NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. Business
Overview
Healthpeak Properties, Inc., a Standard & Poor’s 500 company, is a Maryland corporation that is organized to qualify as a real estate investment trust (“REIT”) that, together with its consolidated entities (collectively, “Healthpeak” or the “Company”), invests primarily in real estate serving the healthcare industry in the United States (“U.S.”). Healthpeak® acquires, develops, leases, owns, and manages healthcare real estate. The Company’s diverse portfolio is comprised of investments in the following reportable healthcare segments: (i) life science; (ii) medical office; and (iii) continuing care retirement community (“CCRC”).
The Company’s corporate headquarters are in Denver, Colorado and it has additional offices in California, Tennessee, and Massachusetts.
Covid Update
The coronavirus (“Covid”) pandemic has caused significant disruption to individuals, governments, financial markets, and businesses, including the Company. The Company’s tenants, operators, and borrowers have experienced significant cost increases as a result of increased health and safety measures, staffing shortages, increased governmental regulation and compliance, vaccine mandates, and other operational changes necessitated either directly or indirectly by the Covid pandemic. The Company evaluated the impacts of Covid on its business thus far and incorporated information concerning the impact of Covid into its assessments of liquidity, impairments, and collectibility from tenants, residents, and borrowers as of March 31, 2022. The Company will continue to monitor such impacts and will adjust its estimates and assumptions based on the best available information.
NOTE 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Management is required to make estimates and assumptions in the preparation of financial statements in conformity with GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from management’s estimates.
The consolidated financial statements include the accounts of Healthpeak Properties, Inc., its wholly-owned subsidiaries, joint ventures (“JVs”), and variable interest entities (“VIEs”) that it controls through voting rights or other means. Intercompany transactions and balances have been eliminated upon consolidation. All adjustments (consisting of normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations, and cash flows have been included. Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. The accompanying unaudited interim financial information should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the U.S. Securities and Exchange Commission (“SEC”).
Revision to Additional Paid-In Capital and Redeemable Noncontrolling Interests
During the third quarter of 2021, the Company identified and corrected immaterial errors in the classification and redemption value of redeemable noncontrolling interests of consolidated joint ventures in its life science segment. The Company corrected the classification of its redeemable noncontrolling interests and increased the balance to its estimated redemption value, with a corresponding decrease to additional paid-in capital (“APIC”) in accordance with Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity.
The increase in the unrealized value of the redeemable noncontrolling interests was largely attributable to rapidly rising rents and compressing capitalization rates in the market in which the entities operate, and was identified and corrected by management. The Company determined the impact of the adjustments to be immaterial, individually and in the aggregate, based on consideration of quantitative and qualitative factors. As such, these adjustments are reflected in this Quarterly Report on Form 10-Q for the three months ended March 31, 2021.
These adjustments had no impact on the Consolidated Statements of Cash Flows, Consolidated Statements of Operations, or any per share amounts. The Company made changes (all amounts in thousands) to the Consolidated Statements of Equity and Redeemable Noncontrolling Interests to decrease APIC, total stockholders’ equity, and total equity as of March 31, 2021 by $75,543 with a corresponding increase to redeemable noncontrolling interests of $78,413 and a decrease to accounts payable, accrued liabilities, and other liabilities as of March 31, 2021 of $2,870 on the Consolidated Balance Sheet.
Government Grant Income
On March 27, 2020, the federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to provide financial aid to individuals, businesses, and state and local governments. During the three months ended March 31, 2022 and 2021, the Company received government grants under the CARES Act primarily to cover increased expenses and lost revenue during the Covid pandemic. Grant income is recognized when there is reasonable assurance that the grant will be received and the Company will comply with all conditions attached to the grant. Additionally, grants are recognized over the periods in which the Company recognizes the increased expenses and lost revenue the grants are intended to defray. As of March 31, 2022, the amount of qualifying expenditures and lost revenue exceeded grant income recognized and the Company believes it has complied and will continue to comply with all grant conditions. In the event of non-compliance, all such amounts received are subject to recapture.
The following table summarizes information related to government grant income received and recognized by the Company (in thousands): | | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | |
| 2022 | | 2021 | | | | |
| Government grant income recorded in other income (expense), net | $ | 6,552 | | | $ | 1,310 | | | | | |
| Government grant income recorded in equity income (loss) from unconsolidated joint ventures | 648 | | | 426 | | | | | |
| Government grant income recorded in income (loss) from discontinued operations | 206 | | | 3,232 | | | | | |
| Total government grants received | $ | 7,406 | | | $ | 4,968 | | | | | |
Discontinued Operations
Senior Housing Triple-Net and Senior Housing Operating Portfolio Dispositions
During 2020, the Company established and began executing a plan to dispose of its senior housing triple-net and Senior Housing Operating Property (“SHOP”) properties and concluded that the planned dispositions represented a strategic shift that had and will have a major effect on the Company’s operations and financial results. Therefore, senior housing triple-net and SHOP assets meeting the held for sale criteria are classified as discontinued operations in all periods presented herein. In September 2021, the Company successfully completed the disposition of the remaining senior housing triple-net and SHOP properties. See Note 4 for further information.
Recent Accounting Pronouncements
Adopted
Government Assistance. In November 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance (“ASU 2021-10”), which increases the transparency of government assistance including the disclosure of the types of assistance, an entity’s accounting for assistance, and the effect of the assistance on an entity’s financial statements. The adoption of ASU 2021-10 on January 1, 2022 did not have a material impact on the Company’s consolidated financial position, results of operations, cash flows, or disclosures.
Not Yet Adopted
Reference Rate Reform. In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provides optional guidance for a limited period of time to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope (“ASU 2021-01”), which amends the scope of ASU 2020-04 to include derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The amendments in ASU 2020-04 and ASU 2021-01 were effective immediately and may be applied through December 31, 2022. The Company is evaluating whether the optional relief provided by ASU 2020-04 or ASU 2021-01 will be adopted but does not expect the adoption of these standards to have a material impact on its consolidated financial position, results of operations, cash flows, or disclosures.
NOTE 3. Real Estate Transactions
2022 Real Estate Investment Acquisitions
67 Smith Place
In January 2022, the Company closed a life science acquisition in Cambridge, Massachusetts for $72 million.
Vista Sorrento Phase II
In January 2022, the Company closed a life science acquisition in San Diego, California for $24 million.
Webster MOB Portfolio
In March 2022, the Company acquired a portfolio of two medical office buildings (“MOBs”) in Houston, Texas for $43 million.
2021 Real Estate Investment Acquisitions
In 2021, the Company closed the following life science acquisitions: (i) eight acquisitions in Cambridge, Massachusetts for $498 million, (ii) one life science acquisition in San Diego, California for $20 million, and (iii) 12 acres of land for $128 million in South San Francisco, California.
Also during 2021, the Company closed the following MOB acquisitions: (i) one MOB in Nashville, Tennessee for $13 million, (ii) one MOB in Denver, Colorado for $38 million, (iii) a portfolio of 14 MOBs for $371 million (the “MOB Portfolio”), (iv) one MOB in Fort Lauderdale, Florida for $16 million; (v) one MOB in Wichita, Kansas for $50 million, (vi) three MOBs in Morristown, New Jersey for $155 million, (vii) two MOBs in Dallas, Texas for $60 million, (viii) one MOB in Seattle, Washington for $43 million, (ix) one MOB in New Orleans, Louisiana for $34 million, and (x) one MOB in Cambridge, Massachusetts for $55 million. In conjunction with the acquisition of the MOB Portfolio, the Company originated $142 million of secured mortgage debt.
Development Activities
The Company’s commitments, which are primarily related to development and redevelopment projects and tenant improvements, decreased by $52 million, to $418 million at March 31, 2022, when compared to December 31, 2021, primarily as a result of actual spend on existing projects in the first quarter of 2022.
NOTE 4. Dispositions of Real Estate and Discontinued Operations
2022 Dispositions of Real Estate
In January 2022, the Company sold one life science facility in Salt Lake City, Utah for $14 million, resulting in a gain on sale of $4 million.
In April 2022, the Company sold one MOB in San Antonio, Texas for $13 million.
2021 Dispositions of Real Estate
Sunrise Senior Housing Portfolio
In January 2021, the Company sold a portfolio of 32 SHOP assets (the “Sunrise Senior Housing Portfolio”) for $664 million, resulting in an immaterial loss on sale, which is recognized in income (loss) from discontinued operations, and provided the buyer with: (i) financing of $410 million (see Note 6) and (ii) a commitment to finance up to $92 million of additional debt for capital expenditures. The commitment to finance additional debt for capital expenditures was subsequently reduced to $56 million in June 2021 and $47 million in February 2022, $0.4 million of which had been funded as of March 31, 2022 (see Note 6). Upon completion of the license transfer process in June 2021, the Company sold the two remaining Sunrise senior housing triple-net assets for $80 million, resulting in a gain on sale of $22 million, which is recognized in income (loss) from discontinued operations.
Brookdale Triple-Net Portfolio
In January 2021, the Company sold 24 senior housing assets in a triple-net lease with Brookdale Senior Living Inc. for $510 million, resulting in total gain on sale of $169 million, which is recognized in income (loss) from discontinued operations.
Additional SHOP Portfolio
In January 2021, the Company sold a portfolio of 16 SHOP assets for $230 million, resulting in total gain on sale of $59 million, which is recognized in income (loss) from discontinued operations. The Company provided the buyer with financing of $150 million (see Note 6).
HRA Triple-Net Portfolio
In February 2021, the Company sold eight senior housing assets in a triple-net lease with Harbor Retirement Associates for $132 million, resulting in total gain on sale of $33 million, which is recognized in income (loss) from discontinued operations.
