Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information set forth in this Item 7 is intended to provide readers with an understanding of our financial condition, changes in financial condition and results of operations. We will discuss and provide our analysis in the following order:

COVID-19 Update
2020 Transaction Overview
Dividends
Results of Operations
Liquidity and Capital Resources
Contractual Obligations
Off-Balance Sheet Arrangements
Inflation
Non-GAAP Financial Measure Reconciliations
Critical Accounting Policies
Recent Accounting Pronouncements

COVID-19 Update

Beginning in late 2019, a novel strain of Coronavirus (“COVID-19”) began to spread throughout the world, including the United States, ultimately being declared a pandemic by the World Health Organization. Global health concerns and increased efforts to reduce the spread of the COVID-19 pandemic have prompted federal, state, and local governments to restrict normal daily activities, and have resulted in travel bans, quarantines, school closings, “shelter-in-place” orders requiring individuals to remain in their homes other than to conduct essential services or activities, as well as business limitations and shutdowns, which resulted in closure of many businesses deemed to be non-essential. Although some of these restrictions have since been lifted or scaled back, certain restrictions remain in place and any future surges of COVID-19 may lead to other restrictions being re-implemented in response to efforts to reduce the spread. In addition, our tenants, operators and borrowers are facing significant cost increases as a result of increased health and safety measures, including increased staffing demands for patient care and sanitation, as well as increased usage and inventory of critical medical supplies and personal protective equipment. These health and safety measures, which may remain in place for a significant amount of time or be re-imposed from time to time, continue to place a substantial strain on the business operations of many of our tenants, operators, and borrowers.

Senior Housing

Within our SHOP and CCRC properties, occupancy rates have declined since the onset of the pandemic, a trend that may continue during the pandemic and for some period thereafter as a result of a reduction in, or in some cases prohibitions on, new tenant move-ins due to stricter move-in criteria, lower inquiry volumes, and reduced in-person tours, as well as incidences of COVID-19 outbreaks at our facilities or the perception that outbreaks may occur. Outbreaks, which directly affect our residents and the employees at our senior housing facilities, have and could continue to materially and adversely disrupt operations, as well as cause significant reputational harm to us, our operators, and our tenants. As of February 8, 2021, we had current confirmed resident COVID-19 cases at 85 of our 95 senior housing properties, since the beginning of the pandemic. Our senior housing property operators are also experiencing significant cost increases as a result of higher staffing hours and compensation, the implementation of increased health and safety measures and protocols, and increased usage and inventory of critical medical supplies and personal protective equipment. At our SHOP and CCRC facilities, we bear these significant cost increases.

We and/or our operators temporarily suspended redevelopment across our senior housing portfolio due to “shelter-in-place” orders and local, state, and federal directives, except for certain life safety and essential projects. Although some of these projects have been allowed to restart with infection control protocols in place, future local, state, or federal orders could cause us to re-suspend the work. Other projects remain suspended and we do not know when we will be able to restart construction. In locations where construction continues, construction workers are following applicable guidelines, including appropriate social distancing, limitations on large group gatherings in close proximity, and increased sanitation efforts, which has slowed the pace of construction. These protective actions do not, however, eliminate the risk that outbreaks caused or spread by such activities may occur and impact our tenants, operators and residents. In addition, our planned dispositions may not occur within the expected time or at all because of buyer terminations or withdrawals related to the pandemic, capital constraints, inability to tour properties, or other factors relating to the pandemic.

The ultimate impact of the pandemic on senior housing generally and the public perception of senior housing as a desirable residential setting depend on a number of factors that are unknown at this time, including, but not limited to: (i) the course and severity of the pandemic; (ii) responses of public and private health authorities; and (iii) the timing, distribution, and health effects of vaccines and other treatments.

Medical Office Portfolio

Within our medical office portfolio, many physician practices and affiliated hospitals initially delayed or discontinued nonessential surgeries and procedures due to “shelter-in-place” orders and other health and safety measures, which negatively impacted their cash flows during part of 2020. These restrictions have now been lifted in the majority of our markets and operations are at or near pre-pandemic levels. However, we expect that planned move-outs will be delayed during the COVID-19 pandemic, which is expected to slightly increase short-term retention in this portfolio.

We implemented a deferred rent program during the second and third quarters of 2020 that was limited to certain non-health system and non-hospital tenants in good standing, which reduced our cash collections during those months, although we required that the deferred rent be repaid ratably by the end of 2020. Under this program, we agreed to defer approximately $6 million of rent through December 31, 2020, substantially all of which had been collected as of December 31, 2020. We may also implement a deferred rent program for future periods.

Life Science Portfolio

Within our life science portfolio, we have numerous tenants that are working tirelessly to address critical research and testing needs in the fight against COVID-19. We are focused on providing our tenants with the necessary space to complete their critical work and are in continuous contact with our tenants regarding how we can help them meet their needs. Through December 31, 2020, we had provided approximately $1 million of rent deferrals to our life science tenants, all of which was required to be repaid by the end of 2020. As of December 31, 2020, all of the deferred rent had been collected.

However, within our life science portfolio, we may experience a decline in leasing activity at certain points during the COVID-19 pandemic. As a result of governmental restrictions on business activities in the greater San Francisco and Boston areas, we temporarily suspended development, redevelopment, and tenant improvement projects at many of our life science properties, resulting in delayed deliveries and project completions. Though we have been able to continue or re-start these projects, we remain subject to future governmental restrictions that may again suspend these projects. Even when these projects continue, we have been experiencing losses in efficiency as a result of the implementation of health and safety protocols related to social distancing and proper hygiene and sanitization.

Liquidity

We believe that we are well positioned to manage the short-term and long-term impacts of the COVID-19 pandemic and the measures to slow its spread while working closely with our tenants, operators, and borrowers as they navigate the pandemic. We had approximately $2.51 billion of liquidity available, including $2.26 billion borrowing capacity under our bank line of credit facility and $259 million of cash and cash equivalents, as of February 8, 2021. While a future downgrade in our credit ratings would adversely impact our cost of borrowing, we believe we continue to have access to the unsecured debt markets. We could also seek to enter into one or more secured debt financings, issue additional securities, including under our 2020 ATM Program (as defined below), or dispose of certain additional assets to fund future operating costs, capital expenditures, or acquisitions, although no assurances can be made in this regard.

Future Rent Collections

The impact of COVID-19 on the ability of our tenants to pay rent in the future is currently unknown. We have, and will continue to monitor the credit quality of each of our tenants and write-off straight-line rent and accounts receivable, as necessary. In the event we conclude that substantially all of a tenant’s straight-line rent or accounts receivable is not probable of collection in the future, such amounts will be written off, which could have a material impact on our future results of operations.

Employee Update

We have taken, and will continue to take, proactive measures to provide for the well-being of our workforce. We have maximized our systems infrastructure as well as virtual and remote working technologies for our employees, including our executive team, to ensure productivity and connectivity internally, as well as with key third-party relationships.

The extent of the impact of the COVID-19 pandemic on our business and financial results will depend on future developments, including the duration, severity, and spread of COVID-19, health and safety actions taken to contain its spread, any new surges of COVID-19, the severity of outbreak of new strains of COVID-19, the timing and distribution of vaccines and other treatments, and how quickly and to what extent normal economic and operating conditions can resume within the markets in which we operate, each of which are highly uncertain at this time and outside of our control.

2020 Transaction Overview

South San Francisco Land Site Acquisition

In October 2020, we executed a definitive agreement to acquire approximately 12 acres of land for $128 million. The acquisition site is located in South San Francisco, CA, adjacent to two sites currently held by us as land for future development. We made a $10 million nonrefundable deposit upon completing due diligence in November 2020 and expect to close the transaction in 2021.

Cambridge Discovery Park Acquisition

In December 2020, we acquired three life science facilities in Cambridge, Massachusetts for $610 million and a 49% unconsolidated joint venture interest in a fourth property on the same campus for $54 million.

Midwest MOB Acquisition

In October 2020, we acquired a portfolio of seven MOBs located in Indiana, Missouri, and Illinois, for $169 million.

Scottsdale Gateway Acquisition

In July 2020, we acquired one MOB in Scottsdale, Arizona, for $27 million.

The Post Acquisition

In April 2020, we acquired a life science campus in Waltham, Massachusetts for $320 million.

Master Transaction and Cooperation Agreement with Brookdale

In January 2020, Healthpeak and Brookdale Senior Living Inc. (“Brookdale”) completed certain of the transactions governed by the previously announced Master Transactions and Cooperation Agreement (the “2019 MTCA”), which includes a series of transactions related to the previously jointly owned 15-campus CCRC portfolio (the “CCRC JV”) and the portfolio of senior housing properties that were triple-net leased to Brookdale. Specifically, the following transactions were completed on January 31, 2020:

We acquired Brookdale’s 51% interest in 13 of the 15 communities in the CCRC JV based on a valuation of $1.06 billion (the “CCRC Acquisition”) and transitioned management (under new management agreements) of those 13 communities to Life Care Services LLC (“LCS”);
We paid Brookdale $100 million to terminate the previous management agreements related to those 13 communities;
Brookdale acquired 18 of the triple-net lease properties (the “Brookdale Acquisition Assets”) from us for cash proceeds of $385 million;
The remaining 24 triple-net lease properties, which were subsequently sold in January 2021 (see Senior Housing Portfolio Sales below), were restructured into a single master lease with 2.4% annual rent escalators and a maturity date of December 31, 2027 (the “2019 Amended Master Lease”);
A portion of annual rent (amount in excess of 6.5% of sales proceeds) related to 14 of the 18 Brookdale Acquisition Assets was reallocated to the remaining properties under the 2019 Amended Master Lease; and
Brookdale paid down $20 million of future rent under the 2019 Amended Master Lease.

