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MarketScreener Homepage  >  Equities  >  Nyse  >  Healthpeak Properties, Inc.    PEAK

HEALTHPEAK PROPERTIES, INC.

(PEAK)
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HEALTHPEAK PROPERTIES : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/03/2020 | 04:24pm EST
All references in this report to "Healthpeak," the "Company," "we," "us" or
"our" mean Healthpeak Properties, Inc., together with its consolidated
subsidiaries. Unless the context suggests otherwise, references to "Healthpeak
Properties, Inc." mean the parent company without its subsidiaries.
Cautionary Language Regarding Forward-Looking Statements
Statements in this Quarterly Report on Form 10-Q that are not historical factual
statements are "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking
statements include, among other things, statements regarding our and our
officers' intent, belief or expectation as identified by the use of words such
as "may," "will," "project," "expect," "believe," "intend," "anticipate,"
"seek," "target," "forecast," "plan," "potential," "estimate," "could," "would,"
"should" and other comparable and derivative terms or the negatives thereof.
Forward-looking statements reflect our current expectations and views about
future events and are subject to risks and uncertainties that could
significantly affect our future financial condition and results of operations.
While forward-looking statements reflect our good faith belief and assumptions
we believe to be reasonable based upon current information, we can give no
assurance that our expectations or forecasts will be attained. As more fully set
forth under Part II, Item 1A. "Risk Factors" in our Quarterly Report on Form
10-Q for the quarters ended March 31, 2020 and June 30, 2020, risks and
uncertainties that may cause our actual results to differ materially from the
expectations contained in the forward-looking statements include, among other
things:
•the severity and duration of the COVID-19 pandemic;
•actions that have been taken and may continue to be taken by governmental
authorities to contain the COVID-19 outbreak or to treat its impact;
•the impact of the COVID-19 pandemic and health and safety measures taken to
slow its spread;
•operational risks associated with third party management contracts, including
the additional regulation and liabilities of our RIDEA lease structures;
•the ability of our existing and future tenants, operators and borrowers to
conduct their respective businesses in a manner sufficient to maintain or
increase their revenues and manage their expenses in order to generate
sufficient income to make rent and loan payments to us and our ability to
recover investments made, if applicable, in their operations;
•the imposition of laws or regulations prohibiting eviction of our tenants or
operators, including new governmental efforts in response to COVID-19;
•the financial condition of our existing and future tenants, operators and
borrowers, including potential bankruptcies and downturns in their businesses,
and their legal and regulatory proceedings, which may result in uncertainties
regarding our ability to continue to realize the full benefit of such tenants'
and operators' leases and borrowers' loans;
•our concentration in the healthcare property sector, particularly in senior
housing, life sciences and medical office buildings, which makes our
profitability more vulnerable to a downturn in a specific sector than if we were
investing in multiple industries;
•the effect on us and our tenants and operators of legislation, executive orders
and other legal requirements, including compliance with the Americans with
Disabilities Act, fire, safety and health regulations, environmental laws, the
Affordable Care Act, licensure, certification and inspection requirements, and
laws addressing entitlement programs and related services, including Medicare
and Medicaid, which may result in future reductions in reimbursements or fines
for noncompliance;
•our ability to identify replacement tenants and operators and the potential
renovation costs and regulatory approvals associated therewith;
•the risks associated with property development and redevelopment, including
costs above original estimates, project delays and lower occupancy rates and
rents than expected;
•the potential impact of uninsured or underinsured losses, including as a result
of hurricanes, earthquakes and other natural disasters, pandemics such as
COVID-19, acts of war and/or terrorism and other events that may cause such
losses and/or performance declines by us or our tenants and operators;
•the risks associated with our investments in joint ventures and unconsolidated
entities, including our lack of sole decision making authority and our reliance
on our partners' financial condition and continued cooperation;
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•competition for the acquisition and financing of suitable healthcare properties
as well as competition for tenants and operators, including with respect to new
leases and mortgages and the renewal or rollover of existing leases;
•our, or our counterparties', ability to fulfill obligations, such as financing
conditions and/or regulatory approval requirements, required to successfully
consummate acquisitions, dispositions, transitions, developments,
redevelopments, joint venture transactions or other transactions;
•our ability to achieve the benefits of acquisitions or other investments within
expected time frames or at all, or within expected cost projections;
•the potential impact on us and our tenants, operators and borrowers from
current and future litigation matters, including the possibility of larger than
expected litigation costs, adverse results and related developments;
•changes in federal, state or local laws and regulations, including those
affecting the healthcare industry that affect our costs of compliance or
increase the costs, or otherwise affect the operations, of our tenants and
operators;
•our ability to foreclose on collateral securing our real estate-related loans;
•volatility or uncertainty in the capital markets, the availability and cost of
capital as impacted by interest rates, changes in our credit ratings, and the
value of our common stock, and other conditions that may adversely impact our
ability to fund our obligations or consummate transactions, or reduce the
earnings from potential transactions;
•changes in global, national and local economic and other conditions, including
the ongoing economic downturn, volatility in the financial markets and high
unemployment rates;
•our ability to manage our indebtedness level and changes in the terms of such
indebtedness;
•competition for skilled management and other key personnel;
•our reliance on information technology systems and the potential impact of
system failures, disruptions or breaches; and
•our ability to maintain our qualification as a real estate investment trust
("REIT").
Except as required by law, we do not undertake, and hereby disclaim, any
obligation to update any forward-looking statements, which speak only as of the
date on which they are made.
COVID-19 Infection Information
Information related to the number of our senior housing facilities with
confirmed resident COVID-19 cases was provided to us by our operators, but has
not been independently verified by us. We have no reason to believe that this
information is inaccurate in any material respect, but cannot assure you it is
accurate.
Overview
The information set forth in this Item 2 is intended to provide readers with an
understanding of our financial condition, changes in financial condition and
results of operations. We will discuss and provide our analysis in the following
order:
•Executive Summary
•COVID-19 Update
•2020 Transaction Overview
•Dividends
•Results of Operations
•Liquidity and Capital Resources
•Contractual Obligations and Off-Balance Sheet Arrangements
•Non-GAAP Financial Measures Reconciliations
•Critical Accounting Policies and Recent Accounting Pronouncements
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Executive Summary
Healthpeak Properties, Inc. is a Standard & Poor's ("S&P") 500 company that
acquires, develops, owns, leases and manages healthcare real estate across the
United States ("U.S."). We are a Maryland corporation and qualify as a
self-administered REIT. In November 2020, we moved our corporate headquarters
from Irvine, CA to Denver, CO. With properties in nearly every state, the new
headquarters provides a favorable mix of affordability and a centralized
geographic location. Our Irvine, CA and Franklin, TN offices will continue to
operate.
We invest in a diversified portfolio of high-quality healthcare properties
across our three core asset classes of senior housing, life science, and medical
office real estate. Our senior housing properties are either operated under
triple-net leases in our senior housing triple-net segment or through RIDEA
structures in our senior housing operating portfolio ("SHOP") and continuing
care retirement community ("CCRC") segments. Under the life science and medical
office segments, we invest through the acquisition, development and management
of life science buildings and medical office buildings ("MOBs"). We have other
non-reportable segments that are comprised primarily of hospital properties and
debt investments.
At September 30, 2020, our portfolio of investments, including properties in our
unconsolidated joint ventures, consisted of interests in 626 properties. The
following table summarizes information for our reportable segments for the three
months ended September 30, 2020 (dollars in thousands):
                                                Total Portfolio             Percentage of Total
                Segment                         Adjusted NOI(1)          Portfolio Adjusted NOI(1)           Number of Properties
Senior housing triple-net                     $          24,230                               9  %                         62
SHOP                                                     23,521                               9  %                        135
CCRC                                                     23,228                               8  %                         17
Life science                                            103,610                              38  %                        136
Medical office                                           85,681                              32  %                        266
Other non-reportable                                     10,789                               4  %                         10
Totals                                        $         271,059                             100  %                        626

