WELLTOWER INC. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Non-GAAP Financial Measures We believe that net income and net income attributable to common stockholders (“NICS”), as defined by U.S. GAAP, are the most appropriate earnings measurements. However, we consider FFO, NOI, SSNOI, EBITDA and Adjusted EBITDA to be useful supplemental measures of our operating performance. Historical cost accounting for real estate assets in accordance with U.S. GAAP implicitly assumes that the value of real estate assets diminishes predictably over time as evidenced by the provision for depreciation. However, since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient. In response, the National Association of Real Estate Investment Trusts (“NAREIT”) created funds from operations attributable to common stockholders (“FFO”) as a supplemental measure of operating performance for REITs that excludes historical cost depreciation from net income. FFO, as defined by NAREIT, means NICS, computed in accordance with U.S. GAAP, excluding gains (or losses) from sales of real estate and impairment of depreciable assets, plus depreciation and amortization, and after adjustments for unconsolidated entities and noncontrolling interests. Consolidated net operating income (“NOI”) is used to evaluate the operating performance of our properties. We define NOI as total revenues, including tenant reimbursements, less property operating expenses. Property operating expenses represent costs associated with managing, maintaining and servicing tenants for our properties. These expenses include, but are not limited to, property-related payroll and benefits, property management fees paid to operators, marketing, housekeeping, food service, maintenance, utilities, property taxes and insurance. General and administrative expenses represent costs unrelated to property operations. These expenses include, but are not limited to, payroll and benefits, professional services, office expenses and depreciation of corporate fixed assets. Same store NOI (“SSNOI”) is used to evaluate the operating performance of our properties using a consistent population which controls for changes in the composition of our portfolio. We believe the drivers of property level NOI for both consolidated properties and unconsolidated properties are generally the same and therefore, we evaluate SSNOI based on our ownership interest in each property ("Welltower Share"). To arrive at Welltower's Share, NOI is adjusted by adding our minority ownership share related to unconsolidated properties and by subtracting the minority partners' noncontrolling ownership interests for consolidated properties. We do not control investments in unconsolidated properties and while we consider disclosures at Welltower Share to be useful, they may not accurately depict the legal and economic implications of our joint venture arrangements and should be used with caution. As used herein, same store is generally defined as those revenue-generating properties in the portfolio for the relevant year-over-year reporting periods. Acquisitions and development conversions are included in SSNOI five full quarters or seven full quarters after acquisition or being placed into service for the QTD Pool and the YTD Pool, respectively. Land parcels, loans and sub-leases, as well as any properties sold or classified as held for sale during the respective periods are excluded from SSNOI. Redeveloped properties (including major refurbishments of a Seniors Housing Operating property where 20% or more of units are simultaneously taken out of commission for 30 days or more or Outpatient Medical properties undergoing a change in intended use) are excluded from SSNOI until five full quarters or seven full quarters post completion of the redevelopment for the QTD Pool and YTD Pool, respectively. Properties undergoing operator transitions and/or segment transitions are also excluded from SSNOI until five full quarters or seven full quarters post completion of the transition for the QTD Pool and YTD