WELLTOWER INC. - FORM 10-Q - November 7, 2017

Attached files

file	filename
EX-32.2 - EX-32.2 - WELLTOWER INC.	exhibit32-2.htm
EX-32.1 - EX-32.1 - WELLTOWER INC.	exhibit32-1.htm
EX-31.2 - EX-31.2 - WELLTOWER INC.	exhibit31-2.htm
EX-31.1 - EX-31.1 - WELLTOWER INC.	exhibit31-1.htm
EX-12 - EX-12 - WELLTOWER INC.	exhibit12.htm
EX-10.3 - EX-10.3 - WELLTOWER INC.	exhibit10-3.htm
EX-10.2 - EX-10.2 - WELLTOWER INC.	exhibit10-2.htm
EX-10.1 - EX-10.1 - WELLTOWER INC.	exhibit10-1.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2017


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

For the transition period from to

Commission file number: 1-8923

WELLTOWER INC.

(Exact name of registrant as specified in its charter)


Delaware		34-1096634

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

4500 Dorr Street, Toledo, Ohio		43615

(Address of principal executive offices)		(Zip Code)

(419) 247-2800

(Registrant’s telephone number, including area code)

Not Applicable

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

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

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

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

Large accelerated filer ☑

Accelerated filer o

Non-accelerated filer o

(Do not check if a smaller reporting company)

Smaller reporting company o

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

As of October 31, 2017, the registrant had 370,356,835 shares of common stock outstanding.

TABLE OF CONTENTS

	Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Consolidated Balance Sheets — September 30, 2017 and December 31, 2016	3

Consolidated Statements of Comprehensive Income — Three and nine months ended September 30, 2017 and 2016	4

Consolidated Statements of Equity — Nine months ended September 30, 2017 and 2016	6

Consolidated Statements of Cash Flows — Nine months ended September 30, 2017 and 2016	7

Notes to Unaudited Consolidated Financial Statements	8

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk	51

Item 4. Controls and Procedures	52

PART II. OTHER INFORMATION

Item 1. Legal Proceedings Item 1A. Risk Factors	52 53

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	53

Item 5. Other Information	53

Item 6. Exhibits	53

Signatures	54

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

WELLTOWER INC. AND SUBSIDIARIES

(In thousands)

				September 30, 2017		December 31, 2016
				(Unaudited)		(Note)
Assets:
Real estate investments:
	Real property owned:
		Land and land improvements		$	2,806,586	$	2,591,071
		Buildings and improvements			26,010,364		24,496,153
		Acquired lease intangibles			1,492,279		1,402,884
		Real property held for sale, net of accumulated depreciation			70,995		1,044,859
		Construction in progress			344,742		506,091
			Gross real property owned		30,724,966		30,041,058
		Less accumulated depreciation and amortization			(4,826,418)		(4,093,494)
			Net real property owned		25,898,548		25,947,564
	Real estate loans receivable				496,850		622,628
		Less allowance for losses on loans receivable			(5,406)		(6,563)
			Net real estate loans receivable		491,444		616,065
	Net real estate investments				26,389,992		26,563,629
Other assets:
		Investments in unconsolidated entities			407,507		457,138
		Goodwill			68,321		68,321
		Cash and cash equivalents			236,247		419,378
		Restricted cash			59,064		187,842
		Straight-line rent receivable			393,142		342,578
		Receivables and other assets			626,106		826,298
			Total other assets		1,790,387		2,301,555
Total assets				$	28,180,379	$	28,865,184

Liabilities and equity
Liabilities:
		Borrowings under primary unsecured credit facility		$	420,000	$	645,000
		Senior unsecured notes			8,315,395		8,161,619
		Secured debt			2,713,513		3,477,699
		Capital lease obligations			72,684		73,927
		Accrued expenses and other liabilities			1,027,375		827,034
Total liabilities					12,548,967		13,185,279
Redeemable noncontrolling interests					386,748		398,433
Equity:
		Preferred stock			718,503		1,006,250
		Common stock			371,012		363,071
		Capital in excess of par value			17,564,805		16,999,691
		Treasury stock			(62,363)		(54,741)
		Cumulative net income			5,416,427		4,803,575
		Cumulative dividends			(9,138,346)		(8,144,981)
		Accumulated other comprehensive income (loss)			(141,240)		(169,531)
		Other equity			1,127		3,059
			Total Welltower Inc. stockholders’ equity		14,729,925		14,806,393
		Noncontrolling interests			514,739		475,079
Total equity					15,244,664		15,281,472
Total liabilities and equity				$	28,180,379	$	28,865,184

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

See notes to unaudited consolidated financial statements

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

WELLTOWER INC. AND SUBSIDIARIES

(In thousands, except per share data)

			Three Months Ended				Nine Months Ended
			September 30,				September 30,
			2017		2016		2017		2016
Revenues:
	Rental income		$	362,880	$	421,152	$	1,085,621	$	1,259,442
	Resident fees and services			702,380		630,017		2,049,757		1,847,386
	Interest income			20,187		25,080		61,836		74,275
	Other income			6,036		2,884		15,169		21,735
		Total revenues		1,091,483		1,079,133		3,212,383		3,202,838
Expenses:
	Interest expense			122,578		129,699		357,405		394,985
	Property operating expenses			523,997		473,680		1,536,021		1,382,148
	Depreciation and amortization			230,138		218,061		683,262		673,326
	General and administrative			29,913		36,828		93,643		122,434
	Transaction costs			-		19,842		-		33,207
	Loss (gain) on derivatives, net			324		(2,516)		2,284		(2,516)
	Loss (gain) on extinguishment of debt, net			-		-		36,870		9
	Impairment of assets			-		9,705		24,662		24,019
	Other expenses			99,595		-		117,608		3,161
		Total expenses		1,006,545		885,299		2,851,755		2,630,773

Income (loss) from continuing operations before income taxes
	and income from unconsolidated entities			84,938		193,834		360,628		572,065
Income tax (expense) benefit				(669)		305		5,535		2,543
Income (loss) from unconsolidated entities				3,408		(1,749)		(23,676)		(7,528)
Income (loss) from continuing operations				87,677		192,390		342,487		567,080

Gain (loss) on real estate dispositions, net				1,622		162,351		287,869		163,881
Net income				89,299		354,741		630,356		730,961
Less:		Preferred stock dividends		11,676		16,352		37,734		49,055
Less:		Preferred stock redemption charge		-		-		9,769		-
Less:		Net income (loss) attributable to noncontrolling interests⁽¹⁾		3,580		3,479		7,735		2,553
Net income (loss) attributable to common stockholders			$	74,043	$	334,910	$	575,118	$	679,353

Average number of common shares outstanding:
	Basic			369,089		358,932		366,096		356,911
	Diluted			370,740		361,237		367,894		358,752

Earnings per share:
	Basic:
	Income (loss) from continuing operations attributable to common stockholders, including real estate dispositions		$	0.20	$	0.93	$	1.57	$	1.90
	Net income (loss) attributable to common stockholders*		$	0.20	$	0.93	$	1.57	$	1.90

	Diluted:
	Income (loss) from continuing operations attributable to common stockholders, including real estate dispositions		$	0.20	$	0.93	$	1.56	$	1.89
	Net income (loss) attributable to common stockholders*		$	0.20	$	0.93	$	1.56	$	1.89

Dividends declared and paid per common share			$	0.87	$	0.86	$	2.61	$	2.58

* Amounts may not sum due to rounding

(1) Includes amounts attributable to redeemable noncontrolling interests.

See notes to unaudited consolidated financial statements

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

WELLTOWER INC. AND SUBSIDIARIES

(In thousands)

		Three Months Ended September 30,				Nine Months Ended September 30,
		2017		2016		2017		2016
Net income		$	89,299	$	354,741	$	630,356	$	730,961

Other comprehensive income (loss):
	Unrecognized gain (loss) on equity investments		(3,808)		5,908		(20,285)		(5,252)
	Change in net unrealized gains (losses) on cash flow hedges:
	Unrealized gains (losses) on cash flow hedges		2		401		2		1,371
	Unrecognized actuarial gain (loss)		-		(2)		-		-
	Foreign currency translation gain (loss)		37,343		516		70,769		(48,496)
Total other comprehensive income (loss)			33,537		6,823		50,486		(52,377)

Total comprehensive income (loss)			122,836		361,564		680,842		678,584
Less: Total comprehensive income (loss) attributable to noncontrolling interests⁽¹⁾			14,732		1,846		29,930		13,117
Total comprehensive income (loss) attributable to common stockholders		$	108,104	$	359,718	$	650,912	$	665,467

(1) Includes amounts attributable to redeemable noncontrolling interests.

See notes to unaudited consolidated financial statements

CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

WELLTOWER INC. AND SUBSIDIARIES

(In thousands)

		Nine Months Ended September 30, 2017
														Accumulated
						Capital in								Other
		Preferred		Common		Excess of		Treasury		Cumulative		Cumulative		Comprehensive		Other		Noncontrolling
		Stock		Stock		Par Value		Stock		Net Income		Dividends		Income (Loss)		Equity		Interests		Total
Balances at beginning of period		$	1,006,250	$	363,071	$	16,999,691	$	(54,741)	$	4,803,575	$	(8,144,981)	$	(169,531)	$	3,059	$	475,079	$	15,281,472
Comprehensive income:
	Net income (loss)										622,621								9,907		632,528
	Other comprehensive income														28,291				22,195		50,486
Total comprehensive income																					683,014
Net change in noncontrolling interests							9,784												7,558		17,342
Amounts related to stock incentive plans, net of forfeitures					337		17,151		(7,611)								(1,942)				7,935
Proceeds from issuance of common stock					7,513		522,954														530,467
Redemption of preferred stock			(287,500)				9,760				(9,769)										(287,509)
Redemption of equity membership units					91		5,465		(11)												5,545
Conversion of preferred stock			(247)																		(247)
Option compensation expense																	10				10
Dividends paid:
	Common stock dividends												(955,631)								(955,631)
	Preferred stock dividends												(37,734)								(37,734)
Balances at end of period		$	718,503	$	371,012	$	17,564,805	$	(62,363)	$	5,416,427	$	(9,138,346)	$	(141,240)	$	1,127	$	514,739	$	15,244,664

		Nine Months Ended September 30, 2016
														Accumulated
						Capital in								Other
		Preferred		Common		Excess of		Treasury		Cumulative		Cumulative		Comprehensive		Other		Noncontrolling
		Stock		Stock		Par Value		Stock		Net Income		Dividends		Income (Loss)		Equity		Interests		Total
Balances at beginning of period		$	1,006,250	$	354,811	$	16,478,300	$	(44,372)	$	3,725,772	$	(6,846,056)	$	(88,243)	$	4,098	$	585,325	$	15,175,885
Comprehensive income:
	Net income (loss)										728,408								7,363		735,771
	Other comprehensive income														(62,941)				10,564		(52,377)
Total comprehensive income																					683,394
Net change in noncontrolling interests							(45,765)												(128,859)		(174,624)
Amounts related to stock incentive plans, net of forfeitures					689		38,888		(7,822)								(1,285)				30,470
Proceeds from issuance of common stock					7,203		512,139														519,342
Option compensation expense																	207				207
Dividends paid:
	Common stock dividends												(921,381)								(921,381)
	Preferred stock dividends												(49,055)								(49,055)
Balances at end of period		$	1,006,250		362,703		16,983,562		(52,194)		4,454,180		(7,816,492)		(151,184)		3,020		474,393	$	15,264,238

See notes to unaudited consolidated financial statements

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

WELLTOWER INC. AND SUBSIDIARIES

(In thousands)

			Nine Months Ended
			September 30,
			2017		2016
Operating activities:
Net income			$	630,356	$	730,961
Adjustments to reconcile net income to
	net cash provided from (used in) operating activities:
		Depreciation and amortization		683,262		673,326
		Other amortization expenses		12,095		5,419
		Impairment of assets		24,662		24,019
		Stock-based compensation expense		16,459		20,618
		Loss (gain) on derivatives, net		2,284		(2,516)
		Loss (gain) on extinguishment of debt, net		36,870		9
		Loss (income) from unconsolidated entities		23,676		7,528
		Rental income in excess of cash received		(64,865)		(60,212)
		Amortization related to above (below) market leases, net		180		362
		Loss (gain) on sales of properties, net		(287,869)		(163,881)
		Distributions by unconsolidated entities		116		473
		Increase (decrease) in accrued expenses and other liabilities		171,713		79,619
		Decrease (increase) in receivables and other assets		(86,475)		(35,557)
Net cash provided from (used in) operating activities				1,162,464		1,280,168

Investing activities:
	Cash disbursed for acquisitions			(575,694)		(1,448,126)
	Cash disbursed for capital improvements to existing properties			(159,142)		(141,200)
	Cash disbursed for construction in progress			(198,068)		(325,372)
	Capitalized interest			(10,033)		(12,109)
	Investment in real estate loans receivable			(70,051)		(105,496)
	Other investments, net of payments			50,877		(88,398)
	Principal collected on real estate loans receivable			82,263		225,092
	Contributions to unconsolidated entities			(73,802)		(41,747)
	Distributions by unconsolidated entities			58,754		72,564
	Proceeds from (payments on) derivatives			55,771		56,842
	Decrease (increase) in restricted cash			130,470		(21,218)
	Proceeds from sales of real property			1,237,851		538,032
Net cash provided from (used in) investing activities				529,196		(1,291,136)

Financing activities:
	Net increase (decrease) under unsecured credit facilities			(225,000)		515,000
	Proceeds from issuance of senior unsecured notes			7,500		693,560
	Payments to extinguish senior unsecured notes			(5,000)		(400,000)
	Net proceeds from the issuance of secured debt			190,459		193,541
	Payments on secured debt			(1,050,879)		(471,898)
	Net proceeds from the issuance of common stock			530,992		520,067
	Redemption of preferred stock			(287,500)		-
	Payments for deferred financing costs and prepayment penalties			(54,027)		(18,831)
	Contributions by noncontrolling interests⁽¹⁾			47,209		142,381
	Distributions to noncontrolling interests⁽¹⁾			(51,824)		(106,076)
	Cash distributions to stockholders			(992,621)		(970,436)
	Other financing activities			(8,416)		(8,941)
Net cash provided from (used in) financing activities				(1,899,107)		88,367
Effect of foreign currency translation on cash and cash equivalents				24,316		(9,690)
Increase (decrease) in cash and cash equivalents				(183,131)		67,709
Cash and cash equivalents at beginning of period				419,378		360,908
Cash and cash equivalents at end of period			$	236,247	$	428,617

Supplemental cash flow information:
	Interest paid		$	312,896	$	360,421
	Income taxes paid			5,606		7,070

(1) Includes amounts attributable to redeemable noncontrolling interests.

See notes to unaudited consolidated financial statements

WELLTOWER INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Business

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

2. Accounting Policies and Related Matters

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (such as normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2017 are not necessarily an indication of the results that may be expected for the year ending December 31, 2017. For further information, refer to the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016.

New Accounting Standards

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

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

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

In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which

WELLTOWER INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

allows companies to make a policy election as to whether they will include an estimate of awards expected to be forfeited or whether they will account for forfeitures as they occur. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. We adopted ASU 2016-09 on January 1, 2017, and we elected to account for forfeitures as they occur. This election had an immaterial impact on our consolidated financial statements. The standard also requires an employer to classify as a financing activity in the statement of cash flow the cash paid to a tax authority when shares are withheld to satisfy the employer’s statutory income tax withholding obligation. This aspect of the standard is required to be applied on a retrospective basis and resulted in an increase in net cash provided by operating activities and a decrease in net cash used in financing activities of $7,822,000 for the nine months ended September 30, 2016. Upon adoption, no other provisions of ASU 2016-09 had an effect on our unaudited consolidated financial statements or related footnote disclosures.

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

In January 2017, the FASB issued ASU No. 2017-01, “Clarifying the Definition of a Business,” which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. ASU 2017-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted. A reporting entity must apply ASU 2017-01 using a prospective approach. We adopted ASU 2017-01 on January 1, 2017 and as a result, have classified our real estate acquisitions completed during the nine months ended September 30, 2017 as asset acquisitions rather than business combinations due to the fact that substantially all of the fair value of the gross assets acquired were concentrated in a single asset or group of similar identifiable assets. We have recorded identifiable assets acquired, liabilities assumed and any noncontrolling interests associated with any asset acquisitions at cost on a relative fair value basis and have capitalized transaction costs incurred.

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

3. Real Property Acquisitions and Development

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

WELLTOWER INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Triple-net Activity

		Nine Months Ended
(In thousands)		September 30, 2017			September 30, 2016
Land and land improvements			$	31,948		$	21,713
Buildings and improvements				206,910			220,274
Acquired lease intangibles				-			2,876
	Total assets acquired			238,858			244,863
Accrued expenses and other liabilities				(21,236)			(2,145)
	Total liabilities assumed			(21,236)			(2,145)
Noncontrolling interests				(7,275)			(3,162)
Non-cash acquisition related activity⁽¹⁾				(54,901)			(51,733)
	Cash disbursed for acquisitions			155,446			187,823
Construction in progress additions				106,186			133,611
Less:	Capitalized interest			(3,886)			(6,263)
	Foreign currency translation			(656)			(3,179)
Cash disbursed for construction in progress				101,644			124,169
Capital improvements to existing properties				17,873			21,447
	Total cash invested in real property, net of cash acquired		$	274,963		$	333,439

(1) For the nine months ended September 30, 2017, $54,901,000 is related to the acquisition of assets previously financed as real estate loans receivable. For the nine months ended September 30, 2016, $45,044,000 is related to the acquisition of assets previously financed as real estate loans receivable and $6,689,000 is related to the acquisition of assets previously financed as an investment in an unconsolidated entity.

Seniors Housing Operating Activity

		Nine Months Ended
(In thousands)		September 30, 2017			September 30, 2016
Land and land improvements			$	31,006		$	122,649
Building and improvements				384,522			1,108,195
Acquired lease intangibles				48,197			90,771
Restricted cash				1,692			137
Receivables and other assets				3,164			2,179
	Total assets acquired⁽¹⁾			468,581			1,323,931
Secured debt				-			(49,381)
Accrued expenses and other liabilities				(43,364)			(12,328)
	Total liabilities assumed			(43,364)			(61,709)
Noncontrolling interests				(4,701)			(1,089)
Non-cash acquisition related activity⁽²⁾				(59,065)			(17,477)
	Cash disbursed for acquisitions			361,451			1,243,656
Construction in progress additions				65,282			139,160
Less:	Capitalized interest			(5,996)			(3,923)
	Foreign currency translation			(6,218)			(5,953)
Cash disbursed for construction in progress				53,068			129,284
Capital improvements to existing properties				110,372			84,444
	Total cash invested in real property, net of cash acquired		$	524,891		$	1,457,384

(1) Excludes $4,581,000 and $135,000 of cash acquired during the nine months ended September 30, 2017 and 2016, respectively.
(2) Includes $6,349,000 related to the acquisition of assets previously financed as real estate loans receivable during the nine months ended September 30, 2017. Includes $51,097,000 and $17,477,000 for the nine months ended September 30, 2017 and 2016, respectively, related to the acquisition of assets previously financed as an investments in an unconsolidated entity.