Senior Housing Portfolio Sales

In December 2020, we sold a portfolio of ten senior housing triple-net assets for $358 million.

*•*In November 2020, we entered into definitive agreements to sell a portfolio of 13 SHOP assets for $334 million. We sold 12 of the assets for $312 million in December 2020 and provided the buyer with financing of $61 million on four of the assets sold. We expect to sell the final asset during the first half of 2021, upon completion of the license transfer process.

In October 2020, we entered into a definitive agreement to sell seven SHOP assets for $115 million. We received a $3 million nonrefundable deposit and expect to close the transaction during the first half of 2021.

*•*In November 2020, we entered into a definitive agreement to sell 32 SHOP and 2 senior housing triple-net assets for $744 million. We received a $35 million nonrefundable deposit upon completion of due diligence in December 2020, sold the 32 SHOP assets in January 2021 for $664 million, and provided the buyer with financing of $410 million. The two senior housing triple-net assets are expected to sell during the first half of 2021, upon completion of the license transfer process.

In January 2021, we sold 24 senior housing assets under a triple-net lease with Brookdale for $510 million.

*•*In January 2021, we sold a portfolio of 16 SHOP assets for $230 million and provided the buyer with financing of $150 million.

In February 2021, we sold eight senior housing assets in a triple-net lease with Harbor Retirement Associates for $132 million.

Other Real Estate Transactions

In addition to the sales discussed above, during the year ended December 31, 2020, we sold the following: (i) 23 SHOP assets for $190 million, (ii) 21 senior housing triple-net assets for $428 million (inclusive of the 18 facilities sold to Brookdale under the 2019 MTCA), (iii) 11 MOBs for $136 million (inclusive of the exercise of a purchase option by one of our tenants to acquire 3 MOBs), (iv) two MOB land parcels for $3 million, and 1 asset from other non-reportable segments for $1 million.
In February 2020, we sold a hospital under a DFL for $82 million.
In December 2020, we acquired one hospital in Dallas, Texas for $34 million.
During the year ended December 31, 2020, we converted: (i) 13 senior housing triple-net assets with Capital Senior Living Corporation (“CSL”) to a RIDEA structure, with CSL remaining as the manager, (ii) 1 senior housing triple-net asset with CSL to a RIDEA structure with Discovery Senior Living, LLC as the operator, (iii) 2 senior housing triple-net assets with HRA Senior Living (“HRA”) to a RIDEA structure, with HRA remaining as the manager, and (iv) 1 senior housing triple-net asset with Brookdale to a RIDEA structure.

Financing Activities

During the year ended December 31, 2020, we utilized the forward provisions under the at-the-market equity offering program established in February 2019 (the “2019 ATM Program”) to allow for the sale of up to an aggregate of 2.0 million shares of our common stock at an initial weighted average net price of $35.23 per share, after commissions.
During the year ended December 31, 2020, we settled all 32.5 million shares previously outstanding under (i) ATM forward contracts and (ii) a 2019 forward equity sales agreement at a weighted average net price of $32.73 per share, after commissions, resulting in net proceeds of $1.06 billion.
In June 2020, we completed a public offering of $600 million aggregate principal amount of 2.88% senior unsecured notes due in 2031 (the “2031 Notes”).
In June 2020, using a portion of the net proceeds from the 2031 Notes offering, we repurchased $250 million aggregate principal amount of our 4.25% senior unsecured notes due in 2023.
In July 2020, using an additional portion of the net proceeds from the 2031 Notes offering, we redeemed all $300 million aggregate principal amount of our 3.15% senior unsecured notes due in 2022.
During the first quarter of 2021, we repurchased $112 million aggregate principal amount of our 4.25% senior unsecured notes due in 2023, $201 million aggregate principal amount of our 4.20% senior unsecured notes due in 2024, and $469 million aggregate principal amount of our 3.88% senior unsecured notes due in 2024.

Development Activities

As part of the development program with HCA Healthcare Inc., at December 31, 2020, we had four MOB developments, all of which are on-campus, under contract with an aggregate total estimated cost of $117 million.
At December 31, 2020, we had five life science development projects in process with an aggregate total estimated cost of $855 million.

Dividends

Quarterly cash dividends paid during 2020 aggregated to $1.48 per share. On February 9, 2021, our Board of Directors declared a quarterly cash dividend of $0.30 per common share. The dividend will be paid on March 5, 2021 to stockholders of record as of the close of business on February 22, 2021.

Results of Operations

We evaluate our business and allocate resources among our reportable business segments: (i) life science, (ii) medical office, and (iii) CCRC. Under the life science and medical office segments, we invest through the acquisition and development of life science facilities, MOBs, and hospitals, which generally require a greater level of property management. Our CCRCs are operated through RIDEA structures. We have other non-reportable segments that are comprised primarily of interests in an unconsolidated senior housing joint venture and debt investments. We evaluate performance based upon property adjusted net operating income (“Adjusted NOI” or “Cash NOI”) in each segment. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2 to the Consolidated Financial Statements).

In conjunction with classifying our senior housing triple-net and SHOP portfolios as discontinued operations as of December 31, 2020, the results of operations related to those portfolios are no longer presented in reportable business segments. Accordingly, results of operations of those portfolios are not included in the reportable business segment analysis below. Refer to Note 5 to the Consolidated Financial Statements for further information regarding discontinued operations.

Non-GAAP Financial Measures

Net Operating Income

NOI and Adjusted NOI are non-U.S. generally accepted accounting principles (“GAAP”) supplemental financial measures used to evaluate the operating performance of real estate. NOI is defined as real estate revenues (inclusive of rental and related revenues, resident fees and services, income from direct financing leases, and government grant income and exclusive of interest income), less property level operating expenses (which exclude transition costs); NOI excludes all other financial statement amounts included in net income (loss) as presented in Note 16 to the Consolidated Financial Statements. Adjusted NOI is calculated as NOI after eliminating the effects of straight-line rents, DFL non-cash interest, amortization of market lease intangibles, termination fees, actuarial reserves for insurance claims that have been incurred but not reported, and the impact of deferred community fee income and expense. NOI and Adjusted NOI include our share of income (loss) generated by unconsolidated joint ventures and exclude noncontrolling interests’ share of income (loss) generated by consolidated joint ventures. Adjusted NOI is oftentimes referred to as “Cash NOI.” Management believes NOI and Adjusted NOI are important supplemental measures because they provide relevant and useful information by reflecting only income and operating expense items that are incurred at the property level and present them on an unlevered basis. We use NOI and Adjusted NOI to make decisions about resource allocations, to assess and compare property level performance, and to evaluate our Same-Store (“SS”) performance, as described below. We believe that net income (loss) is the most directly comparable GAAP measure to NOI and Adjusted NOI. NOI and Adjusted NOI should not be viewed as alternative measures of operating performance to net income (loss) as defined by GAAP since they do not reflect various excluded items. Further, our definitions of NOI and Adjusted NOI may not be comparable to the definitions used by other REITs or real estate companies, as they may use different methodologies for calculating NOI and Adjusted NOI. For a reconciliation of NOI and Adjusted NOI to net income (loss) by segment, refer to Note 16 to the Consolidated Financial Statements.

Operating expenses generally relate to leased medical office and life science properties, as well as SHOP and CCRC facilities. We generally recover all or a portion of our leased medical office and life science property expenses through tenant recoveries. We present expenses as operating or general and administrative based on the underlying nature of the expense.

Same-Store

Same-Store NOI and Adjusted (Cash) NOI information allows us to evaluate the performance of our property portfolio under a consistent population by eliminating changes in the composition of our consolidated portfolio of properties. Same-Store Adjusted NOI excludes amortization of deferred revenue from tenant-funded improvements and certain non-property specific operating expenses that are allocated to each operating segment on a consolidated basis.

Properties are included in Same-Store once they are stabilized for the full period in both comparison periods. Newly acquired operating assets are generally considered stabilized at the earlier of lease-up (typically when the tenant(s) control(s) the physical use of at least 80% of the space) or 12 months from the acquisition date. Newly completed developments and redevelopments are considered stabilized at the earlier of lease-up or 24 months from the date the property is placed in service. Properties that experience a change in reporting structure, such as a conversion from a triple-net lease to a RIDEA reporting structure, are considered stabilized after 12 months in operations under a consistent reporting structure. A property is removed from Same-Store when it is classified as held for sale, sold, placed into redevelopment, experiences a casualty event that significantly impacts operations, a change in reporting structure or operator transition has been agreed to, or a significant tenant relocates from a Same-Store property to a non Same-Store property and that change results in a corresponding increase in revenue. We do not report Same-Store metrics for our other non-reportable segments.

