable and derivative terms or the negatives thereof. Forward-looking statements reflect our current expectations and views about future events and are subject to risks and uncertainties that could significantly affect our future financial condition and results of operations. While forward-looking statements reflect our good faith belief and assumptions we believe to be reasonable based upon current information, we can give no assurance that our expectations or forecasts will be attained. As more fully set forth under Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, risks and uncertainties that may cause our actual results to differ materially from the expectations contained in the forward-looking statements include, among other things:

- our reliance on a concentration of a small number of tenants and operators for a significant percentage of our revenues and net operating income;
- the financial condition of our existing and future tenants, operators and borrowers, including potential bankruptcies and downturns in their businesses, and their legal and regulatory proceedings, which results in uncertainties regarding our ability to continue to realize the full benefit of such tenants’ and operators’ leases and borrowers’ loans;
- the ability of our existing and future tenants, operators and borrowers to conduct their respective businesses in a manner sufficient to maintain or increase their revenues and manage their expenses in order to generate sufficient income to make rent and loan payments to us and our ability to recover investments made, if applicable, in their operations;
- our concentration in the healthcare property sector, particularly in senior housing, life sciences and medical office buildings, which makes our profitability more vulnerable to a downturn in a specific sector than if we were investing in multiple industries;
- operational risks associated with third party management contracts, including the additional regulation and liabilities of our RIDEA lease structures;
- the effect on us and our tenants and operators of legislation, executive orders and other legal requirements, including compliance with the Americans with Disabilities Act, fire, safety and health regulations, environmental laws, the Affordable Care Act, licensure, certification and inspection requirements, and laws addressing entitlement programs and related services, including Medicare and Medicaid, which may result in future reductions in reimbursements or fines for noncompliance;
- our ability to identify replacement tenants and operators and the potential renovation costs and regulatory approvals associated therewith;
- the risks associated with property development and redevelopment, including costs above original estimates, project delays and lower occupancy rates and rents than expected;
- the potential impact of uninsured or underinsured losses;
- the risks associated with our investments in joint ventures and unconsolidated entities, including our lack of sole decision making authority and our reliance on our partners’ financial condition and continued cooperation;
- competition for the acquisition and financing of suitable healthcare properties as well as competition for tenants and operators, including with respect to new leases and mortgages and the renewal or rollover of existing leases;
- our ability to achieve the benefits of acquisitions or other investments within expected time frames or at all, or within expected cost projections;
- the potential impact on us and our tenants, operators and borrowers from current and future litigation matters, including the possibility of larger than expected litigation costs, adverse results and related developments;
- changes in federal, state or local laws and regulations, including those affecting the healthcare industry that affect our costs of compliance or increase the costs, or otherwise affect the operations, of our tenants and operators;
- our ability to foreclose on collateral securing our real estate-related loans;
- volatility or uncertainty in the capital markets, the availability and cost of capital as impacted by interest rates, changes in our credit ratings, and the value of our common stock, and other conditions that may adversely impact our ability to fund our obligations or consummate transactions, or reduce the earnings from potential transactions;
- changes in global, national and local economic and other conditions, including currency exchange rates;
- our ability to manage our indebtedness level and changes in the terms of such indebtedness;
- competition for skilled management and other key personnel;
- our reliance on information technology systems and the potential impact of system failures, disruptions or breaches; and
- our ability to maintain our qualification as a real estate investment trust (“REIT”).

Except as required by law, we do not undertake, and hereby disclaim, any obligation to update any forward-looking statements, which speak only as of the date on which they are made.

The information set forth in this Item 2 is intended to provide readers with an understanding of our financial condition, changes in financial condition and results of operations. We will discuss and provide our analysis in the following order:

- Executive Summary
- 2019 Transaction Overview
- Dividends
- Results of Operations
- Liquidity and Capital Resources
- Off-Balance Sheet Arrangements
- Non-GAAP Financial Measures Reconciliations
- Critical Accounting Policies
- Recent Accounting Pronouncements

### Executive Summary

HCP, Inc., a Standard & Poor’s (“S&P”) 500 company, invests primarily in real estate serving the healthcare industry in the United States. We are a Maryland corporation organized in 1985 and qualify as a self-administered real estate investment trust (“REIT”). We acquire, develop, lease, own and manage healthcare real estate. At March 31, 2019, our portfolio of investments, including properties in our unconsolidated joint ventures (“JVs”), consisted of interests in 734 properties.

We invest and manage our real estate portfolio for the long-term to maximize the benefit to our stockholders and support the growth of our dividends. The core elements of our strategy are to: (i) acquire, develop, lease, own and manage a diversified portfolio of quality healthcare properties across multiple geographic locations and business segments, including senior housing, life science, and medical office, among others; (ii) maintain an investment grade balance sheet with adequate liquidity and long-term fixed rate debt financing with staggered maturities in order to support the longer-term nature of our investments, while reducing our exposure to interest rate volatility and refinancing risk at any point in the interest rate or credit cycles; (iii) align ourselves with leading healthcare companies, operators and service providers which, over the long-term, should result in higher relative rental rates, net operating cash flows and appreciation of property values; and (iv) pursue operational excellence to maximize the value of our investments.

We believe our real estate portfolio holds the potential for increased future cash flows as it is well-maintained and in desirable locations. Our strategy for maximizing the benefits from these opportunities is to: (i) work with new or existing tenants and operators to address their space and capital needs; and (ii) provide high-quality property management services in order to motivate tenants to renew, expand or relocate into our properties.

The delivery of healthcare services requires real estate and, as a result, tenants and operators depend on real estate, in part, to maintain and grow their businesses. We believe that the healthcare real estate market provides investment opportunities due to the: (i) compelling long-term demographics driving the demand for healthcare services; (ii) specialized nature of healthcare real estate investing; and (iii) ongoing consolidation of the fragmented healthcare real estate sector.

We primarily invest in healthcare real estate through long-term ownership, acquisitions and development. We both wholly-own investments and co-invest through joint ventures with institutional or development investors. When consistent with our investment strategies, we may occasionally provide real estate secured financing to healthcare real estate developers or owners. Additionally, we may opportunistically acquire other real estate entities or their assets.

We monitor, but do not limit, our investments based on the percentage of our total assets that may be invested in any one property type, investment vehicle or geographic location, the number of properties that may be leased to a single tenant or operator, or loans that may be made to a single borrower. In allocating capital, we target opportunities with the most attractive risk/reward profile for our portfolio as a whole. We may take additional measures to mitigate risk, including diversifying our investments (by sector, geography, tenant or operator), structuring transactions as master leases, requiring tenant or operator insurance and indemnifications, and obtaining credit enhancements in the form of guarantees, letters of credit or security deposits.

Our REIT qualification requires us to distribute at least 90% of our REIT taxable income (excluding net capital gains); therefore, we do not retain a significant amount of capital. As a result, we regularly access the public equity and debt markets to raise the funds necessary to finance acquisitions and debt investments, develop and redevelop properties, and refinance maturing debt.