Oakmont SHOP Portfolio
In April 2021, the Company sold a portfolio of 12 SHOP assets for $564 million. In conjunction with the sale, mortgage debt held on two properties with a carrying value of $64 million was repaid and the remaining mortgage debt held on four properties with a carrying value of $107 million was assumed by the buyer. The transaction resulted in total gain on sale of $80 million, which is recognized in income (loss) from discontinued operations.
Discovery SHOP Portfolio
In April 2021, the Company sold a portfolio of 10 SHOP assets for $334 million, resulting in total gain on sale of $9 million, which is recognized in income (loss) from discontinued operations. Also included in this transaction was the sale of two mezzanine loans and two preferred equity investments for $21 million, resulting in no gain or loss on sale of the investments (collectively, the “Discovery SHOP Portfolio”).
Sonata SHOP Portfolio
In April 2021, the Company sold a portfolio of five SHOP assets for $64 million, resulting in total gain on sale of $3 million, which is recognized in income (loss) from discontinued operations.
SLC SHOP Portfolio
In May 2021, the Company sold seven SHOP assets for $113 million and repaid $70 million of mortgage debt that was held on six of the assets, resulting in total gain on sale of $1 million, which is recognized in income (loss) from discontinued operations.
Hoag Hospital
In May 2021, the Company sold one hospital for $226 million through the exercise of a purchase option by a tenant, resulting in gain on sale of $172 million.
2021 Other Dispositions
In addition to the portfolio and individual sales discussed above, during the year ended December 31, 2021, the Company sold the following: (i) 15 SHOP assets for $169 million, (ii) 7 senior housing triple-net assets for $24 million, and (iii) 10 MOBs and a portion of 1 MOB land parcel for $68 million, resulting in total gain on sales of $58 million ($39 million of which is recognized in income (loss) from discontinued operations). In conjunction with one of the SHOP asset sales, mortgage debt held on the property with a carrying value of $36 million was assumed by the buyer. Of these sales, one SHOP asset was sold during the three months ended March 31, 2021 for $5 million resulting in an immaterial gain on sale, which is recognized in income (loss) from discontinued operations.
Held for Sale and Discontinued Operations
During 2020, the Company established and began executing a plan to dispose of its senior housing triple-net and SHOP properties. As of December 31, 2020, the Company concluded that the planned dispositions represented a strategic shift that had and will have a major effect on the Company’s operations and financial results. Therefore, senior housing triple-net and SHOP assets meeting the held for sale criteria are classified as discontinued operations in all periods presented herein. In September 2021, the Company successfully completed the disposition of the remaining senior housing triple-net and SHOP properties.
The following summarizes the assets and liabilities classified as held for sale or as discontinued operations at March 31, 2022 and December 31, 2021, which are included in assets held for sale and discontinued operations, net and liabilities related to assets held for sale and discontinued operations, net, respectively, on the Consolidated Balance Sheets (in thousands):
| | | | | | | | | | | |
| March 31,
2022 | | December 31,
2021 |
ASSETS | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Accounts receivable, net of allowance of $4,146 and $4,138 | $ | 2,764 | | | $ | 2,446 | |
| Cash and cash equivalents | 7,989 | | | 7,707 | |
| | | |
| | | |
| Right-of-use asset, net | 23 | | | 26 | |
| Other assets, net | 1,976 | | | 3,237 | |
| Total assets of discontinued operations, net | 12,752 | | 13,416 |
Assets held for sale, net(1) | 21,060 | | | 23,774 | |
| Assets held for sale and discontinued operations, net | $ | 33,812 | | | $ | 37,190 | |
LIABILITIES | | | |
| | | |
| Lease liability | $ | 23 | | | $ | 26 | |
| Accounts payable, accrued liabilities, and other liabilities | 14,072 | | | 14,843 | |
| Deferred revenue | 139 | | | 92 | |
| Total liabilities of discontinued operations, net | 14,234 | | | 14,961 | |
Liabilities related to assets held for sale, net(1) | 84 | | | 95 | |
| Liabilities related to assets held for sale and discontinued operations, net | $ | 14,318 | | | $ | 15,056 | |
_______________________________________
(1)As of March 31, 2022, primarily comprised of five MOBs with net real estate assets of $20 million and right-of-use asset, net of $1 million. As of December 31, 2021, primarily comprised of four MOBs and one life science facility with net real estate assets of $23 million and right-of-use asset, net of $1 million.
The results of discontinued operations during the three months ended March 31, 2022 and 2021, or through the disposal date of each asset or portfolio of assets if they have been sold during such periods, as applicable, are included in the consolidated results of operations for the three months ended March 31, 2022 and 2021. Summarized financial information for discontinued operations for the three months ended March 31, 2022 and 2021 are as follows (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | |
| 2022 | | 2021 | | | | |
| Revenues: | | | | | | | |
| Rental and related revenues | $ | — | | | $ | 5,228 | | | | | |
| Resident fees and services | 2,655 | | | 72,998 | | | | | |
| | | | | | | |
| Total revenues | 2,655 | | | 78,226 | | | | | |
| Costs and expenses: | | | | | | | |
| Interest expense | — | | | 2,676 | | | | | |
| | | | | | | |
| Operating | 2,674 | | | 71,519 | | | | | |
| Transaction costs | — | | | 76 | | | | | |
| | | | | | | |
| Total costs and expenses | 2,674 | | | 74,271 | | | | | |
| Other income (expense): | | | | | | | |
| Gain (loss) on sales of real estate, net | (71) | | | 259,662 | | | | | |
| Other income (expense), net | 3 | | | 5,885 | | | | | |
| Total other income (expense), net | (68) | | | 265,547 | | | | | |
| Income (loss) before income taxes and equity income (loss) from unconsolidated joint ventures | (87) | | | 269,502 | | | | | |
| Income tax benefit (expense) | 340 | | | 821 | | | | | |
| Equity income (loss) from unconsolidated joint ventures | 64 | | | (315) | | | | | |
| | | | | | | |
| Income (loss) from discontinued operations | $ | 317 | | | $ | 270,008 | | | | | |
Impairments of Real Estate
During the three months ended March 31, 2022 and 2021, the Company did not recognize any impairment charges.
Other Losses
During the three months ended March 31, 2022, the Company recognized $14 million of expenses within other income (expense), net on the Consolidated Statements of Operations for tenant relocation and other costs associated with a planned MOB demolition.
NOTE 5. Leases
Lease Income
The following table summarizes the Company’s lease income, excluding discontinued operations (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | |
| 2022 | | 2021 | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Fixed income from operating leases | $ | 287,292 | | | $ | 262,937 | | | | | |
| Variable income from operating leases | 82,858 | | | 65,035 | | | | | |
| Interest income from direct financing leases | 1,168 | | | 2,163 | | | | | |
| | | | | | | |
Direct Financing Leases
2022 Direct Financing Lease Sale
During the first quarter of 2022, the Company sold its remaining hospital classified as a direct financing lease (“DFL”) for $68 million and recognized a gain on sale of $23 million, which is included in other income (expense), net.
Net investment in DFLs consists of the following (in thousands):
| | | | | | | | | | | |
| | March 31,
2022 | | December 31,
2021 |
| Present value of minimum lease payments receivable | $ | — | | | $ | 1,220 | |
| Present value of estimated residual value | — | | | 44,706 | |
| Less deferred selling profits | — | | | (1,220) | |
| | | |
| | | |
| Net investment in direct financing leases | $ | — | | | $ | 44,706 | |
| | | |
Direct Financing Lease Internal Ratings
At March 31, 2022, the Company had no properties classified as a DFL. At December 31, 2021, the Company had one hospital classified as a DFL with a carrying amount of $45 million and an internal rating of “performing”.
NOTE 6. Loans Receivable
The following table summarizes the Company’s loans receivable (in thousands):
| | | | | | | | | | | |
| | March 31,
2022 | | December 31, 2021 |
Secured loans(1) | $ | 388,746 | | | $ | 396,281 | |
| Mezzanine and other | 26,252 | | | 25,529 | |
| Unamortized discounts, fees, and costs | (3,301) | | | (4,186) | |
| Reserve for loan losses | (1,944) | | | (1,813) | |
| Loans receivable, net | $ | 409,753 | | | $ | 415,811 | |
_______________________________________
(1)At March 31, 2022, the Company had $49 million remaining of commitments to fund additional loans for senior housing redevelopment and capital expenditure projects. At December 31, 2021, the Company had $58 million remaining of commitments to fund additional loans for senior housing redevelopment and capital expenditure projects.
SHOP Seller Financing
In conjunction with the sale of 32 SHOP facilities in the Sunrise Senior Housing Portfolio for $664 million in January 2021 (see Note 4), the Company provided the buyer with initial financing of $410 million. The remainder of the sales price was received in cash at the time of sale. Additionally, the Company agreed to provide up to $92 million of additional financing for capital expenditures (up to 65% of the estimated cost of capital expenditures). The additional financing was subsequently reduced to $56 million in June 2021 and $47 million in February 2022 in conjunction with the principal repayments discussed below. Through March 31, 2022, $0.4 million of the additional financing had been funded. The initial and additional financing is secured by the buyer's equity ownership in each property.
In June 2021, the Company received principal repayments of $246 million on the initial financing provided in conjunction with the sale of the Sunrise Senior Housing Portfolio. Additionally, in February 2022, the Company received principal repayments of $8 million in conjunction with the disposition of the underlying collateral. As of March 31, 2022 and December 31, 2021, this secured loan had an outstanding balance of $157 million and $165 million, respectively.
In conjunction with the sale of 16 additional SHOP facilities for $230 million in January 2021 (see Note 4), the Company provided the buyer with financing of $150 million. The remainder of the sales price was received in cash at the time of sale. The financing is secured by the buyer's equity ownership in each property.