_______________________________________

(1) Total Portfolio metrics include results of operations from disposed
properties and properties that transferred segments through the disposition or
transfer date. See Item 2, Management's Discussion and Analysis of Financial
Condition and Results of Operations-Non-GAAP Financial Measures for additional
information regarding Adjusted NOI and see Note 13 to the Consolidated Financial
Statements for a reconciliation of Adjusted NOI by segment to net income (loss).
For a description of our significant activities during 2020, see "Item 2,
Management's Discussion and Analysis of Financial Condition and Results of
Operations-2020 Transaction Overview" in this report.
We invest in and manage our real estate portfolio for the long-term to maximize
benefit to our stockholders and support the growth of our dividends. Our
strategy consists of four core elements:
(i)Our real estate: Our portfolio is grounded in high-quality properties in
desirable locations. We focus on three purposely selected private pay asset
classes, senior housing, life science and medical office, to provide stability
through inevitable market cycles.
(ii)Our financials: We maintain a strong investment-grade balance sheet with
ample liquidity as well as long-term fixed-rate debt financing with staggered
maturities to reduce our exposure to interest-rate volatility and refinancing
risk.
(iii)Our partnerships: We work with leading healthcare companies, operators and
service providers and are responsive to their space and capital needs. We
provide high-quality management services to encourage tenants to renew, expand
and relocate into our properties, which drives increased occupancy, rental
rates, and property values.
(iv)Our platform: We have a people-first culture that we believe attracts,
develops and retains top talent. We continually strive to create and maintain an
industry-leading platform, with systems and tools that allow us to effectively
and efficiently manage our assets and investment activity.
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COVID-19 Update
Beginning in late 2019, a novel strain of Coronavirus ("COVID-19") began to
spread throughout the world, including the United States, ultimately being
declared a pandemic by the World Health Organization. Global health concerns and
increased efforts to reduce the spread of the COVID-19 pandemic have prompted
federal, state, and local governments to restrict normal daily activities, and
have resulted in travel bans, quarantines, school closings, "shelter-in-place"
orders requiring individuals to remain in their homes other than to conduct
essential services or activities, as well as business limitations and shutdowns,
which resulted in closure of many businesses deemed to be non-essential.
Although some of these restrictions have since been lifted or scaled back,
certain restrictions remain in place and any future surges of COVID-19 may lead
to other restrictions being re-implemented in response to efforts to reduce the
spread. In addition, our tenants, operators and borrowers are facing significant
cost increases as a result of increased health and safety measures, including
increased staffing demands for patient care and sanitation, as well as increased
usage and inventory of critical medical supplies and personal protective
equipment. These health and safety measures, which may remain in place for a
significant amount of time or be re-imposed from time to time, continue to place
a substantial strain on the business operations of many of our tenants,
operators, and borrowers.
SHOP, CCRC, and Senior Housing Triple-Net
Within our SHOP and CCRC properties, occupancy rates have declined since the
onset of the pandemic, a trend that may continue during the pandemic as a result
of a reduction in, or in some cases prohibitions on, new tenant move-ins due to
stricter move-in criteria, lower inquiry volumes, and reduced in-person tours,
as well as incidences of COVID-19 outbreaks at our facilities or the perception
that outbreaks may occur. Outbreaks, which directly affect our residents and the
employees at our senior housing facilities, have and could continue to
materially and adversely disrupt operations, as well as cause significant
reputational harm to us, our operators, and our tenants. As of October 30, 2020,
we had confirmed resident COVID-19 cases at 130 of our 208 senior housing
properties. Our senior housing property operators are also facing significant
cost increases as a result of higher staffing hours and compensation, the
implementation of increased health and safety measures and protocols, and
increased usage and inventory of critical medical supplies and personal
protective equipment. At our SHOP and CCRC facilities, we bear these significant
cost increases.
We temporarily suspended development and redevelopment projects in the greater
San Francisco and Boston areas as a result of "shelter-in-place" orders and
local, state, and federal directives. Our operators also temporarily suspended
development and redevelopment across our senior housing portfolio for the same
reasons, except for certain life safety and essential projects. Although some of
these development and redevelopment projects have been allowed to restart with
infection control protocols in place, future local, state, or federal orders
could cause us to re-suspend the work. Other projects remain suspended and we do
not know when we will be able to restart construction. In locations where
construction continues, construction workers are following applicable
guidelines, including appropriate social distancing, limitations on large group
gatherings in close proximity, and increased sanitation efforts, which has
slowed the pace of construction. These protective actions do not, however,
eliminate the risk that outbreaks caused or spread by such activities may occur
and impact our tenants, operators and residents. In addition, our planned
dispositions may not occur within the expected time or at all because of buyer
terminations or withdrawals related to the pandemic, capital constraints,
inability to tour properties, or other factors relating to the pandemic.
The ultimate impact of the pandemic on senior housing generally and the public
perception of senior housing as a desirable residential setting depend on a
number of factors that are unknown at this time, including, but not limited to:
(i) the course and severity of the pandemic; (ii) responses of public and
private health authorities; and (iii) the timing, distribution, and health
effects of vaccines and other treatments.
Medical Office Portfolio
Within our medical office portfolio, many physician practices and affiliated
hospitals initially delayed or discontinued nonessential surgeries and
procedures due to "shelter-in-place" orders and other health and safety
measures, which negatively impacted their cash flows during the second quarter
of 2020. These restrictions have now been lifted in the majority of our markets
and operations are at or near pre-pandemic levels. However, we expect that
planned move-outs will be delayed during the COVID-19 pandemic, which is
expected to slightly increase short-term retention in this portfolio.
We implemented a deferred rent program for during May and June 2020 that was
limited to certain non-health system and non-hospital tenants in good standing,
which has reduced our cash collections during those months, although we are
requiring that the deferred rent be repaid ratably by the end of 2020. Under
this program, we agreed to defer approximately $6 million of rent through
September 30, 2020, $3 million of which remains outstanding as of September 30,
2020. We may also implement a deferred rent program for future periods.
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Life Science Portfolio
Within our life science portfolio, we have numerous tenants that are working
tirelessly to address critical research and testing needs in the fight against
COVID-19. We are focused on providing our tenants with the necessary space to
complete their critical work and are in continuous contact with our tenants
regarding how we can help them meet their needs. Through September 30, 2020, we
had provided approximately $1 million of rent deferrals to our life science
tenants, all of which is required to be repaid by the end of 2020. As of
September 30, 2020, an immaterial amount remained outstanding.
However, within our life science portfolio, we may experience a decline in
leasing activity at certain points during the COVID-19 pandemic. As a result of
governmental restrictions on business activities in the greater San Francisco
and Boston areas, we temporarily suspended development, redevelopment, and
tenant improvement projects at many of our life science properties, resulting in
delayed deliveries and project completions. Though we have been able to continue
or re-start these projects, we remain subject to future governmental
restrictions that may again suspend these projects. Even when these projects
continue, we have been experiencing losses in efficiency as a result of the
implementation of health and safety protocols related to social distancing and