We maintain a disciplined balance sheet by actively managing our debt to equity levels and maintaining multiple sources of liquidity. Our debt obligations are primarily long-term fixed rate with staggered maturities.

We finance our investments based on our evaluation of available sources of funding. For short-term purposes, we may utilize our revolving line of credit facility, arrange for other short-term borrowings from banks or other sources, or issue equity securities pursuant to our at-the-market equity offering program. We arrange for longer-term financing by offering debt and equity securities, placing mortgage debt and obtaining capital from institutional lenders and joint venture partners.

### 2019 Transaction Overview

### Discovery Portfolio Acquisition

- In April 2019, we acquired a portfolio of nine senior housing properties, with a total of 1,242 units, for $445 million. The properties are located across Florida, Georgia and Texas and will be operated by Discovery Senior Living, LLC (“Discovery”).

### Oakmont Portfolio Acquisition and Transitions

- On May 1, 2019, we acquired three newly-built, senior housing communities for $113 million. The portfolio will be operated by Oakmont Senior Living LLC (“Oakmont”) and includes 132 assisted living units and 68 memory care units with an average occupancy of 96%. Additionally, the Company transitioned four senior housing triple-net properties to RIDEA structures with Oakmont continuing as the operator.

### Other Real Estate Transactions

- In January and February 2019, we acquired a life science facility for $71 million and development rights at an adjacent undeveloped land parcel for consideration of up to $27 million. The existing facility and land parcel are located in Cambridge, Massachusetts.
- During the first quarter of 2019, the Company transitioned 18 senior housing triple-net assets, including a 14-property direct financing lease (“DFL”) portfolio, to a RIDEA structure, with Sunrise Senior Living, LLC (“Sunrise”) as the operator. The Company expects to transition an additional 17-property DFL portfolio to a RIDEA structure with Sunrise later in 2019.
- During the quarter ended March 31, 2019, we sold nine senior housing operating portfolio (“SHOP”) assets for $68 million, two senior housing triple-net assets for $26 million and an undeveloped life science land parcel for $35 million.
- In 2018, we entered into definitive agreements to acquire two life science buildings in South San Francisco, California, adjacent to The Shore at Sierra Point development, for $245 million. We expect to close the transaction during the second quarter of 2019.

### Financing Activities

- In February 2019, we terminated our previous at-the-market equity program established in February 2018 (the “2018 ATM Program”) and established a new ATM Program (the “2019 ATM Program) pursuant to which shares of common stock having an aggregate gross sales price of up to $1.0 billion may be sold (i) by the Company through a consortium of banks acting as sales agents or directly to the banks acting as principals, or (ii) by a consortium of banks acting as forward sellers on behalf of any forward purchasers pursuant to a forward sale agreement.

During the three months ended March 31, 2019, we utilized the forward provisions under the 2019 ATM Program to allow for the sale of up to an aggregate of 3.6 million shares of our common stock at an initial weighted average net price of $31.19 per share, after commissions. Each forward sale has a one year term.

Subsequent to March 31, 2019, we utilized the forward provisions under the 2019 ATM Program to allow for the sale of up to an additional 1.5 million shares of our common stock at an initial weighted average net price of $30.63 per share, after commissions.

### Development Activities

- As part of the previously-announced development program with HCA Healthcare, during the first quarter of 2019, we signed definitive agreements to develop three additional medical office buildings (“MOBs”), two of which are on-campus, with an aggregate estimated cost of $70 million. Construction on these projects is expected to commence in the second quarter of 2019.

### Dividends

The following table summarizes our common stock cash dividends declared in 2019:

| Declaration Date | Record Date | Amount Per Share | Dividend Payment Date |
| --- | --- | ---: | --- |
| January 30 | February 19 | $0.37 | February 28 |
| April 25 | May 6 | 0.37 | May 21 |

### Results of Operations

We evaluate our business and allocate resources among our reportable business segments: (i) senior housing triple-net, (ii) SHOP, (iii) life science and (iv) medical office. Under the life science and medical office segments, we invest through the acquisition and development of life science facilities and medical office buildings, which generally require a greater level of property management. Our senior housing facilities are managed utilizing triple-net leases and RIDEA structures. We have other non-reportable segments that are comprised primarily of our debt investments, hospital properties, unconsolidated joint ventures and United Kingdom (“U.K.”) investments. We evaluate performance based upon: (i) property net operating income from continuing operations (“NOI”) and (ii) Adjusted NOI (cash NOI) in each segment. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 2 of our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the United States (“U.S.”) Securities and Exchange Commission (“SEC”), as updated by Note 2 herein.

### Non-GAAP Financial Measures

#### Net Operating Income

NOI and Adjusted NOI are non-U.S. generally accepted accounting principles (“GAAP”) supplemental financial measures used to evaluate the operating performance of real estate. NOI is defined as real estate revenues (inclusive of rental and related revenues, resident fees and services, and income from direct financing leases), less property level operating expenses (which exclude transition costs); NOI excludes all other financial statement amounts included in net income (loss) as presented in Note 11 to the Consolidated Financial Statements. Management believes NOI provides relevant and useful information because it reflects only income and operating expense items that are incurred at the property level and presents them on an unlevered basis. Adjusted NOI is calculated as NOI after eliminating the effects of straight-line rents, DFL non-cash interest, amortization of market lease intangibles, termination fees, actuarial reserves for insurance claims that have been incurred but not reported, and the impact of deferred community fee income and expense. Adjusted NOI is oftentimes referred to as “Cash NOI.” NOI and Adjusted NOI exclude our share of income (loss) generated by unconsolidated joint ventures, which is recognized in equity income (loss) from unconsolidated joint ventures in the consolidated statements of operations. We use NOI and Adjusted NOI to make decisions about resource allocations, to assess and compare property level performance, and to evaluate our same property portfolio (“SPP”), as described below. We believe that net income (loss) is the most directly comparable GAAP measure to NOI and Adjusted NOI. NOI and Adjusted NOI should not be viewed as alternative measures of operating performance to net income (loss) as defined by GAAP since they do not reflect various excluded items. Further, our definitions of NOI and Adjusted NOI may not be comparable to the definitions used by other REITs or real estate companies, as they may use different methodologies for calculating NOI and Adjusted NOI. For a reconciliation of NOI and Adjusted NOI to net income (loss) by segment, refer to Note 11 to the Consolidated Financial Statements.

Operating expenses generally relate to leased medical office and life science properties and SHOP facilities. We generally recover all or a portion of our leased medical office and life science property expenses through tenant recoveries. We present expenses as operating or general and administrative based on the underlying nature of the expense.

#### Same Property Portfolio

SPP NOI and Adjusted (Cash) NOI information allows us to evaluate the performance of our property portfolio under a consistent population by eliminating changes in the composition of our consolidated portfolio of properties. SPP NOI excludes certain non-property specific operating expenses that are allocated to each operating segment on a consolidated basis.