During the first quarter of 2021, the Company reduced the consideration and reported gain on sales of real estate and recognized a mark-to-market discount of $16 million for certain transactions with seller financing. The Company’s discount is based on the difference between the stated interest rates (ranging from 3.50% to 4.50%) and corresponding prevailing market rates of approximately 5.25% as of the transaction dates. The discount is recognized as interest income over the term of the discounted loans (ranging from one to three years) using the effective interest rate method. During the three months ended March 31, 2022 and 2021, the Company recognized $1 million and $2 million, respectively, of non-cash interest income related to the amortization of its mark-to-market discounts.
2021 Other Loans Receivable Transactions
The Company classifies a loan receivable as held for sale when management no longer has the intent or ability to hold the loan receivable for the foreseeable future or until maturity. If a loan receivable is classified as held for sale, previously recorded reserves for loan losses are reversed and the loan is reported at the lower of amortized cost or fair value. During the second quarter of 2021, two loans receivable with a total amortized cost of $64 million were classified as held for sale. Upon the transfer of these two loans to held for sale, the carrying value was decreased by $11 million to an estimated fair value of $53 million, $8 million of which was previously recognized as a reserve for loan losses. In 2021, the Company sold these two loans receivable previously classified as held for sale for their aggregate carrying value of $53 million.
These fair value estimates were made for each individual loan classified as held for sale and primarily relied on a market approach, utilizing comparable market transactions, forecasted sales prices, and negotiations with prospective buyers. These estimates are considered to be a Level 3 measurement within the fair value hierarchy, and are subject to inherent uncertainties.
Additionally, in April 2021, the Company sold two mezzanine loans as part of the Discovery SHOP Portfolio disposition (see Note 4), resulting in no gain or loss on sale of the mezzanine loans.
In May 2021, the Company received a $10 million principal repayment related to one of its secured loans. In September 2021, the Company received repayment of the remaining $15 million balance.
In July 2021, the Company received full repayment of the outstanding balance of an $8 million secured loan.
CCRC Resident Loans
For certain residents that qualify, CCRCs may offer to lend residents the necessary funds to satisfy the entrance fee requirements so that they are able to move into a community while still continuing the process of selling their previous home. The loans are due upon sale of the previous residence. At March 31, 2022 and December 31, 2021, the Company held $25 million and $24 million, respectively, of such notes receivable, which are included in mezzanine and other in the table above.
Loans Receivable Internal Ratings
In connection with the Company’s quarterly review process or upon the occurrence of a significant event, loans receivable are reviewed and assigned an internal rating of Performing, Watch List, or Workout. Loans that are deemed Performing meet all present contractual obligations, and collection and timing of all amounts owed is reasonably assured. Watch List Loans are defined as loans that do not meet the definition of Performing or Workout. Workout Loans are defined as loans in which the Company has determined, based on current information and events, that: (i) it is probable it will be unable to collect all amounts due according to the contractual terms of the agreement, (ii) the borrower is delinquent on making payments under the contractual terms of the agreement, and (iii) the Company has commenced action or anticipates pursuing action in the near term to seek recovery of its investment.
The following table summarizes, by year of origination, the Company’s internal ratings for loans receivable, net of unamortized discounts, fees, and reserves for loan losses, as of March 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment Type | | Year of Origination | | Total |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 | Prior | |
| Secured loans | | | | | | | | | | | | | |
| Risk rating: | | | | | | | | | | | | | |
| Performing loans | | $ | — | | | $ | 301,796 | | | $ | 79,512 | | | $ | 2,199 | | | $ | — | | $ | — | | | $ | 383,507 | |
| Watch list loans | | — | | | — | | | — | | | — | | | — | | — | | | — | |
| Workout loans | | — | | | — | | | — | | | — | | | — | | — | | | — | |
| Total secured loans | | $ | — | | | $ | 301,796 | | | $ | 79,512 | | | $ | 2,199 | | | $ | — | | $ | — | | | $ | 383,507 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Mezzanine and other | | | | | | | | | | | | | |
| Risk rating: | | | | | | | | | | | | | |
| Performing loans | | $ | 12,521 | | | $ | 12,284 | | | $ | 1,441 | | | $ | — | | | $ | — | | $ | — | | | $ | 26,246 | |
| Watch list loans | | — | | | — | | | — | | | — | | | — | | — | | | — | |
| Workout loans | | — | | | — | | | — | | | — | | | — | | — | | | — | |
| Total mezzanine and other | | $ | 12,521 | | | $ | 12,284 | | | $ | 1,441 | | | $ | — | | | $ | — | | $ | — | | | $ | 26,246 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Reserve for Loan Losses
The Company evaluates the liquidity and creditworthiness of its borrowers on a quarterly basis to determine whether any updates to the future expected losses recognized upon inception are necessary. The Company’s evaluation considers industry and economic conditions, individual and portfolio property performance, credit enhancements, liquidity, and other factors. The determination of loan losses also considers concentration of credit risk associated with the senior housing industry to which its loans receivable relate. The Company’s borrowers furnish property, portfolio, and guarantor/operator-level financial statements, among other information, on a monthly or quarterly basis, which the Company utilizes to calculate the debt service coverages used in its assessment of internal ratings, which is a primary credit quality indicator. Debt service coverage information is evaluated together with other property, portfolio, and operator performance information, including revenue, expense, NOI, occupancy, rental rates, capital expenditures, and EBITDA (defined as earnings before interest, tax, and depreciation and amortization), along with other liquidity measures.
In its assessment of current expected credit losses for loans receivable and unfunded loan commitments, the Company utilizes past payment history of its borrowers, current economic conditions, and forecasted economic conditions through the maturity date of each loan to estimate a probability of default and a resulting loss for each loan receivable. Future economic conditions are based primarily on near-term economic forecasts from the Federal Reserve and reasonable assumptions for long-term economic trends.
The following table summarizes the Company’s reserve for loan losses (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
| | Secured Loans | | Mezzanine and Other | | Total | | Secured Loans | | Mezzanine and Other | | Total |
| Reserve for loan losses, beginning of period | $ | 1,804 | | | $ | 9 | | | $ | 1,813 | | | $ | 3,152 | | | $ | 7,128 | | | $ | 10,280 | |
| | | | | | | | | | | |
| Provision for expected loan losses | 134 | | | (3) | | | 131 | | | 793 | | | 896 | | | 1,689 | |
Expected loan losses related to loans sold or repaid(1) | — | | | — | | | — | | | (2,141) | | | (8,015) | | | (10,156) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Reserve for loan losses, end of period | $ | 1,938 | | | $ | 6 | | | $ | 1,944 | | | $ | 1,804 | | | $ | 9 | | | $ | 1,813 | |
_______________________________________
(1)Includes six loans sold or repaid during the year ended December 31, 2021.
Additionally, at each of March 31, 2022 and December 31, 2021, a liability of $0.3 million related to expected credit losses for unfunded loan commitments was included in accounts payable, accrued liabilities, and other liabilities.
NOTE 7. Investments in and Advances to Unconsolidated Joint Ventures
The Company owns interests in the following entities that are accounted for under the equity method, excluding investments classified as discontinued operations (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Carrying Amount |
| | | | | | | | | March 31, | | December 31, |
Entity(1) | | Segment | | Property Count(2) | | Ownership %(2) | | 2022 | | 2021 |
| SWF SH JV | | Other | | 19 | | 54 | | $ | 353,268 | | | $ | 355,394 | |
| Life Science JV | | Life science | | 1 | | 49 | | 26,572 | | | 25,605 | |
Needham Land Parcel JV(3) | | Life science | | — | | 38 | | 14,346 | | | 13,566 | |
Medical Office JVs(4) | | Medical office | | 3 | | 20 - 67 | | 8,973 | | | 9,069 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | $ | 403,159 | | | $ | 403,634 | |
_______________________________________
(1)These entities are not consolidated because the Company does not control, through voting rights or other means, the joint ventures.
(2)Property counts and ownership percentages are as of March 31, 2022.
(3)In December 2021, the Company acquired a 38% interest in a life science development joint venture in Needham, Massachusetts for $13 million. Land held for development is excluded from the property count as of March 31, 2022.
(4)Includes two unconsolidated medical office joint ventures in which the Company holds an ownership percentage as follows: (i) Ventures IV (20%) and (ii) Suburban Properties, LLC (67%). During 2021, the Company also held a 30% interest in Ventures III, which issued its final distribution and was dissolved.
In April 2021, the Company sold its two preferred equity investments for their carrying value as part of the Discovery SHOP Portfolio disposition (see Note 4). Prior to the sale, the Company’s ownership percentage in these two unconsolidated joint ventures was as follows: (i) Discovery Naples JV (41%) and (ii) Discovery Sarasota JV (47%).
In May 2021, the two remaining CCRCs in the CCRC JV were sold for $38 million, $19 million of which represents the Company’s 49% interest, resulting in an immaterial gain on sale recorded within equity income (loss) from unconsolidated joint ventures during the year ended December 31, 2021.
NOTE 8. Intangibles
Intangible assets primarily consist of lease-up intangibles and above market tenant lease intangibles. The following table summarizes the Company’s intangible lease assets (dollars in thousands):
| | | | | | | | | | | | | | |
| Intangible lease assets | | March 31,
2022 | | December 31,
2021 |
| Gross intangible lease assets | | $ | 802,078 | | | $ | 797,675 | |
| Accumulated depreciation and amortization | | (304,974) | | | (277,915) | |
| Intangible assets, net | | $ | 497,104 | | | $ | 519,760 | |
| | | | |
| Weighted average remaining amortization period in years | | 6 | | 6 |
Intangible liabilities consist of below market lease intangibles. The following table summarizes the Company’s intangible lease liabilities (dollars in thousands):
| | | | | | | | | | | | | | |
| Intangible lease liabilities | | March 31,
2022 | | December 31,
2021 |
| Gross intangible lease liabilities | | $ | 239,677 | | | $ | 234,917 | |
| Accumulated depreciation and amortization | | (64,322) | | | (57,685) | |
| Intangible liabilities, net | | $ | 175,355 | | | $ | 177,232 | |
| | | | |
| Weighted average remaining amortization period in years | | 8 | | 8 |
During the three months ended March 31, 2022, in conjunction with the Company’s acquisitions of real estate, the Company acquired intangible assets of $4 million and intangible liabilities of $5 million. The intangible assets and liabilities acquired had a weighted average amortization period at acquisition of 9 years and 12 years, respectively.