Pool, respectively. In addition, properties significantly impacted by force majeure, acts of God, or other extraordinary adverse events are excluded from SSNOI until five full quarters or seven full quarters after the properties are placed back into service for the QTD Pool and YTD Pool, respectively. SSNOI excludes non-cash NOI and includes adjustments to present consistent ownership percentages and to translate Canadian properties and UK properties using a consistent exchange rate. We believe NOI and SSNOI provide investors relevant and useful information because they measure the operating performance of our properties at the property level on an unleveraged basis. We use NOI and SSNOI to make decisions about resource allocations and to assess the property level performance of our properties. EBITDA is defined as earnings (net income) before interest, taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA excluding unconsolidated entities and including adjustments for stock-based compensation expense, provision for loan losses, gains/losses on extinguishment of debt, gains/loss/impairments on properties, gains/losses on derivatives and financial instruments, other expense, additional other income and other impairment charges. We believe that EBITDA and Adjusted EBITDA, along with net income, are important supplemental measures because they provide additional information to assess and evaluate the performance of our operations. We primarily use these measures to determine our interest coverage ratio, which represents EBITDA and Adjusted EBITDA divided by total interest, and our fixed charge coverage ratio, which represents EBITDA and Adjusted EBITDA divided by fixed charges. Fixed charges include total interest and secured debt principal amortization. Covenants in our unsecured senior notes and primary credit facility contain financial ratios based on a definition of EBITDA and Adjusted EBITDA that is specific to those agreements. Our leverage ratios are defined as the proportion of net debt to total capitalization and include book capitalization, undepreciated book capitalization and market capitalization. Book capitalization represents the sum of net debt (defined as total long-term debt, excluding operating lease liabilities, less cash and cash equivalents and any IRC Section 1031 deposits), total equity and redeemable noncontrolling 46 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations interests. Undepreciated book capitalization represents book capitalization adjusted for accumulated depreciation and amortization. Market capitalization represents book capitalization adjusted for the fair market value of our common stock. Our supplemental reporting measures and similarly entitled financial measures are widely used by investors, equity and debt analysts and rating agencies in the valuation, comparison, rating and investment recommendations of companies. Management uses these financial measures to facilitate internal and external comparisons to our historical operating results and in making operating decisions. Additionally, these measures are utilized by the Board of Directors to evaluate management. None of our supplemental measures represent net income or cash flow provided from operating activities as determined in accordance with U.S. GAAP and should not be considered as alternative measures of profitability or liquidity. Finally, the supplemental measures, as defined by us, may not be comparable to similarly entitled items reported by other real estate investment trusts or other companies. Three Months Ended September 30, June 30, March 31, December 31, September 30, June 30, March 31, NOI Reconciliations: 2020 2020 2020 2019 2019 2019 2019 Net income (loss) $ 394,978 $ 159,216 $ 329,380 $ 240,136 $ 647,932 $ 150,040 $ 292,302 Loss (gain) on real estate dispositions, net (484,304) (155,863) (262,824) (12,064) (570,250) 1,682 (167,409) Loss (income) from unconsolidated entities 5,981 (1,332) 3,692 (57,420) (3,262) 9,049 9,199 Income tax expense (benefit) 2,003 2,233 5,442 (4,832) 3,968 1,599 2,222 Other expenses 11,544 19,411 6,292 16,042 6,186 21,628 8,756 Impairment of assets 23,313 75,151 27,827 98 18,096 9,939 — Provision for loan losses 2,857 1,422 7,072 — — — 18,690 Loss (gain) on extinguishment of debt, net 33,004 249 — 2,612 65,824 — 15,719 Loss (gain) on derivatives and financial instruments, net 1,395 1,434 7,651 (5,069) 1,244 1,913 (2,487) General and administrative expenses 31,003 34,062 35,481 26,507 31,019 33,741 35,282 Depreciation and amortization 255,532 265,371 274,801 262,644 272,445 248,052 243,932 Interest expense 124,851 126,357 142,007 131,648 137,343 141,336 145,232 Consolidated net operating income (NOI) $ 402,157 $ 527,711 $ 576,821 $ 600,302 $ 610,545 $ 618,979 $ 601,438 NOI by segment: Seniors Housing Operating $ 174,361 $ 178,137 $ 243,257 $ 242,453 $ 254,155 $ 278,212 $ 264,700 Triple-net 108,361 220,056 194,427 226,837 230,685 227,935 233,286 Outpatient Medical 119,976 129,143 138,721 130,498 124,864 112,378 101,295 Non-segment/corporate (541) 375 416 514 841 454 2,157 Total NOI $ 402,157 $ 527,711 $ 576,821 $ 600,302 $ 610,545 $ 618,979 $ 601,438 47 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Nine Months Ended September 30, 2020 September 30, 2019 NOI Reconciliations: Net income (loss) $ 883,574 $ 1,090,274 Loss (gain) on real estate dispositions, net (902,991) (735,977) Loss (income) from unconsolidated entities 8,341 14,986 Income tax expense (benefit) 9,678 7,789 Other expenses 37,247 36,570 Impairment of assets 126,291 28,035 Provision for loan losses 11,351 18,690 Loss (gain) on extinguishment of debt, net 33,253 81,543 Loss (gain) on derivatives and financial instruments, net 10,480 670 General and administrative expenses 100,546 100,042 Depreciation and amortization 795,704 764,429 Interest expense 393,215 423,911 Consolidated net operating income (NOI) $ 1,506,689 $ 1,830,962 NOI by segment: Seniors Housing Operating $ 595,755 $ 797,067 Triple-net 522,844 691,906 Outpatient Medical 387,840 338,537 Non-segment/corporate 250 3,452 Total NOI $ 1,506,689 $ 1,830,962 48 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations QTD Pool YTD Pool Three Months Ended Nine Months Ended SSNOI Reconciliations: September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 Seniors Housing Operating: Consolidated NOI $ 174,361 $ 254,155 $ 595,755 $ 797,067 NOI attributable to unconsolidated investments 12,323 16,434 40,554 48,896 NOI attributable to noncontrolling interests (11,306) (20,120) (40,804) (61,990) NOI attributable to non-same store properties (13,227) (27,331) (135,172) (208,045) Non-cash NOI attributable to same store properties (1,008) (3,880) (2,872) (3,462) Currency and ownership adjustments (1) 458 1,539 3,807 5,505 SSNOI at Welltower Share 161,601 220,797 461,268 577,971 Triple-net: Consolidated NOI 108,361 230,685 522,844 691,906 NOI attributable to unconsolidated investments (1,288) 5,133 8,978 15,399 NOI attributable to noncontrolling interests (14,328) (14,581) (44,080) (43,717) NOI attributable to non-same store properties (26,916) (31,053) (91,869) (123,923) Non-cash NOI attributable to same store properties 109,451 (16,015) 81,605 (46,137) Currency and ownership adjustments (1) 156 1,016 1,099 800 SSNOI at Welltower Share 175,436 175,185 478,577 494,328 Outpatient Medical: Consolidated NOI 119,976 124,864 387,840 338,537 NOI attributable to unconsolidated investments 2,624 390 6,148 1,007 NOI attributable to noncontrolling interests (4,179) (7,526) (11,923) (20,784) NOI attributable to non-same store properties (27,305) (20,252) (157,432) (85,441) Non-cash NOI attributable to same store properties (1,438) (1,912) (1,043) (1,834) Currency and ownership adjustments (1) (4,741) (11,316) (20,807) (33,690) SSNOI at Welltower Share 84,937 84,248 202,783 197,795 SSNOI at Welltower Share: Seniors Housing Operating 161,601 220,797 461,268 577,971 Triple-net 175,436 175,185 478,577 494,328 Outpatient Medical 84,937 84,248 202,783 197,795 Total $ 421,974 $ 480,230 $ 1,142,628 $ 1,270,094 (1) Includes adjustments to reflect consistent property ownership percentages, to translate Canadian properties at a USD/CAD rate of 1.32 and to translate UK properties at a GBP/USD rate of 1.30. 