Properties are included in SPP once they are stabilized for the full period in both comparison periods. Newly acquired operating assets are generally considered stabilized at the earlier of lease-up (typically when the tenant(s) control(s) the physical use of at least 80% of the space) or 12 months from the acquisition date. Newly completed developments and redevelopments are considered stabilized at the earlier of lease-up or 24 months from the date the property is placed in service. Properties that experience a change in reporting structure, such as a transition from a triple-net lease to a RIDEA reporting structure, are considered stabilized after 12 months in operations under a consistent reporting structure. A property is removed from SPP when it is classified as held for sale, sold, placed into redevelopment, experiences a casualty event that significantly impacts operations or changes its reporting structure (such as triple-net to SHOP). For a reconciliation of SPP to total portfolio Adjusted NOI and other relevant disclosures by segment, refer to our Segment Analysis below.

#### Funds From Operations (“FFO”)

FFO encompasses NAREIT FFO and FFO as adjusted, each of which is described in detail below. We believe FFO applicable to common shares, diluted FFO applicable to common shares, and diluted FFO per common share are important supplemental non-GAAP measures of operating performance for a REIT. Because the historical cost accounting convention used for real estate assets utilizes straight-line depreciation (except on land), such accounting presentation implies that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen and fallen with market conditions, presentations of operating results for a REIT that use historical cost accounting for depreciation could be less informative. The term FFO was designed by the REIT industry to address this issue.

*NAREIT FFO*. FFO, as defined by the National Association of Real Estate Investment Trusts (“NAREIT”), is net income (loss) applicable to common shares (computed in accordance with GAAP), excluding gains or losses from sales of depreciable property, including any current and deferred taxes directly associated with sales of depreciable property, impairments of, or related to, depreciable real estate, plus real estate and other real estate-related depreciation and amortization, and adjustments to compute our share of NAREIT FFO and FFO as adjusted (see below) from joint ventures. Adjustments for joint ventures are calculated to reflect our pro-rata share of both our consolidated and unconsolidated joint ventures. We reflect our share of NAREIT FFO for unconsolidated joint ventures by applying our actual ownership percentage for the period to the applicable reconciling items on an entity by entity basis. For consolidated joint ventures in which we do not own 100%, we reflect our share of the equity by adjusting our NAREIT FFO to remove the third party ownership share of the applicable reconciling items based on actual ownership percentage for the applicable periods. Our pro-rata share information is prepared on a basis consistent with the comparable consolidated amounts, is intended to reflect our proportionate economic interest in the operating results of properties in our portfolio and is calculated by applying our actual ownership percentage for the period. We do not control the unconsolidated joint ventures, and the pro-rata presentations of reconciling items included in NAREIT FFO do not represent our legal claim to such items. The joint venture members or partners are entitled to profit or loss allocations and distributions of cash flows according to the joint venture agreements, which provide for such allocations generally according to their invested capital.

The presentation of pro-rata information has limitations, which include, but are not limited to, the following: (i) the amounts shown on the individual line items were derived by applying our overall economic ownership interest percentage determined when applying the equity method of accounting and do not necessarily represent our legal claim to the assets and liabilities, or the revenues and expenses and (ii) other companies in our industry may calculate their pro-rata interest differently, limiting the usefulness as a comparative measure. Because of these limitations, the pro-rata financial information should not be considered independently or as a substitute for our financial statements as reported under GAAP. We compensate for these limitations by relying primarily on our GAAP financial statements, using the pro-rata financial information as a supplement.

NAREIT FFO does not represent cash generated from operating activities in accordance with GAAP, is not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to net income (loss). We compute NAREIT FFO in accordance with the current NAREIT definition; however, other REITs may report NAREIT FFO differently or have a different interpretation of the current NAREIT definition from ours.

*FFO as adjusted*. In addition, we present NAREIT FFO on an adjusted basis before the impact of non-comparable items including, but not limited to, transaction-related items, impairments (recoveries) of non-depreciable assets, losses (gains) from the sale of non-depreciable assets, severance and related charges, prepayment costs (benefits) associated with early retirement or payment of debt, litigation costs (recoveries), casualty-related charges (recoveries), foreign currency remeasurement losses (gains) and changes in tax legislation (“FFO as adjusted”). Transaction-related items include transaction expenses and gains/charges incurred as a result of mergers and acquisitions and lease amendment or termination activities. Prepayment costs (benefits) associated with early retirement of debt include the write-off of unamortized deferred financing fees, or additional costs, expenses, discounts, make-whole payments, penalties or premiums incurred as a result of early retirement or payment of debt. Management believes that FFO as adjusted provides a meaningful supplemental measurement of our FFO run-rate and is frequently used by analysts, investors and other interested parties in the evaluation of our performance as a REIT. At the same time that NAREIT created and defined its FFO measure for the REIT industry, it also recognized that “management of each of its member companies has the responsibility and authority to publish financial information that it regards as useful to the financial community.” We believe stockholders, potential investors and financial analysts who review our operating performance are best served by an FFO run-rate earnings measure that includes certain other adjustments to net income (loss), in addition to adjustments made to arrive at the NAREIT defined measure of FFO. FFO as adjusted is used by management in analyzing our business and the performance of our properties, and we believe it is important that stockholders, potential investors and financial analysts understand this measure used by management. We use FFO as adjusted to: (i) evaluate our performance in comparison with expected results and results of previous periods, relative to resource allocation decisions, (ii) evaluate the performance of our management, (iii) budget and forecast future results to assist in the allocation of resources, (iv) assess our performance as compared with similar real estate companies and the industry in general and (v) evaluate how a specific potential investment will impact our future results. Other REITs or real estate companies may use different methodologies for calculating an adjusted FFO measure, and accordingly, our FFO as adjusted may not be comparable to those reported by other REITs. For a reconciliation of net income (loss) to NAREIT FFO and FFO as adjusted and other relevant disclosure, refer to “Non-GAAP Financial Measures Reconciliations” below.