For a reconciliation of Same-Store to total portfolio Adjusted NOI and other relevant disclosures by segment, refer to our Segment Analysis below.

Funds From Operations ("FFO")

FFO encompasses NAREIT FFO and FFO as Adjusted, each of which is described in detail below. We believe FFO applicable to common shares, diluted FFO applicable to common shares, and diluted FFO per common share are important supplemental non-GAAP measures of operating performance for a REIT. Because the historical cost accounting convention used for real estate assets utilizes straight-line depreciation (except on land), such accounting presentation implies that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen and fallen with market conditions, presentations of operating results for a REIT that use historical cost accounting for depreciation could be less informative. The term FFO was designed by the REIT industry to address this issue.

NAREIT FFO. FFO, as defined by the National Association of Real Estate Investment Trusts (“NAREIT”), is net income (loss) applicable to common shares (computed in accordance with GAAP), excluding gains or losses from sales of depreciable property, including any current and deferred taxes directly associated with sales of depreciable property, impairments of, or related to, depreciable real estate, plus real estate and other real estate-related depreciation and amortization, and adjustments to compute our share of NAREIT FFO and FFO as Adjusted (see below) from joint ventures. Adjustments for joint ventures are calculated to reflect our pro-rata share of both our consolidated and unconsolidated joint ventures. We reflect our share of NAREIT FFO for unconsolidated joint ventures by applying our actual ownership percentage for the period to the applicable reconciling items on an entity by entity basis. For consolidated joint ventures in which we do not own 100%, we reflect our share of the equity by adjusting our NAREIT FFO to remove the third party ownership share of the applicable reconciling items based on actual ownership percentage for the applicable periods. Our pro-rata share information is prepared on a basis consistent with the comparable consolidated amounts, is intended to reflect our proportionate economic interest in the operating results of properties in our portfolio and is calculated by applying our actual ownership percentage for the period. We do not control the unconsolidated joint ventures, and the pro-rata presentations of reconciling items included in NAREIT FFO do not represent our legal claim to such items. The joint venture members or partners are entitled to profit or loss allocations and distributions of cash flows according to the joint venture agreements, which provide for such allocations generally according to their invested capital.

The presentation of pro-rata information has limitations, which include, but are not limited to, the following: (i) the amounts shown on the individual line items were derived by applying our overall economic ownership interest percentage determined when applying the equity method of accounting and do not necessarily represent our legal claim to the assets and liabilities, or the revenues and expenses and (ii) other companies in our industry may calculate their pro-rata interest differently, limiting the usefulness as a comparative measure. Because of these limitations, the pro-rata financial information should not be considered independently or as a substitute for our financial statements as reported under GAAP. We compensate for these limitations by relying primarily on our GAAP financial statements, using the pro-rata financial information as a supplement.

NAREIT FFO does not represent cash generated from operating activities in accordance with GAAP, is not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to net income (loss). We compute NAREIT FFO in accordance with the current NAREIT definition; however, other REITs may report NAREIT FFO differently or have a different interpretation of the current NAREIT definition from ours.

FFO as Adjusted. In addition, we present NAREIT FFO on an adjusted basis before the impact of non-comparable items including, but not limited to, transaction-related items, impairments (recoveries) of non-depreciable assets, losses (gains) from the sale of non-depreciable assets, restructuring and severance related charges, prepayment costs (benefits) associated with early retirement or payment of debt, litigation costs (recoveries), casualty-related charges (recoveries), foreign currency remeasurement losses (gains), deferred tax asset valuation allowances, and changes in tax legislation (“FFO as Adjusted”). Transaction-related items include transaction expenses and gains/charges incurred as a result of mergers and acquisitions and lease amendment or termination activities. Prepayment costs (benefits) associated with early retirement of debt include the write-off of unamortized deferred financing fees, or additional costs, expenses, discounts, make-whole payments, penalties or premiums incurred as a result of early retirement or payment of debt. Management believes that FFO as Adjusted provides a meaningful supplemental measurement of our FFO run-rate and is frequently used by analysts, investors, and other interested parties in the evaluation of our performance as a REIT. At the same time that NAREIT created and defined its FFO measure for the REIT industry, it also recognized that “management of each of its member companies has the responsibility and authority to publish financial information that it regards as useful to the financial community.” We believe stockholders, potential investors, and financial analysts who review our operating performance are best served by an FFO run-rate earnings measure that includes certain other adjustments to net income (loss), in addition to adjustments made to arrive at the NAREIT defined measure of FFO. FFO as Adjusted is used by management in analyzing our business and the performance of our properties and we believe it is important that stockholders, potential investors, and financial analysts understand this measure used by management. We use FFO as Adjusted to: (i) evaluate our performance in comparison with expected results and results of previous periods, relative to resource allocation decisions, (ii) evaluate the performance of our management, (iii) budget and forecast future results to assist in the allocation of resources, (iv) assess our performance as compared with similar real estate companies and the industry in general, and (v) evaluate how a specific potential investment will impact our future results. Other REITs or real estate companies may use different methodologies for calculating an adjusted FFO measure, and accordingly, our FFO as Adjusted may not be comparable to those reported by other REITs. For a reconciliation of net income (loss) to NAREIT FFO and FFO as Adjusted and other relevant disclosure, refer to “Non-GAAP Financial Measures Reconciliations” below.

Adjusted FFO (“AFFO”)

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

accordance with GAAP. For a reconciliation of net income (loss) to AFFO and other relevant disclosure, refer to “Non-GAAP Financial Measures Reconciliations” below.

Comparison of the Year Ended December 31, 2020 to the Year Ended December 31, 2019 and the Year Ended December 31, 2019 to the Year Ended December 31, 2018

Overview**(1)**

2020 and 2019

The following table summarizes results for the years ended December 31, 2020 and 2019 (dollars in thousands):


	Year Ended December 31,
	2020		2019		Change
Net income (loss) applicable to common shares	$	411,147	$	43,987	$	367,160
NAREIT FFO	693,367		780,307		(86,940)
FFO as Adjusted	874,188		864,352		9,836
AFFO	772,705		745,820		26,885

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(1)For the reconciliation of non-GAAP financial measures, see “Non-GAAP Financial Measure Reconciliations” below.

Net income (loss) applicable to common shares (“net income (loss)”) increased primarily as a result of the following:

an increase in other income, net as a result of: (i) a gain upon change of control related to the acquisition of the outstanding equity interests in 13 CCRCs from Brookdale during the first quarter of 2020, (ii) a gain on sale related to the sale of a hospital underlying a DFL during the first quarter of 2020, and (iii) government grant income received under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) during 2020;
an increase in net gain on sales of real estate during 2020;
an increase in interest income, primarily as a result of new loans and additional funding of existing loans;
a decrease in loss on debt extinguishments;
an increase in income tax benefit as a result of (i) the above-mentioned acquisition of Brookdale’s interest in 13 CCRCs and related management termination fee expense paid to Brookdale in connection with transitioning management to LCS during the first quarter of 2020 and (ii) the extension of the net operating loss carryback provided by the CARES Act, partially offset by additional income tax expense due to a deferred tax asset valuation allowance; and
NOI generated from: (i) 2019 and 2020 acquisitions of real estate, (ii) development and redevelopment projects placed in service during 2019 and 2020, and (iii) new leasing activity in 2019 and 2020 (including the impact to straight-line rents).

The increase in net income (loss) was partially offset by:

a reduction in income related to assets sold during 2019 and 2020;
additional expense due to the management termination fee paid to Brookdale in connection with transitioning management of 13 CCRCs to LCS during the first quarter of 2020;
additional expenses and decreased occupancy in our SHOP and CCRC assets related to COVID-19;
a reduction in equity income (loss) from unconsolidated joint ventures during 2020 primarily due to our share of net losses from an unconsolidated joint venture owning 19 senior housing assets that was formed in December 2019;
increased depreciation and amortization expense as a result of: (i) assets acquired during 2019 and 2020, (ii) the acquisition of Brookdale’s interest in and consolidation of 13 CCRCs during the first quarter of 2020, and (iii) development and redevelopment projects placed into service during 2019 and 2020, partially offset by dispositions of real estate throughout 2019 and 2020; and
increased credit losses related to loans receivable as a result of: (i) adopting the current expected credit losses model required under Accounting Standards Update (“ASU”) No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), (ii) new loans funded during 2020, and (iii) the impact of COVID-19 on expected credit losses.

NAREIT FFO decreased primarily as a result of the aforementioned events impacting net income (loss), except for the following, which are excluded from NAREIT FFO:

net gain on sales of depreciable real estate;
the gain upon change of control related to the acquisition of Brookdale’s interest in 13 CCRCs; and
depreciation and amortization expense.

FFO as Adjusted increased primarily as a result of the aforementioned events impacting NAREIT FFO, except for the following, which are excluded from FFO as Adjusted:

deferred tax asset valuation allowance;
net gain on sales of assets underlying DFLs and non-depreciable assets, such as land;
losses on debt extinguishment; and
the increase in credit losses.