During the year ended December 31, 2021, in conjunction with the Company’s acquisitions of real estate, the Company acquired intangible assets of $109 million and intangible liabilities of $57 million. The intangible assets and intangible liabilities acquired had a weighted average amortization period at acquisition of 9 years.
NOTE 9. Debt
Bank Line of Credit and Term Loan
On May 23, 2019, the Company executed a $2.5 billion unsecured revolving line of credit facility, with a maturity date of May 23, 2023 and two six-month extension options, subject to certain customary conditions. Also in May 2019, the Company entered into a $250 million unsecured term loan facility, with a maturity date of May 23, 2024 (the “2019 Term Loan”). In July 2021, the Company repaid the $250 million 2019 Term Loan.
In September 2021, the Company executed an amended and restated unsecured revolving line of credit (the “Revolving Facility”) to increase total revolving commitments from $2.5 billion to $3.0 billion and extend the maturity date to January 20, 2026. This maturity date may be further extended pursuant to two six-month extension options, subject to certain customary conditions. Borrowings under the Revolving Facility accrue interest at LIBOR plus a margin that depends on the credit ratings of the Company’s senior unsecured long-term debt. The Company also pays a facility fee on the entire revolving commitment that depends on its credit ratings. Based on the Company’s credit ratings at March 31, 2022, the margin on the Revolving Facility was 0.78% and the facility fee was 0.15%. At March 31, 2022 and December 31, 2021, the Company had no balance outstanding under the Revolving Facility.
The Revolving Facility includes a feature that allows the Company to increase the borrowing capacity by an aggregate amount of up to $750 million, subject to securing additional commitments. Further, the Revolving Facility includes customary LIBOR replacement language, including, but not limited to, the use of rates based on the secured overnight financing rate administered by the Federal Reserve Bank of New York. The Revolving Facility also includes a sustainability-linked pricing component whereby the applicable margin may be reduced by up to 0.025% based on the Company’s achievement of specified sustainability-linked metrics, subject to certain conditions.
The Revolving Facility also contains certain financial restrictions and other customary requirements, including financial covenants and cross-default provisions to other indebtedness. Among other things, these covenants, using terms defined in the agreement: (i) limit the ratio of Enterprise Total Indebtedness to Enterprise Gross Asset Value to 60%; (ii) limit the ratio of Enterprise Secured Debt to Enterprise Gross Asset Value to 40%; (iii) limit the ratio of Enterprise Unsecured Debt to Enterprise Unencumbered Asset Value to 60%; (iv) require a minimum Fixed Charge Coverage ratio of 1.5 times; and (v) require a minimum Consolidated Tangible Net Worth of $7.7 billion. The Company believes it was in compliance with each of these covenants at March 31, 2022.
Commercial Paper Program
In September 2019, the Company established an unsecured commercial paper program (the “Commercial Paper Program”). Under the terms of the Commercial Paper Program, the Company may issue, from time to time, unsecured short-term debt securities with varying maturities. Amounts available under the Commercial Paper Program may be borrowed, repaid, and re-borrowed from time to time. During 2021, the Company increased the maximum aggregate face or principal amount that can be outstanding at any one time from $1.0 billion to $1.5 billion. Amounts borrowed under the Commercial Paper Program will be sold on terms that are customary for the U.S. commercial paper market and will be at least equal in right of payment with all of the Company’s other unsecured and unsubordinated indebtedness. The Company uses its Revolving Facility as a liquidity backstop for the repayment of unsecured short-term debt securities issued under the Commercial Paper Program. At March 31, 2022, the Company had $1.33 billion of securities outstanding under the Commercial Paper Program, with original maturities of approximately 45 days and a weighted average interest rate of 0.93%. At December 31, 2021, the Company had $1.17 billion of securities outstanding under the Commercial Paper Program, with original maturities of approximately two months and a weighted average interest rate of 0.32%.
Senior Unsecured Notes
At each of March 31, 2022 and December 31, 2021, the Company had senior unsecured notes outstanding with an aggregate principal balance of $4.7 billion. The senior unsecured notes contain certain covenants including limitations on debt, maintenance of unencumbered assets, cross-acceleration provisions and other customary terms. The Company believes it was in compliance with these covenants at March 31, 2022.
During the three months ended March 31, 2022, the Company did not repurchase or redeem any senior unsecured notes.
The following table summarizes the Company’s senior unsecured notes repurchases and redemptions during the year ended December 31, 2021 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Payoff Date | | Amount | | Coupon Rate | | Maturity Year |
May 19, 2021(1) | | $ | 251,806 | | | 3.40 | % | | 2025 |
May 19, 2021(1) | | 298,194 | | | 4.00 | % | | 2025 |
February 26, 2021(2) | | 188,000 | | | 4.25 | % | | 2023 |
February 26, 2021(2) | | 149,000 | | | 4.20 | % | | 2024 |
February 26, 2021(2) | | 331,000 | | | 3.88 | % | | 2024 |
January 28, 2021(2) | | 112,000 | | | 4.25 | % | | 2023 |
January 28, 2021(2) | | 201,000 | | | 4.20 | % | | 2024 |
January 28, 2021(2) | | 469,000 | | | 3.88 | % | | 2024 |
_______________________________________
(1)Upon repurchasing a portion of the 3.40% and 4.00% senior unsecured notes due 2025, the Company recognized a $61 million loss on debt extinguishment during the year ended December 31, 2021.
(2)Upon completing the repurchases and redemptions of all outstanding 4.25%, 4.20%, and 3.88% senior unsecured notes due 2023 and 2024, the Company recognized a $164 million loss on debt extinguishment during the three months ended March 31, 2021.
During the three months ended March 31, 2022, the Company did not issue any senior unsecured notes.
In 2021, the Company completed two green bond offerings. The net proceeds from both green bonds are or will be allocated to eligible green projects, and the Company may choose to allocate or re-allocate net proceeds from such offerings to one more other eligible green projects. The following table summarizes these senior unsecured note issuances for the year ended December 31, 2021 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Issue Date | | Amount | | Coupon Rate | | Maturity Year |
| November 24, 2021 | | $ | 500,000 | | | 2.13 | % | | 2028 |
| July 12, 2021 | | 450,000 | | | 1.35 | % | | 2027 |
Mortgage Debt
At March 31, 2022 and December 31, 2021, the Company had $349 million and $350 million, respectively, in aggregate principal of mortgage debt outstanding, which was secured by 18 healthcare facilities, with an aggregate carrying value of $803 million and $811 million, respectively.
Mortgage debt generally requires monthly principal and interest payments, is collateralized by real estate assets, and is non-recourse. Mortgage debt typically restricts transfer of the encumbered assets, prohibits additional liens, restricts prepayment, requires payment of real estate taxes, requires maintenance of the assets in good condition, requires insurance on the assets, and includes conditions to obtain lender consent to enter into or terminate material leases. Some of the mortgage debt may require tenants or operators to maintain compliance with the applicable leases or operating agreements of such real estate assets.
During each of the three months ended March 31, 2022 and March 31, 2021, the Company made aggregate principal repayments of mortgage debt of $1 million (excluding mortgage debt on assets held for sale and discontinued operations).
In April 2021, in conjunction with the acquisition of the MOB Portfolio, the Company originated $142 million of secured mortgage debt (see Note 3) that matures in May 2026. In April 2022, the Company terminated its existing interest rate cap agreements associated with this variable rate mortgage debt and entered into two interest rate swap contracts that are designated as cash flow hedges and mature in May 2026 (see Note 17).
Debt Maturities
The following table summarizes the Company’s stated debt maturities and scheduled principal repayments at March 31, 2022 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Senior Unsecured Notes(2) | | Mortgage Debt(3) | | |
| Year | | Bank Line of
Credit | | Commercial Paper(1) | | | | Amount | | Interest Rate | | Amount | | Interest Rate | | Total |
| 2022 | | $ | — | | | $ | — | | | | | $ | — | | | — | % | | $ | 3,778 | | | 3.80 | % | | $ | 3,778 | |
| 2023 | | — | | | — | | | | | — | | | — | % | | 90,089 | | | 3.80 | % | | 90,089 | |
| 2024 | | — | | | — | | | | | — | | | — | % | | 7,024 | | | 3.81 | % | | 7,024 | |
| 2025 | | — | | | — | | | | | 800,000 | | | 3.93 | % | | 3,209 | | | 3.80 | % | | 803,209 | |
| 2026 | | — | | | 1,330,813 | | | | | 650,000 | | | 3.39 | % | | 244,523 | | | 3.11 | % | | 2,225,336 | |
| Thereafter | | — | | | — | | | | | 3,250,000 | | | 3.24 | % | | 366 | | | 5.91 | % | | 3,250,366 | |
| | | — | | | 1,330,813 | | | | | 4,700,000 | | | | | 348,989 | | | | | 6,379,802 | |
| (Discounts), premium and debt costs, net | | — | | | — | | | | | (45,944) | | | | | 1,724 | | | | | (44,220) | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | $ | — | | | $ | 1,330,813 | | | | | $ | 4,654,056 | | | | | $ | 350,713 | | | | | $ | 6,335,582 | |
_______________________________________
(1)Commercial Paper Program borrowings are backstopped by the Revolving Facility. As such, the Company calculates the weighted average remaining term of its Commercial Paper Program borrowings using the maturity date of the Revolving Facility.