proper hygiene and sanitization.
Liquidity
We believe that we are well positioned to manage the COVID-19 pandemic and
measures to slow its spread while working closely with our tenants, operators,
and borrowers as they navigate the pandemic. We had approximately $2.57 billion
of liquidity available, including $2.43 billion borrowing capacity under our
bank line of credit facility and $140 million of cash and cash equivalents, as
of October 30, 2020. Additionally, after completing the July 2020 redemption of
$300 million of senior unsecured notes due in 2022, we have no significant debt
maturities until 2023. While a future downgrade in our credit ratings would
adversely impact our cost of borrowing, we believe we continue to have access to
the unsecured debt markets. We could also seek to enter into one or more secured
debt financings, issue additional securities, including under our 2020 ATM
Program (as defined below), or dispose of certain additional assets to fund
future operating costs, capital expenditures, or acquisitions, although no
assurances can be made in this regard.
Future Rent Collections
The impact of COVID-19 on the ability of our tenants to pay rent in the future
is currently unknown. We have, and will continue to monitor the credit quality
of each of our tenants and write-off straight-line rent and accounts receivable,
as necessary. In the event we conclude that substantially all of a tenant's
straight-line rent or accounts receivable is not probable of collection in the
future, such amounts will be written off, which could have a material impact on
our future results of operations.
Employee Update
We have taken, and will continue to take, proactive measures to provide for the
well-being of our workforce. We have maximized our systems infrastructure as
well as virtual and remote working technologies for our employees, including our
executive team, to ensure productivity and connectivity internally, as well as
with key third-party relationships.
The extent of the impact of the COVID-19 pandemic on our business and financial
results will depend on future developments, including the duration, severity,
and spread of COVID-19, health and safety actions taken to contain its spread,
any new surges of COVID-19, and how quickly and to what extent normal economic
and operating conditions can resume within the markets in which we operate, each
of which are highly uncertain at this time and outside of our control.
2020 Transaction Overview
South San Francisco Land Site Acquisition
In October 2020, we executed a definitive agreement to acquire approximately 12
acres of land for $128 million. The acquisition site is located in South San
Francisco, California, adjacent to two sites currently held by us as land for
future development. We made a $10 million nonrefundable deposit upon completing
due diligence in November 2020 and expect to close the transaction during the
first half of 2021.
Cambridge Discovery Park Acquisition
In October 2020, we entered into definitive agreements to acquire three life
science facilities in Cambridge, Massachusetts for $610 million and a 49% joint
venture interest in a fourth property on the same campus for $54 million. We
made a $20 million nonrefundable deposit upon completing due diligence in
October 2020 and expect to close the transaction during the fourth quarter of
2020.
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Midwest MOB Acquisition
In September 2020, we entered into definitive agreements to acquire a portfolio
of seven MOBs located in Indiana, Missouri, and Illinois, for $169 million. We
made a $9 million nonrefundable deposit upon completing due diligence in
September 2020 and closed the transaction in October 2020.
Scottsdale Gateway Acquisition
In July 2020, we acquired a MOB in Scottsdale, Arizona, for $27 million.
The Post Acquisition
In April 2020, we acquired a life science campus in Waltham, Massachusetts for
$320 million.
Master Transaction and Cooperation Agreement with Brookdale
In January 2020, Healthpeak and Brookdale Senior Living Inc. ("Brookdale")
completed certain of the transactions governed by the previously announced
Master Transactions and Cooperation Agreement (the "2019 MTCA"), which includes
a series of transactions related to the previously jointly owned 15-campus CCRC
portfolio (the "CCRC JV") and the portfolio of senior housing properties that
were triple-net leased to Brookdale. Specifically, the following transactions
were completed on January 31, 2020:
•We acquired Brookdale's 51% interest in 13 of the 15 communities in the CCRC JV
based on a valuation of $1.06 billion (the "CCRC Acquisition") and transitioned
management (under new management agreements) of those 13 communities to Life
Care Services LLC ("LCS");
•We paid Brookdale $100 million to terminate the previous management agreements
related to those 13 communities;
•Brookdale acquired 18 of the triple-net lease properties (the "Brookdale
Acquisition Assets") from us for cash proceeds of $385 million;
•The remaining 24 triple-net lease properties were restructured into a single
master lease with 2.4% annual rent escalators and a maturity date of December
31, 2027 (the "2019 Amended Master Lease");
•A portion of annual rent (amount in excess of 6.5% of sales proceeds) related
to 14 of the 18 Brookdale Acquisition Assets was reallocated to the remaining
properties under the 2019 Amended Master Lease; and
•Brookdale paid down $20 million of future rent under the 2019 Amended Master
Lease.
Other Real Estate Transactions
•During the first quarter of 2020, we sold seven SHOP assets for $36 million and
a hospital under a direct financing lease ("DFL") for $82 million.
•During the second quarter of 2020, we sold two SHOP assets for $28 million and
three MOBs in San Diego, California for $106 million (through exercise of a
purchase option by one of our tenants).
•During the third quarter of 2020, we sold four SHOP assets for $12 million,
four MOBs for $14 million, one undeveloped MOB land parcel for $2 million, and
one asset from the other non-reportable segment for $1 million.
•In October and November 2020, we sold seven SHOP assets and three senior
housing triple-net assets for $88 million.
•In October 2020, we entered into a definitive agreement to sell seven SHOP
assets for $115 million. We received a $3 million nonrefundable deposit upon
completion of due diligence in October 2020.
•In October 2020, we acquired the remaining 15% equity interest in a previously
unconsolidated senior housing joint venture for $4 million and began
consolidating the real estate held by the venture.
•During the nine months ended September 30, 2020, we converted: (i) six senior
housing triple-net assets with Capital Senior Living Corporation ("CSL") into a
RIDEA structure, with CSL remaining as the manager, (ii) one senior housing
triple-net asset with CSL into a RIDEA structure with Discovery Senior Living,
LLC as the operator, and (iii) two senior housing triple-net assets with HRA
Senior Living ("HRA") into a RIDEA structure, with HRA remaining as the manager.
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Financing Activities
•During the nine months ended September 30, 2020, we utilized the forward
provisions under the at-the-market equity offering program established in
February 2019 (the "2019 ATM Program") to allow for the sale of up to an
aggregate of 2 million shares of our common stock at an initial weighted average
net price of $35.23 per share, after commissions.
•During the nine months ended September 30, 2020, we settled all 32.5 million
shares previously outstanding under (i) ATM forward contracts and (ii) a 2019
forward equity sales agreement at a weighted average net price of $32.73 per
share, after commissions, resulting in net proceeds of $1.06 billion.
•In June 2020, we completed a public offering of $600 million aggregate
principal amount of 2.88% senior unsecured notes due in 2031 (the "2031 Notes").
•In June 2020, using a portion of the net proceeds from the 2031 Notes offering,
we repurchased $250 million aggregate principal amount of our 4.25% senior
unsecured notes due in 2023.
•In July 2020, using an additional portion of the net proceeds from the 2031
Notes offering, we redeemed all $300 million aggregate principal amount of our
3.15% senior unsecured notes due in 2022.
Development Activities
•As part of the development program with HCA Healthcare Inc., at September 30,
2020, we had five on-campus MOB developments under contract with an aggregate
total estimated cost of $129 million.
•At September 30, 2020, we had seven life science development projects in
process with an aggregate total estimated cost of approximately $1.03 billion.
Dividends
The following table summarizes our common stock cash dividends declared in 2020:
                                             Amount          Dividend
Declaration Date         Record Date       Per Share       Payment Date
January 30               February 18      $     0.37       February 28
April 30                    May 8               0.37          May 19
August 4                  August 14             0.37        August 25
November 2               November 12            0.37       November 23