49 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations QTD Pool YTD Pool SSNOI Property Reconciliations: Seniors Housing Operating Triple-net Outpatient Medical Total Seniors Housing Operating Triple-net Outpatient Medical Total Consolidated properties 515 652 321 1,488 515 652 321 1,488 Unconsolidated properties 84 39 49 172 84 39 49 172 Total properties 599 691 370 1,660 599 691 370 1,660 Recent acquisitions/development conversions (1) (25) (8) (60) (93) (70) (12) (122) (204) Under development (25) (5) (2) (32) (25) (5) (2) (32) Under redevelopment (2) (10) (1) (2) (13) (11) (1) (2) (14) Current held for sale (8) (2) (4) (14) (8) (2) (4) (14) Land parcels, loans and subleases (10) (17) (8) (35) (10) (17) (8) (35) Transitions (3) (9) (9) — (18) (72) (24) — (96) Other — — — — (1) — — (1) Same store properties 512 649 294 1,455 402 630 232 1,264 (1) Acquisitions and development conversions will enter the QTD Pool and YTD Pool five full quarters and seven full quarters after acquisition or certificate of occupancy, respectively. (2) Redevelopment properties will enter the QTD Pool and YTD Pool after five full quarters and seven full quarters of operations post redevelopment completion, respectively. (3) Transitioned properties will enter the QTD Pool and YTD Pool after five full quarters and seven full quarters of operations with the new operator in place or under the new structure, respectively. The table below reflects the reconciliation of FFO to NICS, the most directly comparable U.S. GAAP measure, for the periods presented. Noncontrolling interest and unconsolidated entity amounts represent adjustments to reflect our share of depreciation and amortization, gains/loss on real estate dispositions and impairment of assets. Amounts are in thousands except for per share data. Three Months Ended September 30, June 30, March 31, December 31, September 30, June 30, March 31, FFO Reconciliation: 2020 2020 2020 2019 2019 2019 2019 Net income attributable to common stockholders $ 325,585 $ 179,246 $ 310,284 $ 224,324 $ 589,876 $ 137,762 $ 280,470 Depreciation and amortization 255,532 265,371 274,801 262,644 272,445 248,052 243,932 Impairment of assets 23,313 75,151 27,827 98 18,096 9,939 — Loss (gain) on real estate dispositions, net (484,304) (155,863) (262,824) (12,064) (570,250) 1,682 (167,409) Noncontrolling interests 48,559 (42,539) (9,409) (14,895) 31,347 (18,889) (17,760) Unconsolidated entities 16,329 14,231 15,445 16,191 10,864 11,475 19,150 FFO $ 185,014 $ 335,597 $ 356,124 $ 476,298 $ 352,378 $ 390,021 $ 358,383 Average diluted shares outstanding 418,987 419,121 412,420 407,904 406,891 406,673 393,452 Per diluted share data: Net income attributable to common stockholders (1) $ 0.77 $ 0.42 $ 0.75 $ 0.55 $ 1.45 $ 0.34 $ 0.71 FFO $ 0.44 $ 0.80 $ 0.86 $ 1.17 $ 0.87 $ 0.96 $ 0.91 (1) Includes adjustment to the numerator for income (loss) attributable to OP unitholders. 50 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Nine Months Ended September 30, September 30, FFO Reconciliations: 2020 2019 Net income attributable to common stockholders $ 815,115 $ 1,008,108 Depreciation and amortization 795,704 764,429 Impairment of assets 126,291 28,035 Loss (gain) on real estate dispositions, net (902,991) (735,977) Noncontrolling interests (3,389) (5,302) Unconsolidated entities 46,005 41,489 FFO $ 876,735 $ 1,100,782 Average diluted common shares outstanding: 416,860 402,412 Per diluted share data: Net income attributable to common stockholders (1) $ 1.94 $ 2.51 FFO $ 2.10 $ 2.74 (1) Includes adjustment to the numerator for income (loss) attributable to OP unitholders. The tables below reflects the reconciliation of EBITDA to net income, the most directly comparable U.S. GAAP measure, for the periods presented. Dollars are in thousands. Three Months Ended September 30, June 30, March 31, December 31, September 30, June 