AFFO increased primarily as a result of the aforementioned events impacting FFO as Adjusted, except for the impact of straight-line rents and the increase in deferred tax benefit, which are excluded from AFFO.

2019 and 2018

The following table summarizes results for the years ended December 31, 2019 and 2018 (dollars in thousands):


	Year Ended December 31,
	2019		2018		Change
Net income (loss) applicable to common shares	$	43,987	$	1,058,424	$	(1,014,437)
NAREIT FFO	780,307		780,189		118
FFO as Adjusted	864,352		857,233		7,119
AFFO	745,820		746,397		(577)

Net income (loss) applicable to common shares (“net income (loss)”) decreased primarily as a result of the following:

a reduction in NOI as a result of asset sales during 2018 and 2019;
a larger net gain on sales of real estate during 2018 compared to 2019, primarily related to the sale of our Shoreline Technology Center life science campus in November 2018;
increased depreciation and amortization expense as a result of: (i) assets acquired during 2018 and 2019, (ii) development and redevelopment projects placed into service during 2018 and 2019, and (iii) the conversion of 14 senior housing triple-net assets from a DFL to a RIDEA structure in 2019, partially offset by decreased depreciation and amortization from asset sales during 2018 and 2019;
an increase in loss on debt extinguishments, resulting from redemptions and repurchases of senior unsecured notes in 2019; and
increased impairment charges on real estate assets recognized during 2019 compared to 2018.

The decrease in net income (loss) was partially offset by:

increased NOI from: (i) annual rent escalations, (ii) 2018 and 2019 acquisitions, and (iii) development and redevelopment projects placed in service during 2018 and 2019;
a reduction in interest expense as a result of debt repayments during 2018 and 2019; and
an increase in other income, primarily resulting from: (i) a gain upon change of control of 19 SHOP assets in 2019, and (ii) a loss on consolidation of seven care homes in the U.K. during the first quarter of 2018, partially offset by a gain upon change of control related to the acquisition of the outstanding equity interests in three life science joint ventures in November 2018.

NAREIT FFO increased primarily as a result of the aforementioned events impacting net income (loss), except for the following, which are excluded from NAREIT FFO:

gains on sales of real estate, including related tax impacts;
depreciation and amortization expense;
impairments charges on real estate assets; and
gains and losses upon change of control.

FFO as Adjusted increased primarily as a result of the aforementioned events impacting NAREIT FFO, except for losses on debt extinguishment, which are excluded from FFO as Adjusted.

AFFO decreased primarily as a result of the aforementioned events impacting FFO as Adjusted, except for the impact of straight-line rents, which is excluded from AFFO. The decrease in AFFO was also partially due to increased AFFO capital expenditures during 2019.

Segment Analysis

The following tables provide selected operating information for our Same-Store and total property portfolio for each of our reportable segments. For the year ended December 31, 2020, our Same-Store consists of 341 properties representing properties acquired or placed in service and stabilized on or prior to January 1, 2019 and that remained in operations under a consistent reporting structure through December 31, 2020. For the year ended December 31, 2019, our Same-Store consisted of 334 properties acquired or placed in service and stabilized on or prior to January 1, 2018 and that remained in operations under a consistent reporting structure through December 31, 2019. Our total property portfolio consisted of 457, 453, and 516 properties at December 31, 2020, 2019, and 2018, respectively.

Life Science

2020 and 2019

The following table summarizes results at and for the years ended December 31, 2020 and 2019 (dollars and square feet in thousands, except per square foot data):


	SS									Total Portfolio(1)
	2020			2019			Change			2020			2019			Change
Rental and related revenues	$	342,486		$	329,024		$	13,462		$	569,296		$	440,784		$	128,512
Healthpeak’s share of unconsolidated joint venture total revenues	—			—			—			448			—			448
Noncontrolling interests' share of consolidated joint venture total revenues	(146)			(140)			(6)			(239)			(187)			(52)
Operating expenses	(81,364)			(79,186)			(2,178)			(138,005)			(107,472)			(30,533)
Healthpeak's share of unconsolidated joint venture operating expenses	—			—			—			(137)			—			(137)
Noncontrolling interests' share of consolidated joint venture operating expenses	48			45			3			72			59			13

Adjustments to NOI(2)	(1,758)			(5,568)			3,810			(20,133)			(22,103)			1,970
Adjusted NOI	$	259,266		$	244,175		$	15,091		411,302			311,081			100,221
Less: non-SS Adjusted NOI										(152,036)			(66,906)			(85,130)
SS Adjusted NOI										$	259,266		$	244,175		$	15,091
Adjusted NOI % change							6.2		%
Property count(3)	95			95						140			134
End of period occupancy	96.8		%	95.5		%				96.3		%	96.0		%
Average occupancy	96.4		%	96.2		%				96.0		%	96.7		%
Average occupied square feet	5,825			5,819						8,724			7,288
Average annual total revenues per occupied square foot	$	58		$	56					$	63		$	57
Average annual base rent per occupied square foot(4)	$	47		$	44					$	50		$	45

_______________________________________

(1)Total Portfolio includes results of operations from disposed properties through the disposition date.

(2)Represents adjustments to NOI in accordance with the Company’s definition of Adjusted NOI. Refer to “Non-GAAP Measures” above for definitions of NOI and Adjusted NOI.

(3)From our 2019 presentation of Same-Store, we removed one life science facility that was placed in redevelopment and one life science facility related to a significant tenant relocation.

(4)Base rent does not include tenant recoveries, additional rents in excess of floors and non-cash revenue adjustments (i.e., straight-line rents, amortization of market lease intangibles, DFL non-cash interest, and deferred revenues).

Same-Store Adjusted NOI increased primarily as a result of the following:

annual rent escalations;
new leasing activity; and
mark-to-market lease renewals.

Total Portfolio Adjusted NOI increased primarily as a result of the aforementioned impacts to Same-Store and the following Non-Same-Store impacts:

NOI from (i) increased occupancy in developments and redevelopments placed into service in 2019 and 2020 and (ii) acquisitions in 2019 and 2020; partially offset by
decreased NOI from the placement of facilities into redevelopment in 2019 and 2020.

2019 and 2018

The following table summarizes results at and for the years ended December 31, 2019 and 2018 (dollars and square feet in thousands, except per square foot data):


	SS									Total Portfolio(1)
	2019			2018			Change			2019			2018			Change
Rental and related revenues	$	293,400		$	276,996		$	16,404		$	440,784		$	395,064		$	45,720
Healthpeak’s share of unconsolidated joint venture total revenues	—			—			—			—			4,328			(4,328)
Noncontrolling interests' share of consolidated joint venture total revenues	(77)			(79)			2			(187)			(117)			(70)
Operating expenses	(69,422)			(65,017)			(4,405)			(107,472)			(91,742)			(15,730)
Healthpeak's share of unconsolidated joint venture operating expenses	—			—			—			—			(1,131)			1,131
Noncontrolling interests' share of consolidated joint venture operating expenses	20			22			(2)			59			44			15

Adjustments to NOI(2)	(1,944)			(2,829)			885			(22,103)			(9,718)			(12,385)
Adjusted NOI	$	221,977		$	209,093		$	12,884		311,081			296,728			14,353
Less: non-SS Adjusted NOI										(89,104)			(87,635)			(1,469)
SS Adjusted NOI										$	221,977		$	209,093		$	12,884
Adjusted NOI % change							6.2		%
Property count(3)	93			93						134			124
End of period occupancy	96.6		%	96.1		%				96.0		%	96.6		%
Average occupancy	96.2		%	94.9		%				96.7		%	95.1		%
Average occupied square feet	5,415			5,345						7,288			7,194
Average annual total revenues per occupied square foot	$	54		$	51					$	57		$	55
Average annual base rent per occupied square foot(4)	$	43		$	41					$	45		$	44

_______________________________________

(1)Total Portfolio includes results of operations from disposed properties through the disposition date.

(2)Represents adjustments to NOI in accordance with the Company’s definition of Adjusted NOI. Refer to “Non-GAAP Measures” above for definitions of NOI and Adjusted NOI.

(3)From our 2018 presentation of Same-Store, we removed one life science facility that was sold, two life science facilities that were placed into redevelopment, and one life science facility related to a casualty event.

Same-Store Adjusted NOI increased primarily as a result of the following:

new leasing activity;
mark-to-market lease renewals;
increased occupancy; and
annual rent escalations.

Total Portfolio Adjusted NOI increased primarily as a result of the aforementioned increases to Same-Store and the following Non-Same-Store impacts:

NOI from (i) increased occupancy in developments and redevelopments placed into service in 2018 and 2019 and (ii) acquisitions in 2019; partially offset by
decreased NOI from facilities sold in 2018 and 2019 and the placement of facilities into redevelopment in 2019.