WELLTOWER INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Outpatient Medical Activity

		Nine Months Ended
(In thousands)		September 30, 2017			September 30, 2016
Land and land improvements			$	25,060	$	1,466
Buildings and improvements				62,336		27,272
Acquired lease intangibles				8,397		4,592
Receivables and other assets				3		-
	Total assets acquired			95,796		33,330
Secured debt				(25,709)		-
Accrued expenses and other liabilities				(2,210)		(1,670)
	Total liabilities assumed			(27,919)		(1,670)
Noncontrolling interests				(9,080)		-
Non-cash acquisition activity⁽¹⁾				-		(15,013)
	Cash disbursed for acquisitions			58,797		16,647
Construction in progress additions				33,495		81,843
Less:	Capitalized interest			(1,847)		(2,588)
	Accruals⁽²⁾			11,708		(7,336)
Cash disbursed for construction in progress				43,356		71,919
Capital improvements to existing properties				30,897		35,309
	Total cash invested in real property		$	133,050	$	123,875

(1) Represents the acquisition of assets previously financed as real estate loans receivable.
(2) Represents the change in non-cash consideration accruals for amounts to be paid in periods other than the period in which the construction projects converted to operations.

Construction Activity

The following is a summary of the construction projects that were placed into service and began generating revenues during the periods presented (in thousands):

			Nine Months Ended
			September 30, 2017			September 30, 2016
	Development projects:
		Triple-net		$	283,472		$	24,535
		Seniors housing operating			3,634			-
		Outpatient medical			63,036			44,113
	Total development projects				350,142			68,648
	Expansion projects				10,336			2,879
Total construction in progress conversions				$	360,478		$	71,527

4. Real Estate Intangibles

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

WELLTOWER INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

		September 30, 2017		December 31, 2016
Assets:
	In place lease intangibles	$	1,333,368	$	1,252,143
	Above market tenant leases		64,408		61,700
	Below market ground leases		62,224		61,628
	Lease commissions		32,279		27,413
	Gross historical cost		1,492,279		1,402,884
	Accumulated amortization		(1,098,814)		(966,714)
	Net book value	$	393,465	$	436,170

	Weighted-average amortization period in years		14.5		13.7

Liabilities:
	Below market tenant leases	$	90,671	$	89,468
	Above market ground leases		8,540		8,107
	Gross historical cost		99,211		97,575
	Accumulated amortization		(57,449)		(52,134)
	Net book value	$	41,762	$	45,441

	Weighted-average amortization period in years		15.5		15.2

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
Rental income related to above/below market tenant leases, net	$	173	$	278	$	745	$	569
Property operating expenses related to above/below market ground leases, net		(306)		(309)		(925)		(931)
Depreciation and amortization related to in place lease intangibles and lease commissions		(34,270)		(30,137)		(109,011)		(95,610)

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

		Assets		Liabilities
2017	$	39,678	$	1,636
2018		104,524		6,190
2019		50,051		5,731
2020		30,582		5,234
2021		20,918		4,746
Thereafter		147,712		18,225
Total	$	393,465	$	41,762

5. Dispositions, Assets Held for Sale and Discontinued Operations

We periodically sell properties for various reasons, including favorable market conditions, the exercise of tenant purchase options or reduction of concentrations (e.g., property type, relationship or geography). During the nine months ended September 30, 2017 and 2016, we recorded impairment charges on certain held-for-sale seniors housing operating, triple-net, and outpatient medical properties for which the carrying values exceeded the fair values, less estimated costs to sell if applicable. The following is a summary of our real property disposition activity for the periods presented (in thousands):

WELLTOWER INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


		Nine Months Ended
		September 30, 2017			September 30, 2016
Real estate dispositions:
	Triple-net		$	899,104		$	295,365
	Seniors housing operating			16,206			-
	Outpatient medical			12,202			78,786
	Total dispositions			927,512			374,151
Gain (loss) on real estate dispositions, net				287,869			163,881
	Net other assets/liabilities disposed			22,470			-
Proceeds from real estate dispositions			$	1,237,851		$	538,032

Dispositions and Assets Held for Sale

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

			Three Months Ended				Nine Months Ended
			September 30,				September 30,
		2017		2016		2017		2016
Revenues:
	Rental income	$	1,955	$	31,966	$	23,255	$	99,057
Expenses:
	Interest expense		-		4,939		1,714		16,697
	Property operating expenses		2,111		1,476		7,209		4,411
	Provision for depreciation		26		4,604		1,167		20,873
	Total expenses		2,137		11,019		10,090		41,981
Income (loss) from real estate dispositions, net		$	(182)	$	20,947	$	13,165	$	57,076

6. Real Estate Loans Receivable

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

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

WELLTOWER INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

		Nine Months Ended
		September 30, 2017						September 30, 2016
				Outpatient						Outpatient
		Triple-net		Medical		Totals		Triple-net		Medical		Totals
Advances on real estate loans receivable:
	Investments in new loans	$	11,315	$	-	$	11,315	$	8,223	$	-	$	8,223
	Draws on existing loans		58,736		-		58,736		94,622		2,651		97,273
	Net cash advances on real estate loans		70,051		-		70,051		102,845		2,651		105,496
Receipts on real estate loans receivable:
	Loan payoffs		142,392		60,500		202,892		251,293		27,303		278,596
	Principal payments on loans		1,121		-		1,121		6,553		-		6,553
	Sub-total		143,513		60,500		204,013		257,846		27,303		285,149
	Less: Non-cash activity⁽¹⁾⁽²⁾		(61,250)		(60,500)		(121,750)		(45,044)		(15,013)		(60,057)
	Net cash receipts on real estate loans		82,263		-		82,263		212,802		12,290		225,092
Net cash advances (receipts) on real estate loans			(12,212)		-		(12,212)		(109,957)		(9,639)		(119,596)
Change in balance due to foreign currency translation			8,183		-		8,183		(9,819)		-		(9,819)
Net change in real estate loans receivable		$	(65,279)	$	(60,500)	$	(125,779)	$	(164,820)	$	(24,652)	$	(189,472)

(1) Triple-net and prior year outpatient medical represents acquisitions of assets previously financed as real estate loans.
(2) Current year outpatient medical represents a deed in lieu of foreclosure on a previously financed first mortgage property.

In 2016, we restructured two existing real estate loans in the triple-net segment with Genesis Healthcare. The two existing loans, with a combined principal balance of $317,000,000, were scheduled to mature in 2017 and 2018. These loans were restructured into four separate loans effective October 1, 2016. Each loan has a five-year term, a 10% interest rate and 25 basis point annual escalator. In 2016, we recorded a loan loss charge in the amount of $6,935,000 on one of the loans as the present value of expected future cash flows was less than the carrying value of the loan. We expect to collect all principal amounts due under the loans and, due to the passage of time, at September 30, 2017, the allowance for loan losses related to these loans is $5,406,000. At September 30, 2017, we had no real estate loans with outstanding balances on non-accrual status and recorded no provision for loan losses during the three months ended September 30, 2017.

		Nine Months Ended
	September 30, 2017		September 30, 2016
Balance of impaired loans at end of period	$	282,929	$	-
Allowance for loan losses		5,406		-
Balance of impaired loans not reserved	$	277,523	$	-
Average impaired loans for the period	$	324,255	$	-
Interest recognized on impaired loans		23,957		-

7. Investments in Unconsolidated Entities

We participate in a number of joint ventures, which generally invest in seniors housing and health care real estate. The results of operations for these entities have been included in our consolidated results of operations from the date of acquisition by the joint ventures and are reflected in our Consolidated Statements of Comprehensive Income as income or loss from unconsolidated entities. The following is a summary of our investments in unconsolidated entities (dollars in thousands):

	Percentage Ownership⁽¹⁾	September 30, 2017		December 31, 2016
Triple-net	10% to 49%	$	22,543	$	27,005
Seniors housing operating	10% to 50%		332,390		407,172
Outpatient medical	43%		52,574		22,961
Total		$	407,507	$	457,138

(1) Excludes ownership of in-substance real estate.

WELLTOWER INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

During the nine months ended September 30, 2017, we increased our ownership in the Sunrise Senior Living, Inc. management company from 24% to 34%. At September 30, 2017, the aggregate unamortized basis difference of our joint venture investments of $83,843,000 is primarily attributable to the difference between the amount for which we purchase our interest in the entity, including transaction costs, and the historical carrying value of the net assets of the entity. This difference is being amortized over the remaining useful life of the related properties and included in the reported amount of income from unconsolidated entities.

8. Credit Concentration

We use consolidated net operating income (“NOI”) as our credit concentration metric. See Note 17 for additional information and reconciliation. The following table summarizes certain information about our credit concentration for the nine months ended September 30, 2017, excluding our share of NOI in unconsolidated entities (dollars in thousands):

		Number of	Total		Percent of
Concentration by relationship:⁽¹⁾		Properties	NOI		NOI⁽²⁾
	Sunrise Senior Living⁽³⁾	157		235,814	14%
	Genesis Healthcare	86	$	149,345	9%
	Revera⁽³⁾	98		117,124	7%
	Brookdale Senior Living	137		113,466	7%
	Benchmark Senior Living	48		74,070	4%
	Remaining portfolio	752		986,543	59%
	Totals	1,278	$	1,676,362	100%

(1) Genesis Healthcare is in our triple-net segment. Sunrise Senior Living and Revera are in our seniors housing operating segment. Benchmark Senior Living and Brookdale Senior Living are in both our triple-net and seniors housing operating segments.
(2) NOI with our top five relationships comprised 45% of total NOI for the year ending December 31, 2016.
(3) Revera owns a controlling interest in Sunrise Senior Living.

9. Borrowings Under Credit Facilities and Related Items

At September 30, 2017, we had a primary unsecured credit facility with a consortium of 29 banks that includes a $3,000,000,000 unsecured revolving credit facility, a $500,000,000 unsecured term credit facility and a $250,000,000 Canadian-denominated unsecured term credit facility. We have an option, through an accordion feature, to upsize the unsecured revolving credit facility and the $500,000,000 unsecured term credit facility by up to an additional $1,000,000,000, in the aggregate, and the $250,000,000 Canadian-denominated unsecured term credit facility by up to an additional $250,000,000. The primary unsecured credit facility also allows us to borrow up to $1,000,000,000 in alternate currencies (none outstanding at September 30, 2017). Borrowings under the unsecured revolving credit facility are subject to interest payable at the applicable margin over LIBOR interest rate (2.13% at September 30, 2017). The applicable margin is based on our debt ratings and was 0.90% at September 30, 2017. In addition, we pay a facility fee quarterly to each bank based on the bank’s commitment amount. The facility fee depends on our debt ratings and was 0.15% at September 30, 2017. The term credit facilities mature on May 13, 2021. The revolving credit facility is scheduled to mature on May 13, 2020 and can be extended for two successive terms of six months each at our option.

The following information relates to aggregate borrowings under the primary unsecured revolving credit facility for the periods presented (dollars in thousands):

WELLTOWER INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

		Three Months Ended September 30,				Nine Months Ended September 30,
		2017		2016		2017		2016
Balance outstanding at quarter end⁽¹⁾		$	420,000	$	1,350,000	$	420,000	$	1,350,000
Maximum amount outstanding at any month end		$	645,000	$	1,560,000	$	1,010,000	$	1,560,000
Average amount outstanding (total of daily
	principal balances divided by days in period)	$	450,130	$	1,050,217	$	601,436	$	782,427
Weighted average interest rate (actual interest
	expense divided by average borrowings outstanding)		2.19%		1.44%		1.95%		1.35%

(1) As of September 30, 2017, letters of credit in the aggregate amount of $25,576,000 have been issued, which reduces the borrowing capacity on the unsecured revolving credit facility.

10. Senior Unsecured Notes and Secured Debt

We may repurchase, redeem or refinance senior unsecured notes from time to time, taking advantage of favorable market conditions when available. We may purchase senior notes for cash through open market purchases, privately negotiated transactions, a tender offer or, in some cases, through the early redemption of such securities pursuant to their terms. The senior unsecured notes are redeemable at our option, at any time in whole or from time to time in part, at a redemption price equal to the sum of (1) the principal amount of the notes (or portion of such notes) being redeemed plus accrued and unpaid interest thereon up to the redemption date and (2) any “make-whole” amount due under the terms of the notes in connection with early redemptions. Redemptions and repurchases of debt, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. At September 30, 2017, the annual principal payments due on these debt obligations were as follows (in thousands):

	Senior		Secured
	Unsecured Notes^(1,2)		Debt ^(1,3)		Totals
2017	$	-	$	121,412	$	121,412
2018		450,000		426,728		876,728
2019		600,000		491,941		1,091,941
2020⁽⁴⁾		697,327		184,281		881,608
2021^(5,6)		1,149,856		221,721		1,371,577
Thereafter^(7,8,9,10)		5,507,210		1,273,919		6,781,129
Totals	$	8,404,393	$	2,720,002	$	11,124,395

(1) Amounts represent principal amounts due and do not include unamortized premiums/discounts, debt issuance costs, or other fair value adjustments as reflected on the balance sheet.
(2) Annual interest rates range from 1.9% to 6.5%.
(3) Annual interest rates range from 1.45% to 7.98%. Carrying value of the properties securing the debt totaled $5,766,501,000 at September 30, 2017.
(4) In November 2015, one of our wholly-owned subsidiaries issued and we guaranteed $300,000,000 of Canadian-denominated 3.35% senior unsecured notes due 2020 (approximately $239,827,000 based on the Canadian/U.S. Dollar exchange rate on September 30, 2017).
(5) On May 13, 2016, we refinanced the funding on a $250,000,000 Canadian-denominated unsecured term credit facility (approximately $199,856,000 based on the Canadian/U.S. Dollar exchange rate on September 30, 2017). The loan matures on May 13, 2021 and bears interest at the Canadian Dealer Offered Rate plus 95 basis points (2.30% at September 30, 2017).
(6) On May 13, 2016, we refinanced the funding on a $500,000,000 unsecured term credit facility. The loan matures on May 13, 2021 and bears interest at LIBOR plus 95 basis points (2.19% at September 30, 2017).
(7) On November 20, 2013, we completed the sale of £550,000,000 (approximately $737,110,000 based on the Sterling/U.S. Dollar exchange rate in effect on September 30, 2017) of 4.8% senior unsecured notes due 2028.
(8) On November 25, 2014, we completed the sale of £500,000,000 (approximately $670,100,000 based on the Sterling/U.S. Dollar exchange rate in effect on September 30, 2017) of 4.5% senior unsecured notes due 2034.
(9) In May 2015, we issued $750,000,000 of 4.0% senior unsecured notes due 2025. In October 2015, we issued an additional $500,000,000 of these notes under a re-opening of the offer.
(10) In March 2016, we issued $700,000,000 of 4.25% senior unsecured notes due 2026.

The following is a summary of our senior unsecured notes principal activity during the periods presented (dollars in thousands):

WELLTOWER INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

	Nine Months Ended
	September 30, 2017			September 30, 2016
			Weighted Avg.			Weighted Avg.
	Amount		Interest Rate	Amount		Interest Rate
Beginning balance	$	8,260,038	4.245%	$	8,645,758	4.237%
Debt issued		7,500	1.940%		705,000	4.228%
Debt extinguished		(5,000)	1.830%		(400,000)	3.625%
Foreign currency		141,855	4.241%		(159,816)	4.443%
Ending balance	$	8,404,393	4.293%	$	8,790,942	4.264%

The following is a summary of our secured debt principal activity for the periods presented (dollars in thousands):

	Nine Months Ended
		September 30, 2017		September 30, 2016
			Weighted Avg.			Weighted Avg.
	Amount		Interest Rate	Amount		Interest Rate
Beginning balance	$	3,465,066	4.094%	$	3,478,207	4.440%
Debt issued		190,459	2.730%		193,541	3.053%
Debt assumed		23,094	6.670%		47,156	4.132%
Debt extinguished		(1,003,372)	5.321%		(416,009)	4.986%
Principal payments		(47,507)	4.339%		53,636	3.631%
Foreign currency		92,262	3.196%		(55,889)	4.478%
Ending balance	$	2,720,002	3.735%	$	3,300,642	4.272%

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 September 30, 2017, we were in compliance with all of the covenants under our debt agreements.

11. Derivative Instruments

We are exposed to various market risks, including the potential loss arising from adverse changes in interest rates. We may elect to use financial derivative instruments to hedge interest rate exposure. These decisions are principally based on our policy to manage the general trend in interest rates at the applicable dates and our perception of the future volatility of interest rates. In addition, non-U.S. investments expose us to the potential losses associated with adverse changes in foreign currency to U.S. Dollar exchange rates. We may elect to manage this risk through the use of forward contracts and issuing debt in foreign currencies.

Interest Rate Swap Contracts and Foreign Currency Forward Contracts Designated as Cash Flow Hedges

For instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (“OCI”), and reclassified into earnings in the same period or periods, during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in earnings. Approximately $6,454,000 of gains, which are included in accumulated other comprehensive income (“AOCI”), are expected to be reclassified into earnings in the next 12 months.

Foreign Currency Hedges

For instruments that are designated and qualify as net investment hedges, the variability in the foreign currency to U.S. Dollar of the instrument is recorded as a cumulative translation adjustment component of OCI. During the nine months ended September 30, 2017 and 2016, we settled certain net investment hedges generating cash proceeds of $55,771,000 and $56,842,000, respectively. The balance of the cumulative translation adjustment will be reclassified to earnings when the hedged investment is sold or substantially liquidated.