#### Funds Available for Distribution (“FAD”)

FAD is defined as FFO as adjusted after excluding the impact of the following: (i) amortization of deferred compensation expense, (ii) amortization of deferred financing costs, net, (iii) straight-line rents, (iv) deferred income taxes, (v) amortization of acquired market lease intangibles, net, (vi) non-cash interest related to DFLs and lease incentive amortization (reduction of straight-line rents), (vii) actuarial reserves for insurance claims that have been incurred but not reported, and (viii) deferred revenues, excluding amounts amortized into rental income that are associated with tenant funded improvements owned/recognized by us and up-front cash payments made by tenants to reduce their contractual rents. Also, FAD: (i) is computed after deducting recurring capital expenditures, including second generation leasing costs and second generation tenant and capital improvements, and (ii) includes lease restructure payments and adjustments to compute our share of FAD from our unconsolidated joint ventures and those related to CCRC non-refundable entrance fees. Certain prior period amounts in the “Non-GAAP Financial Measures Reconciliation” below for FAD have been reclassified to conform to the current period presentation. More specifically, recurring capital expenditures, including second generation leasing costs and second generation tenant and capital improvements ("FAD capital expenditures") excludes our share from unconsolidated joint ventures (reported in “other FAD adjustments”). Adjustments for joint ventures are calculated to reflect our pro-rata share of both our consolidated and unconsolidated joint ventures. We reflect our share of FAD for unconsolidated joint ventures by applying our actual ownership percentage for the period to the applicable reconciling items on an entity by entity basis. We reflect our share for consolidated joint ventures in which we do not own 100% of the equity by adjusting our FAD to remove the third party ownership share of the applicable reconciling items based on actual ownership percentage for the applicable periods (reported in “other FAD adjustments”). See FFO for further disclosure regarding our use of pro-rata share information and its limitations. Other REITs or real estate companies may use different methodologies for calculating FAD, and accordingly, our FAD may not be comparable to those reported by other REITs. Although our FAD computation may not be comparable to that of other REITs, management believes FAD provides a meaningful supplemental measure of our performance and is frequently used by analysts, investors, and other interested parties in the evaluation of our performance as a REIT. We believe FAD is an alternative run-rate earnings measure that improves the understanding of our operating results among investors and makes comparisons with: (i) expected results, (ii) results of previous periods and (iii) results among REITs more meaningful. FAD does not represent cash generated from operating activities determined in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs as it excludes the following items which generally flow through our cash flows from operating activities: (i) adjustments for changes in working capital or the actual timing of the payment of income or expense items that are accrued in the period, (ii) transaction-related costs, (iii) litigation settlement expenses, (iv) severance-related expenses and (v) actual cash receipts from interest income recognized on loans receivable (in contrast to our FAD adjustment to exclude non-cash interest and depreciation related to our investments in direct financing leases). Furthermore, FAD is adjusted for recurring capital expenditures, which are generally not considered when determining cash flows from operations or liquidity. FAD is a non-GAAP supplemental financial measure and should not be considered as an alternative to net income (loss) determined in accordance with GAAP. For a reconciliation of net income (loss) to FAD and other relevant disclosure, refer to “Non-GAAP Financial Measures Reconciliations” below.

### Comparison of the Three Months Ended March 31, 2019 to the Three Months Ended March 31, 2018

### Overview

#### Three Months Ended March 31, 2019 and 2018

The following table summarizes results for the three months ended March 31, 2019 and 2018 (dollars in thousands):

|  | Three Months Ended March 31, 2019 | 2018 | Change |
| --- | ---: | ---: | ---: |
| Net income (loss) applicable to common shares | $61,029 | $39,841 | $21,188 |
| NAREIT FFO | 206,036 | 219,434 | (13,398) |
| FFO as adjusted | 212,025 | 227,352 | (15,327) |
| FAD | 191,471 | 201,736 | (10,265) |

Net income applicable to common shares (“EPS”) increased primarily as a result of the following:

- a one-time loss on consolidation of seven care homes in the U.K. during the first quarter of 2018;
- a reduction in interest expense as a result of debt repayments during 2018 and a lower average balance under our revolving credit facility;
- decreased depreciation and amortization expense as a result of dispositions of real estate throughout 2018 and 2019 partially offset by: (i) assets acquired during 2018 and 2019 and (ii) development and redevelopment projects placed into service during 2018;
- increased NOI from: (i) 2018 and 2019 acquisitions, (ii) development and redevelopment projects placed in service during 2018, and (iii) new leasing activity during 2018 and 2019; and
- a reduction in severance and related charges.

The increase in EPS was partially offset by:

- a reduction in net gain on sales of real estate during the first quarter of 2019 compared to the first quarter of 2018;
- a reduction in NOI in our SHOP segment, primarily as a result of occupancy declines and higher labor costs;
- impairment charges related to two MOBs during the first quarter of 2019; and
- a reduction in income as a result of: (i) asset sales during 2018 and 2019 and (ii) selling interests into the U.K. JV and MSREI JV during 2018 (see Note 3 to the Consolidated Financial Statements).

NAREIT FFO decreased primarily as a result of the aforementioned events impacting EPS, except for the following, which are excluded from NAREIT FFO:

- depreciation and amortization expense;
- impairments of MOBs;
- gain on sales of real estate, including related tax impacts; and
- loss on consolidation of real estate.

FFO as adjusted decreased primarily as a result of the aforementioned events impacting NAREIT FFO, except for the following, which is excluded from FFO as adjusted:

- severance and related charges.

FAD decreased primarily as a result of the aforementioned events impacting FFO as adjusted, except for the impact of straight-line rents, which is excluded from FAD.

#### Segment Analysis

The tables below provide selected operating information for our SPP and total property portfolio for each of our business segments. Our SPP for the three months ended March 31, 2019 consists of 522 properties representing properties acquired or placed in service and stabilized on or prior to January 1, 2018 and that remained in operation under a consistent reporting structure through March 31, 2019. Our total property portfolio consists of 635 and 749 properties at March 31, 2019 and 2018, respectively.

### Senior Housing Triple-Net

The following table summarizes results at and for the three months ended March 31, 2019 and 2018 (dollars in thousands, except per unit data):

|  | SPP Three Months Ended March 31, 2019 | 2018 | Change | Total Portfolio(1) Three Months Ended March 31, 2019 | 2018 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Real estate revenues(2) | $56,049 | $55,560 | $489 | $58,892 | $74,289 | $(15,397) |
| Operating expenses | (88) | (92) | 4 | (993) | (1,045) | 52 |
| NOI | 55,961 | 55,468 | 493 | 57,899 | 73,244 | (15,345) |
| Adjustments to NOI | (1,839) | (2,633) | 794 | 564 | (1,865) | 2,429 |
| Adjusted NOI | $54,122 | $52,835 | $1,287 | 58,463 | 71,379 | (12,916) |
| Non-SPP adjusted NOI |  |  |  | (4,341) | (18,544) | 14,203 |
| SPP adjusted NOI |  |  |  | $54,122 | $52,835 | $1,287 |
| Adjusted NOI % change |  |  | 2.4% |  |  |  |
| Property count(3) | 126 | 126 |  | 126 | 181 |  |
| Average capacity (units)(4) | 12,940 | 12,943 |  | 14,642 | 18,331 |  |
| Average annual rent per unit | $16,757 | $16,357 |  | $16,243 | $15,803 |  |

(1) Total Portfolio includes results of operations from disposed properties and properties that transitioned segments through the disposition or transition date.

(2) Represents rental and related revenues and income from DFLs.

(3) From our 2018 presentation of SPP, we removed 13 senior housing triple-net properties that were sold and 40 senior housing triple-net properties that were transitioned to SHOP.

(4) Represents average capacity as reported by the respective tenants or operators for the three-month period.

SPP NOI and Adjusted NOI increased primarily as a result of annual rent escalations.

Total Portfolio NOI and Adjusted NOI decreased primarily as a result of the following Non-SPP impacts:

- the transfer of 22 and 18 senior housing triple-net facilities to our SHOP segment during 2018 and 2019, respectively, and
- senior housing triple-net facilities sold during 2018 and 2019.