Medical Office

2020 and 2019

The following table summarizes results at and for the years ended December 31, 2020 and 2019 (dollars and square feet in thousands, except per square foot data):


	SS									Total Portfolio(1)
	2020			2019			Change			2020			2019			Change
Rental and related revenues	$	533,842		$	527,192		$	6,650		$	612,678		$	604,505		$	8,173
Income from direct financing leases	8,575			8,387			188			9,720			16,666			(6,946)
Healthpeak’s share of unconsolidated joint venture total revenues	2,683			2,720			(37)			2,772			2,810			(38)
Noncontrolling interests' share of consolidated joint venture total revenues	(34,098)			(33,460)			(638)			(34,597)			(33,998)			(599)
Operating expenses	(175,325)			(175,192)			(133)			(204,008)			(201,620)			(2,388)
Healthpeak's share of unconsolidated joint venture operating expenses	(1,128)			(1,107)			(21)			(1,129)			(1,107)			(22)
Noncontrolling interests' share of consolidated joint venture operating expenses	10,281			10,045			236			10,282			10,109			173

Adjustments to NOI(2)	(5,861)			(6,564)			703			(5,544)			(4,602)			(942)
Adjusted NOI	$	338,969		$	332,021		$	6,948		390,174			392,763			(2,589)
Less: non-SS Adjusted NOI										(51,205)			(60,742)			9,537
SS Adjusted NOI										$	338,969		$	332,021		$	6,948
Adjusted NOI % change							2.1		%
Property count(3)	246			246						281			281
End of period occupancy	92.5		%	92.9		%				90.4		%	92.3		%
Average occupancy	92.5		%	92.6		%				91.3		%	92.3		%
Average occupied square feet	18,488			18,506						20,448			20,736
Average annual total revenues per occupied square foot	$	29		$	29					$	30		$	30
Average annual base rent per occupied square foot(4)	$	25		$	25					$	26		$	26

_______________________________________

(1)Total Portfolio includes results of operations from disposed properties through the disposition date.

(2)Represents adjustments to NOI in accordance with the Company’s definition of Adjusted NOI. Refer to “Non-GAAP Measures” above for definitions of NOI and Adjusted NOI.

(3)From our 2019 presentation of Same-Store, we removed 10 MOBs that were sold, 6 MOBs that were classified as held for sale, and3 MOBs that were placed into redevelopment.

Same-Store Adjusted NOI increased primarily as a result of the following:

mark-to-market lease renewals; and
annual rent escalations; partially offset by
lower parking income.

Total Portfolio Adjusted NOI decreased primarily as a result of MOB sales during 2019 and 2020, partially offset by the aforementioned increases to Same-Store and the following Non-Same-Store impacts:

NOI from our 2019 and 2020 acquisitions; and
increased occupancy in former redevelopment and development properties that have been placed into service.

2019 and 2018

The following table summarizes results at and for the years ended December 31, 2019 and 2018 (dollars and square feet in thousands, except per square foot data):


	SS									Total Portfolio(1)
	2019			2018			Change			2019			2018			Change
Rental and related revenues	$	510,623		$	499,227		$	11,396		$	604,505		$	580,050		$	24,455
Income from direct financing leases	16,665			16,349			316			16,666			16,349			317
Healthpeak’s share of unconsolidated joint venture total revenues	2,720			2,606			114			2,810			2,695			115
Noncontrolling interests' share of consolidated joint venture total revenues	(18,140)			(17,689)			(451)			(33,998)			(18,042)			(15,956)
Operating expenses	(162,996)			(159,772)			(3,224)			(201,620)			(195,362)			(6,258)
Healthpeak's share of unconsolidated joint venture operating expenses	(1,107)			(1,052)			(55)			(1,107)			(1,053)			(54)
Noncontrolling interests' share of consolidated joint venture operating expenses	5,288			5,288			—			10,109			4,591			5,518

Adjustments to NOI(2)	(3,641)			(5,232)			1,591			(4,602)			(5,953)			1,351
Adjusted NOI	$	349,412		$	339,725		$	9,687		392,763			383,275			9,488
Less: non-SS Adjusted NOI										(43,351)			(43,550)			199
SS Adjusted NOI										$	349,412		$	339,725		$	9,687
Adjusted NOI % change							2.9		%
Property count(3)	241			241						281			283
End of period occupancy	93.2		%	93.5		%				92.3		%	92.7		%
Average occupancy	93.2		%	93.4		%				92.3		%	92.6		%
Average occupied square feet	18,016			18,014						20,736			20,329
Average annual total revenues per occupied square foot	$	29		$	29					$	30		$	29
Average annual base rent per occupied square foot(4)	$	25		$	25					$	26		$	25

_______________________________________

(1)Total Portfolio includes results of operations from disposed properties through the disposition date.

(2)Represents adjustments to NOI in accordance with the Company’s definition of Adjusted NOI. Refer to “Non-GAAP Measures” above for definitions of NOI and Adjusted NOI.

(3)From our 2018 presentation of Same-Store, we removed eight MOBs that were sold, three MOBs that were placed into redevelopment, and two MOBs that were classified as held for sale.

Same-Store Adjusted NOI increased primarily as a result of the following:

mark-to-market lease renewals; and
annual rent escalations.

Total Portfolio Adjusted NOI increased primarily as a result of the aforementioned increases to Same-Store and the following Non-Same-Store impacts:

2018 and 2019 acquisitions; and
increased occupancy in former development and redevelopment properties placed into service; partially offset by
dispositions during 2018 and 2019.

Continuing Care Retirement Community

2020 and 2019

The following table summarizes results at and for the years ended December 31, 2020 and 2019 (dollars in thousands, except per unit data):


	SS(1)									Total Portfolio(2)
	2020			2019			Change			2020			2019			Change
Resident fees and services	$	—		$	—		$	—		$	436,494		$	3,010		$	433,484
Government grant income(3)	—			—			—			16,198			—			16,198
Healthpeak’s share of unconsolidated joint venture total revenues	—			—			—			35,392			211,377			(175,985)
Healthpeak's share of unconsolidated joint venture government grant income	—			—			—			920			—			920
Operating expenses	—			—			—			(440,528)			(2,215)			(438,313)
Healthpeak's share of unconsolidated joint venture operating expenses	—			—			—			(32,125)			(170,473)			138,348

Adjustments to NOI(4)	—			—			—			97,072			16,985			80,087
Adjusted NOI	$	—		$	—		$	—		113,423			58,684			54,739
Less: non-SS Adjusted NOI										(113,423)			(58,684)			(54,739)
SS Adjusted NOI										$	—		$	—		$	—
Adjusted NOI % change							—		%
Property count	—			—						17			17
Average occupancy	—		%	—		%				81.4		%	85.6		%
Average capacity (units)(5)	—			—						8,323			7,310
Average annual rent per unit	$	—		$	—					$	63,252		$	64,337

_______________________________________

(1)All CCRC properties are excluded from the Same-Store population as they experienced a change in reporting structure, underwent an operator transition during the periods presented, or are classified as held for sale. As such, no Same-Store results are presented in the table above.

(2)Total Portfolio includes results of operations from disposed properties and properties that transferred segments through the disposition or transfer date.

(3)Represents government grant income received under the CARES Act, which is recorded in other income (expense), net in the consolidated statements of operations.

(4)Represents adjustments to NOI in accordance with the Company’s definition of Adjusted NOI. Refer to “Non-GAAP Measures” above for definitions of NOI and Adjusted NOI.

(5)Represents average capacity as reported by the respective tenants or operators for the 12-month period.

Total Portfolio Adjusted NOI increased primarily as a result of the following:

the acquisition of the remaining 51% interest in 13 communities previously held in a joint venture during the first quarter of 2020; and
the transfer of two CCRC properties that converted from triple-net leases to RIDEA structures during the fourth quarter of 2019.

2019 and 2018

The following table summarizes results at and for the years ended December 31, 2019 and 2018 (dollars in thousands, except per unit data):


	SS									Total Portfolio(1)
	2019			2018			Change			2019			2018			Change
Resident fees and services	$	—		$	—		$	—		$	3,010		$	—		$	3,010

Healthpeak’s share of unconsolidated joint venture total revenues	—			—			—			211,377			206,221			5,156

Operating expenses	—			—			—			(2,215)			—			(2,215)
Healthpeak's share of unconsolidated joint venture operating expenses	—			—			—			(170,473)			(166,414)			(4,059)

Adjustments to NOI(3)	—			—			—			16,985			15,504			1,481
Adjusted NOI	$	—		$	—		$	—		58,684			55,311			3,373
Less: non-SS Adjusted NOI										(58,684)			(55,311)			(3,373)
SS Adjusted NOI										$	—		$	—		$	—
Adjusted NOI % change							—		%
Property count	—			—						17			15
Average occupancy	—		%	—		%				85.6		%	85.8		%
Average capacity (units)(4)	—			—						7,310			7,263
Average annual rent per unit	$	—		$	—					$	64,337		$	62,531

_____________________________________

(2)Total Portfolio includes results of operations from disposed properties and properties that transferred segments through the disposition or transfer date.

(3)Represents adjustments to NOI in accordance with the Company’s definition of Adjusted NOI. Refer to “Non-GAAP Measures” above for definitions of NOI and Adjusted NOI.

(4)Represents average capacity as reported by the respective tenants or operators for the 12-month period.

Total Portfolio Adjusted NOI increased as a result of the transfer of two CCRC properties that converted from triple-net leases to RIDEA structures during the fourth quarter of 2019 and an increase in our share of Total Portfolio Adjusted NOI from the CCRC JV.

