(EDGAR Online via COMTEX) -- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations EXECUTIVE SUMMARY Company Overview 45 Business Strategy 46 Key Transactions 47 Key Performance Indicators, Trends and Uncertainties 48 Corporate Governance 49 LIQUIDITY AND CAPITAL RESOURCES Sources and Uses of Cash 49 Off-Balance Sheet Arrangements 50 Contractual Obligations 51 Capital Structure 51 RESULTS OF OPERATIONS Summary 52 Seniors Housing Operating 53 Triple-net 55 Outpatient Medical 57 Non-Segment/Corporate 59 OTHER Non-GAAP Financial Measures 60 Critical Accounting Policies 65
Item 7. Management's Discussion and Analysis of Financial Condition and Results
Percentage of Number of Type of Property NOI(1) NOI Properties Seniors Housing Operating $ 755,552 37.6 % 556 Triple-net 748,121 37.2 % 641 Outpatient Medical 505,071 25.2 % 296 Totals $ 2,008,744 100.0 % 1,493
(1) Represents consolidated net operating income ("NOI") and excludes our share of investments in unconsolidated entities. Entities in which we have a joint venture with a minority partner are shown at 100% of the joint venture amount. See Non-GAAP Financial Measures for additional information and reconciliation. The COVID-19 pandemic has had and may continue to have material and adverse effects on our financial condition, results of operations and cash flows in the future. The extent to which the COVID-19 pandemic impacts our operations and those of our operators and tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the effectiveness and availability of vaccines and the success of ongoing vaccination deployment efforts in our facilities and the geographic areas in which we operate, the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic effects of the pandemic and containment measures, among others. Our Seniors Housing Operating revenues are dependent on occupancy. While admission bans were lifted across our portfolio during the second and third quarter, with the ramp up of COVID-19 cases in the general community in the fourth quarter, admissions bans, both government-imposed and voluntary bans adopted by operators, have been reinstated in many locations which have significantly affected occupancy rates. Occupancy has consistently declined since the beginning of the pandemic to 76.2% as of December 31, 2020. Through February 5, 2021, total occupancy declined an additional 180 basis points to 74.4%. Occupancy metrics represents approximate spot occupancy as reported by our operators for properties in operation as of February 29, 2020, including unconsolidated properties but excluding acquisitions, executed dispositions and development conversions since such date. We have incurred increased operational costs as a result of the introduction of public health measures and other regulations affecting our properties, as well as additional health and safety measures adopted by us and our operators related to the COVID-19 pandemic, including increases in labor, personal protective equipment and sanitation. We expect total Seniors Housing Operating expenses to remain elevated during the pandemic and potentially beyond as these additional health and safety measures become standard practice. Our Triple-net operators are experiencing similar occupancy declines and operating costs as described above with respect to our Seniors Housing Operating properties. However, long-term/post-acute care facilities are generally experiencing a higher degree of occupancy declines. These factors may continue to impact the ability of our Triple-net operators to make contractual rent payments to us in the future. Many of our Triple-net operators received funds under the Coronavirus Aid Relief, and Economic Security Act ("CARES Act") Paycheck Protection Program. In addition, operators of long-term/post-acute care facilities have generally received funds from Phase 1 of the Provider Relief Fund and operators of assisted living facilities have or are expected to receive funds from Phase 2 of the Provider Relief Fund. Accordingly, collection of Triple-net rent due during the COVID-19 pandemic to date (from March to December) has generally been consistent with historical collection rates and no significant rent concessions or deferrals have been made.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations debt service payments (including principal and interest), real property investments (including acquisitions, capital expenditures, construction advances and transaction costs), loan advances, property operating expenses, general and administrative expenses and other expenses. Depending upon the availability and cost of external capital, we believe our liquidity is sufficient to fund these uses of cash. We also continuously evaluate opportunities to finance future investments. New investments are generally funded from temporary borrowings under our unsecured revolving credit facility and commercial paper program, internally generated cash and the proceeds from investment dispositions. Our investments generate cash from NOI and principal payments on loans receivable. Permanent financing for future investments, which replaces funds drawn under our unsecured revolving credit facility and commercial paper program, has historically been provided through a combination of the issuance of public debt and equity securities and the incurrence or assumption of secured debt. Depending upon market conditions, we believe that new investments will be available in the future with spreads over our cost of capital that will generate appropriate returns to our stockholders. It is also likely that investment dispositions may occur in the future. To the extent that investment dispositions exceed new investments, our revenues and cash flows from operations could be adversely affected. We expect to reinvest the proceeds from any investment dispositions in new investments. To the extent that new investment requirements exceed our available cash on-hand, we expect to borrow under our unsecured revolving credit facility and commercial paper program. During 2020, in response to the COVID-19 pandemic, we were strategic and opportunistic in disposing of certain real estate which provided significant near term liquidity. At December 31, 2020, we had $1,545,046,000 of cash and cash equivalents, $475,997,000 of restricted cash and $3,000,000,000 of available borrowing capacity under our unsecured revolving credit facility. Key Transactions Capital The following summarizes key capital transactions that occurred during the year ended December 31, 2020: In April 2020, we closed on a $1.0 billion two-year unsecured term loan. The term loan bears interest at a rate of 1-month LIBOR + 1.20%, based on our credit rating. In June 2020, we completed the issuance of $600,000,000 senior unsecured notes bearing interest at 2.75% with a maturity date of January 2031. Net proceeds were used to fund tender offers for $426,248,000 of our 3.75% senior unsecured notes due 2023 and our 3.95% senior unsecured notes due 2023 which settled on July 1, 2020. The remaining proceeds were used to reduce borrowings under our term loan by $140,000,000. We sold 2,128,000 shares of common stock under our ATM and DRIP programs, primarily in the first quarter, via both cash settle and forward sale agreements, generating gross proceeds of approximately $175,484,000. The sale of these shares and settlement of previously outstanding forward sales resulted in gross proceeds of approximately $607,177,000 which were used to reduce borrowings under our unsecured revolving credit facility. We extinguished $632,288,000 of secured debt at a blended average interest rate of 2.21% throughout 2020. Investments The following summarizes property acquisitions and joint venture investments completed during the year ended December 31, 2020 (dollars in thousands):
Investment Properties Amount(1) Capitalization Rates(2) Book Amount(3) Seniors Housing Operating 26 $ 574,793 3.5% $ 610,857 Triple-net 11 88,908 6.5% 90,731 Outpatient Medical 17 246,516 6.1% 249,312 Totals 54 $ 910,217 4.5% $ 950,900
(1) Represents stated pro rata purchase price including cash and any assumed debt but excludes fair value adjustments pursuant to U.S. GAAP.