The decrease in Total Portfolio NOI and Adjusted NOI is partially offset by the aforementioned increases to SPP.

### Senior Housing Operating Portfolio

The following table summarizes results at and for the three months ended March 31, 2019 and 2018 (dollars in thousands, except per unit data):

|  | SPP Three Months Ended March 31, 2019 | 2018 | Change | Total Portfolio(1) Three Months Ended March 31, 2019 | 2018 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Resident fees and services | $70,165 | $70,838 | $(673) | $126,181 | $144,670 | $(18,489) |
| Operating expenses | (48,690) | (47,524) | (1,166) | (96,948) | (101,746) | 4,798 |
| NOI | 21,475 | 23,314 | (1,839) | 29,233 | 42,924 | (13,691) |
| Adjustments to NOI | 169 | 123 | 46 | 1,152 | (1,607) | 2,759 |
| Adjusted NOI | $21,644 | $23,437 | $(1,793) | 30,385 | 41,317 | (10,932) |
| Non-SPP adjusted NOI |  |  |  | (8,741) | (17,880) | 9,139 |
| SPP adjusted NOI |  |  |  | $21,644 | $23,437 | $(1,793) |
| Adjusted NOI % change |  |  | (7.7)% |  |  |  |
| Property count(2) | 50 | 50 |  | 102 | 100 |  |
| Average capacity (units)(3) | 6,405 | 6,404 |  | 11,271 | 13,597 |  |
| Average annual rent per unit | $44,056 | $43,840 |  | $45,123 | $41,867 |  |

(1) Total Portfolio includes results of operations from disposed properties and properties that transitioned segments through the disposition or transition date.

(2) From our 2018 presentation of SPP, we removed 13 SHOP properties that were sold and 10 SHOP properties that were placed in redevelopment.

(3) Represents average capacity as reported by the respective tenants or operators for the three-month period.

SPP NOI and Adjusted NOI decreased primarily as a result of the following:

- occupancy declines and higher labor costs; partially offset by
- increased rates for resident fees.

Total Portfolio NOI and Adjusted NOI decreased primarily as a result of the aforementioned impacts to SPP and the following Non-SPP impacts:

- decreased NOI from assets sold in 2018 and 2019; partially offset by
- increased NOI from the transfer of 22 and 18 senior housing triple-net assets to our SHOP segment during 2018 and 2019, respectively.

### Life Science

The following table summarizes results at and for the three months ended March 31, 2019 and 2018 (dollars and square feet in thousands, except per square foot data):

|  | SPP Three Months Ended March 31, 2019 | 2018 | Change | Total Portfolio Three Months Ended March 31, 2019 | 2018 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Rental and related revenues | $73,340 | $69,072 | $4,268 | $94,473 | $99,622 | $(5,149) |
| Operating expenses | (16,465) | (15,345) | (1,120) | (21,992) | (21,809) | (183) |
| NOI | 56,875 | 53,727 | 3,148 | 72,481 | 77,813 | (5,332) |
| Adjustments to NOI | (446) | (765) | 319 | (2,478) | (3,751) | 1,273 |
| Adjusted NOI | $56,429 | $52,962 | $3,467 | 70,003 | 74,062 | (4,059) |
| Non-SPP adjusted NOI |  |  |  | (13,574) | (21,100) | 7,526 |
| SPP adjusted NOI |  |  |  | $56,429 | $52,962 | $3,467 |
| Adjusted NOI % change |  |  | 6.5% |  |  |  |
| Property count(1) | 97 | 97 |  | 125 | 131 |  |
| Average occupancy | 96.1% | 93.9% |  | 96.6% | 93.7% |  |
| Average occupied square feet | 5,645 | 5,515 |  | 6,655 | 7,289 |  |
| Average annual total revenues per occupied square foot | $52 | $50 |  | $55 | $53 |  |
| Average annual base rent per occupied square foot(2) | $42 | $40 |  | $44 | $43 |  |

(1) From our 2018 presentation of SPP, we removed 12 life science facilities that were sold and three life science facilities that were placed in redevelopment.

(2) Base rent does not include tenant recoveries, additional rents in excess of floors and non-cash revenue adjustments (i.e., straight-line rents, amortization of market lease intangibles, DFL non-cash interest and deferred revenues).

SPP NOI and Adjusted NOI increased primarily as a result of the following:

- increased occupancy and new leasing activity; and
- specific to adjusted NOI, annual rent escalations.

Total Portfolio NOI and Adjusted NOI decreased primarily as a result of the aforementioned increases to SPP and the following Non-SPP impacts:

- decreased NOI from: (i) facilities sales in 2018 and (ii) the placement of facilities into redevelopment in 2018 and 2019; partially offset by
- increased NOI from: (i) increased occupancy in developments and redevelopments placed into service in 2018 and 2019, and (ii) acquisitions in 2018 and 2019.

### Medical Office

The following table summarizes results at and for the three months ended March 31, 2019 and 2018 (dollars and square feet in thousands, except per square foot data):

|  | SPP Three Months Ended March 31, 2019 | 2018 | Change | Total Portfolio Three Months Ended March 31, 2019 | 2018 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Rental and related revenues | $121,976 | $118,557 | $3,419 | $142,195 | $133,220 | $8,975 |
| Operating expenses | (40,919) | (40,288) | (631) | (48,987) | (47,878) | (1,109) |
| NOI | 81,057 | 78,269 | 2,788 | 93,208 | 85,342 | 7,866 |
| Adjustments to NOI | (1,258) | (1,703) | 445 | (1,771) | (1,932) | 161 |
| Adjusted NOI | $79,799 | $76,566 | $3,233 | 91,437 | 83,410 | 8,027 |
| Non-SPP adjusted NOI |  |  |  | (11,638) | (6,844) | (4,794) |
| SPP adjusted NOI |  |  |  | $79,799 | $76,566 | $3,233 |
| Adjusted NOI % change |  |  | 4.2% |  |  |  |
| Property count(1) | 236 | 236 |  | 269 | 256 |  |
| Average occupancy | 92.5% | 93.1% |  | 92.1% | 92.5% |  |
| Average occupied square feet | 16,777 | 16,852 |  | 19,104 | 18,343 |  |
| Average annual total revenues per occupied square foot | $29 | $28 |  | $29 | $28 |  |
| Average annual base rent per occupied square foot(2) | $24 | $23 |  | $25 | $24 |  |

(1) From our 2018 presentation of SPP, we removed four MOBs that were sold and two MOBs that were placed into redevelopment.

(2) Base rent does not include tenant recoveries, additional rents in excess of floors and non-cash revenue adjustments (i.e., straight-line rents, amortization of market lease intangibles, DFL non-cash interest and deferred revenues).

SPP NOI and Adjusted NOI increased primarily as a result of mark-to-market lease renewals. Additionally, SPP adjusted NOI increased as a result of annual rent escalations.

Total Portfolio NOI and Adjusted NOI increased primarily as a result of the aforementioned increases to SPP and the following Non-SPP impacts:

- increased NOI from 2018 acquisitions; and
- increased occupancy in former redevelopment and development properties that have been placed into service; partially offset by
- decreased NOI from MOB sales during 2018.