Other Income and Expense Items

The following table summarizes results for the years ended December 31, 2020, 2019 and 2018 (in thousands):


	Year Ended December 31,						2020 vs.		2019 vs.
	2020		2019		2018		2019		2018
Interest income	$	16,553	$	9,844	$	10,406	$	6,709	$	(562)
Interest expense	218,336		217,612		261,280		724		(43,668)
Depreciation and amortization	553,949		435,191		404,681		118,758		30,510
General and administrative	93,237		92,966		96,702		271		(3,736)
Transaction costs	18,342		1,963		1,137		16,379		826
Impairments and loan loss reserves (recoveries), net	42,909		17,708		10,917		25,201		6,791
Gain (loss) on sales of real estate, net	90,350		(40)		831,368		90,390		(831,408)
Loss on debt extinguishments	(42,912)		(58,364)		(44,162)		15,452		(14,202)
Other income (expense), net	234,684		165,069		13,425		69,615		151,644
Income tax benefit (expense)	9,423		5,479		4,396		3,944		1,083
Equity income (loss) from unconsolidated joint ventures	(66,599)		(6,330)		(5,755)		(60,269)		(575)
Income (loss) from discontinued operations	267,746		(115,408)		236,256		383,154		(351,664)
Noncontrolling interests’ share in continuing operations	(14,394)		(14,558)		(12,294)		164		(2,264)
Noncontrolling interests’ share in discontinued operations	(296)		27		(87)		(323)		114

Interest income

Interest income increased for the year ended December 31, 2020 primarily as a result of new loans and additional funding of existing loans.

Interest expense

Interest expense decreased for the year ended December 31, 2019 primarily as a result of senior unsecured notes repurchases and redemptions during 2018 and 2019, partially offset by senior unsecured notes issued during 2019.

Depreciation and amortization expense

Depreciation and amortization expense increased for the year ended December 31, 2020 primarily as a result of: (i) the acquisition of Brookdale’s interest in and consolidation of 13 CCRCs during the first quarter of 2020, (ii) assets acquired during 2019 and 2020, and (iii) development and redevelopment projects placed into service during 2019 and 2020. The increase was partially offset by dispositions of real estate throughout 2019 and 2020.

Depreciation and amortization expense increased for the year ended December 31, 2019 primarily as a result of (i) assets acquired during 2018 and 2019 and (ii) development and redevelopment projects placed into service during 2018 and 2019, partially offset by dispositions of real estate throughout 2018 and 2019.

General and administrative expense

General and administrative expenses decreased for the year ended December 31, 2019 primarily as a result of decreased severance and related charges, driven by the departure of our former Executive Chairman in March 2018, partially offset by higher compensation costs in 2019.

Transaction costs

Transaction costs increased for the year ended December 31, 2020 primarily as a result of costs associated with the transition of 13 CCRCs from Brookdale to LCS in January 2020.

Impairments and loan loss reserves (recoveries), net

The impairment charges recognized in each period vary depending on facts and circumstances related to each asset and are impacted by negotiations with potential buyers, current operations of the assets, and other factors.

Impairments and loan loss reserves (recoveries), net increased for the year ended December 31, 2020 primarily as a result of: (i) an increase related to buildings we intend to demolish and (ii) an increase in credit losses under the current expected credit losses model (which we began using in conjunction with our adoption of ASU 2016-13 on January 1, 2020).

Impairments and loan loss reserves (recoveries), net increased for the year ended December 31, 2019 as a result of additional assets being impaired under the held-for-sale impairment model.

Gain (loss) on sales of real estate, net

During the year ended December 31, 2020, we sold: (i) 11 MOBs, (ii) 2 MOB land parcels, and (iii) 1 facility from the other non-reportable segment, resulting in total gain on sales of $90 million.

During the year ended December 31, 2019, we sold: (i) our remaining 49% interest in our U.K. joint venture, (ii) 11 MOBs, (iii) 1 life science asset, (iv) 1 undeveloped life science land parcel, and (v) 1 facility from other non-reportable segments, resulting in no material gain or loss on sale.

During the year ended December 31, 2018, we sold: (i) a 51% interest in substantially all the U.K. assets previously owned by the Company, (ii) 16 life science assets, and (iii) 4 MOBs, resulting in total gain on sales of $831 million.

Loss on debt extinguishments

Refer to Note 11 to the Consolidated Financial Statements for information regarding unsecured note repurchases, repayments, and redemptions and the associated loss on debt extinguishments recognized.

Other income (expense), net

Other income (expense), net increased for the year ended December 31, 2020 primarily as a result of: (i) a gain upon change of control related to the acquisition of the outstanding equity interest in 13 CCRCs from Brookdale during the first quarter of 2020; (ii) a gain on sale related to the sale of a hospital underlying a DFL during the first quarter of 2020; and (iii) government grant income received under the CARES Act during 2020. The increase was partially offset by a gain upon change of control recognized in 2019 related to a senior housing joint venture with a sovereign wealth fund (see Note 4 to the Consolidated Financial Statements).

Other income (expense), net increased for the year ended December 31, 2019 primarily as a result of (i) a gain upon change of control recognized in 2019 related to a senior housing joint venture with a sovereign wealth fund and (ii) a loss upon change of control of seven U.K. care homes in March 2018 (see Note 19 to the Consolidated Financial Statements). The increase in other income (expense), net was partially offset by a gain upon change of control related to the acquisition of the outstanding equity interests in three life science joint ventures in November 2018.

Income tax benefit (expense)

Income tax benefit increased for the year ended December 31, 2020 primarily as a result of the tax benefits related to the purchase of Brookdale’s interest in 13 of the 15 communities in the CCRC JV, including the management termination fee expense paid to Brookdale in connection with transitioning management of 13 CCRCs to LCS, and the extension of the net operating loss carryback period provided by the CARES Act, partially offset by a deferred tax asset valuation allowance and corresponding income tax expense recognized in 2020.

Equity income (loss) from unconsolidated joint ventures

Equity income from unconsolidated joint ventures decreased for the year ended December 31, 2020 primarily as a result of our share of net losses from an unconsolidated joint venture owning 19 SHOP assets that was formed in December 2019, partially offset by no longer recognizing the operating results of 13 CCRCs in equity income (loss) from unconsolidated joint ventures as we acquired Brookdale’s interest and now consolidate those facilities. The decrease is further offset by our share of a gain on sale of one asset in an unconsolidated joint venture during the first quarter of 2020.

Equity income from unconsolidated joint ventures decreased for the year ended December 31, 2019 primarily as a result of an impairment charge recognized related to one asset classified as held-for-sale in the CCRC JV (see Note 9 to the Consolidated Financial Statements) and the sale of our equity method investment in RIDEA II in June 2018, partially offset by additional equity income from our previously-held investment in the U.K. JV.

Income (loss) from discontinued operations

Income from discontinued operations increased for the year ended December 31, 2020 primarily as a result of: (i) increased gain on sales of real estate from the disposal of multiple senior housing portfolios during 2019 and 2020; (ii) decreased depreciation and amortization expense due to assets being disposed of or classified as held for sale throughout 2019 and 2020 and assets that were fully depreciated in 2019 and 2020; (iii) government grant income received under the CARES Act during 2020; and (iv) NOI from acquisitions during 2019. The increase in income (loss) from discontinued operations was partially offset by: (i) decreased NOI from dispositions of real estate during 2019 and 2020 and (ii) increased expenses and decreased occupancy related to COVID-19.

Income (loss) from discontinued operations decreased for the year ended December 31, 2019 primarily as a result of: (i) decreased gain on sales of real estate; (ii) increased impairment charges due to additional asset being classified as held for sale in 2019; (iii) increased depreciation and amortization expense due to acquisitions of real estate during 2018 and 2019; (iv) decreased NOI from dispositions of real estate during 2018 and 2019. The decrease in income (loss) from discontinued operations was partially offset by: (i) increased other income (expense), net from a gain upon change of control related to consolidating a senior housing joint venture in 2019 and (ii) additional NOI from acquisitions during 2018 and 2019.

Liquidity and Capital Resources

We anticipate that our cash flow from operations, available cash balances, and cash from our various financing activities will be adequate for at least the next 12 months for purposes of: (i) funding recurring operating expenses; (ii) meeting debt service requirements; and (iii) satisfying our distributions to our stockholders and non-controlling interest members. During the year ended December 31, 2020, distributions to common shareholders and noncontrolling interest holders exceeded cash flows from operations by approximately $66 million. Distributions were made using a combination of cash flows from operations, funds available under our bank line of credit and commercial paper program, proceeds from the sale of properties, and other sources of cash available to us.

Our principal investing liquidity needs for the next 12 months are to:

fund capital expenditures, including tenant improvements and leasing costs and
fund future acquisition, transactional and development activities.

We anticipate satisfying these future investing needs using one or more of the following:

cash flow from operations;
sale of, or exchange of ownership interests in, properties or other investments;
borrowings under our bank line of credit and commercial paper program;
issuance of additional debt, including unsecured notes, term loans, and mortgage debt; and/or
issuance of common or preferred stock or its equivalent.