30, March 31, EBITDA Reconciliations: 2020 2020 2020 2019 2019 2019 2019 Net income (loss) $ 394,978 $ 159,216 $ 329,380 $ 240,136 $ 647,932 $ 150,040 $ 292,302 Interest expense 124,851 126,357 142,007 131,648 137,343 141,336 145,232 Income tax expense (benefit) 2,003 2,233 5,442 (4,832) 3,968 1,599 2,222 Depreciation and amortization 255,532 265,371 274,801 262,644 272,445 248,052 243,932 EBITDA $ 777,364 $ 553,177 $ 751,630 $ 629,596 $ 1,061,688 $ 541,027 $ 683,688 Interest Coverage Ratio: Interest expense $ 124,851 $ 126,357 $ 142,007 $ 131,648 $ 137,343 $ 141,336 $ 145,232 Non-cash interest expense (3,973) (1,914) (8,125) (734) (1,988) (752) (5,171) Capitalized interest 3,947 4,541 4,746 4,868 4,148 3,929 2,327 Total interest 124,825 128,984 138,628 135,782 139,503 144,513 142,388 EBITDA $ 777,364 $ 553,177 $ 751,630 $ 629,596 $ 1,061,688 $ 541,027 $ 683,688 Interest coverage ratio 6.23 x 4.29 x 5.42 x 4.64 x 7.61 x 3.74 x 4.80 x Fixed Charge Coverage Ratio: Total interest $ 124,825 $ 128,984 $ 138,628 $ 135,782 $ 139,503 $ 144,513 $ 142,388 Secured debt principal payments 15,876 15,183 15,526 13,977 13,121 13,684 13,543 Total fixed charges 140,701 144,167 154,154 149,759 152,624 158,197 155,931 EBITDA $ 777,364 $ 553,177 $ 751,630 $ 629,596 $ 1,061,688 $ 541,027 $ 683,688 Fixed charge coverage ratio 5.52 x 3.84 x 4.88 x 4.20 x 6.96 x 3.42 x 4.38 x 51 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Nine Months Ended September 30, September 30, EBITDA Reconciliations: 2020 2019 Net income (loss) $ 883,574 $ 1,090,274 Interest expense 393,215 423,911 Income tax expense (benefit) 9,678 7,789 Depreciation and amortization 795,704 764,429 EBITDA $ 2,082,171 $ 2,286,403 Interest Coverage Ratio: Interest expense $ 393,215 $ 423,911 Non-cash interest expense (14,012) (7,911) Capitalized interest 13,234 10,404 Total interest 392,437 426,404 EBITDA $ 2,082,171 $ 2,286,403 Interest coverage ratio 5.31 x 5.36 x Fixed Charge Coverage Ratio: Total interest $ 392,437 $ 426,404 Secured debt principal payments 46,585 40,348 Total fixed charges 439,022 466,752 EBITDA $ 2,082,171 $ 2,286,403 Fixed charge coverage ratio 4.74 x 4.90 x 52 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The table below reflects the reconciliation of Adjusted EBITDA to net income, the most directly comparable U.S. GAAP measure, for the periods presented. Dollars are in thousands. Twelve Months Ended September 30, June 30, March 31, December 31, September 30, June 30, March 31, Adjusted EBITDA Reconciliations: 2020 2020 2020 2019 2019 2019 2019 Net income $ 1,123,710 $ 1,376,664 $ 1,367,488 $ 1,330,410 $ 1,214,970 $ 651,264 $ 668,497 Interest expense 524,863 537,355 552,334 555,559 568,280 568,969 549,049 Income tax expense (benefit) 4,846 6,811 6,177 2,957 9,293 7,066 9,308 Depreciation and amortization 1,058,348 1,075,261 1,057,942 1,027,073 1,007,263 977,967 966,190 EBITDA 2,711,767 2,996,091 2,983,941 2,915,999 2,799,806 2,205,266 2,193,044 Loss (income) from unconsolidated entities (49,079) (58,322) (47,941) (42,434) 14,791 17,709 7,411 Stock-based compensation expense (1) 25,485 24,229 24,601 25,047 25,347 26,113 23,618 Loss (gain) on extinguishment of debt, net 35,865 68,685 68,436 84,155 81,596 19,810 20,109 Loss (gain) on real estate dispositions, net (915,055) (1,001,001) (843,456) (748,041) (777,890) (232,363) (244,800) Impairment of assets 126,389 121,172 55,960 28,133 104,057 92,701 87,394 Provision for loan losses 11,351 8,494 7,072 18,690 18,690 18,690 18,690 Loss (gain) on derivatives and financial instruments, net 5,411 5,260 5,739 (4,399) 2,296 10,043 670 Other expenses (1) 52,630 46,971 48,327 51,052 45,512 126,994 117,942 Other impairment (2) 146,508 34,110 32,268 — — — — Additional other income — — — — (4,027) (4,027) (14,832) Adjusted EBITDA $ 2,151,272 $ 2,245,689 $ 2,334,947 $ 2,328,202 $ 2,310,178 $ 2,280,936 $ 2,209,246 Adjusted Interest Coverage Ratio: Interest expense $ 524,863 $ 537,355 $ 552,334 $ 555,559 $ 568,280 $ 568,969 $ 549,049 Capitalized interest 18,102 18,303 17,691 15,272 