WELLTOWER INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following presents the notional amount of derivatives and other financial instruments as of the dates indicated (in thousands):

		September 30, 2017		December 31, 2016
Derivatives designated as net investment hedges:
Denominated in Canadian Dollars	$	575,000	$	900,000
Denominated in Pounds Sterling	£	550,000	£	550,000

Financial instruments designated as net investment hedges:
Denominated in Canadian Dollars	$	250,000	$	250,000
Denominated in Pounds Sterling	£	1,050,000	£	1,050,000

Derivatives designated as cash flow hedges:
Denominated in U.S. Dollars	$	-	$	57,000
Denominated in Canadian Dollars	$	54,000	$	54,000
Denominated in Pounds Sterling	£	54,000	£	48,000

Derivative instruments not designated:
Denominated in Canadian Dollars	$	680,000	$	37,000

The following presents the impact of derivative instruments on the Consolidated Statements of Comprehensive Income for the periods presented (in thousands):

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
	Location		2017		2016		2017		2016

Gain (loss) on forward exchange contracts recognized in income	Interest expense	$	(576)	$	3,420	$	3,613	$	4,789

(Gain) on release of cumulative translation adjustment related to ineffectiveness on net investment hedge	Loss (gain) on derivatives, net		-		(2,516)		-		(2,516)

Gain (loss) on foreign exchange contracts and term loans designated as net investment hedge recognized in OCI	OCI		(98,003)		53,421		(239,884)		229,256

12. Commitments and Contingencies

At September 30, 2017, we had 14 outstanding letter of credit obligations totaling $162,629,000 and expiring between 2017 and 2024. At September 30, 2017, we had outstanding construction in progress of $344,742,000 and were committed to providing additional funds of approximately $317,542,000 to complete construction. At September 30, 2017, we had contingent purchase obligations totaling $16,053,000. These contingent purchase obligations relate to unfunded capital improvement obligations and contingent obligations on acquisitions. Rents due from the tenant are increased to reflect the additional investment in the property. In September 2017, we entered into an agreement with the University of Toledo Foundation to transfer our corporate headquarters as a gift. The gift is conditional based on certain terms within the agreement, which expire on November 30, 2017. Once the conditional terms have been satisfied, we expect to record the expense related to the gift.

We evaluate our leases for operating versus capital lease treatment in accordance with ASC Topic 840 “Leases.” A lease is classified as a capital lease if it provides for transfer of ownership of the leased asset at the end of the lease term, contains a bargain purchase option, has a lease term greater than 75% of the economic life of the leased asset, or if the net present value of the future minimum lease payments are in excess of 90% of the fair value of the leased asset. Certain leases contain bargain purchase options and have been classified as capital leases. At September 30, 2017, we had operating lease obligations of $1,105,254,000 relating to certain ground leases and company office space and capital lease obligations of $90,288,000 relating primarily to certain investment properties. Regarding ground leases, we have sublease agreements with certain of our operators that require the operators to reimburse us for our monthly operating lease obligations. At September 30, 2017, aggregate future minimum rentals to be received under these noncancelable subleases totaled $71,964,000.

WELLTOWER INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

13. Stockholders’ Equity

The following is a summary of our stockholders’ equity capital accounts as of the dates indicated:

	September 30, 2017	December 31, 2016
Preferred Stock:
Authorized shares	50,000,000	50,000,000
Issued shares	14,375,000	25,875,000
Outstanding shares	14,370,065	25,875,000

Common Stock, $1.00 par value:
Authorized shares	700,000,000	700,000,000
Issued shares	371,430,074	363,576,924
Outstanding shares	370,341,635	362,602,173

Preferred Stock. The following is a summary of our preferred stock activity during the periods indicated:

	Nine Months Ended
	September 30, 2017		September 30, 2016
		Weighted Avg.		Weighted Avg.
	Shares	Dividend Rate	Shares	Dividend Rate
Beginning balance	25,875,000	6.500%	25,875,000	6.500%
Shares redeemed	(11,500,000)	6.500%	-	0.000%
Shares converted	(4,935)	6.500%	-	0.000%
Ending balance	14,370,065	6.500%	25,875,000	0.000%

During the nine months ended September 30, 2017, we recognized a charge of $9,769,000 in connection with the redemption of the Series J preferred stock.

Common Stock. The following is a summary of our common stock issuances during the nine months ended September 30, 2017 and 2016 (dollars in thousands, except average price amounts):

	Shares Issued		Average Price		Gross Proceeds		Net Proceeds
2016 Dividend reinvestment plan issuances	3,946,821	$	70.51	$	278,578	$	278,297
2016 Option exercises	137,579		50.57		6,958		6,958
2016 Equity shelf program issuances	3,119,801		75.27		237,131		234,812
2016 Stock incentive plans, net of forfeitures	442,899				-		-
2016 Totals	7,647,100			$	522,667	$	520,067

2017 Dividend reinvestment plan issuances	4,312,447	$	71.14	$	306,785	$	305,996
2017 Option exercises	209,192		50.62		10,590		10,590
2017 Equity shelf program issuances	2,986,574		72.30		215,917		214,406
2017 Preferred stock conversions	4,296				-		-
2017 Redemption of equity membership units	91,180				-		-
2017 Stock incentive plans, net of forfeitures	135,773				-		-
2017 Totals	7,739,462			$	533,292	$	530,992

Dividends. The increase in dividends is primarily attributable to increases in our common shares outstanding as described above and an increase in common dividends per share. The following is a summary of our dividend payments (in thousands, except per share amounts):

WELLTOWER INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

	Nine Months Ended
	September 30, 2017				September 30, 2016
	Per Share		Amount		Per Share		Amount
Common Stock	$	2.6100	$	955,631	$	2.5800	$	921,381
Series I Preferred Stock		2.4375		35,035		2.4375		35,039
Series J Preferred Stock		0.2347		2,699		1.2189		14,016
Totals			$	993,365			$	970,436

Accumulated Other Comprehensive Income. The following is a summary of accumulated other comprehensive income (loss) for the periods presented (in thousands):


		Unrecognized gains (losses) related to:
		Foreign Currency Translation		Available for Sale Securities		Actuarial Losses		Cash Flow Hedges		Total
Balance at December 31, 2016	$	(173,496)	$	5,120	$	(1,153)	$	(2)	$	(169,531)
Other comprehensive income before reclassification adjustments		48,574		(20,285)		-		2		28,291
Net current-period other comprehensive income		48,574		(20,285)		-		2		28,291
Balance at September 30, 2017	$	(124,922)	$	(15,165)	$	(1,153)	$	-	$	(141,240)

Balance at December 31, 2015	$	(85,484)	$	-	$	(1,343)	$	(1,416)	$	(88,243)
Other comprehensive income before reclassification adjustments		(59,060)		(5,252)		-		11		(64,301)
Reclassification amount to net income		-		-		-		1,360 ⁽¹⁾		1,360
Net current-period other comprehensive income		(59,060)		(5,252)		-		1,371		(62,941)
Balance at September 30, 2016	$	(144,544)	$	(5,252)	$	(1,343)	$	(45)	$	(151,184)

(1) Please see Note 11 for additional information.

14. Stock Incentive Plans

Our 2016 Long-Term Incentive Plan (“2016 Plan”) authorizes up to 10,000,000 shares of common stock to be issued at the discretion of the Compensation Committee of the Board of Directors. Our non-employee directors, officers and key employees are eligible to participate in the 2016 Plan. The 2016 Plan allows for the issuance of, among other things, stock options, stock appreciation rights, restricted stock, deferred stock units and dividend equivalent rights. Vesting periods for options, deferred stock units and restricted shares generally range from three to five years. Options expire ten years from the date of grant. Stock-based compensation expense totaled $6,790,000 and $16,459,000 for the three and nine months ended September 30, 2017, respectively, and $5,401,000 and $20,618,000 for the same periods in 2016.

15. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):

WELLTOWER INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2017		2016		2017		2016
Numerator for basic and diluted earnings
	per share - net income (loss) attributable
	to common stockholders	$	74,043	$	334,910	$	575,118	$	679,353

Denominator for basic earnings per
	share - weighted average shares		369,089		358,932		366,096		356,911
Effect of dilutive securities:
	Employee stock options		40		128		53		119
	Non-vested restricted shares		515		526		464		414
	Redeemable shares		1,096		1,651		1,281		1,308
Dilutive potential common shares			1,651		2,305		1,798		1,841
Denominator for diluted earnings per
	share - adjusted weighted average shares		370,740		361,237		367,894		358,752

Basic earnings per share		$	0.20	$	0.93	$	1.57	$	1.90
Diluted earnings per share		$	0.20	$	0.93	$	1.56	$	1.89

The Series I Cumulative Convertible Perpetual Preferred Stock was not included in the calculations as the effect of conversions into common stock was anti-dilutive.

16. Disclosure about Fair Value of Financial Instruments

U.S. GAAP provides authoritative guidance for measuring and disclosing fair value measurements of assets and liabilities. The guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Please see Note 2 to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016 for additional information. The guidance describes three levels of inputs that may be used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.

Mortgage Loans and Other Real Estate Loans Receivable — The fair value of mortgage loans and other real estate loans receivable is generally estimated by using Level 2 and Level 3 inputs such as discounting the estimated future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Cash and Cash Equivalents — The carrying amount approximates fair value.

Available-for-sale Equity Investments — Available-for-sale equity investments are recorded at their fair value based on Level 1 publicly available trading prices.

WELLTOWER INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Borrowings Under Primary Unsecured Credit Facility — The carrying amount of the primary unsecured credit facility approximates fair value because the borrowings are interest rate adjustable.

Senior Unsecured Notes — The fair value of the senior unsecured notes payable was estimated based on Level 1 publicly available trading prices. The carrying amount of the variable rate senior unsecured notes approximates fair value because they are interest rate adjustable.

Secured Debt — The fair value of fixed rate secured debt is estimated using Level 2 inputs by discounting the estimated future cash flows using the current rates at which similar loans would be made with similar credit ratings and for the same remaining maturities. The carrying amount of variable rate secured debt approximates fair value because the borrowings are interest rate adjustable.

Foreign Currency Forward Contracts — Foreign currency forward contracts are recorded in other assets or other liabilities on the balance sheet at fair market value. Fair market value is determined using Level 2 inputs by estimating the future value of the currency pair based on existing exchange rates, comprised of current spot and traded forward points, and calculating a present value of the net amount using a discount factor based on observable traded interest rates.

Redeemable OP Unitholder Interests — Our redeemable unitholder interests are recorded on the balance sheet at fair value using Level 2 inputs. The fair value is measured using the closing price of our common stock, as units may be redeemed at the election of the holder for cash or, at our option, one share of our common stock per unit, subject to adjustment in certain circumstances.

The carrying amounts and estimated fair values of our financial instruments are as follows (in thousands):


		September 30, 2017				December 31, 2016
		Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
	Mortgage loans receivable	$	377,283	$	413,221	$	485,735	$	521,773
	Other real estate loans receivable		119,567		124,408		136,893		138,050
	Available-for-sale equity investments		7,615		7,615		27,899		27,899
	Cash and cash equivalents		236,247		236,247		419,378		419,378
	Foreign currency forward contracts		13,682		13,682		135,561		135,561

Financial liabilities:
	Borrowings under unsecured credit facilities	$	420,000	$	420,000	$	645,000	$	645,000
	Senior unsecured notes		8,315,395		9,186,768		8,161,619		8,879,176
	Secured debt		2,713,513		2,750,467		3,477,699		3,558,378
	Foreign currency forward contracts		55,264		55,264		4,342		4,342

Redeemable OP unitholder interests		$	104,363	$	104,363	$	110,502	$	110,502

Items Measured at Fair Value on a Recurring Basis

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


	Fair Value Measurements as of September 30, 2017
	Total		Level 1		Level 2		Level 3
Available-for-sale equity investments⁽¹⁾	$	7,615	$	7,615	$	-	$	-
Foreign currency forward contracts, net⁽²⁾		(41,582)		-		(41,582)		-
Redeemable OP unitholder interests		104,363		-		104,363		-
Totals	$	70,396	$	7,615	$	62,781	$	-

(1) Unrealized gains or losses on equity investments are recorded in accumulated other comprehensive income (loss) at each measurement date.
(2) Please see Note 11 for additional information.

WELLTOWER INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Items Measured at Fair Value on a Nonrecurring Basis

In addition to items that are measured at fair value on a recurring basis, we also have assets and liabilities in our balance sheet that are measured at fair value on a nonrecurring basis. As these assets and liabilities are not measured at fair value on a recurring basis, they are not included in the tables above. Assets, liabilities and noncontrolling interests that are measured at fair value on a nonrecurring basis include those acquired/assumed. Asset impairments (if applicable, see Note 5 for impairments of real property and Note 6 for impairments of loans receivable) are also measured at fair value on a nonrecurring basis. We have determined that the fair value measurements included in each of these assets and liabilities rely primarily on company-specific inputs and our assumptions about the use of the assets and settlement of liabilities, as observable inputs are not available. As such, we have determined that each of these fair value measurements generally resides within Level 3 of the fair value hierarchy. We estimate the fair value of real estate and related intangibles using the income approach and unobservable data such as net operating income and estimated capitalization and discount rates. We also consider local and national industry market data including comparable sales, and commonly engage an external real estate appraiser to assist us in our estimation of fair value. We estimate the fair value of assets held for sale based on current sales price expectations or, in the absence of such price expectations, Level 3 inputs described above. We estimate the fair value of secured debt assumed in business combinations and asset acquisitions using current interest rates at which similar borrowings could be obtained on the transaction date.

17. Segment Reporting

We invest in seniors housing and health care real estate. We evaluate our business and make resource allocations on our three operating segments: triple-net, seniors housing operating and outpatient medical. During the three months ended December 31, 2016, we reclassified interest expense on our foreign-denominated senior notes from the seniors housing operating segment to non-segment. Accordingly, the segment information provided in this Note has been reclassified to conform to the current presentation for all periods presented.

Our triple-net properties include long-term/post-acute care facilities, assisted living facilities, independent living/continuing care retirement communities, care homes (United Kingdom), independent support living facilities (Canada), care homes with nursing (United Kingdom) and combinations thereof. Under the triple-net segment, we invest in seniors housing and health care real estate through acquisition and financing of primarily single tenant properties. Properties acquired are primarily leased under triple-net leases and we are not involved in the management of the property. Our seniors housing operating properties include the seniors housing communities referenced above that are owned and/or operated through RIDEA structures (see Note 18). Our outpatient medical properties are typically leased to multiple tenants and generally require a certain level of property management.

We evaluate performance based upon consolidated net operating income (“NOI”) of each segment. We define NOI as total revenues, including tenant reimbursements, less property operating expenses. We believe NOI provides investors relevant and useful information as it measures the operating performance of our properties at the property level on an unleveraged basis. We use NOI to make decisions about resource allocations and to assess the property level performance of our properties.

Non-segment revenue consists mainly of interest income on certain non-real estate investments and other income. Non-segment assets consist of corporate assets including cash, deferred loan expenses and corporate offices and equipment among others. Non-property specific revenues and expenses are not allocated to individual segments in determining NOI. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2 to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016). The results of operations for all acquisitions described in Note 3 are included in our consolidated results of operations from the acquisition dates and are components of the appropriate segments. There are no intersegment sales or transfers. Summary information for the reportable segments (which excludes unconsolidated entities) is as follows (in thousands):

WELLTOWER INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended September 30, 2017:		Triple-net		Seniors Housing Operating		Outpatient Medical		Non-segment / Corporate		Total
Rental income	$	221,555	$	-	$	141,325	$	-	$	362,880
Resident fees and services		-		702,380		-		-		702,380
Interest income		20,187		-		-		-		20,187
Other income		3,174		1,497		667		698		6,036
Total revenues		244,916		703,877		141,992		698		1,091,483

Property operating expenses		-		478,777		45,220		-		523,997
Consolidated net operating income		244,916		225,100		96,772		698		567,486


Interest expense		3,622		16,369		2,929		99,658		122,578
Loss (gain) on derivatives, net		324		-		-		-		324
Depreciation and amortization		62,891		119,089		48,158		-		230,138
General and administrative		-		-		-		29,913		29,913
Other expenses		89,236 ⁽¹⁾		5,157		530		4,672		99,595
Income (loss) from continuing operations before income taxes and income from unconsolidated entities		88,843		84,485		45,155		(133,545)		84,938
Income tax (expense) benefit		(816)		(1,519)		(366)		2,032		(669)
Income (loss) from unconsolidated entities		5,478		(2,886)		816		-		3,408
Income (loss) from continuing operations		93,505		80,080		45,605		(131,513)		87,677
Gain (loss) on real estate dispositions, net		(185)		(197)		2,004		-		1,622
Net income (loss)	$	93,320	$	79,883	$	47,609	$	(131,513)	$	89,299

Total assets	$	9,463,910	$	13,538,090	$	4,992,534	$	185,845	$	28,180,379

(1) Represents non-capitalizable transaction costs primarily related to a joint venture transaction with an existing seniors housing operator including the conversion of properties from triple-net to seniors housing operating, an exchange of PropCo/OpCo interests, and termination/restructuring of pre-existing relationships.