Results of Operations
We evaluate our business and allocate resources among our reportable business
segments: (i) senior housing triple-net, (ii) SHOP, (iii) CCRC, (iv) life
science, and (v) medical office. Our senior housing facilities, including CCRCs,
are managed utilizing triple-net leases and RIDEA structures. Under the life
science and medical office segments, we invest through the acquisition and
development of life science facilities and MOBs, which generally require a
greater level of property management. We have other non-reportable segments that
are comprised primarily of our debt investments and hospital properties. We
evaluate performance based upon property adjusted net operating income
("Adjusted NOI" or "Cash NOI") in each segment. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies in Note 2 to the Consolidated Financial Statements in our
Annual Report on Form 10-K for the year ended December 31, 2019 filed with the
U.S. Securities and Exchange Commission ("SEC"), as updated by Note 2 to the
Consolidated Financial Statements herein.
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Non-GAAP Financial Measures
Net Operating Income
NOI and Adjusted NOI are non-U.S. generally accepted accounting principles
("GAAP") supplemental financial measures used to evaluate the operating
performance of real estate. NOI is defined as real estate revenues (inclusive of
rental and related revenues, resident fees and services, income from direct
financing leases, and government grant income and exclusive of interest income),
less property level operating expenses (which exclude transition costs); NOI
excludes all other financial statement amounts included in net income (loss) as
presented in Note 13 to the Consolidated Financial Statements. Adjusted NOI is
calculated as NOI after eliminating the effects of straight-line rents, DFL
non-cash interest, amortization of market lease intangibles, termination fees,
actuarial reserves for insurance claims that have been incurred but not
reported, and the impact of deferred community fee income and expense. NOI and
Adjusted NOI include our share of income (loss) generated by unconsolidated
joint ventures and exclude noncontrolling interests' share of income (loss)
generated by consolidated joint ventures. Adjusted NOI is oftentimes referred to
as "Cash NOI." Management believes NOI and Adjusted NOI are important
supplemental measures because they provide relevant and useful information by
reflecting only income and operating expense items that are incurred at the
property level and present them on an unlevered basis. We use NOI and Adjusted
NOI to make decisions about resource allocations, to assess and compare property
level performance, and to evaluate our Same-Store ("SS") performance, as
described below. We believe that net income (loss) is the most directly
comparable GAAP measure to NOI and Adjusted NOI. NOI and Adjusted NOI should not
be viewed as alternative measures of operating performance to net income (loss)
as defined by GAAP since they do not reflect various excluded items. Further,
our definitions of NOI and Adjusted NOI may not be comparable to the definitions
used by other REITs or real estate companies, as they may use different
methodologies for calculating NOI and Adjusted NOI. For a reconciliation of NOI
and Adjusted NOI to net income (loss) by segment, refer to Note 13 to the
Consolidated Financial Statements.
Operating expenses generally relate to leased medical office and life science
properties, as well as SHOP and CCRC facilities. We generally recover all or a
portion of our leased medical office and life science property expenses through
tenant recoveries. We present expenses as operating or general and
administrative based on the underlying nature of the expense.
Same-Store
Same-Store NOI and Adjusted (Cash) NOI information allows us to evaluate the
performance of our property portfolio under a consistent population by
eliminating changes in the composition of our consolidated portfolio of
properties. Same-Store Adjusted NOI excludes amortization of deferred revenue
from tenant-funded improvements and certain non-property specific operating
expenses that are allocated to each operating segment on a consolidated basis.
Properties are included in Same-Store once they are stabilized for the full
period in both comparison periods. Newly acquired operating assets are generally
considered stabilized at the earlier of lease-up (typically when the tenant(s)
control(s) the physical use of at least 80% of the space) or 12 months from the
acquisition date. Newly completed developments and redevelopments are considered
stabilized at the earlier of lease-up or 24 months from the date the property is
placed in service. Properties that experience a change in reporting structure,
such as a conversion from a triple-net lease to a RIDEA reporting structure, are
considered stabilized after 12 months in operations under a consistent reporting
structure. A property is removed from Same-Store when it is classified as held
for sale, sold, placed into redevelopment, experiences a casualty event that
significantly impacts operations, a change in reporting structure (such as
triple-net to SHOP) or operator transition has been agreed to, or a significant
tenant relocates from a Same-Store property to a non Same-Store property and
that change results in a corresponding increase in revenue. For a reconciliation
of Same-Store to total portfolio Adjusted NOI and other relevant disclosures by
segment, refer to our Segment Analysis below.
Funds From Operations ("FFO")
FFO encompasses NAREIT FFO and FFO as Adjusted, each of which is described in
detail below. We believe FFO applicable to common shares, diluted FFO applicable
to common shares, and diluted FFO per common share are important supplemental
non-GAAP measures of operating performance for a REIT. Because the historical
cost accounting convention used for real estate assets utilizes straight-line
depreciation (except on land), such accounting presentation implies that the
value of real estate assets diminishes predictably over time. Since real estate
values instead have historically risen and fallen with market conditions,
presentations of operating results for a REIT that use historical cost