11,952 9,725 7,896 Non-cash interest expense (14,746) (12,761) (11,599) (8,645) (11,218) (10,888) (11,852) Total interest 528,219 542,897 558,426 562,186 569,014 567,806 545,093 Adjusted EBITDA $ 2,151,272 $ 2,245,689 $ 2,334,947 $ 2,328,202 $ 2,310,178 $ 2,280,936 $ 2,209,246 Adjusted interest coverage ratio 4.07 x 4.14 x 4.18 x 4.14 x 4.06 x 4.02 x 4.05 x Adjusted Fixed Charge Coverage Ratio: Total interest $ 528,219 $ 542,897 $ 558,426 $ 562,186 $ 569,014 $ 567,806 $ 545,093 Secured debt principal payments 60,562 57,807 56,308 54,325 54,342 55,129 55,584 Preferred dividends — — — — 11,676 23,352 35,028 Total fixed charges 588,781 600,704 614,734 616,511 635,032 646,287 635,705 Adjusted EBITDA $ 2,151,272 $ 2,245,689 $ 2,334,947 $ 2,328,202 $ 2,310,178 $ 2,280,936 $ 2,209,246 Adjusted fixed charge coverage ratio 3.65 x 3.74 x 3.80 x 3.78 x 3.64 x 3.53 x 3.48 x (1) Certain severance-related costs are included in stock-based compensation and excluded from other expenses. (2) Represents write-off of straight-line rent receivable deemed uncollectible. Our leverage ratios include book capitalization, undepreciated book capitalization and market capitalization. Book capitalization represents the sum of net debt (defined as total long-term debt less cash and cash equivalents and any IRC section 1031 deposits), total equity and redeemable noncontrolling interests. Undepreciated book capitalization represents book capitalization adjusted for accumulated depreciation and amortization. Market capitalization represents book capitalization adjusted for the fair market value of our common stock. Our leverage ratios are defined as the proportion of net debt to total capitalization. The table below reflects the reconciliation of our leverage ratios to our balance sheets for the periods presented. Amounts are in thousands, except share price. 53 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations As of September 30, June 30, March 31, December 31, September 30, June 30, March 31, 2020 2020 2020 2019 2019 2019 2019 Book capitalization: Unsecured credit facility and commercial paper $ — $ — $ 844,985 $ 1,587,597 $ 1,334,586 $ 1,869,188 $ 419,293 Long-term debt obligations (1) 13,889,030 14,543,485 13,228,433 13,436,365 12,463,680 13,390,344 12,371,729 Cash and cash equivalents (2) (2,096,571) (1,766,819) (303,423) (284,917) (265,788) (268,666) (249,127) Total net debt 11,792,459 12,776,666 13,769,995 14,739,045 13,532,478 14,990,866 12,541,895 Total equity and noncontrolling interests (3) 17,291,155 17,263,672 17,495,696 16,982,504 16,696,070 16,452,806 16,498,376 Book capitalization $ 29,083,614 $ 30,040,338 $ 31,265,691 $ 31,721,549 $ 30,228,548 $ 31,443,672 $ 29,040,271 Net debt to book capitalization ratio 41 % 43 % 44 % 46 % 45 % 48 % 43 % Undepreciated book capitalization: Total net debt $ 11,792,459 $ 12,776,666 $ 13,769,995 $ 14,739,045 $ 13,532,478 $ 14,990,866 $ 12,541,895 Accumulated depreciation and amortization 6,002,775 6,001,177 5,910,979 5,715,459 5,769,843 5,539,435 5,670,111 Total equity and noncontrolling interests (3) 17,291,155 17,263,672 17,495,696 16,982,504 16,696,070 16,452,806 16,498,376 Undepreciated book capitalization $ 35,086,389 $ 36,041,515 $ 37,176,670 $ 37,437,008 $ 35,998,391 $ 36,983,107 $ 34,710,382 Net debt to undepreciated book capitalization ratio 34 % 35 % 37 % 39 % 38 % 41 % 36 % Market capitalization: Common shares outstanding 417,305 417,302 417,391 410,257 405,758 405,254 403,740 Period end share price $ 55.09 $ 51.75 $ 45.78 $ 81.78 $ 90.65 $ 81.53 $ 77.60 Common equity market capitalization $ 22,989,332 $ 21,595,379 $ 19,108,160 $ 33,550,817 $ 36,781,963 $ 33,040,359 $ 31,330,224 Total net debt 11,792,459 12,776,666 13,769,995 14,739,045 13,532,478 14,990,866 12,541,895 Noncontrolling interests (3) 1,183,281 1,215,532 1,362,913 1,442,060 1,430,005 1,458,351 1,419,885 Market capitalization $ 35,965,072 $ 35,587,577 $ 34,241,068 $ 49,731,922 $ 51,744,446 $ 49,489,576 $ 45,292,004 Net debt to market capitalization ratio 33 % 36 % 40 % 30 % 26 % 30 % 28 % (1) Amounts include senior unsecured notes, secured debt and lease liabilities related to financing leases, as reflected on our Consolidated Balance Sheet. Operating lease liabilities related to the ASC 842 adoption are excluded. (2) Inclusive of IRC section 1031 deposits of $381 million at September 30, 2020 and $88 million at June 30, 2020. September 30, 2020 also includes $112 million of restricted cash related to secured debt that was defeased in September and subsequently extinguished in October 2020. (3) Includes amounts attributable to both redeemable noncontrolling interests and noncontrolling interests as reflected on our Consolidated Balance Sheet. Critical Accounting Policies Our unaudited consolidated financial statements are prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions. Management considers an accounting estimate or assumption critical if: • the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and • the impact of the estimates and assumptions on financial condition or operating performance is material. Management has discussed the development and selection of its critical accounting policies with the Audit Committee of the Board of Directors. Management believes the current assumptions and other considerations used to estimate amounts reflected in our unaudited consolidated financial statements are appropriate and are not reasonably likely to change in the future. However, since these estimates require assumptions to be made that were uncertain at the time the estimate was made, they bear the risk of change. If actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our unaudited consolidated financial statements, the resulting changes could have a material adverse effect on our consolidated results of operations, liquidity and/or financial condition. Please refer to Note 2 to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 for further information regarding significant accounting policies that impact us. There have been no material changes to these policies in 2020, except the adoption of ASC 2016-13. See Notes 2 and 7 to the unaudited consolidated financial statements for details. 54 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statement Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q may contain “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. When Welltower uses words such as “may,” “will,” “intend,” “should,” “believe,” “expect,” “anticipate,” “project,” “pro forma,” “estimate” or similar expressions that do not relate solely to historical matters, Welltower is making forward-looking statements. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that may cause Welltower’s actual results to differ materially from Welltower’s expectations discussed in the forward-looking statements. This may be a result of various factors, including, but not limited to: the duration and scope of the COVID-19 pandemic; the impact of the COVID-19 pandemic on occupancy rates and on the operations of Welltower and its operators/tenants; actions governments take in response to the COVID-19 pandemic, including the introduction of public health measures and other regulations affecting Welltower’s properties and the operations of Welltower and its operators/tenants; the effects of health and safety measures adopted by Welltower and its operators/tenants related to the COVID-19 pandemic; increased operational costs as a result of health and safety measures related to COVID-19; the impact of the COVID-19 pandemic on the business and financial condition of operators/tenants and their ability to make payments to Welltower; disruptions to Welltower's property acquisition and disposition activity due to economic uncertainty caused by COVID-19; general economic uncertainty in key markets as a result of the COVID-19 pandemic and a worsening of global economic conditions or low levels of economic growth; the status of capital markets, including availability and cost of capital; uncertainty from the expected discontinuance of LIBOR and the transition to any other interest