(2)Effective interest rates on the senior unsecured notes range from 1.54% to 6.91% with a weighted average effective interest rate of 3.39% and a weighted average maturity of 7 years.
(3)Effective interest rates on the mortgage debt range from 2.72% to 5.91% with a weighted average effective interest rate of 3.36% and a weighted average maturity of 4 years.
NOTE 10. Commitments and Contingencies
Legal Proceedings
From time to time, the Company is a party to legal proceedings, lawsuits and other claims that arise in the ordinary course of the Company’s business. The Company is not aware of any legal proceedings or claims that it believes may have, individually or taken together, a material adverse effect on the Company’s financial condition, results of operations, or cash flows. The Company’s policy is to expense legal costs as they are incurred.
DownREITs and Other Partnerships
In connection with the formation of certain limited liability companies (“DownREITs”), members may contribute appreciated real estate to a DownREIT in exchange for DownREIT units. These contributions are generally tax-deferred, so that the pre-contribution gain related to the property is not taxed to the member. However, if a contributed property is later sold by the DownREIT, the unamortized pre-contribution gain that exists at the date of sale is specifically allocated and taxed to the contributing members. In many of the DownREITs, the Company has entered into indemnification agreements with those members who contributed appreciated property into the DownREIT. Under these indemnification agreements, if any of the appreciated real estate contributed by the members is sold by the DownREIT in a taxable transaction within a specified number of years, the Company will reimburse the affected members for the federal and state income taxes associated with the pre-contribution gain that is specially allocated to the affected member under the Internal Revenue Code (“make-whole payments”). These make-whole payments include a tax gross-up provision. These indemnification agreements have expirations terms that range through 2039 on a total of 29 properties.
Additionally, the Company owns a 49% interest in the Life Science JV (see Note 7). If the property in the joint venture is sold in a taxable transaction, the Company is generally obligated to indemnify its joint venture partner for its federal and state income taxes associated with the gain that existed at the time of the contribution to the joint venture.
NOTE 11. Equity and Redeemable Noncontrolling Interests
Dividends
On April 28, 2022, the Company announced that its Board of Directors declared a quarterly cash dividend of $0.30 per share. The common stock cash dividend will be paid on May 20, 2022 to stockholders of record as of the close of business on May 9, 2022.
During the three months ended March 31, 2022 and 2021, the Company declared and paid common stock cash dividends of $0.30 per share.
At-The-Market Equity Offering Program
In February 2020, the Company established an at-the-market equity offering program (as amended from time to time, the “ATM Program”), which was most recently amended in May 2021 to increase the size of the program from $1.25 billion to $1.5 billion, pursuant to which shares of common stock having an aggregate gross sales price of up to $1.5 billion may be sold (i) by the Company through a consortium of banks acting as sales agents or directly to the banks acting as principals or (ii) by a consortium of banks acting as forward sellers on behalf of any forward purchasers pursuant to a forward sale agreement (each, an “ATM forward contract”). The use of ATM forward contracts allows the Company to lock in a share price on the sale of shares at the time the ATM forward contract is effective, but defer receiving the proceeds from the sale of shares until a later date.
ATM forward contracts generally have a one to two year term. At any time during the term, the Company may settle a forward sale by delivery of physical shares of common stock to the forward seller or, at the Company’s election, in cash or net shares. The forward sale price the Company expects to receive upon settlement of outstanding ATM forward contracts will be the initial forward price established upon the effective date, subject to adjustments for: (i) accrued interest, (ii) the forward purchasers’ stock borrowing costs, and (iii) certain fixed price reductions during the term of the ATM forward contract.
At March 31, 2022, $1.18 billion of the Company’s common stock remained available for sale under the ATM Program.
ATM Forward Contracts
During the year ended December 31, 2021, the Company utilized the forward provisions under the ATM Program to allow for the sale of an aggregate of 9.1 million shares of its common stock at an initial weighted average net price of $35.25 per share, after commissions. During the three months ended March 31, 2022, no shares were settled under ATM forward contracts. Therefore, at March 31, 2022, 9.1 million shares remained outstanding under ATM forward contracts.
During the three months ended March 31, 2021, the Company did not utilize the forward provisions under the ATM Program.
ATM Direct Issuances
During the three months ended March 31, 2022 and March 31, 2021, no shares of common stock were issued under the ATM Program.
Accumulated Other Comprehensive Income (Loss)
The following table summarizes the Company’s accumulated other comprehensive income (loss) (in thousands):
| | | | | | | | | | | | | | |
| | | March 31,
2022 | | December 31,
2021 |
| | | | |
| | | | |
| Supplemental Executive Retirement Plan minimum liability | | $ | (3,047) | | | $ | (3,147) | |
| | | | |
| Total accumulated other comprehensive income (loss) | | $ | (3,047) | | | $ | (3,147) | |
Redeemable Noncontrolling Interests
Arrangements with noncontrolling interest holders are assessed for appropriate balance sheet classification based on the redemption and other rights held by the noncontrolling interest holder. Certain of the Company’s noncontrolling interest holders have the ability to put their equity interests to the Company upon specified events or after the passage of a predetermined period of time. Each put option is payable in cash and subject to increases in redemption value in the event that the underlying property generates specified returns for the Company and meets certain promote thresholds pursuant to the respective agreements. Accordingly, the Company records redeemable noncontrolling interests outside of permanent equity and presents the redeemable noncontrolling interests at the greater of their carrying amount or redemption value at the end of each reporting period.
During the year ended December 31, 2021, one of the redeemable noncontrolling interests met the conditions for redemption and the related put option was exercised during the year then ended. Accordingly, the Company made a cash payment for the redemption value of $60 million to the related noncontrolling interest holder during the year ended December 31, 2021 and acquired the redeemable noncontrolling interest associated with this entity. The remaining redeemable noncontrolling interests had not yet met the conditions for redemption as of March 31, 2022 or December 31, 2021. Three of the interests will become redeemable following the passage of a predetermined amount of time, one of which will occur in late 2022, and the remaining two in 2023 and 2024. The fourth interest will become redeemable at the earlier of a predetermined passage of time or stabilization of the underlying development property, which is expected to occur in 2023. The redemption values are subject to change based on the assessment of value at each redemption date.
NOTE 12. Earnings Per Common Share
Basic income (loss) per common share (“EPS”) is computed based on the weighted average number of common shares outstanding. Diluted income (loss) per common share is computed based on the weighted average number of common shares outstanding plus the impact of forward equity sales agreements using the treasury stock method and common shares issuable from the assumed conversion of DownREIT units, stock options, certain performance restricted stock units, and unvested restricted stock units. Only those instruments having a dilutive impact on the Company’s basic income (loss) per share are included in diluted income (loss) per share during the periods presented.
Restricted stock and certain performance restricted stock units are considered participating securities, because dividend payments are not forfeited even if the underlying award does not vest, and require use of the two-class method when computing basic and diluted earnings per share.
Refer to Note 11 for a discussion of the sale of shares under and settlement of forward sales agreements during the periods presented. The Company considered the potential dilution resulting from the forward agreements to the calculation of earnings per share. At inception, the agreements do not have an effect on the computation of basic EPS as no shares are delivered until settlement. However, the Company uses the treasury stock method to calculate the dilution, if any, resulting from the forward sales agreements during the period of time prior to settlement. The aggregate effect on the Company’s diluted weighted-average common shares for the three months ended March 31, 2022 and 2021 was zero weighted-average incremental shares from the forward equity sales agreements.
The following table illustrates the computation of basic and diluted earnings per share (in thousands, except per share amounts):
| | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | |
| | 2022 | | 2021 | | | | |
| Numerator | | | | | | | |
| Income (loss) from continuing operations | $ | 75,026 | | | $ | (120,585) | | | | | |
| Noncontrolling interests' share in continuing operations | (3,730) | | | (3,306) | | | | | |
| Income (loss) from continuing operations attributable to Healthpeak Properties, Inc. | 71,296 | | | (123,891) | | | | | |
| Less: Participating securities' share in continuing operations | (1,976) | | | (2,451) | | | | | |
| Income (loss) from continuing operations applicable to common shares | 69,320 | | | (126,342) | | | | | |
| Income (loss) from discontinued operations | 317 | | | 270,008 | | | | | |
| Noncontrolling interests' share in discontinued operations | — | | | (329) | | | | | |
| Net income (loss) applicable to common shares | $ | 69,637 | | | $ | 143,337 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Denominator | | | | | | | |
| Basic weighted average shares outstanding | 539,352 | | | 538,679 | | | | | |
Dilutive potential common shares - equity awards(1) | 234 | | | — | | | | | |
| | | | | | | |
| | | | | | | |
| Diluted weighted average common shares | 539,586 | | | 538,679 | | | | | |
| Basic earnings (loss) per common share | | | | | | | |
| Continuing operations | $ | 0.13 | | | $ | (0.23) | | | | | |
| Discontinued operations | 0.00 | | | 0.50 | | | | | |
| Net income (loss) applicable to common shares | $ | 0.13 | | | $ | 0.27 | | | | | |
| Diluted earnings (loss) per common share | | | | | | | |
| Continuing operations | $ | 0.13 | | | $ | (0.23) | | | | | |
| Discontinued operations | 0.00 | | | 0.50 | | | | | |
| Net income (loss) applicable to common shares | $ | 0.13 | | | $ | 0.27 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
_______________________________________
(1)For all periods presented, represents the dilutive impact of 1 million outstanding equity awards (restricted stock units and stock options).