Three Months Ended September 30, 2016:		Triple-net		Seniors Housing Operating		Outpatient Medical		Non-segment / Corporate		Total
Rental income	$	286,226	$	-	$	134,926	$	-	$	421,152
Resident fees and services		-		630,017		-		-		630,017
Interest income		23,017		1,054		1,009		-		25,080
Other income		1,621		716		358		189		2,884
Total revenues		310,864		631,787		136,293		189		1,079,133

Property operating expenses		-		432,292		41,388		-		473,680
Consolidated net operating income		310,864		199,495		94,905		189		605,453


Interest expense		4,714		20,360		3,986		100,639		129,699
Loss (gain) on derivatives, net		-		-		-		(2,516)		(2,516)
Depreciation and amortization		74,296		97,210		46,555		-		218,061
General and administrative		-		-		-		36,828		36,828
Transaction costs		1,613		18,083		146		-		19,842
Impairment of assets		5,070		-		4,635		-		9,705
Income (loss) from continuing operations before income taxes and income from unconsolidated entities		225,171		63,842		39,583		(134,762)		193,834
Income tax (expense) benefit		(896)		515		417		269		305
Income (loss) from unconsolidated entities		1,998		(3,891)		144		-		(1,749)
Income (loss) from continuing operations		226,273		60,466		40,144		(134,493)		192,390
Gain (loss) on real estate dispositions, net		163,579		-		(1,228)		-		162,351
Net income (loss)	$	389,852	$	60,466	$	38,916	$	(134,493)	$	354,741


Nine Months Ended September 30, 2017:		Triple-net		Seniors Housing Operating		Outpatient Medical		Non-segment / Corporate		Total
Rental income	$	666,735	$	-	$	418,886	$	-	$	1,085,621
Resident fees and services		-		2,049,757		-		-		2,049,757
Interest income		61,767		69		-		-		61,836
Other income		7,496		4,005		2,497		1,171		15,169
Total revenues		735,998		2,053,831		421,383		1,171		3,212,383

Property operating expenses		-		1,400,313		135,708		-		1,536,021
Consolidated net operating income		735,998		653,518		285,675		1,171		1,676,362


Interest expense		11,647		47,587		7,342		290,829		357,405
Loss (gain) on derivatives, net		2,284		-		-		-		2,284
Depreciation and amortization		182,672		356,023		144,567		-		683,262
General and administrative		-		-		-		93,643		93,643
Loss (gain) on extinguishment of debt, net		29,083		3,414		4,373		-		36,870
Impairment of assets		4,846		14,191		5,625		-		24,662
Other expenses		96,425		8,100		2,201		10,882		117,608
Income (loss) from continuing operations before income taxes and income from unconsolidated entities		409,041		224,203		121,567		(394,183)		360,628
Income tax (expense) benefit		(2,070)		9,133		(655)		(873)		5,535
Income (loss) from unconsolidated entities		14,983		(40,527)		1,868		-		(23,676)
Income (loss) from continuing operations		421,954		192,809		122,780		(395,056)		342,487
Gain (loss) on real estate dispositions, net		273,051		12,814		2,004		-		287,869
Net income (loss)	$	695,005	$	205,623	$	124,784	$	(395,056)	$	630,356

WELLTOWER INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


Nine Months Ended September 30, 2016:		Triple-net		Seniors Housing Operating		Outpatient Medical		Non-segment / Corporate		Total
Rental income	$	857,184	$	-	$	402,258	$	-	$	1,259,442
Resident fees and services		-		1,847,386		-		-		1,847,386
Interest income		67,842		3,126		3,307		-		74,275
Other income		4,317		11,889		4,824		705		21,735
Total revenues		929,343		1,862,401		410,389		705		3,202,838

Property operating expenses		-		1,259,182		122,966		-		1,382,148
Consolidated net operating income		929,343		603,219		287,423		705		1,820,690


Interest expense		16,832		61,157		15,132		301,864		394,985
Loss (gain) on derivatives, net		-		-		-		(2,516)		(2,516)
Depreciation and amortization		229,906		301,354		142,066		-		673,326
General and administrative		-		-		-		122,434		122,434
Transaction costs		5,760		25,259		2,188		-		33,207
Loss (gain) on extinguishment of debt, net		97		(88)		-		-		9
Impairment of assets		19,384		-		4,635		-		24,019
Other expenses		-		-		-		3,161		3,161
Income (loss) from continuing operations before income taxes and income from unconsolidated entities		657,364		215,537		123,402		(424,238)		572,065
Income tax expense		(1,425)		5,304		(59)		(1,277)		2,543
(Loss) income from unconsolidated entities		8,097		(15,713)		88		-		(7,528)
Income (loss) from continuing operations		664,036		205,128		123,431		(425,515)		567,080
Gain (loss) on real estate dispositions, net		165,109		-		(1,228)		-		163,881
Net income (loss)	$	829,145	$	205,128	$	122,203	$	(425,515)	$	730,961

Our portfolio of properties and other investments are located in the United States, the United Kingdom and Canada. Revenues and assets are attributed to the country in which the property is physically located. The following is a summary of geographic information for the periods presented (dollars in thousands):

WELLTOWER INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


		Three Months Ended						Nine Months Ended
		September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
Revenues:		Amount	%		Amount	%		Amount	%		Amount	%
United States	$	871,431	79.9%	$	874,050	81.0%	$	2,582,042	80.4%	$	2,581,533	80.6%
United Kingdom		105,028	9.6%		95,068	8.8%		298,618	9.3%		295,203	9.2%
Canada		115,024	10.5%		110,015	10.2%		331,723	10.3%		326,102	10.2%
Total	$	1,091,483	100.0%	$	1,079,133	100.0%	$	3,212,383	100.0%	$	3,202,838	100.0%

		As of
		September 30, 2017			December 31, 2016
Assets:		Amount	%		Amount	%
United States	$	22,535,209	80.0%	$	23,572,459	81.7%
United Kingdom		3,202,180	11.3%		2,782,489	9.6%
Canada		2,442,990	8.7%		2,510,236	8.7%
Total	$	28,180,379	100.0%	$	28,865,184	100.0%

18. Income Taxes and Distributions

We elected to be taxed as a REIT commencing with our first taxable year. To qualify as a REIT for federal income tax purposes, at least 90% of taxable income (excluding 100% of net capital gains) must be distributed to stockholders. REITs that do not distribute a certain amount of current year taxable income in the current year are also subject to a 4% federal excise tax. The main differences between undistributed net income for federal income tax purposes and financial statement purposes are the recognition of straight-line rent for reporting purposes, basis differences in acquisitions, recording of impairments, differing useful lives and depreciation and amortization methods for real property and the provision for loan losses for reporting purposes versus bad debt expense for tax purposes.

Under the provisions of the REIT Investment Diversification and Empowerment Act of 2007 (“RIDEA”), for taxable years beginning after July 30, 2008, a REIT may lease “qualified health care properties” on an arm’s-length basis to a taxable REIT subsidiary (“TRS”) if the property is operated on behalf of such TRS by a person who qualifies as an “eligible independent contractor.” Generally, the rent received from the TRS will meet the related party rent exception and will be treated as “rents from real property.” A “qualified health care property” includes real property and any personal property that is, or is necessary or incidental to the use of, a hospital, nursing facility, assisted living facility, congregate care facility, qualified continuing care facility, or other licensed facility which extends medical or nursing or ancillary services to patients. We have entered into various joint ventures that were structured under RIDEA. Resident level rents and related operating expenses for these facilities are reported in the unaudited consolidated financial statements and are subject to federal and state income taxes as the operations of such facilities are included in TRS entities. Certain net operating loss carryforwards could be utilized to offset taxable income in future years.

Income taxes reflected in the financial statements primarily represents U.S. federal and state and local income taxes as well as non-U.S. income based or withholding taxes on certain investments located in jurisdictions outside the U.S. The provision for income taxes for the three and nine months ended September 30, 2017 and 2016, was primarily due to operating income or losses, offset by certain discrete items at our TRS entities. In 2014, we established certain wholly-owned direct and indirect subsidiaries in Luxembourg and Jersey and transferred interests in certain foreign investments into this holding company structure. The structure includes a property holding company that is tax resident in the United Kingdom. No material adverse current tax consequences in Luxembourg, Jersey or the United Kingdom resulted from the creation of this holding company structure and all of the subsidiary entities in the structure are treated as disregarded entities of the company for U.S. federal income tax purposes. The company reflects current and deferred tax liabilities for any such withholding taxes incurred as a result of this holding company structure in its consolidated financial statements. Generally, given current statutes of limitations, we are subject to audit by the Internal Revenue Service (“IRS”) for the year ended December 31, 2013 and subsequent years and by state taxing authorities for the year ended December 31, 2012 and subsequent years. The company and its subsidiaries are also subject to audit by the Canada Revenue Agency and provincial authorities generally for periods subsequent to our initial investments in Canada in May 2012, by HM Revenue & Customs for periods subsequent to our initial investments in the United Kingdom in August 2012 and by Luxembourg taxing authorities generally for periods subsequent to our establishment of certain Luxembourg-based subsidiaries during 2014.

WELLTOWER INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

19. Variable Interest Entities

We have entered into joint ventures to own certain seniors housing and outpatient medical assets which are deemed to be variable interest entities (“VIE”). We have concluded that we are the primary beneficiary of these VIEs based on a combination of operational control of the joint venture and the rights to receive residual returns or the obligation to absorb losses arising from the joint ventures. Except for capital contributions associated with the initial joint venture formations, the joint ventures have been and are expected to be funded from the ongoing operations of the underlying properties. Accordingly, such joint ventures have been consolidated, and the table below summarizes the balance sheets of consolidated VIEs in the aggregate (in thousands):


		September 30, 2017		December 31, 2016
Assets
	Net real property owned	$	1,010,638	$	989,596
	Cash and cash equivalents		11,874		10,501
	Receivables and other assets		18,920		12,102
	Total assets⁽¹⁾	$	1,041,432	$	1,012,199

Liabilities and equity
	Secured debt	$	472,445	$	450,255
	Accrued expenses and other liabilities		16,982		13,803
	Redeemable noncontrolling interests		176,591		185,556
	Total equity		375,414		362,585
	Total liabilities and equity	$	1,041,432	$	1,012,199

(1) Note that assets of the consolidated VIEs can only be used to settle obligations relating to such VIEs. Liabilities of the consolidated VIEs represent claims against the specific assets of the VIEs.

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

	EXECUTIVE SUMMARY

	Company Overview Business Strategy Key Transactions in 2017 Key Performance Indicators, Trends and Uncertainties Corporate Governance	29 29 30 31 33

	LIQUIDITY AND CAPITAL RESOURCES

	Sources and Uses of Cash Off-Balance Sheet Arrangements Contractual Obligations Capital Structure	33 34 35 35

	RESULTS OF OPERATIONS

	Summary Triple-net Seniors Housing Operating Outpatient Medical Non-Segment/Corporate	36 36 38 40 42

	OTHER

	Cautionary Statement Regarding Forward-Looking Statements	51

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

The following discussion and analysis is based primarily on the unaudited consolidated financial statements of Welltower Inc. for the periods presented and should be read together with the notes thereto contained in this Quarterly Report on Form 10-Q. Other important factors are identified in our Annual Report on Form 10-K for the year ended December 31, 2016, including factors identified under the headings “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” References herein to “we,” “us,” “our,” or the “company” refer to Welltower Inc. and its subsidiaries unless specifically noted otherwise.

Executive Summary

Company Overview

Welltower Inc. (NYSE:HCN), an S&P 500 company headquartered in Toledo, Ohio, is driving the transformation of health care infrastructure. The company invests with leading seniors housing operators, post-acute providers and health systems to fund the real estate and infrastructure needed to scale innovative care delivery models and improve people’s wellness and overall health care experience. Welltower™, a real estate investment trust (“REIT”), owns properties concentrated in major, high-growth markets in the United States, Canada and the United Kingdom, consisting of seniors housing and post-acute communities and outpatient medical properties. Our capital programs, when combined with comprehensive planning, development and property management services, make us a single-source solution for acquiring, planning, developing, managing, repositioning and monetizing real estate assets.

The following table summarizes our consolidated portfolio for the three months ended September 30, 2017 (dollars in thousands):

			Percentage of	Number of
Type of Property	NOI⁽¹⁾		NOI	Properties
Triple-net	$	244,916	43.2%	570
Seniors housing operating		225,100	39.7%	442
Outpatient medical		96,772	17.1%	266
Totals	$	566,788	100.0%	1,278

(1) Represents consolidated NOI and excludes our share of investments in unconsolidated entities. Entities in which we have a joint venture with a minority partner are shown at 100% of the joint venture amount. See Non-GAAP Financial Measures for additional information and reconciliation.

Business Strategy

Our primary objectives are to protect stockholder capital and enhance stockholder value. We seek to pay consistent cash dividends to stockholders and create opportunities to increase dividend payments to stockholders as a result of annual increases in NOI and portfolio growth. To meet these objectives, we invest across the full spectrum of seniors housing and health care real estate and diversify our investment portfolio by property type, relationship and geographic location.

Substantially all of our revenues are derived from operating lease rentals, resident fees and services, and interest earned on outstanding loans receivable. These items represent our primary sources of liquidity to fund distributions and depend upon the continued ability of our obligors to make contractual rent and interest payments to us and the profitability of our operating properties. To the extent that our customers/partners experience operating difficulties and become 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. Our proactive and comprehensive asset management process for seniors housing properties generally includes review of monthly financial statements and other operating data for each property, review of obligor/partner creditworthiness, property inspections, and review of covenant compliance relating to licensure, real estate taxes, letters of credit and other collateral. Our internal property management division actively manages and monitors the outpatient medical portfolio with a comprehensive process including tenant relations, lease expirations, the mix of health service providers, hospital/health system relationships, property performance, capital improvement needs, and market conditions among other things. 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. We evaluate the operating environment in each property’s market to determine the likely trend in operating performance of the facility. When we identify unacceptable trends, we seek to mitigate, eliminate or transfer the risk. Through these efforts, we are generally able to intervene at an early stage to address any negative trends, and in so doing, support both the collectability of revenue and the value of our investment.

In addition to our asset/property management and research efforts, we also structure our investments to help mitigate payment risk. Operating leases and loans are normally credit enhanced by guaranties and/or letters of credit. In addition, operating leases are

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

typically structured as master leases and loans are generally cross-defaulted and cross-collateralized with other real estate loans, operating leases or agreements between us and the obligor and its affiliates.

For the nine months ended September 30, 2017, rental income and resident fees and services represented 34% and 64%, respectively, of total revenues. Substantially all of our operating leases are designed with escalating rent structures. Leases with fixed annual rental escalators are generally recognized on a straight-line basis over the initial lease period, subject to a collectability assessment. Rental income related to leases with contingent rental escalators is generally recorded based on the contractual cash rental payments due for the period. Our yield on loans receivable depends upon a number of factors, including the stated interest rate, the average principal amount outstanding during the term of the loan and any interest rate adjustments.

Our primary sources of cash include rent and interest receipts, resident fees and services, borrowings under our primary unsecured credit facility, public issuances of debt and equity securities, proceeds from investment dispositions and principal payments on loans receivable. Our primary uses of cash include dividend distributions, debt service payments (including principal and interest), real property investments (including acquisitions, capital expenditures, construction advances and transaction costs), loan advances, property operating expenses and general and administrative expenses. Depending upon the availability and cost of external capital, we believe our liquidity is sufficient to fund these uses of cash.

We also continuously evaluate opportunities to finance future investments. New investments are generally funded from temporary borrowings under our primary unsecured credit facility, internally generated cash and the proceeds from investment dispositions. Our investments generate cash from NOI and principal payments on loans receivable. Permanent financing for future investments, which replaces funds drawn under our primary unsecured credit facility, has historically been provided through a combination of the issuance of public debt and equity securities and the incurrence or assumption of secured debt.

Depending upon market conditions, we believe that new investments will be available in the future with spreads over our cost of capital that will generate appropriate returns to our stockholders. It is also possible that investment dispositions may occur in the future. To the extent that investment dispositions exceed new investments, our revenues and cash flows from operations could be adversely affected. We expect to reinvest the proceeds from any investment dispositions in new investments. To the extent that new investment requirements exceed our available cash on-hand, we expect to borrow under our primary unsecured credit facility. At September 30, 2017, we had $236,247,000 of cash and cash equivalents, $59,064,000 of restricted cash and $2,554,424,000 of available borrowing capacity under our primary unsecured credit facility.

Key Transactions in 2017

Capital. During the nine months ended September 30, 2017, we extinguished $1,003,372,000 of secured debt at a blended average interest rate of 5.3%. In addition, we redeemed all 11,500,000 shares of our 6.5% Series J Cumulative Redeemable Preferred Stock. During the nine months ended September 30, 2017, we raised $522,702,000 through our dividend reinvestment program and our Equity Shelf Program (as defined below).

Investments. The following summarizes our acquisitions and joint venture investments completed during the nine months ended September 30, 2017 (dollars in thousands):

	Properties		Investment Amount⁽¹⁾	Capitalization Rates⁽²⁾		Book Amount⁽³⁾
Triple-net	7	$	127,653	6.5%	$	238,858
Seniors housing operating	7		320,400	6.5%		468,581
Outpatient medical	4		71,395	6.7%		95,796
Totals	18	$	519,448	6.5%	$	803,235

(1) Represents stated pro rata purchase price including cash and any assumed debt but excludes fair value adjustments pursuant to U.S. GAAP.
(2) Represents annualized contractual or projected income to be received in cash divided by investment amounts.
(3) Represents amounts recorded on our books including fair value adjustments pursuant to U.S. GAAP. See Note 3 to our unaudited consolidated financial statements for additional information.

Dispositions. The following summarizes property dispositions made during the nine months ended September 30, 2017 (dollars in thousands):

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

	Properties		Proceeds⁽¹⁾	Capitalization Rates⁽²⁾		Book Amount⁽³⁾
Triple-net	58	$	1,160,191	6.8%	$	899,104
Seniors housing operating	2		29,715	4.4%		16,206
Outpatient medical	1		15,940	9.1%		12,202
Totals	61	$	1,205,846	6.8%	$	927,512

(1) Represents pro rata proceeds received upon disposition including any seller financing.
(2) Represents annualized contractual income that was being received in cash at date of disposition divided by disposition proceeds.
(3) Represents carrying value of assets at time of disposition. See Note 5 to our unaudited consolidated financial statements for additional information.

Dividends. Our Board of Directors increased the annual cash dividend to $3.48 per common share ($0.87 per share quarterly), as compared to $3.44 per common share for 2016, beginning in February 2017. The dividend declared for the quarter ended September 30, 2017 represents the 186^th consecutive quarterly dividend payment.

Key Performance Indicators, Trends and Uncertainties

We utilize several key performance indicators to evaluate the various aspects of our business. These indicators are discussed below and relate to operating performance, concentration risk and credit strength. Management uses these key performance indicators to facilitate internal and external comparisons to our historical operating results, in making operating decisions and for budget planning purposes.