accounting for depreciation could be less informative. The term FFO was designed
by the REIT industry to address this issue.
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NAREIT FFO. FFO, as defined by the National Association of Real Estate
Investment Trusts ("NAREIT"), is net income (loss) applicable to common shares
(computed in accordance with GAAP), excluding gains or losses from sales of
depreciable property, including any current and deferred taxes directly
associated with sales of depreciable property, impairments of, or related to,
depreciable real estate, plus real estate and other real estate-related
depreciation and amortization, and adjustments to compute our share of NAREIT
FFO and FFO as Adjusted (see below) from joint ventures. Adjustments for joint
ventures are calculated to reflect our pro-rata share of both our consolidated
and unconsolidated joint ventures. We reflect our share of NAREIT FFO for
unconsolidated joint ventures by applying our actual ownership percentage for
the period to the applicable reconciling items on an entity by entity basis. For
consolidated joint ventures in which we do not own 100%, we reflect our share of
the equity by adjusting our NAREIT FFO to remove the third party ownership share
of the applicable reconciling items based on actual ownership percentage for the
applicable periods. Our pro-rata share information is prepared on a basis
consistent with the comparable consolidated amounts, is intended to reflect our
proportionate economic interest in the operating results of properties in our
portfolio and is calculated by applying our actual ownership percentage for the
period. We do not control the unconsolidated joint ventures, and the pro-rata
presentations of reconciling items included in NAREIT FFO do not represent our
legal claim to such items. The joint venture members or partners are entitled to
profit or loss allocations and distributions of cash flows according to the
joint venture agreements, which provide for such allocations generally according
to their invested capital.
The presentation of pro-rata information has limitations, which include, but are
not limited to, the following: (i) the amounts shown on the individual line
items were derived by applying our overall economic ownership interest
percentage determined when applying the equity method of accounting and do not
necessarily represent our legal claim to the assets and liabilities, or the
revenues and expenses and (ii) other companies in our industry may calculate
their pro-rata interest differently, limiting the usefulness as a comparative
measure. Because of these limitations, the pro-rata financial information should
not be considered independently or as a substitute for our financial statements
as reported under GAAP. We compensate for these limitations by relying primarily
on our GAAP financial statements, using the pro-rata financial information as a
supplement.
NAREIT FFO does not represent cash generated from operating activities in
accordance with GAAP, is not necessarily indicative of cash available to fund
cash needs and should not be considered an alternative to net income (loss). We
compute NAREIT FFO in accordance with the current NAREIT definition; however,
other REITs may report NAREIT FFO differently or have a different interpretation
of the current NAREIT definition from ours.
FFO as Adjusted. In addition, we present NAREIT FFO on an adjusted basis before
the impact of non-comparable items including, but not limited to,
transaction-related items, impairments (recoveries) of non-depreciable assets,
losses (gains) from the sale of non-depreciable assets, severance and related
charges, prepayment costs (benefits) associated with early retirement or payment
of debt, litigation costs (recoveries), casualty-related charges (recoveries),
foreign currency remeasurement losses (gains), deferred tax asset valuation
allowances, and changes in tax legislation ("FFO as Adjusted").
Transaction-related items include transaction expenses and gains/charges
incurred as a result of mergers and acquisitions and lease amendment or
termination activities. Prepayment costs (benefits) associated with early
retirement of debt include the write-off of unamortized deferred financing fees,
or additional costs, expenses, discounts, make-whole payments, penalties or
premiums incurred as a result of early retirement or payment of debt. Management
believes that FFO as Adjusted provides a meaningful supplemental measurement of
our FFO run-rate and is frequently used by analysts, investors, and other
interested parties in the evaluation of our performance as a REIT. At the same
time that NAREIT created and defined its FFO measure for the REIT industry, it
also recognized that "management of each of its member companies has the
responsibility and authority to publish financial information that it regards as
useful to the financial community." We believe stockholders, potential
investors, and financial analysts who review our operating performance are best
served by an FFO run-rate earnings measure that includes certain other
adjustments to net income (loss), in addition to adjustments made to arrive at
the NAREIT defined measure of FFO. FFO as Adjusted is used by management in
analyzing our business and the performance of our properties and we believe it
is important that stockholders, potential investors, and financial analysts
understand this measure used by management. We use FFO as Adjusted to: (i)
evaluate our performance in comparison with expected results and results of
previous periods, relative to resource allocation decisions, (ii) evaluate the
performance of our management, (iii) budget and forecast future results to
assist in the allocation of resources, (iv) assess our performance as compared
with similar real estate companies and the industry in general, and (v) evaluate
how a specific potential investment will impact our future results. Other REITs
or real estate companies may use different methodologies for calculating an
adjusted FFO measure, and accordingly, our FFO as Adjusted may not be comparable
to those reported by other REITs. For a reconciliation of net income (loss) to
NAREIT FFO and FFO as Adjusted and other relevant disclosure, refer to "Non-GAAP
Financial Measures Reconciliations" below.