### Other Income and Expense Items

The following table summarizes the results of our other income and expense items for the three months ended March 31, 2019 and 2018 (in thousands):

|  | Three months ended March 31, 2019 | 2018 | Change |
| --- | ---: | ---: | ---: |
| Interest income | $1,713 | $6,365 | $(4,652) |
| Interest expense | 49,327 | 75,102 | (25,775) |
| Depreciation and amortization | 131,951 | 143,250 | (11,299) |
| General and administrative | 21,355 | 29,175 | (7,820) |
| Transaction costs | 4,518 | 2,195 | 2,323 |
| Impairments (recoveries), net | 8,858 | — | 8,858 |
| Gain (loss) on sales of real estate, net | 8,044 | 20,815 | (12,771) |
| Other income (expense), net | 3,133 | (40,407) | 43,540 |
| Income tax benefit (expense) | 3,458 | 5,336 | (1,878) |
| Equity income (loss) from unconsolidated joint ventures | (863) | 570 | (1,433) |
| Noncontrolling interests’ share in earnings | (3,520) | (3,005) | (515) |

#### Interest income

Interest income decreased for the three months ended March 31, 2019 primarily as a result of: (i) the conversion of the U.K. Bridge Loan into real estate during the first quarter of 2018 and (ii) the paydown of a participating development loan during the first quarter of 2018.

#### Interest expense

Interest expense decreased for the three months ended March 31, 2019 as a result of senior unsecured notes, term loan, and mortgage debt repayments during 2018 and a lower average balance under our revolving credit facility.

#### Depreciation and amortization expense

Depreciation and amortization expense decreased for the three months ended March 31, 2019 primarily as a result of dispositions of real estate throughout 2018 and 2019 (including selling interests into the U.K. JV in 2018), partially offset by: (i) assets acquired during 2018 and 2019 (primarily in our life science and medical office segments) and (ii) development and redevelopment projects placed into service during 2018 (primarily in our life science and medical office segments).

#### General and administrative expenses

General and administrative expenses decreased for the three months ended March 31, 2019 primarily as a result of a reduction in severance and related charges (the three months ended March 31, 2018 included charges related to the departure of our former Executive Chairman in March 2018).

#### Transaction costs

Transaction costs increased for the three months ended March 31, 2019 primarily as a result of costs associated with transitioning senior housing triple-net assets to our SHOP segment.

#### Impairments (recoveries), net

We recognized impairments on two MOBs identified as candidates for potential future sale during the three months ended March 31, 2019. There were no impairments recognized in the three months ended March 31, 2018.

#### Gain (loss) on sales of real estate, net

During the three months ended March 31, 2019, we sold: (i) nine SHOP assets for $68 million, (ii) two senior housing triple-net assets for $26 million, and (iii) one undeveloped life science land parcel for $35 million, resulting in total net gain on sales of $8 million. During the three months ended March 31, 2018, we sold two SHOP facilities, resulting in total net gain on sales of $21 million.

#### Other income (expense), net

Other income (expense), net, increased for the three months ended March 31, 2019 primarily as a result of a loss on consolidation of seven U.K. care homes in March 2018 (see Note 14 to the Consolidated Financial Statements for additional information).

### Liquidity and Capital Resources

We anticipate that our cash flow from operations, available cash balances and cash from our various financing activities will be adequate for at least the next 12 months for purposes of: (i) funding recurring operating expenses; (ii) meeting debt service requirements; and (iii) satisfying our distributions to our stockholders and non-controlling interest members. During the three months ended March 31, 2019, distributions to shareholders and noncontrolling interest holders exceeded cash flows from operations by approximately $24 million. Distributions were made using a combination of cash flows from operations, funds available under revolving line of credit, proceeds from the sale of properties, and other sources of cash available to us.

Our principal investing needs for the next 12 months are to:

- fund capital expenditures, including tenant improvements and leasing costs; and
- fund future acquisition, transactional and development activities.

We anticipate satisfying these future investing needs using one or more of the following:

- cash flow from operations;
- sale or exchange of ownership interests in properties;
- draws on our credit facilities;
- issuance of additional debt, including unsecured notes and mortgage debt; and/or
- issuance of common or preferred stock.

Access to capital markets impacts our cost of capital and ability to refinance maturing indebtedness, as well as our ability to fund future acquisitions and development through the issuance of additional securities or secured debt. Credit ratings impact our ability to access capital and directly impact our cost of capital as well. For example, our revolving line of credit facility accrues interest at a rate per annum equal to LIBOR plus a margin that depends upon our credit ratings. We also pay a facility fee on the entire revolving commitment that depends upon our credit ratings. At April 30, 2019, we had senior unsecured credit ratings of Baa1 from Moody’s, BBB+ from S&P Global and BBB from Fitch.

### Cash Flow Summary

The following summary discussion of our cash flows is based on the consolidated statements of cash flows and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below.

The following table sets forth changes in cash flows (in thousands):

|  | Three Months Ended March 31, 2019 | 2018 | Change |
| --- | ---: | ---: | ---: |
| Net cash provided by (used in) operating activities | $158,582 | $196,164 | $(37,582) |
| Net cash provided by (used in) investing activities | (160,277) | 10,728 | (171,005) |
| Net cash provided by (used in) financing activities | 8,521 | (171,238) | 179,759 |

#### Operating Cash Flows

The decrease in operating cash flow is primarily the result of a reduction in income related to (i) dispositions during 2018 and 2019 and (ii) occupancy declines and higher labor costs within our SHOP segment, as well as the timing of payments to satisfy accounts payable and accrued liabilities. The decrease in operating cash flow is partially offset by: (i) 2018 and 2019 acquisitions, (ii) annual rent increases, (iii) developments and redevelopments placed in service during 2018 and 2019, and (iv) decreased interest paid as a result of debt repayments during 2018. Our cash flow from operations is dependent upon the occupancy levels of our buildings, rental rates on leases, our tenants’ performance on their lease obligations, the level of operating expenses and other factors.

#### Investing Cash Flows

The following are significant investing activities for the three months ended March 31, 2019:

- made investments of $289 million primarily related to the acquisition, development, and redevelopment of real estate; and
- received net proceeds of $129 million primarily from sales of real estate assets.

The following are significant investing activities for the three months ended March 31, 2018:

- received net proceeds of $163 million primarily from the sale of our Tandem Mezzanine Loan and sales of real estate assets; and
- made investments of $159 million primarily for the development of real estate.

#### Financing Cash Flows

The following are significant financing activities for the three months ended March 31, 2019:

- made net borrowings of $193 million under our bank line of credit, senior unsecured notes and mortgage debt; and
- paid cash dividends on common stock of $177 million.

The following are significant financing activities for the three months ended March 31, 2018:

- made net borrowings of $70 million under our bank line of credit;
- paid $63 million to purchase Brookdale’s noncontrolling interest in RIDEA I; and
- paid cash dividends on common stock of $174 million.