Operating Performance. We believe that net income and net income attributable to common stockholders (“NICS”) per the Statement of Comprehensive Income are the most appropriate earnings measures. Other useful supplemental measures of our operating performance include funds from operations attributable to common stockholders (“FFO”), consolidated net operating income (“NOI”) and same store NOI (“SSNOI”); however, these supplemental measures are not defined by U.S. generally accepted accounting principles (“U.S. GAAP”). Please refer to the section entitled “Non-GAAP Financial Measures” for further discussion and reconciliations. These earnings measures (and FFO per share amounts) are widely used by investors and analysts in the valuation, comparison and investment recommendations of companies. The following table reflects the recent historical trends of our operating performance measures for the periods presented (in thousands, except per share amounts):

			Three Months Ended
		March 31,		June 30,		September 30,		December 31,		March 31,		June 30,		September 30,
		2016		2016		2016		2016			2017		2017	2017
NICS		$	148,969	$	195,474	$	334,910	$	333,042	$	312,639	$	188,429	$	74,043
FFO			391,264		416,974		401,870		372,829		306,231		384,390		295,722
NOI			597,414		617,825		605,453		583,486		552,129		556,747		567,486
SSNOI			441,299		457,660		446,955		444,090		444,209		457,714		464,062

Per share data (fully diluted):
	NICS	$	0.42	$	0.54	$	0.93	$	0.91	$	0.86	$	0.51	$	0.20
	FFO		1.10		1.16		1.11		1.02		0.84		1.04		0.80

Credit Strength. We measure our credit strength both in terms of leverage ratios and coverage ratios. The leverage ratios indicate how much of our balance sheet capitalization is related to long-term debt, net of cash and IRC section 1031 deposits. The coverage ratios indicate our ability to service interest and fixed charges (interest, secured debt principal amortization and preferred dividends). We expect to maintain capitalization ratios and coverage ratios sufficient to maintain a capital structure consistent with our current profile. The coverage ratios are based on earnings before interest, taxes, depreciation and amortization (“EBITDA”). Please refer to the section entitled “Non-GAAP Financial Measures” for further discussion and reconciliations of these measures. Leverage ratios and coverage ratios are widely used by investors, analysts and rating agencies in the valuation, comparison, investment recommendations and rating of companies. The following table reflects the recent historical trends for our credit strength measures for the periods presented:

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

		Three Months Ended
		March, 31	June 30,	September 30,	December 31,	March 31,	June 30,	September 30,
		2016	2016	2016	2016	2017	2017	2017

Net debt to book capitalization ratio		45%	45%	45%	43%	42%	41%	42%
Net debt to undepreciated book
	capitalization ratio	40%	39%	39%	37%	36%	35%	36%
Net debt to market capitalization ratio		32%	30%	31%	31%	29%	27%	29%

Interest coverage ratio		3.85x	4.21x	5.24x	5.26x	5.67x	4.60x	3.63x
Fixed charge coverage ratio		3.06x	3.34x	4.17x	4.15x	4.53x	3.72x	2.97x

Concentration Risk. We evaluate our concentration risk in terms of NOI by property mix, relationship mix and geographic mix. Concentration risk is a valuable measure in understanding what portion of our NOI could be at risk if certain sectors were to experience downturns. Property mix measures the portion of our NOI that relates to our various property types. Relationship mix measures the portion of our NOI that relates to our top five relationships. Geographic mix measures the portion of our NOI that relates to our top five states (or international equivalents). The following table reflects our recent historical trends of concentration risk by NOI for the periods indicated below:

		Three Months Ended
		March 31,	June 30,	September 30,	December 31,	March 31,	June 30,	September 30,
		2016	2016	2016	2016	2017	2017	2017
Property mix:⁽¹⁾
	Triple-net	52%	50%	51%	48%	45%	44%	43%
	Seniors housing operating	32%	34%	33%	36%	38%	39%	40%
	Outpatient medical	16%	16%	16%	16%	17%	17%	17%

Relationship mix:⁽¹⁾
	Sunrise Senior Living⁽²⁾	13%	14%	12%	13%	14%	14%	14%
	Genesis Healthcare	17%	16%	16%	13%	9%	9%	9%
	Revera⁽²⁾	6%	6%	6%	7%	7%	7%	7%
	Brookdale Senior Living	7%	7%	7%	7%	7%	7%	7%
	Benchmark Senior Living	4%	4%	4%	4%	4%	5%	5%
	Remaining relationships	53%	53%	55%	56%	59%	58%	58%

Geographic mix:⁽¹⁾
	California	10%	10%	10%	12%	13%	14%	13%
	United Kingdom	8%	8%	7%	7%	9%	9%	9%
	Canada	7%	7%	7%	8%	8%	8%	8%
	New Jersey	8%	8%	8%	8%	7%	8%	8%
	Texas	6%	6%	7%	7%	7%	7%	7%
	Remaining geographic areas	61%	61%	61%	58%	56%	54%	55%

(1) Excludes our share of investments in unconsolidated entities. Entities in which the company has a joint venture with a minority partner are shown at 100% of the joint venture amount.
(2) Revera owns a controlling interest in Sunrise Senior Living.

Lease Expirations. The following table sets forth information regarding lease expirations for certain portions of our portfolio as of September 30, 2017 (dollars in thousands):

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

			Expiration Year ⁽¹⁾
			2017		2018		2019		2020		2021		2022		2023		2024		2025		2026		Thereafter

Triple-net:
	Properties		3		51		-		14		14		11		4		5		59		32		364
	Base rent⁽²⁾	$	4,530	$	38,233	$	-	$	17,740	$	25,239	$	9,107	$	4,175	$	10,597	$	74,402	$	65,545	$	632,492
	% of base rent		0.5%		4.3%		0.0%		2.0%		2.9%		1.0%		0.5%		1.2%		8.4%		7.4%		71.8%
	Units/beds		367		3,151		-		1,225		2,289		1,042		317		692		4,489		3,724		36,207
	% of Units/beds		0.7%		5.9%		0.0%		2.3%		4.3%		1.9%		0.6%		1.3%		8.4%		7.0%		67.6%



Outpatient medical:
	Square feet		519,045		802,423		1,198,264		1,272,329		1,488,146		2,504,590		1,261,361		1,422,735		717,500		1,130,877		4,390,075
	Base rent⁽²⁾	$	13,437	$	21,836	$	32,704	$	34,331	$	40,184	$	54,993	$	31,857	$	39,582	$	20,640	$	28,656	$	102,135
	% of base rent		3.2%		5.2%		7.8%		8.2%		9.6%		13.1%		7.6%		9.4%		4.9%		6.8%		24.2%
	Leases		134		252		313		306		263		291		199		118		103		125		210
	% of Leases		5.8%		10.9%		13.5%		13.2%		11.4%		12.6%		8.6%		5.1%		4.5%		5.4%		9.0%

(1) Excludes investments in unconsolidated entities. Investments classified as held for sale are included in the current year.
(2) The most recent monthly base rent including straight-line for leases with fixed escalators or annual cash rents for leases with contingent escalators. Base rent does not include tenant recoveries or amortization of above and below market lease intangibles.

We evaluate our key performance indicators in conjunction with current expectations to determine if historical trends are indicative of future results. Our expected results may not be achieved and actual results may differ materially from our expectations. Factors that may cause actual results to differ from expected results are described in more detail in “Cautionary Statement Regarding Forward-Looking Statements” and other sections of this Quarterly Report on Form 10-Q. Management regularly monitors economic and other factors to develop strategic and tactical plans designed to improve performance and maximize our competitive position. Our ability to achieve our financial objectives is dependent upon our ability to effectively execute these plans and to appropriately respond to emerging economic and company-specific trends. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2016, under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of these risk factors.

Corporate Governance

Maintaining investor confidence and trust is important in today’s business environment. Our Board of Directors and management are strongly committed to policies and procedures that reflect the highest level of ethical business practices. Our corporate governance guidelines provide the framework for our business operations and emphasize our commitment to increase stockholder value while meeting all applicable legal requirements. These guidelines meet the listing standards adopted by the New York Stock Exchange and are available on the Internet at www.welltower.com/investors/governance. The information on our website is not incorporated by reference in this Quarterly Report on Form 10-Q, and our web address is included as an inactive textual reference only.

Liquidity and Capital Resources

Sources and Uses of Cash

Our primary sources of cash include rent and interest receipts, resident fees and services, borrowings under our primary unsecured credit facility, public issuances of debt and equity securities, proceeds from investment dispositions and principal payments on loans receivable. Our primary uses of cash include dividend distributions, debt service payments (including principal and interest), real property investments (including acquisitions, capital expenditures, construction advances and transaction costs), loan advances, property operating expenses, and general and administrative expenses. These sources and uses of cash are reflected in our Consolidated Statements of Cash Flows and are discussed in further detail below. The following is a summary of our sources and uses of cash flows (dollars in thousands):

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

	Nine Months Ended				Change
	September 30, 2017		September 30, 2016		$		%

Cash and cash equivalents at beginning of period	$	419,378	$	360,908	$	58,470	16%
Cash provided from (used in) operating activities		1,162,464		1,280,168		(117,704)	-9%
Cash provided from (used in) investing activities		529,196		(1,291,136)		1,820,332	n/a
Cash provided from (used in) financing activities		(1,899,107)		88,367		(1,987,474)	n/a
Effect of foreign currency translation		24,316		(9,690)		34,006	n/a
Cash and cash equivalents at end of period	$	236,247	$	428,617	$	(192,370)	-45%

Operating Activities. The change in net cash provided from operating activities was immaterial. Please see “Results of Operations” for discussion of net income fluctuations. For the nine months ended September 30, 2017 and 2016, cash flow provided from operations exceeded cash distributions to stockholders.

Investing Activities. The changes in net cash provided from/used in investing activities are primarily attributable to an increase in dispositions, which are summarized above in “Key Transactions in 2017” and Notes 5 and 6 of our unaudited consolidated financial statements. The following is a summary of cash used in non-acquisition capital improvement activities (dollars in thousands):

	Nine Months Ended				Change
	September 30,		September 30,
	2017		2016		$		%
New development	$	198,068	$	325,372	$	(127,304)	-39%
Recurring capital expenditures, tenant improvements and lease commissions		45,777		48,055		(2,278)	-5%
Renovations, redevelopments and other capital improvements		113,365		93,145		20,220	22%
Total	$	357,210	$	466,572	$	(109,362)	-23%

The change in new development is primarily due to the number and size of construction projects on-going during the relevant periods. Renovations, redevelopments and other capital improvements include expenditures to maximize property value, increase net operating income, maintain a market-competitive position and/or achieve property stabilization. Generally, these expenditures have increased as a result of acquisitions, primarily in our seniors housing operating segment.

Financing Activities. The changes in net cash provided from/used in financing activities are primarily attributable to changes related to our long-term debt arrangements, the issuance/redemption of common and preferred stock, and dividend payments. Please refer to Notes 9, 10 and 13 of our unaudited consolidated financial statements for additional information.

Off-Balance Sheet Arrangements

At September 30, 2017, we had investments in unconsolidated entities with our ownership interests ranging from 10% to 50%. Please see Note 7 to our unaudited consolidated financial statements for additional information. We use financial derivative instruments to hedge interest rate and foreign currency exchange rate exposure. Please see Note 11 to our unaudited consolidated financial statements for additional information. At September 30, 2017, we had 14 outstanding letter of credit obligations. Please see Note 12 to our unaudited consolidated financial statements for additional information.

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 September 30, 2017 (in thousands):

	Payments Due by Period
Contractual Obligations	Total		2017		2018-2019		2020-2021		Thereafter
Unsecured revolving credit facility⁽¹⁾	$	420,000	$	-	$	-	$	420,000	$	-
Senior unsecured notes and term credit facilities:⁽²⁾
U.S. Dollar senior unsecured notes		6,050,000		-		1,050,000		900,000		4,100,000
Canadian Dollar senior unsecured notes⁽³⁾		239,827		-		-		239,827		-
Pounds Sterling senior unsecured notes⁽³⁾		1,407,210		-		-		-		1,407,210
U.S. Dollar term credit facility		507,500		-		-		507,500		-
Canadian Dollar term credit facility⁽³⁾		199,856		-		-		199,856		-
Secured debt:^(2,3)
Consolidated		2,720,002		121,412		918,669		406,002		1,273,919
Unconsolidated		738,004		2,046		150,803		58,136		527,019
Contractual interest obligations:⁽⁴⁾
Unsecured revolving credit facility		38,116		2,242		17,937		17,937		-
Senior unsecured notes and term loans⁽³⁾		3,251,019		139,547		701,200		590,237		1,820,035
Consolidated secured debt⁽³⁾		520,722		25,542		172,182		119,399		203,599
Unconsolidated secured debt⁽³⁾		177,010		7,198		57,525		40,910		71,377
Capital lease obligations⁽⁵⁾		90,288		1,183		9,012		8,346		71,747
Operating lease obligations⁽⁵⁾		1,105,254		4,479		35,482		34,443		1,030,850
Purchase obligations⁽⁵⁾		333,595		121,949		211,646		-		-
Other long-term liabilities⁽⁶⁾		3,073		369		2,704		-		-
Total contractual obligations	$	17,801,476	$	425,967	$	3,327,160	$	3,542,593	$	10,505,756

(1) Relates to unsecured revolving credit facility with an aggregate commitment of $3,000,000,000. See Note 9 to our unaudited consolidated financial statements for additional information.
(2) Amounts represent principal amounts due and do not reflect unamortized premiums/discounts or other fair value adjustments as reflected on the balance sheet.
(3) Based on foreign currency exchange rates in effect as of balance sheet date.
(4) Based on variable interest rates in effect as of balance sheet date.
(5) See Note 12 to our unaudited consolidated financial statements for additional information.
(6) Primarily relates to payments to be made under our Supplemental Executive Retirement Plan.

Capital Structure

Please refer to “Credit Strength” above for a discussion of our leverage and coverage ratio trends. Our debt agreements contain various covenants, restrictions and events of default. Certain agreements require us to maintain financial ratios and minimum net worth and impose certain limits on our ability to incur indebtedness, create liens and make investments or acquisitions. As of September 30, 2017, we were in compliance with all of the covenants under our debt agreements. None of our debt agreements contain provisions for acceleration which could be triggered by our debt ratings. However, under our primary unsecured credit facility, the ratings on our senior unsecured notes are used to determine the fees and interest charged. We plan to manage the company to maintain compliance with our debt covenants and with a capital structure consistent with our current profile. Any downgrades in terms of ratings or outlook by any or all of the rating agencies could have a material adverse impact on our cost and availability of capital, which could in turn have a material adverse impact on our consolidated results of operations, liquidity and/or financial condition.

On May 1, 2015, we filed with the Securities and Exchange Commission (1) an open-ended automatic or “universal” shelf registration statement covering an indeterminate amount of future offerings of debt securities, common stock, preferred stock, depositary shares, warrants and units and (2) a registration statement in connection with our enhanced dividend reinvestment plan (“DRIP”) under which we may issue up to 15,000,000 shares of common stock. As of October 31, 2017, 3,437,349 shares of common stock remained available for issuance under the DRIP registration statement. We have entered into separate equity distribution agreements with each of Morgan Stanley & Co. LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman Sachs & Co. LLC, UBS Securities LLC and Wells Fargo Securities, LLC relating to the offer and sale from time to time of up to $1,000,000,000 aggregate amount of our common stock (“Equity Shelf Program”). The Equity Shelf Program also allows us to enter into forward sale

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

agreements. We expect that, if entered into, we will physically settle each forward sale agreement on one or more dates on or prior to the maturity date of that particular forward sale agreement, in which case we will expect to receive per share cash proceeds at settlement equal to the forward sale price under the relevant forward sale agreement. However, we may also elect to cash settle or net share settle a forward sale agreement. As of October 31, 2017, we had $784,083,000 of remaining capacity under the Equity Shelf Program and there were no outstanding forward sales agreements. Depending upon market conditions, we anticipate issuing securities under our registration statements to invest in additional properties and to repay borrowings under our primary unsecured credit facility.

Results of Operations

Summary

Our primary sources of revenue include rent and resident fees and services. Our primary expenses include interest expense, depreciation and amortization, property operating expenses, and general and administrative expenses. We evaluate our business and make resource allocations on our three business segments: triple-net, seniors housing operating and outpatient medical. The primary performance measures for our properties are NOI and SSNOI, which are discussed below. Please see Non-GAAP Financial Measures for additional information and reconciliations. The following is a summary of our results of operations (dollars in thousands, except per share amounts):

	Three Months Ended				Change			Nine Months Ended				Change
	September 30,		September 30,					September 30,		September 30,
	2017		2016		Amount		%	2017		2016		Amount		%
NICS	$	74,043	$	334,910	$	(260,867)	-78%	$	575,118	$	679,353	$	(104,235)	-15%
FFO		295,722		401,870		(106,148)	-26%		986,352		1,210,108		(223,756)	-18%
EBITDA		442,684		702,196		(259,512)	-37%		1,665,488		1,796,729		(131,241)	-7%
NOI		567,486		605,453		(37,967)	-6%		1,676,362		1,820,690		(144,328)	-8%
SSNOI		464,062		446,955		17,107	4%		1,365,983		1,345,907		20,076	1%

Per share data (fully diluted):
NICS	$	0.20	$	0.93	$	(0.73)	-78%	$	1.56	$	1.89	$	(0.33)	-17%
FFO	$	0.80	$	1.11	$	(0.31)	-28%	$	2.68	$	3.37	$	(0.69)	-20%

Interest coverage ratio		3.63x		5.24x		-1.61x	-31%		4.63x		4.43x		0.20x	5%
Fixed charge coverage ratio		2.97x		4.17x		-1.20x	-29%		3.74x		3.52x		0.22x	6%

Triple-net

The following is a summary of our NOI and SSNOI for the triple-net segment (dollars in thousands):

	Three Months Ended					Change			Nine Months Ended					Change
		September 30,		September 30,						September 30,		September 30,
		2017		2016		$		%		2017		2016		$		%
NOI		$	244,916	$	310,864	$	(65,948)	-21%		$	735,998	$	929,343	$	(193,345)	-21%
Non SSNOI attributable to same store properties			(9,097)		(11,325)		2,228	-20%			(28,691)		(36,190)		7,499	-21%
NOI attributable to non same store properties⁽¹⁾			(61,543)		(131,847)		70,304	-53%			(192,013)		(393,989)		201,976	-51%
SSNOI⁽²⁾		$	174,276	$	167,692	$	6,584	4%		$	515,294	$	499,164	$	16,130	3%

(1) Change is primarily due to the acquisition of 26 properties and the conversion of 15 construction projects into revenue-generating properties subsequent to January 1, 2016.
(2) Relates to 511 same store properties.

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

The following is a summary of our results of operations for the triple-net segment (dollars in thousands):

			Three Months Ended				Change			Nine Months Ended				Change
			September 30,		September 30,					September 30,		September 30,
			2017		2016		$		%	2017		2016		$		%
Revenues:
	Rental income		$	221,555	$	286,226	$	(64,671)	-23%	$	666,735	$	857,184	$	(190,449)	-22%
	Interest income			20,187		23,017		(2,830)	-12%		61,767		67,842		(6,075)	-9%
	Other income			3,174		1,621		1,553	96%		7,496		4,317		3,179	74%
		Total revenues		244,916		310,864		(65,948)	-21%		735,998		929,343		(193,345)	-21%
		NOI⁽¹⁾		244,916		310,864		(65,948)	-21%		735,998		929,343		(193,345)	-21%
Other expenses:
	Interest expense			3,622		4,714		(1,092)	-23%		11,647		16,832		(5,185)	-31%
	Loss (gain) on derivatives, net			324		-		324	n/a		2,284		-		2,284	n/a
	Depreciation and amortization			62,891		74,296		(11,405)	-15%		182,672		229,906		(47,234)	-21%
	Transaction costs⁽²⁾			-		1,613		(1,613)	-100%		-		5,760		(5,760)	-100%
	Loss (gain) on extinguishment of debt, net			-		-		-	n/a		29,083		97		28,986	29882%
	Impairment of assets			-		5,070		(5,070)	-100%		4,846		19,384		(14,538)	-75%
	Other expenses⁽²⁾			89,236		-		89,236	n/a		96,425		-		96,425	n/a
		Total other expenses		156,073		85,693		70,380	82%		326,957		271,979		54,978	20%
Income from continuing operations before income taxes and income (loss) from unconsolidated entities				88,843		225,171		(136,328)	-61%		409,041		657,364		(248,323)	-38%
Income tax (expense) benefit				(816)		(896)		80	-9%		(2,070)		(1,425)		(645)	45%
Income (loss) from unconsolidated entities				5,478		1,998		3,480	174%		14,983		8,097		6,886	85%
Income from continuing operations				93,505		226,273		(132,768)	-59%		421,954		664,036		(242,082)	-36%
Gain (loss) on real estate dispositions, net⁽³⁾				(185)		163,579		(163,764)	n/a		273,051		165,109		107,942	65%
Net income				93,320		389,852		(296,532)	-76%		695,005		829,145		(134,140)	-16%
Less: Net income (loss) attributable to noncontrolling interests				1,539		926		613	66%		3,112		1,357		1,755	129%
Net income attributable to common stockholders			$	91,781	$	388,926	$	(297,145)	-76%	$	691,893	$	827,788	$	(135,895)	-16%

(1) See Non-GAAP Financial Measures.
(2) See Note 3 to our unaudited consolidated financial statements.
(3) See Note 5 to our unaudited consolidated financial statements.