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Adjusted FFO ("AFFO")
AFFO is defined as FFO as Adjusted after excluding the impact of the following:
(i) amortization of deferred compensation expense, (ii) amortization of deferred
financing costs, net, (iii) straight-line rents, (iv) deferred income taxes, (v)
amortization of acquired market lease intangibles, net, (vi) non-cash interest
related to DFLs and lease incentive amortization (reduction of straight-line
rents), (vii) actuarial reserves for insurance claims that have been incurred
but not reported, and (viii) deferred revenues, excluding amounts amortized into
rental income that are associated with tenant funded improvements
owned/recognized by us and up-front cash payments made by tenants to reduce
their contractual rents. Also, AFFO: (i) is computed after deducting recurring
capital expenditures, including second generation leasing costs and second
generation tenant and capital improvements and (ii) includes lease restructure
payments and adjustments to compute our share of AFFO from our unconsolidated
joint ventures. Certain prior period amounts in the "Non-GAAP Financial Measures
Reconciliation" below for AFFO have been reclassified to conform to the current
period presentation. More specifically, recurring capital expenditures,
including second generation leasing costs and second generation tenant and
capital improvements ("AFFO capital expenditures") excludes our share from
unconsolidated joint ventures (reported in "other AFFO adjustments").
Adjustments for joint ventures are calculated to reflect our pro-rata share of
both our consolidated and unconsolidated joint ventures. We reflect our share of
AFFO for unconsolidated joint ventures by applying our actual ownership
percentage for the period to the applicable reconciling items on an entity by
entity basis. We reflect our share for consolidated joint ventures in which we
do not own 100% of the equity by adjusting our AFFO to remove the third party
ownership share of the applicable reconciling items based on actual ownership
percentage for the applicable periods (reported in "other AFFO adjustments").
See FFO for further disclosure regarding our use of pro-rata share information
and its limitations. Other REITs or real estate companies may use different
methodologies for calculating AFFO, and accordingly, our AFFO may not be
comparable to those reported by other REITs. Although our AFFO computation may
not be comparable to that of other REITs, management believes AFFO provides a
meaningful supplemental measure of our performance and is frequently used by
analysts, investors, and other interested parties in the evaluation of our
performance as a REIT. We believe AFFO is an alternative run-rate earnings
measure that improves the understanding of our operating results among investors
and makes comparisons with: (i) expected results, (ii) results of previous
periods, and (iii) results among REITs more meaningful. AFFO does not represent
cash generated from operating activities determined in accordance with GAAP and
is not necessarily indicative of cash available to fund cash needs as it
excludes the following items which generally flow through our cash flows from
operating activities: (i) adjustments for changes in working capital or the
actual timing of the payment of income or expense items that are accrued in the
period, (ii) transaction-related costs, (iii) litigation settlement expenses,
(iv) severance-related expenses, and (v) actual cash receipts from interest
income recognized on loans receivable (in contrast to our AFFO adjustment to
exclude non-cash interest and depreciation related to our investments in direct
financing leases). Furthermore, AFFO is adjusted for recurring capital
expenditures, which are generally not considered when determining cash flows
from operations or liquidity. AFFO is a non-GAAP supplemental financial measure
and should not be considered as an alternative to net income (loss) determined
in accordance with GAAP. For a reconciliation of net income (loss) to AFFO and
other relevant disclosure, refer to "Non-GAAP Financial Measures
Reconciliations" below.
Comparison of the Three and Nine Months Ended September 30, 2020 to the Three
and Nine Months Ended September 30, 2019
Overview