Properties Proceeds(1) Capitalization Rates(2) Book Amount(3) Seniors Housing Operating 31 $ 1,282,439 4.8% $ 1,289,769 Triple-net 8 109,439 7.9% 51,666 Outpatient Medical 108 2,324,062 5.6% 1,755,864 Totals 147 $ 3,715,940 5.4% $ 3,097,299
(1) Represents pro rata proceeds received upon disposition including any seller financing.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Dividends On February 9, 2021, the Board of Directors declared a cash dividend for the quarter ended December 31, 2020 of $0.61 per share, consistent with the cash dividends for the quarters ended September 30, June 30 and March 31, 2020, representing a 30% decrease from the $0.87 per share dividend for the quarter ended December 31, 2019. The dividend declaration represents the 199th consecutive quarterly dividend payment. Key Performance Indicators, Trends and Uncertainties We utilize several key performance indicators to evaluate the various aspects of our business. These indicators are discussed below and relate to operating performance, credit strength and concentration risk. Management uses these key performance indicators to facilitate internal and external comparisons to our historical operating results, in making operating decisions, and for budget planning purposes. Operating Performance We believe that net income and net income attributable to common stockholders ("NICS") per the Statement of Comprehensive Income are the most appropriate earnings measures. Other useful supplemental measures of our operating performance include funds from operations attributable to common stockholders ("FFO") and consolidated net operating income ("NOI"); however, these supplemental measures are not defined by U.S. GAAP. Please refer to the section entitled "Non-GAAP Financial Measures" for further discussion and reconciliations. These earnings measures are widely used by investors and analysts in the valuation, comparison and investment recommendations of companies. The following table reflects the recent historical trends of our operating performance measures for the periods presented (in thousands):
Year Ended December 31, 2020 2019 2018 Net income $ 1,038,852 $ 1,330,410 $ 829,750 Net income attributable to common stockholders 978,844 1,232,432 758,250 Funds from operations attributable to common stockholders 1,102,562 1,577,080 1,392,183 Consolidated net operating income 2,008,144 2,431,264 2,267,482
Credit Strength We measure our credit strength both in terms of leverage ratios and coverage ratios. The leverage ratios indicate how much of our balance sheet capitalization is related to long-term debt, net of cash and Internal Revenue Code ("IRC") Section 1031 deposits. The coverage ratios indicate our ability to service interest and fixed charges (interest, secured debt principal amortization and preferred dividends). We expect to maintain capitalization ratios and coverage ratios sufficient to maintain a capital structure consistent with our current profile. The coverage ratios are based on adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA"). Please refer to the section entitled "Non-GAAP Financial Measures" for further discussion and reconciliation of these measures. Leverage ratios and coverage ratios are widely used by investors, analysts and rating agencies in the valuation, comparison, investment recommendations and rating of companies. The following table reflects the recent historical trends for our credit strength measures for the periods presented:
Year Ended December 31, 2020 2019 2018 Net debt to book capitalization ratio 40.9% 46.5% 45.0% Net debt to undepreciated book capitalization ratio 33.8% 39.4% 37.8% Net debt to market capitalization ratio 29.7% 29.6% 31.3% Adjusted interest coverage ratio 3.97x 4.14x 4.11x Adjusted fixed charge coverage ratio 3.54x 3.78x 3.44x
Concentration Risk We evaluate our concentration risk in terms of NOI by property mix, relationship mix and geographic mix. Concentration risk is a valuable measure in understanding what portion of our NOI could be at risk if certain sectors were to experience downturns. Property mix measures the portion of our NOI that relates to our various property types. Relationship mix measures the portion of our NOI that relates to our current top five relationships. Geographic mix measures the portion of our NOI that relates to our current top five states (or international equivalents). The following table reflects our recent historical trends of concentration risk by NOI for the years indicated below:
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations December 31,(1) 2020 2019 2018 Property mix: Seniors Housing Operating 38% 43% 43% Triple-net 37% 38% 40% Outpatient Medical 25% 19% 17% Relationship mix: Sunrise Senior Living(2) 13% 14% 15% ProMedica 11% 9% 4% Revera(2) 5% 6% 7% Avery Healthcare 4% 3% 3% Sagora Senior Living 3% 3% 3% Remaining 64% 65% 68% Geographic mix: California 14% 13% 14% United Kingdom 10% 8% 9% Texas 9% 8% 8% Canada 6% 7% 7% Pennsylvania 6% 6% 5% Remaining 55% 58% 57%
(1) Excludes our share of investments in unconsolidated entities and non-segment/corporate NOI. Entities in which we have a joint venture with a minority partner are shown at 100% of the joint venture amount.
Feb 10, 2021
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