The decrease in rental income is attributable to the disposition of properties exceeding new acquisitions. Certain of our leases contain annual rental escalators that are contingent upon changes in the Consumer Price Index and/or changes in the gross operating revenues of the tenant’s properties. These escalators are not fixed, so no straight-line rent is recorded; however, rental income is recorded based on the contractual cash rental payments due for the period. If gross operating revenues at our facilities and/or the Consumer Price Index do not increase, a portion of our revenues may not continue to increase. For the three months ended September 30, 2017, we had 32 leases with rental rate increasers ranging from 0.07% to 0.58% in our triple-net portfolio. The decrease in interest income is directly related to the volume of loan payoffs during 2016 and 2017.

Depreciation and amortization decreased as a result of the disposition of triple-net properties. To the extent that we acquire or dispose of additional properties in the future, our provision for depreciation and amortization will change accordingly.

During the nine months ended September 30, 2017 and 2016, we recorded impairment charges on certain held-for-sale triple-net properties as the carrying values exceeded the estimated fair value less costs to sell. Changes in the gain on sales of properties are related to the volume of property sales and the sales prices.

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

For the three months ended September 30, 2017, the increase in other expenses represents non-capitalizable transaction costs primarily related to a joint venture transaction with an existing seniors housing operator, including the conversion of properties from triple-net to seniors housing operating, an exchange of PropCo/OpCo interests and termination/restructuring of pre-existing relationships.

During the nine months ended September 30, 2017, we completed ten triple-net construction projects totaling $283,472,000 or $347,818 per bed/unit. The following is a summary of triple-net construction projects pending as of September 30, 2017 (dollars in thousands):

Location	Units/Beds		Commitment		Balance	Est. Completion
Alexandria, VA	116	$	60,156	$	40,405	2Q18
Exton, PA	120		34,175		12,779	2Q18
Westerville, OH	90		22,800		3,387	4Q18
	326	$	117,131		56,571
Raleigh, NC	Project in planning stage				7,095
Total				$	63,666

Interest expense for the nine months ended September 30, 2017 and 2016 represents secured debt interest expense and related fees. The change in interest expense is due to the net effect and timing of assumptions, segment transitions, fluctuations in foreign currency rates, extinguishments and principal amortizations. The fluctuation in losses/gains on debt extinguishment is attributable to the large volume of extinguishments in the first quarter of 2017. The following is a summary of our triple-net secured debt principal activity (dollars in thousands):

	Three Months Ended						Nine Months Ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
			Wtd. Avg.			Wtd. Avg.			Wtd. Avg.			Wtd. Avg.
	Amount		Interest Rate	Amount		Interest Rate	Amount		Interest Rate	Amount		Interest Rate
Beginning balance	$	345,866	3.532%	$	460,269	5.509%	$	594,199	4.580%	$	554,014	5.488%
Debt issued		13,000	4.570%		-	0.000%		13,000	4.570%		-	0.000%
Debt extinguished		-	0.000%		(14,565)	5.865%		(255,553)	5.923%		(107,577)	5.028%
Foreign currency		7,707	3.134%		(503)	5.428%		18,525	2.954%		4,550	5.303%
Principal payments		(1,126)	5.559%		(2,514)	5.608%		(4,724)	5.684%		(8,300)	5.635%
Ending balance	$	365,447	5.554%	$	442,687	5.515%	$	365,447	3.554%	$	442,687	5.515%

Monthly averages	$	358,425	3.560%	$	455,044	5.511%	$	424,583	3.996%	$	498,934	5.496%

A portion of our triple-net properties were formed through partnerships. Income or loss from unconsolidated entities represents our share of net income or losses related to unconsolidated investments. Net income attributable to noncontrolling interest represents our partners’ share of net income relating to those partnerships where we are the controlling partner.

Seniors Housing Operating

The following is a summary of our NOI and SSNOI for the seniors housing operating segment (dollars in thousands):

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

	Three Months Ended					Change			Nine Months Ended				Change
		September 30,		September 30,					September 30,		September 30,
		2017		2016		$		%	2017		2016		$		%
NOI		$	225,100	$	199,495	$	25,605	13%	$	653,518	$	603,219	$	50,299	8%
Non SSNOI attributable to same store properties			206		1,269		(1,063)	-84%		918		1,759		(841)	-48%
NOI attributable to non same store properties⁽¹⁾			(20,894)		(5,803)		(15,091)	260%		(57,501)		(11,596)		(45,905)	396%
SSNOI⁽²⁾		$	204,412	$	194,961	$	9,451	5%	$	596,935	$	593,382	$	3,553	1%

(1) Change is primarily due to the acquisition of 50 properties subsequent to January 1, 2016.
(2) Relates to 373 same store properties.

The following is a summary of our seniors housing operating results of operations (dollars in thousands):

			Three Months Ended				Change			Nine Months Ended				Change
			September 30,		September 30,					September 30,		September 30,
			2017		2016		$		%	2017		2016		$		%
Revenues:
	Resident fees and services		$	702,380	$	630,017	$	72,363	11%	$	2,049,757	$	1,847,386	$	202,371	11%
	Interest income			-		1,054		(1,054)	-100%		69		3,126		(3,057)	-98%
	Other income			1,497		716		781	109%		4,005		11,889		(7,884)	-66%
		Total revenues		703,877		631,787		72,090	11%		2,053,831		1,862,401		191,430	10%
Property operating expenses				478,777		432,292		46,485	11%		1,400,313		1,259,182		141,131	11%
	NOI⁽¹⁾			225,100		199,495		25,605	13%		653,518		603,219		50,299	8%
Other expenses:
	Interest expense			16,369		20,360		(3,991)	-20%		47,587		61,157		(13,570)	-22%
	Depreciation and amortization			119,089		97,210		21,879	23%		356,023		301,354		54,669	18%
	Transaction costs⁽²⁾			-		18,083		(18,083)	-100%		-		25,259		(25,259)	-100%
	Loss (gain) on extinguishment of debt, net			-		-		-	n/a		3,414		(88)		3,502	n/a
	Impairment of assets			-		-		-	n/a		14,191		-		14,191	n/a
	Other expenses⁽²⁾			5,157		-		5,157	n/a		8,100		-		8,100	n/a
		Total other expenses		140,615		135,653		4,962	4%		429,315		387,682		41,633	11%
Income (loss) from continuing operations before income taxes and income (loss) from unconsolidated entities				84,485		63,842		20,643	32%		224,203		215,537		8,666	4%
Income tax benefit (expense)				(1,519)		515		(2,034)	n/a		9,133		5,304		3,829	72%
Income (loss) from unconsolidated entities				(2,886)		(3,891)		1,005	-26%		(40,527)		(15,713)		(24,814)	158%
Income from continuing operations				80,080		60,466		19,614	32%		192,809		205,128		(12,319)	-6%
Gain (loss) on real estate dispositions, net⁽³⁾				(197)		-		(197)	n/a		12,814		-		12,814	n/a
Net income (loss)				79,883		60,466		19,417	32%		205,623		205,128		495	0%
Less: Net income (loss) attributable to noncontrolling interests				1,008		1,556		(548)	-35%		1,199		1,739		(540)	-31%
Net income (loss) attributable to common stockholders			$	78,875	$	58,910	$	19,965	34%	$	204,424	$	203,389	$	1,035	1%

(1) See Non-GAAP Financial Measures.
(2) See Note 3 to our unaudited consolidated financial statements.
(3) See Note 5 to our unaudited consolidated financial statements.

Fluctuations in revenues and property operating expenses are primarily a result of acquisitions and the movement of U.S. and foreign currency exchange rates. The fluctuations in depreciation and amortization are due to acquisitions and variations in amortization of short-lived intangible assets. To the extent that we acquire or dispose of additional properties in the future, these amounts will change accordingly.

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

During the nine month period ended September 30, 2017, we recorded an impairment charge related to two held-for-sale properties for which our carrying value exceeded the estimated fair value less costs to sell. During the nine month period ended September 30, 2017, we recorded a gain on sale related to the sale of one property previously classified as held-for-sale.

During the nine month period ended September 30, 2017, we completed one seniors housing operating construction project representing $3,634,000 or $302,833 per unit. The following is a summary of our seniors housing operating construction projects, excluding expansions, pending as of September 30, 2017 (dollars in thousands):

Location	Units		Commitment		Balance	Est. Completion
Chertsey, UK	94	$	41,814	$	32,103	1Q18
Bushey, UK	95		54,613		30,681	3Q18
	189	$	96,427		62,784
New York, NY	Project in planning stage				136,327
London, UK	Project in planning stage				28,433
Total				$	227,544

Interest expense represents secured debt interest expense. The change in secured debt interest expense is primarily due to the net effect and timing of assumptions, extinguishments and principal amortizations. The following is a summary of our seniors housing operating property secured debt principal activity (dollars in thousands):


	Three Months Ended						Nine Months Ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
			Weighted Avg.			Weighted Avg.			Weighted Avg.			Weighted Avg.
	Amount		Interest Rate	Amount		Interest Rate	Amount		Interest Rate	Amount		Interest Rate
Beginning balance	$	2,040,985	3.556%	$	2,393,628	3.923%	$	2,463,249	3.936%	$	2,290,552	3.958%
Debt issued		15,659	3.458%		31,549	3.036%		177,459	2.595%		193,541	3.053%
Debt assumed		-	0.000%		47,156	4.132%		-	0.000%		47,156	4.132%
Debt extinguished		(15,449)	2.883%		(29,724)	3.655%		(610,403)	4.918%		(121,337)	3.609%
Foreign currency		39,696	3.180%		(7,980)	3.394%		73,737	3.257%		49,086	3.476%
Principal payments		(11,857)	3.573%		(12,326)	3.860%		(35,008)	3.629%		(36,695)	3.908%
Ending balance	$	2,069,034	3.633%	$	2,422,303	3.926%	$	2,069,034	3.633%	$	2,422,303	3.926%

Monthly averages	$	2,065,572	3.605%	$	2,413,116	3.910%	$	2,082,662	3.662%	$	2,371,211	3.940%

The majority of our seniors housing operating properties are formed through partnership interests. Net income attributable to noncontrolling interests represents our partners’ share of net income (loss) related to joint ventures. The fluctuations in income (loss) from unconsolidated entities is primarily due to the recognition of goodwill and intangible asset impairments as well as non-recurring income tax expense adjustments related to our investments in unconsolidated entities during the nine month period ended September 30, 2017. During the nine months ended September 30, 2017, we recognized a $7,916,000 deferred tax benefit arising from basis difference generated by the aforementioned unconsolidated entities’ adjustments.

Outpatient Medical

The following is a summary of our NOI and SSNOI for the outpatient medical segment (dollars in thousands):

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

	Three Months Ended					Change			Nine Months Ended				Change
		September 30,		September 30,					September 30,		September 30,
		2017		2016		$		%	2017		2016		$		%
NOI		$	96,772	$	94,905	$	1,867	2%	$	285,675	$	287,423	$	(1,748)	-1%
Non SSNOI on same store properties			(1,827)		(2,636)		809	-31%		(6,745)		(7,620)		875	-11%
NOI attributable to non same store properties⁽¹⁾			(9,571)		(7,967)		(1,604)	20%		(25,176)		(26,442)		1,266	-5%
SSNOI⁽²⁾		$	85,374	$	84,302	$	1,072	1%	$	253,754	$	253,361	$	393	0%

(1) Change is primarily due to a nonrecurring cash receipt during the three months ended June 30, 2016, offset by acquisitions of seven properties subsequent to January 1, 2016.
(2) Relates to 235 same store properties.

The following is a summary of our results of operations for the outpatient medical segment (dollars in thousands):

			Three Months Ended				Change			Nine Months Ended				Change
			September 30,		September 30,					September 30,		September 30,
			2017		2016		$		%	2017		2016		$		%
Revenues:
	Rental income		$	141,325	$	134,926	$	6,399	5%	$	418,886	$	402,258	$	16,628	4%
	Interest income			-		1,009		(1,009)	-100%		-		3,307		(3,307)	-100%
	Other income			667		358		309	86%		2,497		4,824		(2,327)	-48%
		Total revenues		141,992		136,293		5,699	4%		421,383		410,389		10,994	3%
Property operating expenses				45,220		41,388		3,832	9%		135,708		122,966		12,742	10%
	NOI⁽¹⁾			96,772		94,905		1,867	2%		285,675		287,423		(1,748)	-1%
Other expenses:
	Interest expense			2,929		3,986		(1,057)	-27%		7,342		15,132		(7,790)	-51%
	Depreciation and amortization			48,158		46,555		1,603	3%		144,567		142,066		2,501	2%
	Transaction costs⁽²⁾			-		146		(146)	-100%		-		2,188		(2,188)	-100%
	Impairment of assets			-		4,635		(4,635)	-100%		5,625		4,635		990	21%
	Loss (gain) on extinguishment of debt, net			-		-		-	n/a		4,373		-		4,373	n/a
	Other expenses⁽²⁾			530		-		530	n/a		2,201		-		2,201	n/a
		Total other expenses		51,617		55,322		(3,705)	-7%		164,108		164,021		87	0%
Income from continuing operations before income taxes and income from unconsolidated entities				45,155		39,583		5,572	14%		121,567		123,402		(1,835)	-1%
Income tax (expense) benefit				(366)		417		(783)	n/a		(655)		(59)		(596)	1010%
Income from unconsolidated entities				816		144		672	467%		1,868		88		1,780	2023%
Income from continuing operations				45,605		40,144		5,461	14%		122,780		123,431		(651)	-1%
Gain (loss) on real estate dispositions, net⁽³⁾				2,004		(1,228)		3,232.00	n/a		2,004		(1,228)		3,232.00	n/a
Net income (loss)				47,609		38,916		8,693	22%		124,784		122,203		2,581	2%
Less: Net income (loss) attributable to noncontrolling interests				1,032		997		35	4%		3,424		(529)		3,953	n/a
Net income (loss) attributable to common stockholders			$	46,577	$	37,919	$	8,658	23%	$	121,360	$	122,732	$	(1,372)	-1%

(1) See Non-GAAP Financial Measures.
(2) See Note 3 to our unaudited consolidated financial statements.
(3) See Note 5 to our unaudited consolidated financial statements.

The increase in rental income is primarily attributable to the acquisitions of new properties and the conversion of newly constructed outpatient medical properties from which we receive rent. Certain of our leases contain annual rental escalators that are contingent upon changes in the Consumer Price Index. These escalators are not fixed, so no straight-line rent is recorded; however, rental income is recorded based on the contractual cash rental payments due for the period. If the Consumer Price Index does not increase, a portion of our revenues may not continue to increase. Sales of real property would offset revenue increases and, to the extent that they exceed

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

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 September 30, 2017, our consolidated outpatient medical portfolio signed 98,116 square feet of new leases and 240,234 square feet of renewals. The weighted-average term of these leases was seven years, with a rate of $33.97 per square foot and tenant improvement and lease commission costs of $20.72 per square foot. Substantially all of these leases during the referenced quarter contain an annual fixed or contingent escalation rent structure ranging from 0% to 5%.

The fluctuation in property operating expenses is primarily attributable to acquisitions and construction conversions of new outpatient medical facilities for which we incur certain property operating expenses. The fluctuations in depreciation and amortization are due to acquisitions and variations in amortization of short-lived intangible assets. To the extent that we acquire or dispose of additional properties in the future, these amounts will change accordingly.

During the nine months ended September 30, 2017 and 2016, we recorded impairment charges related to certain held-for-sale properties as the carrying values exceeded the estimated fair values less costs to sell.

During the nine months ended September 30, 2017, we completed four outpatient medical construction projects representing $63,036,000 or $310 per square foot. The following is a summary of the outpatient medical construction projects, excluding expansions, pending as of September 30, 2017 (dollars in thousands):

Location	Square Feet		Commitment		Balance	Est. Completion
Palmer. AK	38,676	$	12,345	$	466	3Q18
Brooklyn, NY	140,955		105,177		48,165	3Q19
	179,631	$	117,522	$	48,631

Total interest expense represents secured debt interest expense. The change in secured debt interest expense is primarily due to the net effect and timing of assumptions, extinguishments and principal amortizations. The fluctuation in losses/gains on debt extinguishment is attributable to the large volume of extinguishments in 2017. The following is a summary of our outpatient medical secured debt principal activity (dollars in thousands):

	Three Months Ended						Nine Months Ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
			Weighted Avg.			Weighted Avg.			Weighted Avg.			Weighted Avg.
	Amount		Interest Rate	Amount		Interest Rate	Amount		Interest Rate	Amount		Interest Rate
Beginning balance	$	284,918	4.617%	$	563,232	5.129%	$	404,079	4.846%	$	627,689	5.177%
Debt assumed		-	0.000%		-	0.000%		23,094	6.670%		-	0.000%
Debt extinguished		-	0.000%		(128,406)	5.847%		(137,416)	5.990%		(185,914)	5.892%
Principal payments		(2,000)	6.633%		(3,014)	5.373%		(6,839)	6.762%		(9,963)	5.471%
Ending balance	$	282,918	4.693%	$	431,812	4.929%	$	282,918	4.693%	$	431,812	4.929%

Monthly averages	$	283,885	4.676%	$	521,636	5.077%	$	298,933	4.607%	$	571,466	5.152%

A portion of our outpatient medical properties were formed through partnerships. Income or loss from unconsolidated entities represents our share of net income or losses related to certain unconsolidated property investments. Net income attributable to noncontrolling interests represents our partners’ share of net income relating to those partnerships where we are the controlling partner.