Three Months Ended September 30, 2020 and 2019
The following table summarizes results for the three months ended September 30,
2020 and 2019 (dollars in thousands):
                                                            Three Months Ended
                                                              September 30,
                                                              2020                    2019                 Change

Net income (loss) applicable to common shares            $    (63,768)$ (46,249)$ (17,519)
NAREIT FFO                                                    164,603               181,591               (16,988)
FFO as Adjusted                                               213,529               220,572                (7,043)
AFFO                                                          183,791               190,247                (6,456)


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Net income (loss) applicable to common shares decreased primarily as a result of
the following:
•a deferred tax asset valuation allowance and corresponding income tax expense
recognized during the third quarter of 2020;
•a reduction in income related to assets sold during 2019 and 2020;
•a reduction in equity income (loss) from unconsolidated joint ventures during
2020 primarily due to our share of net losses from an unconsolidated joint
venture owning 19 SHOP assets that was formed in December 2019; and
•additional expenses and decreased occupancy in our SHOP and CCRC segments
related to COVID-19.
The decrease in net income (loss) applicable to common shares was partially
offset by:
•a decrease in loss on debt extinguishments;
•a reduction in impairment charges related to depreciable real estate and assets
underlying DFLs during the third quarter of 2020; and
•NOI generated from: (i) 2019 and 2020 acquisitions of real estate, (ii)
development and redevelopment projects placed in service during 2019 and 2020,
and (iii) new leasing activity during 2019 and 2020.
NAREIT FFO decreased primarily as a result of the aforementioned events
impacting net income (loss) applicable to common shares, except for impairments
of depreciable real estate, which are excluded from NAREIT FFO.
FFO as Adjusted decreased primarily as a result of the aforementioned events
impacting NAREIT FFO, except for the following, which are excluded from FFO as
Adjusted:
•the deferred tax asset valuation allowance; and
•the loss on debt extinguishment.
AFFO decreased primarily as a result of the aforementioned events impacting FFO
as Adjusted, except for the impact of straight-line rents, which is excluded
from AFFO. The decrease was further impacted by decreased AFFO capital
expenditures during the period.
Nine Months Ended September 30, 2020 and 2019
The following table summarizes results for the nine months ended September 30,
2020 and 2019 (dollars in thousands):
                                                            Nine Months Ended
                                                              September 30,
                                                              2020                    2019                  Change

Net income (loss) applicable to common shares            $    265,018$      787$ 264,231
NAREIT FFO                                                    518,519                586,052               (67,533)
FFO as Adjusted                                               655,255                645,538                 9,717
AFFO                                                          583,343                576,784                 6,559