For the three months ended March 31, 2022, the 9.1 million shares under forward sales agreements that have not been settled as of March 31, 2022 were anti-dilutive. For the three months ended March 31, 2021, forward sales agreements had no dilutive impact as no shares remained outstanding under ATM forward contracts during the period.
For the three months ended March 31, 2022 and 2021, all 7 million shares issuable upon conversion of DownREIT units were not included because they were anti-dilutive.
NOTE 13. Segment Disclosures
The Company’s reportable segments, based on how its chief operating decision makers (“CODMs”) evaluate the business and allocate resources, are as follows: (i) life science, (ii) medical office, and (iii) CCRC. The Company has non-reportable segments that are comprised primarily of the Company’s interests in an unconsolidated JV that owns 19 senior housing assets (the “SWF SH JV”) and debt investments. The accounting policies of the segments are the same as those described in Note 2 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC, as updated by Note 2 herein.
The Company evaluates performance based on property Adjusted NOI. 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; NOI excludes all other financial statement amounts included in net income (loss). 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 the Company’s share of income (loss) from unconsolidated joint ventures and exclude noncontrolling interests’ share of income (loss) from consolidated joint ventures. Management believes that Adjusted NOI is an important supplemental measure because it provides relevant and useful information by reflecting only income and operating expense items that are incurred at the property level and presenting it on an unlevered basis. Additionally, management believes 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.
Non-segment assets consist of assets in the Company’s other non-reportable segments and corporate non-segment assets. Corporate non-segment assets consist primarily of corporate assets, including cash and cash equivalents, restricted cash, accounts receivable, net, loans receivable, marketable equity securities, other assets, real estate assets held for sale and discontinued operations, and liabilities related to assets held for sale.
The following tables summarize information for the reportable segments (in thousands):
For the three months ended March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Life Science | | Medical Office | | CCRC | | Other Non-reportable | | Corporate Non-segment | | Total |
| Total revenues | | | | | | $ | 194,055 | | | $ | 177,263 | | | $ | 121,560 | | | $ | 5,494 | | | $ | — | | | $ | 498,372 | |
Government grant income(1) | | | | | | — | | | — | | | 6,552 | | | — | | | — | | | 6,552 | |
| Less: Interest income | | | | | | — | | | — | | | — | | | (5,494) | | | — | | | (5,494) | |
| Healthpeak’s share of unconsolidated joint venture total revenues | | | | | | 1,431 | | | 732 | | | — | | | 18,045 | | | — | | | 20,208 | |
| Healthpeak’s share of unconsolidated joint venture government grant income | | | | | | — | | | — | | | 333 | | | 315 | | | — | | | 648 | |
| Noncontrolling interests’ share of consolidated joint venture total revenues | | | | | | (57) | | | (8,820) | | | — | | | — | | | — | | | (8,877) | |
| Operating expenses | | | | | | (48,189) | | | (61,170) | | | (97,888) | | | — | | | — | | | (207,247) | |
| Healthpeak’s share of unconsolidated joint venture operating expenses | | | | | | (483) | | | (299) | | | — | | | (14,055) | | | — | | | (14,837) | |
| Noncontrolling interests’ share of consolidated joint venture operating expenses | | | | | | 19 | | | 2,602 | | | — | | | — | | | — | | | 2,621 | |
| | | | | | | | | | | | | | | | |
Adjustments to NOI(2) | | | | | | (14,112) | | | (3,546) | | | — | | | (8) | | | — | | | (17,666) | |
| Adjusted NOI | | | | | | 132,664 | | | 106,762 | | | 30,557 | | | 4,297 | | | — | | | 274,280 | |
Plus: Adjustments to NOI(2) | | | | | | 14,112 | | | 3,546 | | | — | | | 8 | | | — | | | 17,666 | |
| Interest income | | | | | | — | | | — | | | — | | | 5,494 | | | — | | | 5,494 | |
| Interest expense | | | | | | — | | | (1,036) | | | (1,865) | | | — | | | (34,685) | | | (37,586) | |
| Depreciation and amortization | | | | | | (78,138) | | | (67,773) | | | (31,822) | | | — | | | — | | | (177,733) | |
| General and administrative | | | | | | — | | | — | | | — | | | — | | | (23,831) | | | (23,831) | |
| Transaction costs | | | | | | (292) | | | (4) | | | — | | | — | | | — | | | (296) | |
| Impairments and loan loss reserves | | | | | | — | | | — | | | — | | | (132) | | | — | | | (132) | |
| Gain (loss) on sales of real estate, net | | | | | | 3,856 | | | — | | | — | | | — | | | — | | | 3,856 | |
| | | | | | | | | | | | | | | | |
| Other income (expense), net | | | | | | (9) | | | 10,937 | | | 6,511 | | | (32) | | | 909 | | | 18,316 | |
| Less: Government grant income | | | | | | — | | | — | | | (6,552) | | | — | | | — | | | (6,552) | |
| Less: Healthpeak’s share of unconsolidated joint venture NOI | | | | | | (948) | | | (433) | | | (333) | | | (4,305) | | | — | | | (6,019) | |
| Plus: Noncontrolling interests’ share of consolidated joint venture NOI | | | | | | 38 | | | 6,218 | | | — | | | — | | | — | | | 6,256 | |
| Income (loss) before income taxes and equity income (loss) from unconsolidated joint ventures | | | | | | 71,283 | | | 58,217 | | | (3,504) | | | 5,330 | | | (57,607) | | | 73,719 | |
| Income tax benefit (expense) | | | | | | — | | | — | | | — | | | — | | | (777) | | | (777) | |
| Equity income (loss) from unconsolidated joint ventures | | | | | | 966 | | | 200 | | | 539 | | | 379 | | | — | | | 2,084 | |
| | | | | | | | | | | | | | | | |
| Income (loss) from continuing operations | | | | | | 72,249 | | | 58,417 | | | (2,965) | | | 5,709 | | | (58,384) | | | 75,026 | |
| Income (loss) from discontinued operations | | | | | | — | | | — | | | — | | | — | | | 317 | | | 317 | |
| Net income (loss) | | | | | | $ | 72,249 | | | $ | 58,417 | | | $ | (2,965) | | | $ | 5,709 | | | $ | (58,067) | | | $ | 75,343 | |
_______________________________________
(1)Represents government grant income received under the CARES Act, which is recorded in other income (expense), net in the Consolidated Statements of Operations (see Note 2).
(2)Represents straight-line rents, DFL non-cash interest, amortization of market lease intangibles, net, actuarial reserves for insurance claims that have been incurred but not reported, deferral of community fees, and termination fees. Includes the Company’s share of income (loss) generated by unconsolidated joint ventures and excludes noncontrolling interests’ share of income (loss) generated by consolidated joint ventures.
For the three months ended March 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Life Science | | Medical Office | | CCRC | | Other Non-reportable | | Corporate Non-segment | | Total |
| Total revenues | | | | | | $ | 169,934 | | | $ | 160,201 | | | $ | 116,128 | | | $ | 9,013 | | | $ | — | | | $ | 455,276 | |
Government grant income(1) | | | | | | — | | | — | | | 1,310 | | | — | | | — | | | 1,310 | |
| Less: Interest income | | | | | | — | | | — | | | — | | | (9,013) | | | — | | | (9,013) | |
| Healthpeak’s share of unconsolidated joint venture total revenues | | | | | | 1,337 | | | 715 | | | 4,488 | | | 16,753 | | | — | | | 23,293 | |
| Healthpeak’s share of unconsolidated joint venture government grant income | | | | | | — | | | — | | | 199 | | | 227 | | | — | | | 426 | |
| Noncontrolling interests’ share of consolidated joint venture total revenues | | | | | | (65) | | | (8,926) | | | — | | | — | | | — | | | (8,991) | |
| Operating expenses | | | | | | (39,461) | | | (51,121) | | | (91,179) | | | — | | | — | | | (181,761) | |
| Healthpeak’s share of unconsolidated joint venture operating expenses | | | | | | (425) | | | (294) | | | (4,745) | | | (12,595) | | | — | | | (18,059) | |
| Noncontrolling interests’ share of consolidated joint venture operating expenses | | | | | | 20 | | | 2,504 | | | — | | | — | | | — | | | 2,524 | |
| | | | | | | | | | | | | | | | |
Adjustments to NOI(2) | | | | | | (11,810) | | | (1,923) | | | 20 | | | 112 | | | — | | | (13,601) | |
| Adjusted NOI | | | | | | 119,530 | | | 101,156 | | | 26,221 | | | 4,497 | | | — | | | 251,404 | |
Plus: Adjustments to NOI(2) | | | | | | 11,810 | | | 1,923 | | | (20) | | | (112) | | | — | | | 13,601 | |
| Interest income | | | | | | — | | | — | | | — | | | 9,013 | | | — | | | 9,013 | |
| Interest expense | | | | | | (102) | | | (95) | | | (1,918) | | | — | | | (44,728) | | | (46,843) | |
| Depreciation and amortization | | | | | | (68,434) | | | (57,954) | | | (31,150) | | | — | | | — | | | (157,538) | |
| General and administrative | | | | | | — | | | — | | | — | | | — | | | (24,902) | | | (24,902) | |
| Transaction costs | | | | | | (32) | | | (330) | | | (432) | | | (4) | | | — | | | (798) | |
| Impairments and loan loss reserves | | | | | | — | | | — | | | — | | | (3,242) | | | — | | | (3,242) | |
| | | | | | | | | | | | | | | | |
| Gain (loss) on debt extinguishments | | | | | | — | | | — | | | — | | | — | | | (164,292) | | | (164,292) | |
| Other income (expense), net | | | | | | 4 | | | (2,279) | | | 2,176 | | | 482 | | | 1,817 | | | 2,200 | |
| Less: Government grant income | | | | | | — | | | — | | | (1,310) | | | — | | | — | | | (1,310) | |
| Less: Healthpeak’s share of unconsolidated joint venture NOI | | | | | | (912) | | | (421) | | | 58 | | | (4,385) | | | — | | | (5,660) | |
| Plus: Noncontrolling interests’ share of consolidated joint venture NOI | | | | | | 45 | | | 6,422 | | | — | | | — | | | — | | | 6,467 | |
| Income (loss) before income taxes and equity income (loss) from unconsolidated joint ventures | | | | | | 61,909 | | | 48,422 | | | (6,375) | | | 6,249 | | | (232,105) | | | (121,900) | |
| Income tax benefit (expense) | | | | | | — | | | — | | | — | | | — | | | (8) | | | (8) | |
| Equity income (loss) from unconsolidated joint ventures | | | | | | (93) | | | 192 | | | — | | | 1,224 | | | — | | | 1,323 | |
| | | | | | | | | | | | | | | | |
| Income (loss) from continuing operations | | | | | | 61,816 | | | 48,614 | | | (6,375) | | | 7,473 | | | (232,113) | | | (120,585) | |
| Income (loss) from discontinued operations | | | | | | — | | | — | | | — | | | — | | | 270,008 | | | 270,008 | |
| Net income (loss) | | | | | | $ | 61,816 | | | $ | 48,614 | | | $ | (6,375) | | | $ | 7,473 | | | $ | 37,895 | | | $ | 149,423 | |
______________________________________________________________________________
(1)Represents government grant income received under the CARES Act, which is recorded in other income (expense), net in the Consolidated Statements of Operations (see Note 2).