Non-Segment/Corporate

The following is a summary of our results of operations for the non-segment/corporate activities (dollars in thousands):

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

		Three Months Ended				Change			Nine Months Ended				Change
		September 30,		September 30,					September 30,		September 30,
		2017		2016		$		%	2017		2016		$		%
Revenues:
	Other income	$	698	$	189	$	509	269%	$	1,171	$	705	$	466	66%
Expenses:
	Interest expense		99,658		100,639		(981)	-1%		290,829		301,864		(11,035)	-4%
	Loss (gain) on derivatives, net		-		(2,516)		2,516	-100%		-		(2,516)		2,516	-100%
	General and administrative		29,913		36,828		(6,915)	-19%		93,643		122,434		(28,791)	-24%
	Other expenses		4,672		-		4,672	n/a		10,882		3,161		7,721	244%
	Total expenses		134,243		134,951		(708)	-1%		395,354		424,943		(29,589)	-7%
Loss from continuing operations before income taxes			(133,545)		(134,762)		1,217	-1%		(394,183)		(424,238)		30,055	-7%
Income tax (expense) benefit			2,032		269		1,763	655%		(873)		(1,277)		404	-32%
Loss from continuing operations			(131,513)		(134,493)		2,980	-2%		(395,056)		(425,515)		30,459	-7%
Less: Preferred stock dividends			11,676		16,352		(4,676)	-29%		37,734		49,055		(11,321)	-23%
Less: Preferred stock redemption charge			-		-		-	n/a		9,769		-		9,769	n/a
Net loss attributable to common stockholders		$	(143,189)	$	(150,845)	$	7,656	-5%	$	(442,559)	$	(474,570)	$	32,011	-7%

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

	Three Months Ended				Change			Nine Months Ended				Change
	September 30,		September 30,					September 30,		September 30,
	2017		2016		$		%	2017		2016		$		%
Senior unsecured notes	$	92,296	$	92,005	$	291	0%	$	267,444	$	279,901	$	(12,457)	-4%
Secured debt		49		69		(20)	-29%		164		245		(81)	-33%
Primary unsecured credit facility		3,906		5,137		(1,231)	-24%		13,179		12,142		1,037	9%
Loan expense		3,407		3,428		(21)	-1%		10,042		9,576		466	5%
Totals	$	99,658	$	100,639	$	(981)	-1%	$	290,829	$	301,864	$	(11,035)	-4%

The change in interest expense on senior unsecured notes is due to the net effect of issuances and extinguishments. The year-to-date decrease in interest expense is attributed primarily to the $450,000,000 of 4.70% senior unsecured notes extinguished in December 2016. Please refer to Note 10 to our unaudited consolidated financial statements for additional information. Loan expense represents the amortization of deferred loan costs incurred in connection with the issuance and amendments of debt. Loan expense changes are due to amortization of charges for costs incurred in connection with senior unsecured note issuances. The change in interest expense on the primary unsecured credit facility is due primarily to the net effect and timing of draws, paydowns and variable interest rate changes. Please refer to Note 9 of our unaudited consolidated financial statements for additional information regarding our primary unsecured credit facility.

General and administrative expenses as a percentage of consolidated revenues for the three months ended September 30, 2017 and 2016 were 2.74% and 3.41%, respectively. The decrease in general and administrative expenses is primarily related to a reduction in professional service fees for tax and legal consulting and compensation costs as a result of execution of our strategic initiatives. Other expenses primarily represent severance-related costs associated with the departure of certain executive officers and key employees.

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

Other

Non-GAAP Financial Measures

We believe that net income and net income attributable to common stockholders (“NICS”), as defined by U.S. GAAP, are the most appropriate earnings measurements. However, we consider FFO, NOI, SSNOI, EBITDA and Adjusted EBITDA to be useful supplemental measures of our operating performance. Historical cost accounting for real estate assets in accordance with U.S. GAAP implicitly assumes that the value of real estate assets diminishes predictably over time as evidenced by the provision for depreciation. However, since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient. In response, the National Association of Real Estate Investment Trusts (“NAREIT”) created funds from operations attributable to common stockholders (“FFO”) as a supplemental measure of operating performance for REITs that excludes historical cost depreciation from net income. FFO, as defined by NAREIT, means NICS, computed in accordance with U.S. GAAP, excluding gains (or losses) from sales of real estate and impairment of depreciable assets, plus depreciation and amortization, and after adjustments for unconsolidated entities and noncontrolling interests.

Consolidated net operating income (“NOI”) is used to evaluate the operating performance of our properties. We define NOI as total revenues, including tenant reimbursements, less property operating expenses. Property operating expenses represent costs associated with managing, maintaining and servicing tenants for our seniors housing operating and medical facility properties. These expenses include, but are not limited to, property-related payroll and benefits, property management fees paid to operators, marketing, housekeeping, food service, maintenance, utilities, property taxes and insurance. General and administrative expenses represent costs unrelated to property operations 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 NOI (“SSNOI”) is used to evaluate the operating performance of our properties under a consistent population which eliminates changes in the composition of our portfolio. As used herein, same store is generally defined as those revenue-generating properties in the portfolio for the reporting period subsequent to January 1, 2016. Land parcels, loans, sub-leases and major capital restructurings as well as any properties acquired, developed/redeveloped, transitioned, sold or classified as held for sale during that period are excluded from the same store amounts. We believe NOI and SSNOI provide investors relevant and useful information because they measure the operating performance of our properties at the property level on an unleveraged basis. We use NOI and SSNOI to make decisions about resource allocations and to assess the property level performance of our properties.

EBITDA stands for earnings (net income) before interest, taxes, depreciation and amortization. We believe that EBITDA, along with net income and cash flow provided from operating activities, is an important supplemental measure because it provides additional information to assess and evaluate the performance of our operations. We primarily utilize EBITDA to measure our interest coverage ratio, which represents EBITDA divided by total interest, and our fixed charge coverage ratio, which represents EBITDA divided by fixed charges. Fixed charges include total interest, secured debt principal amortization and preferred dividends. Covenants in our senior unsecured notes contain a financial ratios based on a definition of EBITDA that is specific to those agreements. Failure to satisfy these covenants could result in an event of default that could have a material adverse impact on our cost and availability of capital, which could in turn have a material adverse impact on our consolidated results of operations, liquidity and/or financial condition. Due to the materiality of these debt agreements and the financial covenants, we have disclosed Adjusted EBITDA, which represents EBITDA as defined above excluding unconsolidated entities and adjusted for items per our covenant. We use Adjusted EBITDA to measure our adjusted fixed charge coverage ratio, which represents Adjusted EBITDA divided by fixed charges on a trailing twelve months basis. Fixed charges include total interest (excluding capitalized interest and non-cash interest expenses), secured debt principal amortization and preferred dividends. Our covenant requires an adjusted fixed charge coverage ratio of at least 1.50 times.

Our supplemental reporting measures and similarly entitled financial measures are widely used by investors, equity and debt analysts and rating agencies in the valuation, comparison, rating and investment recommendations of companies. Management uses these financial measures to facilitate internal and external comparisons to our historical operating results and in making operating decisions. Additionally, these measures are utilized by the Board of Directors to evaluate management. None of our supplemental measures represent net income or cash flow provided from operating activities as determined in accordance with U.S. GAAP and should not be considered as alternative measures of profitability or liquidity. Finally, the supplemental measures, as defined by us, may not be comparable to similarly entitled items reported by other real estate investment trusts or other companies.

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

The following tables reflect the reconciliations of NOI and SSNOI to net income, the most directly comparable U.S. GAAP measure, for the periods presented. Dollars are in thousands.

			Three Months Ended
			March 31,		June 30,		September 30,		December 31,		March 31,		June 30,		September 30,
NOI Reconciliations:			2016		2016		2016		2016		2017		2017		2017
Net income			$	165,474	$	210,749	$	354,741	$	351,108	$	337,610	$	203,441	$	89,299
Loss (gain) on real estate dispositions, net				-		(1,530)		(162,351)		(200,165)		(244,092)		(42,155)		(1,622)
Loss (income) from unconsolidated entities				3,820		1,959		1,749		2,829		23,106		3,978		(3,408)
Income tax expense (benefit)				(1,725)		(513)		(305)		(16,585)		2,245		(8,448)		669
Other expenses				-		3,161		-		8,838		11,675		6,339		99,595
Impairment of assets				14,314		-		9,705		13,187		11,031		13,631		-
Provision for loan losses				-		-		-		10,215		-		-		-
Loss (gain) on extinguishment of debt, net				(24)		33		-		17,204		31,356		5,515		-
Loss (gain) on derivatives, net				-		-		(2,516)		68		1,224		736		324
Transaction costs				8,208		5,157		19,842		9,704		-		-		-
General and administrative expenses				45,691		39,914		36,828		32,807		31,101		32,632		29,913
Depreciation and amortization				228,696		226,569		218,061		227,916		228,276		224,847		230,138
Interest expense				132,960		132,326		129,699		126,360		118,597		116,231		122,578
Consolidated net operating income (NOI)			$	597,414	$	617,825	$	605,453	$	583,486	$	552,129	$	556,747	$	567,486

NOI by segment:
	Triple-net		$	308,168	$	310,311	$	310,864	$	279,516	$	249,735	$	241,347	$	244,916
	Seniors housing operating			196,475		207,255		199,495		210,895		209,442		218,978		225,100
	Outpatient medical			92,713		99,805		94,905		92,841		92,719		96,183		96,772
	Non-segment/corporate			58		454		189		234		233		239		698
		Total NOI	$	597,414	$	617,825	$	605,453	$	583,486	$	552,129	$	556,747	$	567,486

			Nine Months Ended
			September 30,		September 30,
NOI Reconciliations:			2016		2017
Net income			$	730,961	$	630,356
Loss (gain) on real estate dispositions, net				(163,881)		(287,869)
Loss (income) from unconsolidated entities				7,528		23,676
Income tax expense (benefit)				(2,543)		(5,535)
Other expenses				3,161		117,608
Impairment of assets				24,019		24,662
Loss (gain) on extinguishment of debt, net				9		36,870
Loss (gain) on derivatives, net				(2,516)		2,284
Transaction costs				33,207		-
General and administrative expenses				122,434		93,643
Depreciation and amortization				673,326		683,262
Interest expense				394,985		357,405
Consolidated net operating income (NOI)			$	1,820,690	$	1,676,362

NOI by segment:
	Triple-net		$	929,343	$	735,998
	Seniors housing operating			603,219		653,518
	Outpatient medical			287,423		285,675
	Non-segment/corporate			705		1,171
		Total NOI	$	1,820,690	$	1,676,362

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

					Three Months Ended
					March 31,		June 30,		September 30,		December 31,		March 31,		June 30,		September 30,
SSNOI Reconciliations:					2016		2016		2016		2016		2017		2017		2017
NOI:
	Triple-net				$	308,168	$	310,311	$	310,864	$	279,516	$	249,735	$	241,347	$	244,916
	Seniors housing operating					196,475		207,255		199,495		210,895		209,442		218,978		225,100
	Outpatient medical					92,713		99,805		94,905		92,841		92,719		96,183		96,772
			Total			597,356		617,371		605,264		583,252		551,896		556,508		566,788
Adjustments:
	Triple-net:
		Non SSNOI on same store properties				(13,461)		(11,404)		(11,325)		(11,151)		(10,301)		(9,293)		(9,097)
		NOI attributable to non same store properties				(131,095)		(131,047)		(131,847)		(100,819)		(70,397)		(60,073)		(61,543)
			Subtotal			(144,556)		(142,451)		(143,172)		(111,970)		(80,698)		(69,366)		(70,640)
	Seniors housing operating:
		Non SSNOI on same store properties				248		242		1,269		231		231		481		206
		NOI attributable to non same store properties				(2,909)		(2,884)		(5,803)		(20,413)		(18,754)		(17,853)		(20,894)
			Subtotal			(2,661)		(2,642)		(4,534)		(20,182)		(18,523)		(17,372)		(20,688)
	Outpatient medical:
		Non SSNOI on same store properties				(2,373)		(2,611)		(2,636)		(1,974)		(2,214)		(2,704)		(1,827)
		NOI attributable to non same store properties				(6,467)		(12,007)		(7,967)		(5,036)		(6,252)		(9,352)		(9,571)
			Subtotal			(8,840)		(14,618)		(10,603)		(7,010)		(8,466)		(12,056)		(11,398)
SSNOI:				Properties
	Triple-net			511		163,612		167,860		167,692		167,546		169,037		171,981		174,276
	Seniors housing operating			373		193,814		204,613		194,961		190,713		190,919		201,606		204,412
	Outpatient medical			235		83,873		85,187		84,302		85,831		84,253		84,127		85,374
			Total	1,119	$	441,299	$	457,660	$	446,955	$	444,090	$	444,209	$	457,714	$	464,062

SSNOI Property Reconciliation:
	Total properties			1,278
	Acquisitions			(83)
	Developments			(30)
	Held-for-sale			(8)
	Transitions/restructurings			(29)
	Other⁽¹⁾			(9)
		Same store properties		1,119
(1) Includes eight land parcels and one loan.

					Nine Months Ended
						September 30,		September 30,
SSNOI Reconciliations:						2016		2017
NOI:
	Triple-net					$	929,343	$	735,998
	Seniors housing operating						603,219		653,518
	Outpatient medical						287,423		285,675
			Total				1,819,985		1,675,191
Adjustments:
	Triple-net:
		Non SSNOI on same store properties					(36,190)		(28,691)
		NOI attributable to non same store properties					(393,989)		(192,013)
			Subtotal				(430,179)		(220,704)
	Seniors housing operating:
		Non SSNOI on same store properties					1,759		918
		NOI attributable to non same store properties					(11,596)		(57,501)
			Subtotal				(9,837)		(56,583)
	Outpatient medical
		Non SSNOI on same store properties					(7,620)		(6,745)
		NOI attributable to non same store properties					(26,442)		(25,176)
			Subtotal				(34,062)		(31,921)
SSNOI:				Properties
	Triple-net			511			499,164		515,294
	Seniors housing operating			373			593,382		596,935
	Outpatient medical			235			253,361		253,754
			Total	1,119		$	1,345,907	$	1,365,983

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

The table below reflects the reconciliation of FFO to NICS, the most directly comparable U.S. GAAP measure, for the periods presented. Noncontrolling interest and unconsolidated entity amounts represent adjustments to reflect our share of depreciation and amortization. Amounts are in thousands except for per share data.

		Three Months Ended
			March 31,		June 30,		September 30,		December 31,		March 31,		June 30,		September 30,
FFO Reconciliations:			2016		2016		2016		2016		2017		2017		2017
NICS			$	148,969	$	195,474	$	334,910	$	333,042	$	312,639	$	188,429	$	74,043
Depreciation and amortization				228,696		226,569		218,061		227,916		228,276		224,847		230,138
Impairment of assets				14,314		-		9,705		13,187		11,031		13,631		-
Loss (gain) on sales of properties, net				-		(1,530)		(162,351)		(200,165)		(244,092)		(42,155)		(1,622)
Noncontrolling interests				(17,319)		(20,616)		(15,695)		(17,897)		(18,107)		(16,955)		(16,826)
Unconsolidated entities				16,604		17,077		17,240		16,746		16,484		16,593		9,989
FFO			$	391,264	$	416,974	$	401,870	$	372,829	$	306,231	$	384,390	$	295,722

Average common shares outstanding:
	Basic			355,076		356,646		358,932		362,088		362,534		366,524		369,089
	Diluted			356,051		358,891		361,237		364,369		364,652		368,149		370,740

Per share data:
NICS
	Basic		$	0.42	$	0.55	$	0.93	$	0.92	$	0.86	$	0.51	$	0.20
	Diluted			0.42		0.54		0.93		0.91		0.86		0.51		0.20

FFO
	Basic		$	1.10	$	1.17	$	1.12	$	1.03	$	0.84	$	1.05	$	0.80
	Diluted			1.10		1.16		1.11		1.02		0.84		1.04		0.80


		Nine Months Ended
		September 30,		September 30,
FFO Reconciliations:		2016		2017
NICS		$	679,353	$	575,118
Depreciation and amortization			673,326		683,262
Impairment of assets			24,019		24,662
Loss (gain) on sales of properties, net			(163,881)		(287,869)
Noncontrolling interests			(53,630)		(51,887)
Unconsolidated entities			50,921		43,066
FFO		$	1,210,108	$	986,352

Average common shares outstanding:
	Basic		356,911		366,096
	Diluted		358,752		367,894

Per share data:
NICS
	Basic	$	1.90	$	1.57
	Diluted		1.89		1.56

FFO
	Basic	$	3.39	$	2.69
	Diluted		3.37		2.68

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

The table below reflects the reconciliation of EBITDA to net income, the most directly comparable U.S. GAAP measure, for the periods presented. Dollars are in thousands.

		Three Months Ended
		March 31,		June 30,		September 30,		December 31,		March 31,		June 30,		September 30,
EBITDA Reconciliations:		2016		2016		2016		2016		2017		2017			2017
Net income		$	165,474	$	210,749	$	354,741	$	351,108	$	337,610	$	203,441	$	89,299
Interest expense			132,960		132,326		129,699		126,360		118,597		116,231		122,578
Income tax expense (benefit)			(1,725)		(513)		(305)		(16,585)		2,245		(8,448)		669
Depreciation and amortization			228,696		226,569		218,061		227,916		228,276		224,847		230,138
EBITDA		$	525,405	$	569,131	$	702,196	$	688,799	$	686,728	$	536,071	$	442,684

Interest Coverage Ratio:
Interest expense		$	132,960	$	132,326	$	129,699	$	126,360	$	118,597	$	116,231	$	122,578
Non-cash interest expense			599		(1,519)		(543)		(216)		(1,679)		(2,946)		(3,199)
Capitalized interest			3,037		4,306		4,766		4,834		4,129		3,358		2,545
	Total interest		136,596		135,113		133,922		130,978		121,047		116,643		121,924
EBITDA		$	525,405	$	569,131	$	702,196	$	688,799	$	686,728	$	536,071	$	442,684
	Interest coverage ratio		3.85x		4.21x		5.24x		5.26x		5.67x		4.60x		3.63x

Fixed Charge Coverage Ratio:
Total interest		$	136,596	$	135,113	$	133,922	$	130,978	$	121,047	$	116,643	$	121,924
Secured debt principal payments			18,642		19,096		18,151		18,577		16,249		15,958		15,300
Preferred dividends			16,352		16,352		16,352		16,352		14,379		11,680		11,676
	Total fixed charges		171,590		170,561		168,425		165,907		151,675		144,281		148,900
EBITDA		$	525,405	$	569,131	$	702,196	$	688,799	$	686,728	$	536,071	$	442,684
	Fixed charge coverage ratio		3.06x		3.34x		4.17x		4.15x		4.53x		3.72x		2.97x

		Nine Months Ended
		September 30,		September 30,
EBITDA Reconciliations:		2016			2017
Net income		$	730,961	$	630,356
Interest expense			394,985		357,405
Income tax expense (benefit)			(2,543)		(5,535)
Depreciation and amortization			673,326		683,262
EBITDA		$	1,796,729	$	1,665,488

Interest Coverage Ratio:
Interest expense		$	394,985	$	357,405
Non-cash interest expense			(1,465)		(7,825)
Capitalized interest			12,109		10,033
	Total interest		405,629		359,613
EBITDA		$	1,796,729	$	1,665,488
	Interest coverage ratio		4.43x		4.63x

Fixed Charge Coverage Ratio:
Total interest		$	405,629	$	359,613
Secured debt principal payments			55,889		47,507
Preferred dividends			49,055		37,734
	Total fixed charges		510,573		444,854
EBITDA		$	1,796,729	$	1,665,488
	Fixed charge coverage ratio		3.52x		3.74x

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

The table below reflects the reconciliation of Adjusted EBITDA to net income, the most directly comparable U.S. GAAP measure, for the periods presented. Dollars are in thousands.