Our ability to access the capital markets impacts our cost of capital and ability to refinance maturing indebtedness, as well as our ability to fund future acquisitions and development through the issuance of additional securities or secured debt. Credit ratings impact our ability to access capital and directly impact our cost of capital as well. For example, our bank line of credit and term loan accrue interest at a rate per annum equal to LIBOR plus a margin that depends upon the credit ratings of our senior unsecured long term debt. We also pay a facility fee on the entire revolving commitment that depends upon our credit ratings. As of February 8, 2021, we had long-term credit ratings of Baa1 from Moody’s and BBB+ from S&P Global and Fitch, and short-term credit ratings of P-2, A-2 and F2 from Moody's, S&P Global, and Fitch, respectively.

A downgrade in credit ratings by Moody’s, S&P Global, and Fitch may have a negative impact on the interest rates and facility fees for our bank line of credit and term loan. While a downgrade in our credit ratings would adversely impact our cost of borrowing, we believe we continue to have access to the unsecured debt markets, and we could also seek to enter into one or more secured debt financings, issue additional securities, including under our 2020 ATM Program (as defined below), or dispose of certain assets to fund future operating costs, capital expenditures, or acquisitions, although no assurances can be made in this regard. Refer to “COVID-19 Update” above for a more comprehensive discussion of the potential impact of COVID-19 on our business.

Cash Flow Summary

The following summary discussion of our cash flows is based on the Consolidated Statements of Cash Flows and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below. The following table sets forth changes in cash flows (in thousands):


	Year Ended December 31,
	2020		2019		2018
Net cash provided by (used in) operating activities	$	758,431	$	846,073	$	848,709
Net cash provided by (used in) investing activities	(1,007,700)		(1,448,778)		1,829,279
Net cash provided by (used in) financing activities	246,450		647,271		(2,620,536)

Operating Cash Flows

Operating cash flow decreased $88 million between the years ended December 31, 2020 and 2019 primarily as the result of: (i) the termination fee paid to Brookdale in connection with the CCRC Acquisition; (ii) assets sold during 2019 and 2020, and (iii) additional expenses and decreased occupancy in our SHOP and CCRC assets related to COVID-19. The decrease in operating cash flow is partially offset by: (i) 2019 and 2020 acquisitions, (ii) annual rent increases, (iii) new leasing activity; (iv) developments and redevelopments placed in service during 2019 and 2020, and (v) increased interest received from new loan investments.

Operating cash flow decreased $3 million between the years ended December 31, 2019 and 2018 primarily as the result of: (i) dispositions during 2018 and 2019 and (ii) occupancy declines and higher labor costs within our SHOP assets. The decrease in operating cash flow is partially offset by: (i) 2018 and 2019 acquisitions, (ii) annual rent increases, (iii) developments and redevelopments placed in service during 2018 and 2019, and (iv) decreased interest paid as a result of debt repayments during 2018 and 2019.

Our cash flow from operations is dependent upon the occupancy levels of our buildings, rental rates on leases, our tenants’ performance on their lease obligations, the level of operating expenses, and other factors.

Investing Cash Flows

The following are significant investing activities for the year ended December 31, 2020:

received net proceeds of $1.5 billion primarily from (i) sales of real estate assets (including real estate assets under DFLs) and (ii) sales and repayments of loans receivable; and
made investments of $2.5 billion primarily related to the (i) acquisition, development, and redevelopment of real estate and (ii) funding of loan investments.

The following are significant investing activities for the year ended December 31, 2019:

received net proceeds of $976 million primarily from: (i) sales of real estate assets (including real estate assets under DFLs), (ii) the sale of our investment in the U.K. JV, and (iii) the sale of a 46.5% interest in 19 previously consolidated SHOP assets; and
made investments of $2.4 billion primarily related to the (i) acquisition, development, and redevelopment of real estate and (ii) funding of loan investments.

The following are significant investing activities for the year ended December 31, 2018:

received net proceeds of $2.9 billion primarily from: (i) sales of real estate assets, (ii) the sale of RIDEA II, (iii) the sale of the Tandem Mezzanine Loan, and (iv) the U.K. JV transaction; and
made investments of $1.1 billion primarily for the acquisition and development of real estate.

Financing Cash Flows

The following are significant financing activities for the year ended December 31, 2020:

made net borrowings of $16 million primarily under our bank line of credit, commercial paper, and senior unsecured notes (including debt extinguishment costs);
paid cash dividends on common stock of $787 million; and
issued common stock of $1.1 billion.

The following are significant financing activities for the year ended December 31, 2019:

made net borrowings of $573 million primarily under our bank line of credit, commercial paper, term loan, and senior unsecured notes (including debt extinguishment costs);
paid cash dividends on common stock of $720 million; and
issued common stock of $796 million.

The following are significant financing activities for the year ended December 31, 2018:

repaid $2.4 billion of debt under our: (i) bank line of credit, (ii) term loan, (iii) senior unsecured notes (including debt extinguishment costs) and (iv) mortgage debt;
paid cash dividends on common stock of $697 million;
paid $83 million for distributions to and purchases of noncontrolling interests, primarily related to our acquisition of Brookdale’s noncontrolling interest in RIDEA I;
raised net proceeds of $218 million from the issuances of common stock, primarily from our at-the-market equity program; and
received proceeds of $300 million for issuances of noncontrolling interests.

Discontinued Operations

Operating, investing, and financing cash flows in our Consolidated Statements of Cash Flows are reported inclusive of both cash flows from continuing operations and cash flows from discontinued operations. Certain significant cash flows from discontinued operations are disclosed in Note 18 to the Consolidated Financial Statements. The absence of future cash flows from discontinued operations is not expected to significantly impact our liquidity, as the proceeds from senior housing triple-net and SHOP dispositions are expected to be used to pay down debt and invest in additional real estate in our other business lines. Additionally, we have multiple other sources of liquidity that can be utilized in the future, as needed. Refer to the Liquidity and Capital Resources section above for additional information regarding our liquidity.

Debt

Senior Unsecured Notes

In June 2020, we completed a public offering of $600 million in aggregate principal amount of our 2031 Notes.

In June 2020, using a portion of the net proceeds from the 2031 Notes offering, we repurchased $250 million aggregate principal amount of our 4.25% senior unsecured notes due in 2023.

In July 2020, using an additional portion of the net proceeds from the 2031 Notes offering, we redeemed all $300 million of our 3.15% senior unsecured notes due in 2022.

From January 1, 2021 to February 8, 2021, we repurchased $112 million aggregate principal amount of our 4.25% senior unsecured notes due in 2023, $201 million aggregate principal amount of our 4.20% senior unsecured notes due in 2024, and $469 million aggregate principal amount of our 3.88% senior unsecured notes due in 2024.

See Note 11 to the Consolidated Financial Statements for additional information about our outstanding debt.

Approximately 94%, 94%, and 99% of our consolidated debt, excluding debt classified as liabilities related to assets held for sale and discontinued operations, net, was fixed rate debt as of December 31, 2020, 2019 and 2018, respectively. At December 31, 2020, our fixed rate debt and variable rate debt had weighted average interest rates of 3.85% and 0.85%, respectively. At December 31, 2019, our fixed rate debt and variable rate debt had weighted average interest rates of 3.94% and 2.58%, respectively. At December 31, 2018, our fixed rate debt and variable rate debt had weighted average interest rates of 4.04% and 2.12%, respectively. We had $36 million, $42 million and $43 million of variable rate debt swapped to fixed through interest rate swaps as of December 31, 2020, 2019 and 2018, respectively, which is reported in liabilities related to assets held for sale and discontinued operations, net. For a more detailed discussion of our interest rate risk, see “Quantitative and Qualitative Disclosures About Market Risk” in Item 3 below.

Equity

At December 31, 2020, we had 538 million shares of common stock outstanding, equity totaled $7.3 billion, and our equity securities had a market value of $16.5 billion.

At December 31, 2020, non-managing members held an aggregate of five million units in seven limited liability companies (“DownREITs”) for which we are the managing member. The DownREIT units are exchangeable for an amount of cash approximating the then-current market value of shares of our common stock or, at our option, shares of our common stock (subject to certain adjustments, such as stock splits and reclassifications). At December 31, 2020, the outstanding DownREIT units were convertible into approximately seven million shares of our common stock.

At-The-Market Program

In February 2020, we terminated our previous at-the-market equity offering program and concurrently established a new at-the-market equity offering program (the “2020 ATM Program”). In addition to the issuance and sale of shares of our common stock, we may also enter into one or more forward sales agreements with sales agents for the sale of our shares of common stock under our 2020 ATM Program.

During the year ended December 31, 2020, the Company settled all 16.8 million shares previously outstanding under ATM forward contracts at a weighted average net price of $31.38 per share, after commissions, resulting in net proceeds of $528 million.

At December 31, 2020, approximately $1.25 billion of our common stock remained available for sale under the 2020 ATM Program. Actual future sales of our common stock will depend upon a variety of factors, including but not limited to market conditions, the trading price of our common stock, and our capital needs. We have no obligation to sell any of the remaining shares under our 2020 ATM Program.

Other than in connection with settlement of ATM forward contracts described above, during the year ended December 31, 2020, we did not issue any shares of our common stock under our 2020 ATM Program.