### Debt

See Note 8 to the Consolidated Financial Statements for additional information about our outstanding debt.

Approximately 95% and 83% of our consolidated debt, inclusive of $43 million and $43 million of variable rate debt swapped to fixed through interest rate swaps, was fixed rate debt as of March 31, 2019 and 2018, respectively. At March 31, 2019, our fixed rate debt and variable rate debt had weighted average interest rates of 4.04% and 3.19%, respectively. At March 31, 2018, our fixed rate debt and variable rate debt had weighted average interest rates of 4.20% and 2.78%, respectively. For a more detailed discussion of our interest rate risk, see “Quantitative and Qualitative Disclosures About Market Risk” in Item 3 below.

### Equity

At March 31, 2019, we had 478 million shares of common stock outstanding, equity totaled $6.4 billion, and our equity securities had a market value of $15.2 billion.

At March 31, 2019, non-managing members held an aggregate of 4 million units in five limited liability companies (“DownREITs”) for which we are the managing member. The DownREIT units are exchangeable for an amount of cash approximating the then-current market value of shares of our common stock or, at our option, shares of our common stock (subject to certain adjustments, such as stock splits and reclassifications). At March 31, 2019, the DownREIT units were convertible into 6 million shares of our common stock.

#### At-The-Market Program

In February 2019, we terminated our 2018 ATM Program and concurrently established our 2019 ATM Program. In addition to the issuance and sale of shares of our common stock, we may also enter into one or more forward sales agreements with the sales agents for the sale of our shares of common stock under our 2019 ATM Program.

During the three months ended March 31, 2019, we utilized the forward provisions under the 2019 ATM Program to allow for the sale of up to an aggregate of 3.6 million shares of our common stock at an initial weighted average net price of $31.19 per share, after commissions. Each forward sale has a one year term, during which time we must settle the forward sale by delivery of physical shares of common stock to the forward seller or, at our election, in cash or net shares. The forward sale price that we expect to receive upon settlement will be the initial forward price established upon the effective date, subject to adjustments for: (i) accrued interest, (ii) the forward purchasers’ stock borrowing costs, and (iii) certain fixed price reductions during the term of the agreement. At March 31, 2019, no shares had been issued to settle any of the forward sales, all of which remain outstanding.

At March 31, 2019, approximately $888 million of our common stock remained available for sale under the 2019 ATM Program. Actual future sales will depend upon a variety of factors, including but not limited to market conditions, the trading price of our common stock and our capital needs. We have no obligation to sell any of these remaining shares under our at-the-market program.

Subsequent to March 31, 2019, we utilized the forward provisions under the 2019 ATM Program to allow for the sale of up to an additional 1.5 million shares of our common stock at an initial weighted average net price of $30.63 per share, after commissions.

See Note 10 to the Consolidated Financial Statements for additional information about our 2019 ATM Program.

In December 2018, we entered into a forward sales agreement to sell up to an aggregate of 15.25 million shares of our common stock (including shares issued through the exercise of underwriters’ options) at an initial net price of $28.60 per share, after underwriting discounts and commissions. The agreement has a one year term and expires on December 13, 2019 during which time we may settle the forward sales agreement by delivery of physical shares of common stock to the forward seller or, at the our election, by settling in cash or net shares. The forward sale price that we expect to receive upon settlement of the agreement will be the initial net price of $28.60, subject to adjustments for: (i) accrued interest, (ii) the forward purchasers’ stock borrowing costs, and (iii) certain fixed price reductions during the term of the agreement. At March 31, 2019, no shares have been issued under the forward sales agreement, which remains outstanding.

#### Shelf Registration

We filed a prospectus with the SEC as part of a registration statement on Form S-3, using an automatic shelf registration process. Our current shelf registration statement expires in May 2021, at which time we expect to file a new shelf registration statement. Under the “shelf” process, we may sell any combination of the securities described in the prospectus through one or more offerings. The securities described in the prospectus include common stock, preferred stock, depositary shares, debt securities and warrants.

### Off-Balance Sheet Arrangements

We own interests in certain unconsolidated joint ventures as described in Note 6 to the Consolidated Financial Statements. Except in limited circumstances, our risk of loss is limited to our investment in the joint ventures and any outstanding loans receivable. In addition, we have certain properties which serve as collateral for debt that is owed by a previous owner of certain of our facilities. Our risk of loss for these certain properties is limited to the outstanding debt balance plus penalties, if any. We have no other material off-balance sheet arrangements that we expect would materially affect our liquidity and capital resources except for commitments and operating leases included in our Annual Report on Form 10-K for the year ended December 31, 2018 in “Contractual Obligations” under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

### Non-GAAP Financial Measures Reconciliations

The following is a reconciliation from net income (loss) applicable to common shares, the most directly comparable financial measure calculated and presented in accordance with GAAP, to NAREIT FFO, FFO as adjusted and FAD (in thousands, except per share data):

|  | Three Months Ended March 31, 2019 | 2018 |
| --- | ---: | ---: |
| Net income (loss) applicable to common shares | $61,029 | $39,841 |
| Real estate related depreciation and amortization | 131,951 | 143,250 |
| Real estate related depreciation and amortization on unconsolidated joint ventures | 15,077 | 17,388 |
| Real estate related depreciation and amortization on noncontrolling interests and other | (4,920) | (2,543) |
| Other real estate-related depreciation and amortization | 2,085 | 1,296 |
| Loss (gain) on sales of real estate, net | (8,044) | (20,815) |
| Loss (gain) upon consolidation of real estate, net(1) | — | 41,017 |
| Impairments (recoveries) of depreciable real estate, net | 8,858 | — |
| NAREIT FFO applicable to common shares | 206,036 | 219,434 |
| Distributions on dilutive convertible units and other | 1,795 | — |
| Diluted NAREIT FFO applicable to common shares | $207,831 | $219,434 |
| Weighted average shares outstanding - diluted NAREIT FFO | 483,671 | 469,695 |
| Impact of adjustments to NAREIT FFO: |  |  |
| Transaction-related items | $5,889 | $1,942 |
| Other impairments (recoveries) and losses (gains), net(2) | — | (3,298) |
| Severance and related charges(3) | — | 8,738 |
| Litigation costs (recoveries) | 128 | 406 |
| Foreign currency remeasurement losses (gains) | (28) | 130 |
| Total adjustments | $5,989 | $7,918 |
| FFO as adjusted applicable to common shares | $212,025 | $227,352 |
| Distributions on dilutive convertible units and other | 1,780 | 1,711 |
| Diluted FFO as adjusted applicable to common shares | $213,805 | $229,063 |
| Weighted average shares outstanding - diluted FFO as adjusted | 483,671 | 474,363 |