		Twelve Months Ended
Adjusted EBITDA		March 31,		June 30,		September 30,		December 31,		March 31,		June 30,		September 30,
Reconciliations:		2016		2016		2016		2016		2017		2017		2017
Net income		$	844,606	$	724,894	$	880,380	$	1,082,070	$	1,254,208	$	1,246,899	$	981,458
Interest expense			504,048		517,512		526,082		521,345		506,982		490,886		483,765
Income tax expense (benefit)			5,030		(2,899)		139		(19,128)		(15,158)		(23,093)		(22,119)
Depreciation and amortization			866,106		883,873		896,135		901,242		900,822		899,100		911,180
	EBITDA		2,219,790		2,123,380		2,302,736		2,485,529		2,646,854		2,613,792		2,354,284
Loss (income) from unconsolidated entities			12,676		11,682		10,801		10,357		29,643		31,662		26,505
Transaction costs			70,579		63,245		73,754		42,910		34,702		29,545		9,704
Stock-based compensation expense⁽¹⁾			29,976		25,883		25,807		28,869		25,588		23,321		24,710
Loss (gain) on extinguishment of debt, net			19,252		398		(186)		17,214		48,593		54,074		54,074
Losses/impairments (gain) on sale of properties, net			(209,228)		(20,647)		(171,246)		(326,839)		(574,216)		(601,209)		(450,185)
Provision for loan losses			-		-		-		10,215		10,215		10,215		10,215
Loss (gain) on derivatives, net			-		-		(2,516)		(2,448)		(1,225)		(489)		2,351
Other expenses⁽¹⁾			40,636		37,386		37,386		7,721		19,396		23,997		122,211
Additional other income			(2,144)		(13,955)		(11,811)		(16,664)		(16,664)		(4,853)		(4,853)
Adjusted EBITDA		$	2,181,537	$	2,227,372	$	2,264,725	$	2,256,864	$	2,222,886	$	2,180,055	$	2,149,016

Adjusted Fixed Charge Coverage Ratio:
Interest expense		$	504,048	$	517,512	$	526,082	$	521,345	$	506,982	$	490,886	$	483,765
Capitalized interest			9,320		11,566		14,467		16,943		18,035		17,087		14,866
Non-cash interest expense			(1,868)		(7,589)		(4,341)		(1,681)		(3,958)		(5,386)		(8,041)
	Total interest		511,500		521,489		536,208		536,607		521,059		502,587		490,590
Adjusted EBITDA		$	2,181,537	$	2,227,372	$	2,264,725	$	2,256,864	$	2,222,886	$	2,180,055	$	2,149,016
	Adjusted interest coverage ratio		4.26x		4.27x		4.22x		4.21x		4.27x		4.34x		4.38x

Total interest		$	511,500	$	521,489	$	536,208	$	536,607	$	521,059	$	502,587	$	490,590
Secured debt principal payments			70,076		71,836		74,170		74,466		72,073		68,935		66,084
Preferred dividends			65,408		65,408		65,407		65,406		63,434		58,762		54,086
	Total fixed charges		646,984		658,733		675,785		676,479		656,566		630,284		610,760
Adjusted EBITDA		$	2,181,537	$	2,227,372	$	2,264,725	$	2,256,864	$	2,222,886	$	2,180,055	$	2,149,016
	Adjusted fixed charge coverage ratio		3.37x		3.38x		3.35x		3.34x		3.39x		3.46x		3.52x

(1) Certain severance-related costs are included in stock-based compensation and excluded from other expenses.

Our leverage ratios include book capitalization, undepreciated book capitalization and market capitalization. Book capitalization represents the sum of net debt (defined as total long-term debt less cash and cash equivalents and any IRC section 1031 deposits), total equity and redeemable noncontrolling interests. Undepreciated book capitalization represents book capitalization adjusted for accumulated depreciation and amortization. Market capitalization represents book capitalization adjusted for the fair market value of our common stock. Our leverage ratios are defined as the proportion of net debt to total capitalization. The table below reflects the reconciliation of our leverage ratios to our balance sheets for the periods presented. Amounts are in thousands, except share price.

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

			As of
		March 31,		June 30,		September 30,		December 31,		March 31,		June 30,		September 30,
			2016		2016		2016		2016		2017		2017		2017
Book capitalization:
Borrowings under primary unsecured credit facility		$	645,000	$	745,000	$	1,350,000	$	645,000	$	522,000	$	385,000	$	420,000
Long-term debt obligations⁽¹⁾			12,418,198		12,228,727		12,080,888		11,713,245		10,932,185		10,994,946		11,101,592
Cash & cash equivalents⁽²⁾			(355,949)		(466,585)		(456,420)		(557,659)		(380,360)		(442,284)		(250,776)
Total net debt			12,707,249		12,507,142		12,974,468		11,800,586		11,073,825		10,937,662		11,270,816
Total equity			14,999,794		14,868,568		15,264,238		15,281,472		15,110,263		15,313,523		15,244,664
Redeemable noncontrolling interest			359,656		394,126		393,530		398,433		385,418		388,876		386,748
Book capitalization		$	28,066,699	$	27,769,836	$	28,632,236	$	27,480,491	$	26,569,506	$	26,640,061	$	26,902,228
	Net debt to book capitalization ratio		45%		45%		45%		43%		42%		41%		42%

Undepreciated book capitalization:
Total net debt		$	12,707,249	$	12,507,142	$	12,974,468	$	11,800,586	$	11,073,825	$	10,937,662	$	11,270,816
Accumulated depreciation and amortization			4,032,726		4,109,585		4,243,038		4,093,494		4,335,160		4,568,408		4,826,418
Total equity			14,999,794		14,868,568		15,264,238		15,281,472		15,110,263		15,313,523		15,244,664
Redeemable noncontrolling interest			359,656		394,126		393,530		398,433		385,418		388,876		386,748
Undepreciated book capitalization		$	32,099,425	$	31,879,421	$	32,875,274	$	31,573,985	$	30,904,666	$	31,208,469	$	31,728,646
	Net debt to undepreciated book capitalization ratio		40%		39%		39%		37%		36%		35%		36%

Market capitalization:
Common shares outstanding			356,773		357,690		362,425		362,602		364,564		368,878		370,342
Period end share price		$	69.34	$	76.17	$	74.77	$	66.93	$	70.82	$	74.85	$	70.28
Common equity market capitalization		$	24,738,640	$	27,245,247	$	27,098,517	$	24,268,952	$	25,818,422	$	27,610,518	$	26,027,636
Total net debt			12,707,249		12,507,142		12,974,468		11,800,586		11,073,825		10,937,662		11,270,816
Noncontrolling interests⁽³⁾			839,856		869,320		867,923		873,512		859,478		873,567		901,487
Preferred stock			1,006,250		1,006,250		1,006,250		1,006,250		718,750		718,750		718,503
Enterprise value		$	39,291,995	$	41,627,959	$	41,947,158	$	37,949,300	$	38,470,475	$	40,140,497	$	38,918,442
	Net debt to market capitalization ratio		32%		30%		31%		31%		29%		27%		29%

(1) Amounts include senior unsecured notes, secured debt and capital lease obligations as reflected on our consolidated balance sheet.
(2) Inclusive of IRC section 1031 deposits, if any.
(3) Includes all noncontrolling interests (redeemable and permanent) as reflected on our consolidated balance sheet.

Critical Accounting Policies

Our unaudited consolidated financial statements are prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions. Management considers an accounting estimate or assumption critical if:

· the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and

· the impact of the estimates and assumptions on financial condition or operating performance is material.

Management has discussed the development and selection of its critical accounting policies with the Audit Committee of the Board of Directors. Management believes the current assumptions and other considerations used to estimate amounts reflected in our unaudited consolidated financial statements are appropriate and are not reasonably likely to change in the future. However, since these estimates require assumptions to be made that were uncertain at the time the estimate was made, they bear the risk of change. If actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our unaudited consolidated financial statements, the resulting changes could have a material adverse effect on our consolidated results of operations, liquidity and/or financial condition. Please refer to Note 2 to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016 for further information regarding significant accounting policies that impact us. There have been no material changes to these policies in 2017.

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

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q may contain “forward-looking” statements as defined in the Private Securities Litigation Reform Act of 1995. When the company uses words such as “may,” “will,” “intend,” “should,” “believe,” “expect,” “anticipate,” “project,” “estimate” or similar expressions that do not relate solely to historical matters, it is making forward-looking statements. In particular, these forward-looking statements include, but are not limited to, those relating to the company’s opportunities to acquire, develop or sell properties; the company’s ability to close its anticipated acquisitions, investments or dispositions on currently anticipated terms, or within currently anticipated timeframes; the expected performance of the company’s operators/tenants and properties; the company’s expected occupancy rates; the company’s ability to declare and to make distributions to shareholders; the company’s investment and financing opportunities and plans; the company’s continued qualification as a real estate investment trust (“REIT”); the company’s ability to access capital markets or other sources of funds; and the company’s ability to meet its earnings guidance. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that may cause the company’s actual results to differ materially from the company’s expectations discussed in the forward-looking statements. This may be a result of various factors, including, but not limited to: the status of the economy; the status of capital markets, including availability and cost of capital; issues facing the health care industry, including compliance with, and changes to, regulations and payment policies, responding to government investigations and punitive settlements and operators’/tenants’ difficulty in cost-effectively obtaining and maintaining adequate liability and other insurance; changes in financing terms; competition within the health care and seniors housing industries; negative developments in the operating results or financial condition of operators/tenants, including, but not limited to, their ability to pay rent and repay loans; the company’s ability to transition or sell properties with profitable results; the failure to make new investments or acquisitions as and when anticipated; natural disasters and other acts of God affecting the company’s properties; the company’s ability to re-lease space at similar rates as vacancies occur; the company’s ability to timely reinvest sale proceeds at similar rates to assets sold; operator/tenant or joint venture partner bankruptcies or insolvencies; the cooperation of joint venture partners; government regulations affecting Medicare and Medicaid reimbursement rates and operational requirements; liability or contract claims by or against operators/tenants; unanticipated difficulties and/or expenditures relating to future investments or acquisitions; environmental laws affecting the company’s properties; changes in rules or practices governing the company’s financial reporting; the movement of U.S. and foreign currency exchange rates; the company’s ability to maintain its qualification as a REIT; and key management personnel recruitment and retention. Other important factors are identified in the company’s Annual Report on Form 10-K for the year ended December 31, 2016, including factors identified under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Finally, the company undertakes no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events or otherwise, or to update the reasons why actual results could differ from those projected in any forward-looking statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to various market risks, including the potential loss arising from adverse changes in interest rates and foreign currency exchange rates. We seek to mitigate the underlying foreign currency exposures with gains and losses on derivative contracts hedging these exposures. We seek to mitigate the effects of fluctuations in interest rates by matching the terms of new investments with new long-term fixed rate borrowings to the extent possible. We may or may not elect to use financial derivative instruments to hedge interest rate exposure. These decisions are principally based on our policy to match our variable rate investments with comparable borrowings, but are also based on the general trend in interest rates at the applicable dates and our perception of the future volatility of interest rates. This section is presented to provide a discussion of the risks associated with potential fluctuations in interest rates and foreign currency exchange rates.

We historically borrow on our primary unsecured credit facility to acquire, construct or make loans relating to health care and seniors housing properties. Then, as market conditions dictate, we will issue equity or long-term fixed rate debt to repay the borrowings under our primary unsecured credit facility. We are subject to risks associated with debt financing, including the risk that existing indebtedness may not be refinanced or that the terms of refinancing may not be as favorable as the terms of current indebtedness. The majority of our borrowings were completed under indentures or contractual agreements that limit the amount of indebtedness we may incur. Accordingly, in the event that we are unable to raise additional equity or borrow money because of these limitations, our ability to acquire additional properties may be limited.

A change in interest rates will not affect the interest expense associated with our fixed rate debt. Interest rate changes, however, will affect the fair value of our fixed rate debt. Changes in the interest rate environment upon maturity of this fixed rate debt could have an effect on our future cash flows and earnings, depending on whether the debt is replaced with other fixed rate debt, variable rate debt or equity or repaid by the sale of assets. To illustrate the impact of changes in the interest rate markets, we performed a sensitivity analysis on our fixed rate debt instruments whereby we modeled the change in net present values arising from a hypothetical 1% increase in interest rates to determine the instruments’ change in fair value. The following table summarizes the

analysis performed as of the dates indicated (in thousands):

	September 30, 2017				December 31, 2016
	Principal		Change in		Principal		Change in
	balance		fair value		balance		fair value
Senior unsecured notes	$	7,697,037	$	(506,781)	$	7,568,832	$	(521,203)
Secured debt		1,791,932		(65,900)		2,489,276		(73,944)
Totals	$	9,488,969	$	(572,681)	$	10,058,108	$	(595,147)

Our variable rate debt, including our primary unsecured credit facility, is reflected at fair value. At September 30, 2017, we had $2,055,426,000 outstanding related to our variable rate debt. Assuming no changes in outstanding balances, a 1% increase in interest rates would result in increased annual interest expense of $20,554,000. At December 31, 2016, we had $2,311,996,000 outstanding under our variable rate debt. Assuming no changes in outstanding balances, a 1% increase in interest rates would have resulted in increased annual interest expense of $23,120,000.

We are subject to currency fluctuations that may, from time to time, affect our financial condition and results of operations. Increases or decreases in the value of the Canadian Dollar or Pounds Sterling relative to the U.S. Dollar impact the amount of net income we earn from our investments in Canada and the United Kingdom. Based solely on our results for the three months ended September 30, 2017, including the impact of existing hedging arrangements, if these exchange rates were to increase or decrease by 10%, our net income from these investments would increase or decrease, as applicable, by less than $4,500,000. We will continue to mitigate these underlying foreign currency exposures with non-U.S. denominated borrowings and gains and losses on derivative contracts. If we increase our international presence through investments in, or acquisitions or development of, seniors housing and health care properties outside the U.S., we may also decide to transact additional business or borrow funds in currencies other than U.S. Dollars, Canadian Dollars or Pounds Sterling. To illustrate the impact of changes in foreign currency markets, we performed a sensitivity analysis on our derivative portfolio whereby we modeled the change in net present values arising from a hypothetical 1% increase in foreign currency exchange rates to determine the instruments’ change in fair value. The following table summarizes the results of the analysis performed (dollars in thousands):

	September 30, 2017				December 31, 2016
	Carrying		Change in		Carrying		Change in
	Value		fair value		Value		fair value
Foreign currency forward contracts	$	42,036	$	13,778	$	87,962 ⁽¹⁾	$	722 ⁽¹⁾
Debt designated as hedges		1,607,066		16,071		1,481,591		13,000
Totals	$	1,649,102	$	29,849	$	1,569,553	$	13,722

(1) Amounts exclude cross currency hedge activity.

For additional information regarding fair values of financial instruments, see “Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” and Notes 11 and 16 to our unaudited consolidated financial statements.

Item 4. Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed by us in the reports we file with or submit to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. No changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, there are various legal proceedings pending against us that arise in the ordinary course of our business.

Management does not believe that the resolution of any of these legal proceedings either individually or in the aggregate will have a material adverse effect on our business, results of operations or financial condition. Despite management’s view of the ultimate resolution of these legal proceedings, we may have significant legal expenses and costs associated with the defense of such matters. Further, management cannot predict the outcome of these legal proceedings and if management’s expectation regarding such matters is not correct, such proceedings could have a material adverse effect on our business, results of operations or financial condition.

From time to time, we are party to certain legal proceedings for which third parties, such as tenants, operators and/or managers, are contractually obligated to indemnify, defend and hold us harmless. In some of these matters, the indemnitors have insurance for the potential damages. In other matters, we are being defended by tenants and other obligated third parties and these indemnitors may not have sufficient insurance, assets, income or resources to satisfy their defense and indemnification obligations to us. The unfavorable resolution of such legal proceedings could, individually or in the aggregate, materially adversely affect the indemnitors’ ability to satisfy their respective obligations to us, which, in turn, could have a material adverse effect on our business, results of operations or financial condition. It is management’s opinion that there are currently no such legal proceedings pending that will, individually or in the aggregate, have such a material adverse effect.

Item 1A. Risk Factors

There have been no material changes from the risk factors identified under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.

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

Issuer Purchases of Equity Securities
Period	Total Number of Shares Purchased⁽¹⁾	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs⁽²⁾	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 1, 2017 through July 31, 2017	-	$	-
August 1, 2017 through August 31, 2017	56		71.93
September 1, 2017 through September 30, 2017	-		-
Totals	56	$	71.93

(1) During the three months ended September 30, 2017, the company acquired shares of common stock held by employees who tendered owned shares to satisfy tax withholding obligations.
(2) No shares were purchased as part of publicly announced plans or programs.

Item 5. Other Information

None.

Item 6. Exhibits

10.1 Resignation Agreement, dated October 3, 2017, by and between Scott A. Estes and Welltower Inc.*

10.2 Welltower Inc. 2017-2019 Long-Term Incentive Program – Bridge 1.*

10.3 Welltower Inc. 2017-2019 Long-Term Incentive Program – Bridge 2.*

12 Statement Regarding Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends (Unaudited).

31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.

31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.

32.1 Certification pursuant to 18 U.S.C. Section 1350 by Chief Executive Officer.

32.2 Certification pursuant to 18 U.S.C. Section 1350 by Chief Financial Officer.

101.INS XBRL Instance Document**

101.SCH XBRL Taxonomy Extension Schema Document**

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document**

101.LAB XBRL Taxonomy Extension Label Linkbase Document**

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document**

101.DEF XBRL Taxonomy Extension Definition Linkbase Document**

Management Contract or Compensatory Plan or Arrangement

Attached as Exhibit 101 to this Quarterly Report on Form 10-Q are the following materials, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets at September 30, 2017 and December 31, 2016, (ii) the Consolidated Statements of Comprehensive Income for the nine months ended September 30, 2017 and 2016, (iii) the Consolidated Statements of Equity for the nine months ended September 30, 2017 and 2016, (iv) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 and (v) the Notes to Unaudited Consolidated Financial Statements.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	WELLTOWER INC.
Date: November 7, 2017	By:	/s/ THOMAS J. DEROSA
	Thomas J. DeRosa,
	Chief Executive Officer (Principal Executive Officer)


Date: November 7, 2017	By:	/s/ JOHN A. GOODEY
	John A. Goodey,
	Executive Vice President - Chief Financial Officer (Principal Financial Officer)


Date: November 7, 2017	By:	/s/ PAUL D. NUNGESTER, JR.
	Paul D. Nungester, Jr.,
	Senior Vice President & Controller (Principal Accounting Officer)

WELLTOWER INC. - FORM 10-Q - November 7, 2017

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WELLTOWER INC. Reports