(2)Represents straight-line rents, DFL non-cash interest, amortization of market lease intangibles, net, actuarial reserves for insurance claims that have been incurred but not reported, deferral of community fees, and termination fees. Includes the Company’s share of income (loss) generated by unconsolidated joint ventures and excludes noncontrolling interests’ share of income (loss) generated by consolidated joint ventures.
See Notes 3, 4, and 5 for significant transactions impacting the Company’s segment assets during the periods presented.
NOTE 14. Supplemental Cash Flow Information
The following table provides supplemental cash flow information (in thousands):
| | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2022 | | 2021 |
| Supplemental cash flow information: | | | |
| Interest paid, net of capitalized interest | $ | 58,487 | | | $ | 90,032 | |
| Income taxes paid (refunded) | (1,947) | | | 2,521 | |
| Capitalized interest | 8,305 | | | 5,453 | |
| Supplemental schedule of non-cash investing and financing activities: | | | |
| Increase in ROU asset in exchange for new lease liability related to operating leases | 179 | | | 5,020 | |
| | | |
| Seller financing provided on disposition of real estate asset | — | | | 559,745 | |
| Accrued construction costs | 163,277 | | | 107,798 | |
| Vesting of restricted stock units and conversion of non-managing member units into common stock | 752 | | | 838 | |
| | | |
| | | |
| | | |
| | | |
The following table summarizes certain cash flow information related to assets classified as discontinued operations (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| | | |
| Leasing costs, tenant improvements, and recurring capital expenditures | $ | 18 | | | $ | 1,873 | |
| Development, redevelopment, and other major improvements of real estate | — | | | 3,861 | |
| Depreciation and amortization of real estate, in-place lease, and other intangibles | — | | | — | |
The following table summarizes cash, cash equivalents and restricted cash (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
| | Continuing operations | | Discontinued operations | | Total |
| Beginning of period: | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 158,287 | | | $ | 44,226 | | | $ | 7,707 | | | $ | 53,085 | | | $ | 165,994 | | | $ | 97,311 | |
| Restricted cash | | 53,454 | | | 67,206 | | | — | | | 17,168 | | | 53,454 | | | 84,374 | |
| Cash, cash equivalents and restricted cash | | $ | 211,741 | | | $ | 111,432 | | | $ | 7,707 | | | $ | 70,253 | | | $ | 219,448 | | | $ | 181,685 | |
| End of period: | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 89,066 | | | $ | 34,007 | | | $ | 7,989 | | | $ | 40,161 | | | $ | 97,055 | | | $ | 74,168 | |
| Restricted cash | | 52,103 | | | 68,033 | | | — | | | 5,817 | | | 52,103 | | | 73,850 | |
| Cash, cash equivalents and restricted cash | | $ | 141,169 | | | $ | 102,040 | | | $ | 7,989 | | | $ | 45,978 | | | $ | 149,158 | | | $ | 148,018 | |
NOTE 15. Variable Interest Entities
Unconsolidated Variable Interest Entities
At March 31, 2022 and December 31, 2021, the Company had investments in: (i) two unconsolidated VIE joint ventures and (ii) marketable debt securities of one VIE. The Company determined it is not the primary beneficiary of and therefore does not consolidate these VIEs because it does not have the ability to control the activities that most significantly impact their economic performance. Except for the Company’s equity interest in the unconsolidated joint ventures (the LLC investment and Needham Land Parcel JV discussed below), it has no formal involvement in these VIEs beyond its investments.
Debt Securities Investment. The Company holds commercial mortgage-backed securities (“CMBS”) issued by Federal Home Loan Mortgage Corporation (commonly referred to as Freddie MAC) through a special purpose entity that has been identified as a VIE because it is “thinly capitalized.” The CMBS issued by the VIE are backed by mortgage debt obligations on real estate assets. These securities are classified as held-to-maturity because the Company has the intent and ability to hold the securities until maturity.
LLC Investment. The Company holds a limited partner ownership interest in an unconsolidated LLC that has been identified as a VIE. The Company’s involvement in the entity is limited to its equity investment as a limited partner and it does not have any substantive participating rights or kick-out rights over the general partner. The assets and liabilities of the entity primarily consist of those associated with its senior housing real estate and development activities. Any assets generated by the entity may only be used to settle its contractual obligations (primarily development expenses and debt service payments).
Needham Land Parcel JV. In December 2021, the Company acquired a 38% interest in a life science development joint venture in Needham, Massachusetts for $13 million. Current equity at risk is not sufficient to finance the joint venture’s activities. The assets and liabilities of the entity primarily consist of real estate and debt service obligations. Any assets generated by the entity may only be used to settle its contractual obligations (primarily development expenses and debt service payments).
The classification of the related assets and liabilities and the maximum loss exposure as a result of the Company’s involvement with these VIEs at March 31, 2022 was as follows (in thousands):
| | | | | | | | | | | | | | |
| VIE Type | | Asset Type | | Maximum Loss Exposure and Carrying Amount(1) |
| Continuing operations: | | | | |
| | | | |
| | | | |
| CMBS and LLC investment | | Other assets, net | | $ | 36,492 | |
| Needham Land Parcel JV | | Investments in and advances to unconsolidated joint ventures | | 14,346 | |
| | | | |
| | | | |
_______________________________________
(1)The Company’s maximum loss exposure represents the aggregate carrying amount of such investments (including accrued interest).
As of March 31, 2022, the Company had not provided, and is not required to provide, financial support through a liquidity arrangement or otherwise, to its unconsolidated VIEs, including under circumstances in which it could be exposed to further losses (e.g., cash shortfalls).
See Notes 3, 4, and 7 for additional descriptions of the nature, purpose, and operating activities of the Company’s unconsolidated VIEs and interests therein.
Consolidated Variable Interest Entities
The Company’s consolidated total assets and total liabilities at March 31, 2022 and December 31, 2021 include certain assets of VIEs that can only be used to settle the liabilities of the related VIE. The VIE creditors do not have recourse to the Company.
Ventures V, LLC. The Company holds a 51% ownership interest in and is the managing member of a joint venture entity formed in October 2015 that owns and leases MOBs (“Ventures V”). The Company classifies Ventures V as a VIE due to the non-managing member lacking substantive participation rights in the management of Ventures V or kick-out rights over the managing member. The Company consolidates Ventures V as the primary beneficiary because it has the ability to control the activities that most significantly impact the VIE’s economic performance. The assets of Ventures V primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; its obligations primarily consist of capital expenditures for the properties. Assets generated by Ventures V may only be used to settle its contractual obligations (primarily from capital expenditures).
Life Science JVs. The Company holds a 99% ownership interest in multiple joint venture entities that own and lease life science assets (the “Life Science JVs”). The Life Science JVs are VIEs as the members share in control of the entities, but substantially all of the activities are performed on behalf of the Company. The Company consolidates the Life Science JVs as the primary beneficiary because it has the ability to control the activities that most significantly impact these VIEs’ economic performance. The assets of the Life Science JVs primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; their obligations primarily consist of debt service payments and capital expenditures for the properties. Assets generated by the Life Science JVs may only be used to settle their contractual obligations (primarily from capital expenditures). Refer to Note 11 for a discussion of certain put options associated with the Life Science JVs.
MSREI MOB JV. The Company holds a 51% ownership interest in, and is the managing member of, a joint venture entity formed in August 2018 that owns and leases MOBs (the “MSREI JV”). The MSREI JV is a VIE due to the non-managing member lacking substantive participation rights in the management of the joint venture or kick-out rights over the managing member. The Company consolidates the MSREI JV as the primary beneficiary because it has the ability to control the activities that most significantly impact the VIE’s economic performance. The assets of the MSREI JV primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; its obligations primarily consist of capital expenditures for the properties. Assets generated by the MSREI JV may only be used to settle its contractual obligations (primarily from capital expenditures).
DownREITs. The Company holds a controlling ownership interest in and is the managing member of seven DownREITs. The Company classifies the DownREITs as VIEs due to the non-managing members lacking substantive participation rights in the management of the DownREITs or kick-out rights over the managing member. The Company consolidates the DownREITs as the primary beneficiary because it has the ability to control the activities that most significantly impact these VIEs’ economic performance. The assets of the DownREITs primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; their obligations primarily consist of debt service payments and capital expenditures for the properties. Assets generated by the DownREITs (primarily from resident rents) may only be used to settle their contractual obligations (primarily from debt service and capital expenditures).