49

|  | Three Months Ended March 31, 2019 | 2018 |
| --- | ---: | ---: |
| FFO as adjusted applicable to common shares | $212,025 | $227,352 |
| Amortization of deferred compensation(4) | 3,590 | 3,420 |
| Amortization of deferred financing costs | 2,699 | 3,336 |
| Straight-line rents | (6,246) | (10,686) |
| FAD capital expenditures | (19,220) | (19,118) |
| Lease restructure payments | 288 | 299 |
| CCRC entrance fees(5) | 3,496 | 3,027 |
| Deferred income taxes | (3,732) | (2,140) |
| Other FAD adjustments(6) | (1,429) | (3,754) |
| FAD applicable to common shares | 191,471 | 201,736 |
| Distributions on dilutive convertible units and other | 1,794 | — |
| Diluted FAD applicable to common shares | $193,265 | $201,736 |
| Weighted average shares outstanding - diluted FAD | 483,671 | 469,695 |

|  | Three Months Ended March 31, 2019 | 2018 |
| --- | ---: | ---: |
| Diluted earnings per common share | $0.13 | $0.08 |
| Depreciation and amortization | 0.30 | 0.34 |
| Loss (gain) on sales of real estate, net | (0.02) | (0.04) |
| Loss (gain) upon consolidation of real estate, net(1) | — | 0.09 |
| Impairments (recoveries) of depreciable real estate, net | 0.02 | — |
| Diluted NAREIT FFO per common share | $0.43 | $0.47 |
| Transaction-related items | 0.01 | — |
| Other impairments (recoveries) and losses (gains), net(2) | — | (0.01) |
| Severance and related charges(3) | — | 0.02 |
| Diluted FFO as adjusted per common share | $0.44 | $0.48 |

(1) For the three months ended March 31, 2018, represents the loss on consolidation of seven U.K. care homes.

(2) For the three months ended March 31, 2018, represents the impairment recovery of our Tandem Health Care mezzanine loan.

(3) For the three months ended March 31, 2018, primarily relates to the departure of our former Executive Chairman, which consisted of $6 million of cash severance and $3 million of equity award vestings.

(4) Excludes amounts related to the acceleration of deferred compensation for restricted stock units that vested upon the departure of certain former employees, which have already been excluded from FFO as adjusted in severance and related charges.

(5) Represents our 49% share of non-refundable entrance fees, as the fees are collected by our CCRC JV, net of reserves and CCRC JV entrance fee amortization.

(6) Primarily includes our share of FAD capital expenditures from unconsolidated joint ventures, partially offset by noncontrolling interests' share of FAD capital expenditures from consolidated joint ventures.

For a reconciliation of NOI and Adjusted NOI to net income (loss), refer to Note 11 to the Consolidated Financial Statements. For a reconciliation of SPP NOI and Adjusted NOI to total portfolio NOI and Adjusted NOI by segment, refer to the analysis of each segment in “Results of Operations” above.

### Critical Accounting Policies and Recent Accounting Pronouncements

The preparation of financial statements in conformity with U.S. GAAP requires our management to use judgment in the application of accounting policies, including making estimates and assumptions. We base estimates on the best information available to us at the time, our experience and on various other assumptions believed to be reasonable under the circumstances. These estimates affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, it is possible that different accounting would have been applied, resulting in a different presentation of our consolidated financial statements. From time to time, we re-evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2018 in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 2 to the Consolidated Financial Statements. There have been no significant changes to our critical accounting policies during 2019 other than those resulting from new accounting standards (see Note 2 to the Consolidated Financial Statements).

## Market risk

As filed, 4,335 characters.

We are exposed to various market risks, including the potential loss arising from adverse changes in interest rates and foreign currency exchange rates, specifically the British pound sterling (“GBP”). We use derivative financial instruments in the normal course of business to mitigate interest rate and foreign currency risk. We do not use derivative financial instruments for speculative or trading purposes. Derivatives are recorded on the consolidated balance sheets at fair value (see Note 17 to the Consolidated Financial Statements).

To illustrate the effect of movements in the interest rate markets, we performed a market sensitivity analysis on our hedging instruments. We applied various basis point spreads to the underlying interest rate curves of the derivative portfolio in order to determine the change in fair value. Assuming a one percentage point change in the underlying interest rate curve, the estimated change in fair value of each of the underlying derivative instruments would not be material.

*Interest Rate Risk.* At March 31, 2019, our exposure to interest rate risk is primarily on our variable rate debt. At March 31, 2019, $43 million of our variable-rate debt was hedged by interest rate swap transactions. The interest rate swaps are designated as cash flow hedges, with the objective of managing the exposure to interest rate risk by converting the interest rates on our variable-rate debt to fixed interest rates.

Interest rate fluctuations will generally not affect our future earnings or cash flows on our fixed rate debt and assets until their maturity or earlier prepayment and refinancing. If interest rates have risen at the time we seek to refinance our fixed rate debt, whether at maturity or otherwise, our future earnings and cash flows could be adversely affected by additional borrowing costs. Conversely, lower interest rates at the time of refinancing may reduce our overall borrowing costs. However, interest rate changes will affect the fair value of our fixed rate instruments. A one percentage point increase or decrease in interest rates would change the fair value of our fixed rate debt by approximately $252 million and $269 million, respectively, and would not materially impact earnings or cash flows. Conversely, changes in interest rates on variable rate debt and investments would change our future earnings and cash flows, but not materially impact the fair value of those instruments. Assuming a one percentage point increase in the interest rate related to the variable-rate debt and variable-rate investments, and assuming no other changes in the outstanding balance at March 31, 2019, our annual interest expense and interest income would increase by approximately $3 million and $1 million, respectively.

*Foreign Currency Risk.* At March 31, 2019, our exposure to foreign currencies primarily relates to U.K. investments in leased real estate and related GBP denominated cash flows. Our foreign currency exposure is partially mitigated through the use of GBP-denominated borrowings. Based solely on our operating results for the three months ended March 31, 2019, including the impact of existing hedging arrangements, if the value of the GBP relative to the U.S. dollar were to increase or decrease by 10% compared to the average exchange rate during the three months ended March 31, 2019, the increase or decrease to our cash flows would not be material.

*Market Risk.* We have investments in marketable debt securities classified as held-to-maturity because we have the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are recorded at amortized cost and adjusted for the amortization of premiums and discounts through maturity. We consider a variety of factors in evaluating an other-than-temporary decline in value, such as: the length of time and the extent to which the market value has been less than our current adjusted carrying value; the issuer’s financial condition, capital strength and near-term prospects; any recent events specific to that issuer and economic conditions of its industry; and our investment horizon in relationship to an anticipated near-term recovery in the market value, if any. At March 31, 2019, both the fair value and carrying value of marketable debt securities was $19 million.

## Controls and procedures

As filed, 2,012 characters.

*Disclosure Controls and Procedures.* We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2019. Based upon that evaluation, our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer) concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2019.

*Changes in Internal Control Over Financial Reporting.* There were no changes in our internal control over financial reporting (as such term as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

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There are no material changes to the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018.

Filed May 2, 2019.
Source: SEC EDGAR, the filing index for accession 0001628280-19-005690. Last ingested by Listed: Nov 14, 2026, 21:09 ET. No prices; not investment advice.