rate benchmark; issues facing the health care industry, including compliance with, and changes to, regulations and payment policies, responding to government investigations and punitive settlements and operators’/tenants’ difficulty in cost effectively obtaining and maintaining adequate liability and other insurance; changes in financing terms; competition within the health care and seniors housing industries; negative developments in the operating results or financial condition of operators/tenants, including, but not limited to, their ability to pay rent and repay loans; Welltower’s ability to transition or sell properties with profitable results; the failure to make new investments or acquisitions as and when anticipated; natural disasters and other acts of God affecting Welltower’s properties; Welltower’s ability to re-lease space at similar rates as vacancies occur; Welltower’s ability to timely reinvest sale proceeds at similar rates to assets sold; operator/tenant or joint venture partner bankruptcies or insolvencies; the cooperation of joint venture partners; government regulations affecting Medicare and Medicaid reimbursement rates and operational requirements; liability or contract claims by or against operators/tenants; unanticipated difficulties and/or expenditures relating to future investments or acquisitions; environmental laws affecting Welltower’s properties; changes in rules or practices governing Welltower’s financial reporting; the movement of U.S. and foreign currency exchange rates; Welltower’s ability to maintain Welltower’s qualification as a REIT; key management personnel recruitment and retention; and other risks described in Welltower’s reports filed from time to time with the SEC. Other important factors are identified in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, including factors identified under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Finally, the Company undertakes no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events or otherwise, or to update the reasons why actual results could differ from those projected in any forward-looking statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to various market risks, including the potential loss arising from adverse changes in interest rates and foreign currency exchange rates. We seek to mitigate the underlying foreign currency exposures with gains and losses on derivative contracts hedging these exposures. We seek to mitigate the effects of fluctuations in interest rates by matching the terms of new investments with new long-term fixed rate borrowings to the extent possible. We may or may not elect to use financial derivative instruments to hedge interest rate exposure. These decisions are principally based on our policy to match our variable rate investments with comparable borrowings, but are also based on the general trend in interest rates at the applicable dates and our perception of the future volatility of interest rates. This section is presented to provide a discussion of the risks associated with potential fluctuations in interest rates and foreign currency exchange rates. We historically borrow on our unsecured revolving credit facility and commercial paper program to acquire, construct or make loans relating to health care and seniors housing properties. Then, as market conditions dictate, we will issue equity or long-term fixed rate debt to repay the borrowings under our unsecured revolving credit facility and commercial paper program. We are subject to risks associated with debt financing, including the risk that existing indebtedness may not be refinanced or that the terms of refinancing may not be as favorable as the terms of current indebtedness. The majority of our borrowings were completed under indentures or contractual agreements that limit the amount of indebtedness we may incur. Accordingly, in the event that we are unable to raise additional equity or borrow money because of these limitations, our ability to acquire additional properties may be limited. 55