Other Consolidated Real Estate Partnerships. The Company holds a controlling ownership interest in and is the general partner (or managing member) of multiple partnerships that own and lease real estate assets (the “Partnerships”). The Company classifies the Partnerships as VIEs due to the limited partners (non-managing members) lacking substantive participation rights in the management of the Partnerships or kick-out rights over the general partner (managing member). The Company consolidates the Partnerships as the primary beneficiary because it has the ability to control the activities that most significantly impact these VIEs’ economic performance. The assets of the Partnerships primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; their obligations primarily consist of debt service payments and capital expenditures for the properties. Assets generated by the Partnerships (primarily from resident rents) may only be used to settle their contractual obligations (primarily from debt service and capital expenditures).
Exchange Accommodation Titleholder. During the three months ended March 31, 2022, the Company acquired two MOBs (the “acquired properties”) using a reverse like-kind exchange structure pursuant to Section 1031 of the Internal Revenue Code (a “reverse 1031 exchange”). As of March 31, 2022, the Company had not completed the reverse 1031 exchange and as such, the acquired properties remained in the possession of the Exchange Accommodation Titleholder (“EAT”). The EAT was classified as a VIE as it was a “thinly capitalized” entity. The Company consolidated the EAT because it had the ability to control the activities that most significantly impacted the economic performance of the EAT and was, therefore, the primary beneficiary of the EAT. The properties held by the EAT had a carrying value of $43 million as of March 31, 2022. The assets of the EAT primarily consisted of leased properties (net real estate, including intangibles), rents receivable, and cash and cash equivalents; their obligations primarily consisted of capital expenditures for the properties. Assets generated by the EAT may only be used to settle its contractual obligations (primarily from capital expenditures).
Additionally, during the year ended December 31, 2021, the Company acquired two MOBs using reverse 1031 exchanges. As of December 31, 2021, the Company had not completed the reverse 1031 exchanges and as such, the acquired properties remained in the possession of the EAT. These properties held by the EAT had a carrying value of $77 million as of December 31, 2021. These reverse 1031 exchanges were completed in February 2022.
Total assets and total liabilities include VIE assets and liabilities as follows (in thousands):
| | | | | | | | | | | | |
| | March 31,
2022 | | December 31,
2021 | |
| Assets | | | | |
| Buildings and improvements | $ | 2,303,407 | | | $ | 2,303,920 | | |
| Development costs and construction in progress | 107,066 | | | 82,303 | | |
| Land | 509,678 | | | 548,168 | | |
| Accumulated depreciation and amortization | (569,437) | | | (551,097) | | |
| Net real estate | 2,350,714 | | | 2,383,294 | | |
| | | | |
| Accounts receivable, net | 4,854 | | | 5,455 | | |
| Cash and cash equivalents | 37,080 | | | 22,295 | | |
| Restricted cash | 162 | | | 114 | | |
| Intangible assets, net | 109,993 | | | 117,180 | | |
| Assets held for sale and discontinued operations, net | 288 | | | 754 | | |
| Right-of-use asset, net | 106,600 | | | 107,993 | | |
| Other assets, net | 65,201 | | | 62,886 | | |
| Total assets | $ | 2,674,892 | | | $ | 2,699,971 | | |
| Liabilities | | | | |
| Mortgage debt | $ | 144,425 | | | $ | 144,350 | | |
| | | | |
| Intangible liabilities, net | 27,549 | | | 23,909 | | |
| Liabilities related to assets held for sale and discontinued operations, net | 1,677 | | | 1,677 | | |
| Lease liability | 98,474 | | | 99,213 | | |
| Accounts payable, accrued liabilities, and other liabilities | 56,712 | | | 58,440 | | |
| Deferred revenue | 24,405 | | | 21,546 | | |
| Total liabilities | $ | 353,242 | | | $ | 349,135 | | |
Total assets and liabilities related to assets held for sale and discontinued operations include VIE assets and liabilities as follows (in thousands):
| | | | | | | | | | | | | | |
| | March 31,
2022 | | December 31,
2021 |
| Assets | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Accounts receivable, net | | $ | 62 | | | $ | 62 | |
| Cash and cash equivalents | | 225 | | | 59 | |
| | | | |
| | | | |
| | | | |
| Other assets, net | | 1 | | | 633 | |
| Total assets | | $ | 288 | | | $ | 754 | |
| Liabilities | | | | |
| | | | |
| | | | |
| | | | |
| Accounts payable, accrued liabilities, and other liabilities | | $ | 1,677 | | | $ | 1,677 | |
| | | | |
| Total liabilities | | $ | 1,677 | | | $ | 1,677 | |
NOTE 16. Fair Value Measurements
Financial assets and liabilities measured at fair value on a recurring basis in the Consolidated Balance Sheets were immaterial at March 31, 2022 and December 31, 2021.
The table below summarizes the carrying amounts and fair values of the Company’s financial instruments (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022(3) | | December 31, 2021(3) |
| | Carrying
Value | | Fair Value | | Carrying
Value | | Fair Value |
Loans receivable, net(2) | $ | 409,753 | | | $ | 424,346 | | | $ | 415,811 | | | $ | 437,607 | |
Marketable debt securities(2) | 21,172 | | | 21,172 | | | 21,003 | | | 21,003 | |
Interest rate cap assets(2) | 2,391 | | | 2,391 | | | 397 | | | 397 | |
Bank line of credit and commercial paper(2) | 1,330,813 | | | 1,330,813 | | | 1,165,975 | | | 1,165,975 | |
| | | | | | | |
Senior unsecured notes(1) | 4,654,056 | | | 4,669,414 | | | 4,651,933 | | | 5,054,747 | |
Mortgage debt(2) | 350,713 | | | 344,995 | | | 352,081 | | | 352,800 | |
| | | | | | | |
| | | | | | | |
_______________________________________
(1)Level 1: Fair value calculated based on quoted prices in active markets.
(2)Level 2: Fair value based on (i) for marketable debt securities, quoted prices for similar or identical instruments in active or inactive markets, respectively, or (ii) for loans receivable, net, mortgage debt, and caps, standardized pricing models in which significant inputs or value drivers are observable in active markets. For bank line of credit and commercial paper, the carrying values are a reasonable estimate of fair value because the borrowings are primarily based on market interest rates and the Company’s credit rating.
(3)During the three months ended March 31, 2022 and year ended December 31, 2021, there were no material transfers of financial assets or liabilities within the fair value hierarchy.
NOTE 17. Derivative Financial Instruments
The Company uses derivative instruments to mitigate the effects of interest rate fluctuations on specific forecasted transactions as well as recognized financial obligations or assets. Utilizing derivative instruments allows the Company to manage the risk of fluctuations in interest rates related to the potential impact these changes could have on future earnings and forecasted cash flows. The Company does not use derivative instruments for speculative or trading purposes.
In March 2021, the Company repaid $39 million of variable rate secured debt on two SHOP assets and terminated the two remaining related interest rate swap contracts. Therefore, at March 31, 2022 and December 31, 2021, the Company had no remaining interest rate swap contracts.
In April 2021, the Company executed two interest rate cap agreements on its mortgage debt issued in conjunction with the acquisition of the MOB Portfolio (see Note 3).
The following table summarizes the Company’s outstanding interest rate cap agreements as of March 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Date Entered | | Maturity Date | | Hedge Designation | | Notional | | Strike Rate | | Index | | Fair Value(1) |
| | | | | | | | | | | | |
April 2021(2) | | May 2024 | | Non-designated | | $ | 142,100 | | | 2.00 % | | 1 mo. USD-LIBOR-BBA | | $ | 2,391 | |
_____________________________
(1)Derivative assets are recorded in other assets, net in the Consolidated Balance Sheets.
(2)Represents two interest rate cap agreements that manage the Company’s exposure to variable cash flows on certain mortgage debt borrowings by limiting interest rates.
During the three months ended March 31, 2022, the Company recognized a $2 million increase in the fair value of the interest rate cap agreements within other income (expense), net.
In April 2022, the Company terminated its existing interest rate cap agreements associated with $142 million of variable rate mortgage debt and entered into two interest rate swap contracts that are designated as cash flow hedges and mature in May 2026.
NOTE 18. Accounts Payable, Accrued Liabilities, and Other Liabilities
The following table summarizes the Company’s accounts payable, accrued liabilities, and other liabilities, excluding accounts payable, accrued liabilities, and other liabilities related to assets classified as discontinued operations (in thousands):
| | | | | | | | | | | |
| | March 31,
2022 | | December 31,
2021 |
Refundable entrance fees(1) | $ | 281,242 | | | $ | 288,409 | |
| Accrued construction costs | 163,277 | | | 179,995 | |
| Accrued interest | 35,753 | | | 59,342 | |
| Other accounts payable and accrued liabilities | 215,101 | | | 227,638 | |
| Accounts payable, accrued liabilities, and other liabilities | $ | 695,373 | | | $ | 755,384 | |
_______________________________________
(1)At March 31, 2022 and December 31, 2021, unamortized nonrefundable entrance fee liabilities were $498 million and $496 million, respectively, which are recorded within deferred revenue on the Consolidated Balance Sheets. During the three months ended March 31, 2022, the Company collected nonrefundable entrance fees of $21 million and recognized amortization of $19 million. During the three months ended March 31, 2021, the Company collected nonrefundable entrance fees of $15 million and recognized amortization of $20 million. The amortization of nonrefundable entrance fees is included within resident fees and services on the Consolidated Statements of Operations.