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Net income (loss) applicable to common shares increased primarily as a result of
the following:
•an increase in other income, net as a result of: (i) a gain upon change of
control related to the acquisition of the outstanding equity interests in 13
CCRCs from Brookdale during the first quarter of 2020, (ii) a gain on sale
related to the sale of a hospital underlying a DFL during the first quarter of
2020, and (iii) government grant income received under the Coronavirus Aid,
Relief and Economic Security Act ("CARES Act") during the second and third
quarters of 2020;
•an increase in net gain on sales of real estate during the nine months ended
September 30, 2020;
•a reduction in impairment charges related to depreciable real estate and assets
underlying DFLs during the nine months ended September 30, 2020;
•an increase in interest income primarily as a result of new loans and
additional funding of existing loans;
•an increase in income tax benefit as a result of (i) the above-mentioned
acquisition of Brookdale's interest in 13 CCRCs and related management
termination fee expense paid to Brookdale in connection with transitioning
management to LCS during the first quarter of 2020 and (ii) the extension of the
net operating loss carryback period provided by the CARES Act; partially offset
by additional income tax expense due to a deferred tax asset valuation allowance
and corresponding income tax expense recognized during the third quarter of
2020; and
•NOI generated from: (i) 2019 and 2020 acquisitions of real estate, (ii)
development and redevelopment projects placed in service during 2019 and 2020,
and (iii) new leasing activity during 2019 and 2020.
The increase in net income (loss) applicable to common shares was partially
offset by:
•A reduction in income related to assets sold during 2019 and 2020;
•an increase in loss on debt extinguishments;
•increased expense related to the management termination fee paid to Brookdale
in connection with transitioning management of 13 CCRCs to LCS during the first
quarter of 2020;
•a reduction in equity income (loss) from unconsolidated joint ventures during
2020 primarily due to our share of net losses from an unconsolidated joint
venture owning 19 SHOP assets that was formed in December 2019;
•increased depreciation and amortization expense as a result of: (i) assets
acquired during 2019 and 2020, (ii) the acquisition of Brookdale's interest in
and consolidation of 13 CCRCs during the first quarter of 2020, and (iii)
development and redevelopment projects placed into service during 2019 and 2020,
partially offset by dispositions of real estate throughout 2019 and 2020; and
•increased credit losses related to loans receivable as a result of: (i)
adopting the current expected credit losses model required under ASU 2016-13,
(ii) new loans funded during 2020, and (iii) the impact of COVID-19 on expected
credit losses.
NAREIT FFO decreased primarily as a result of the aforementioned events
impacting net income (loss) applicable to common shares, except for the
following, which are excluded from NAREIT FFO:
•impairments of depreciable real estate;
•net gain on sales of depreciable real estate;
•the gain upon change of control related to the acquisition of Brookdale's
interest in 13 CCRCs; and
•depreciation and amortization expense.
FFO as Adjusted increased primarily as a result of the aforementioned events
impacting NAREIT FFO, except for the following, which are excluded from FFO as
Adjusted:
•the deferred tax asset valuation allowance;
•net gain on sales of assets underlying DFLs and non-depreciable assets, such as
land;
•the loss on debt extinguishment; and
•the increase in credit losses.
AFFO increased primarily as a result of the aforementioned events impacting FFO
as Adjusted, except for the impact of straight-line rents and the increase in
deferred tax benefit, which are excluded from AFFO.
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Segment Analysis
The following tables provide selected operating information for our Same-Store
and total property portfolio for each of our reportable segments. For the three
months ended September 30, 2020, our Same-Store consists of 407 properties
representing properties acquired or placed in service and stabilized on or prior
to July 1, 2019 and that remained in operations under a consistent reporting
structure through September 30, 2020. For the nine months ended September 30,
2020, our Same-Store consists of 394 properties representing properties acquired
or placed in service and stabilized on or prior to January 1, 2019 and that
remained in operations under a consistent reporting structure through
September 30, 2020. Our total property portfolio consisted of 626 and 740
properties at September 30, 2020 and 2019, respectively.
Senior Housing Triple-Net


The following table summarizes results at and for the three months ended September 30, 2020 and 2019 (dollars in thousands, except per unit data):

                                                       SS                                                Total Portfolio(1)
                                        Three Months Ended September 30,                          Three Months Ended September 30,
                                    2020                2019             Change               2020               2019              Change
Rental and related revenues    $     10,561$ 11,074$   (513)$    24,558$ 42,543$ (17,985)
Income from direct financing
leases                                    -                 -                 -                    -             5,413             (5,413)

Operating expenses                      (40)              (38)               (2)                (421)             (865)               444

Adjustments to NOI(2)                   955               (43)              998                   93            (1,537)             1,630
Adjusted NOI                   $     11,476$ 10,993$    483               24,230            45,554            (21,324)
Less: non-SS adjusted NOI                                                                    (12,754)          (34,561)            21,807
SS adjusted NOI                                                                          $    11,476$ 10,993$     483
Adjusted NOI % change                                                       4.4  %
Property count(3)                        28                28                                     62                92
Average capacity (units)(4)           2,756             2,756                                  5,848            11,161
Average annual rent per unit   $     16,714$ 16,010$    16,861$ 16,636

_______________________________________

(1)Total Portfolio includes results of operations from disposed properties and
properties that transferred segments through the disposition or transfer date.
(2)Represents adjustments to NOI in accordance with the Company's definition of
Adjusted NOI. Refer to "Non-GAAP Financial Measures" above for definitions of
NOI and Adjusted NOI.
(3)From our 2019 presentation of Same-Store, we removed 10 senior housing
triple-net properties that were converted, or we agreed to convert, to SHOP, 33
senior housing triple-net properties that were classified as held for sale, and
1 senior housing triple-net property that was transferred to other
non-reportable.
(4)Represents average capacity as reported by the respective tenants or
operators for the three-month period.
Same-Store Adjusted NOI increased primarily as a result of annual rent
escalations and increased rent associated with capital improvements.
Total Portfolio Adjusted NOI decreased primarily as a result of the following
Non-Same-Store impacts:
•the transfer of nine senior housing triple-net facilities to our SHOP segment
during 2020;
•the transfer of two senior housing triple-net facilities to our CCRC segment
during 2020; and
•senior housing triple-net facilities sold during 2019 and 2020.
The decrease in Total Portfolio Adjusted NOI is partially offset by the
aforementioned increase to Same-Store.
                                       52

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Table of Contents The following table summarizes results at and for the nine months ended September 30, 2020 and 2019 (dollars in thousands, except per unit data):

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