See Note 13 to the Consolidated Financial Statements for additional information about our 2020 ATM Program and our previous at-the-market equity offering program.

Shelf Registration

In May 2018, we filed a prospectus with the SEC as part of a registration statement on Form S-3, using an automatic shelf registration process. This shelf registration statement expires in May 2021 and at or prior to such time, we expect to file a new shelf registration statement. Under the “shelf” process, we may sell any combination of the securities described in the prospectus through one or more offerings. The securities described in the prospectus include common stock, preferred stock, depositary shares, debt securities and warrants.

Contractual Obligations

The following table summarizes our material contractual payment obligations and commitments, excluding obligations and commitments related to assets classified as discontinued operations, at December 31, 2020 (in thousands):


	Total(1)		2021		2022-2023		2024-2025		More than Five Years
Bank line of credit	$	—	$	—	$	—	$	—	$	—
Commercial paper	129,590		129,590		—		—		—
Term loan	250,000		—		—		250,000		—
Senior unsecured notes	5,750,000		—		300,000		2,500,000		2,950,000
Mortgage debt(2)	216,780		13,015		94,717		6,259		102,789

Construction loan commitments(3)	11,137		11,137		—		—		—
Lease and other contractual commitments(4)	109,126		94,124		15,002		—		—
Development commitments(5)	196,749		180,846		15,247		656		—
Ground and other operating leases	536,223		11,349		23,196		19,622		482,056

Interest(6)	1,649,566		233,954		457,063		332,007		626,542
Total	$	8,849,171	$	674,015	$	905,225	$	3,108,544	$	4,161,387

_______________________________________

(1)Excludes $4 million of development commitments, $4 million of ground and other operating leases, and $111 million of interest related to assets classified as discontinued operations. See Note 5 to the Consolidated Financial Statements for further information regarding discontinued operations.

(2)Excludes mortgage debt on assets held for sale and discontinued operations of $319 million and mortgage debt from unconsolidated joint ventures.

(3)Represents loan commitments to finance development and redevelopment projects.

(4)Represents our commitments, as lessor, under signed leases and contracts for operating properties and includes allowances for tenant improvements and leasing commissions. Excludes allowances for tenant improvements related to developments in progress for which we have executed an agreement with a general contractor to complete the tenant improvements (recognized in the "Development commitments" line).

(5)Represents construction and other commitments for developments in progress and includes allowances for tenant improvements of $28 million that we have provided as a lessor.

(6)Interest on variable-rate debt is calculated using rates in effect at December 31, 2020.

Off-Balance Sheet Arrangements

We own interests in certain unconsolidated joint ventures as described in Note 9 to the Consolidated Financial Statements. Except in limited circumstances, our risk of loss is limited to our investment in the joint venture and any outstanding loans receivable. We have no other material off-balance sheet arrangements that we expect would materially affect our liquidity and capital resources except those described above under “Contractual Obligations”.

Inflation

Our leases often provide for either fixed increases in base rents or indexed escalators, based on the Consumer Price Index or other measures, and/or additional rent based on increases in the tenants’ operating revenues. Most of our MOB leases require the tenant to pay a share of property operating costs such as real estate taxes, insurance and utilities. Substantially all of our senior housing triple-net, life science, and remaining other leases require the tenant or operator to pay all of the property operating costs or reimburse us for all such costs. We believe that inflationary increases in expenses will be offset, in part, by the tenant or operator expense reimbursements and contractual rent increases described above.

Non-GAAP Financial Measure Reconciliations

Funds From Operations

The following is a reconciliation from net income (loss) applicable to common shares, the most directly comparable financial measure calculated and presented in accordance with GAAP, to NAREIT FFO, FFO as Adjusted and AFFO (in thousands, except per share data):


	Year Ended December 31,
	2020		2019		2018		2017		2016
Net income (loss) applicable to common shares	$	411,147	$	43,987	$	1,058,424	$	413,013	$	626,549
Real estate related depreciation and amortization	697,143		659,989		549,499		534,726		572,998
Healthpeak's share of real estate related depreciation and amortization from unconsolidated joint ventures	105,090		60,303		63,967		60,058		49,043
Noncontrolling interests' share of real estate related depreciation and amortization	(19,906)		(20,054)		(11,795)		(15,069)		(21,001)
Other real estate-related depreciation and amortization	2,766		6,155		6,977		9,364		11,919
Loss (gain) on sales of depreciable real estate, net	(550,494)		(22,900)		(925,985)		(356,641)		(164,698)
Healthpeak's share of loss (gain) on sales of depreciable real estate, net, from unconsolidated joint ventures	(9,248)		(2,118)		—		(1,430)		(16,332)
Noncontrolling interests' share of gain (loss) on sales of depreciable real estate, net	(3)		335		—		—		224
Loss (gain) upon change of control, net(1)	(159,973)		(166,707)		(9,154)		—		—
Taxes associated with real estate dispositions(2)	(7,785)		—		3,913		(5,498)		60,451
Impairments (recoveries) of depreciable real estate, net	224,630		221,317		44,343		22,590		—


NAREIT FFO applicable to common shares	693,367		780,307		780,189		661,113		1,119,153
Distributions on dilutive convertible units and other	6,662		6,592		—		—		8,732
Diluted NAREIT FFO applicable to common shares	$	700,029	$	786,899	$	780,189	$	661,113	$	1,127,885
Weighted average shares outstanding - diluted NAREIT FFO	536,562		494,335		470,719		468,935		471,566

Impact of adjustments to NAREIT FFO:
Transaction-related items(3)	$	128,619	$	15,347	$	11,029	$	62,576	$	96,586
Other impairments (recoveries) and other losses (gains), net(4)	(22,046)		10,147		7,619		92,900		—
Restructuring and severance related charges(5)	2,911		5,063		13,906		5,000		16,965
Loss on debt extinguishments	42,912		58,364		44,162		54,227		46,020
Litigation costs (recoveries)	232		(520)		363		15,637		3,081
Casualty-related charges (recoveries), net	469		(4,106)		—		10,964		—
Foreign currency remeasurement losses (gains)	153		(250)		(35)		(1,043)		585
Valuation allowance on deferred tax assets(6)	31,161		—		—		—		—
Tax rate legislation impact(7)	(3,590)		—		—		17,028		—
Total adjustments	$	180,821	$	84,045	$	77,044	$	257,289	$	163,237

FFO as Adjusted applicable to common shares	$	874,188	$	864,352	$	857,233	$	918,402	$	1,282,390
Distributions on dilutive convertible units and other	6,490		6,396		(198)		6,657		12,849
Diluted FFO as Adjusted applicable to common shares	$	880,678	$	870,748	$	857,035	$	925,059	$	1,295,239
Weighted average shares outstanding - diluted FFO as Adjusted	536,562		494,335		470,719		473,620		473,340

FFO as Adjusted applicable to common shares	$	874,188	$	864,352	$	857,233	$	918,402	$	1,282,390
Amortization of deferred compensation	17,368		14,790		14,714		13,510		15,581
Amortization of deferred financing costs	10,157		10,863		12,612		14,569		20,014
Straight-line rents	(29,316)		(28,451)		(23,138)		(23,933)		(27,560)

AFFO capital expenditures	(93,579)		(108,844)		(106,193)		(113,471)		(88,953)
Lease restructure payments	1,321		1,153		1,195		1,470		16,604
CCRC entrance fees(8)	—		18,856		17,880		21,385		21,287
Deferred income taxes	(15,647)		(18,972)		(18,744)		(15,490)		(13,692)
Other AFFO adjustments(9)	8,213		(7,927)		(9,162)		(12,722)		(9,975)
AFFO applicable to common shares	772,705		745,820		746,397		803,720		1,215,696
Distributions on dilutive convertible units and other	6,662		6,591		—		—		13,088
Diluted AFFO applicable to common shares	$	779,367	$	752,411	$	746,397	$	803,720	$	1,228,784
Weighted average shares outstanding - diluted AFFO	536,562		494,335		470,719		468,935		473,340


	Year Ended December 31,
	2020		2019		2018		2017		2016
Diluted earnings per common share	$	0.77	$	0.09	$	2.24	$	0.88	$	1.34
Depreciation and amortization	1.47		1.43		1.30		1.25		1.30
Loss (gain) on sales of depreciable real estate, net	(1.05)		(0.04)		(1.96)		(0.76)		(0.38)
Loss (gain) upon change of control, net(1)	(0.30)		(0.34)		(0.02)		—		—
Taxes associated with real estate dispositions(2)	(0.01)		—		0.01		(0.01)		0.13
Impairments (recoveries) of depreciable real estate, net	0.42		0.45		0.09		0.05		—
Diluted NAREIT FFO per common share	$	1.30	$	1.59	$	1.66	$	1.41	$	2.39
Transaction-related items(3)	0.24		0.03		0.02		0.13		0.20
Other impairments (recoveries) and other losses (gains), net(4)	(0.04)		0.02		0.02		0.20		—
Restructuring and severance related charges(5)	0.01		0.01		0.03		0.01		0.04
Loss on debt extinguishments	0.08		0.12		0.09		0.11		0.10
Litigation costs (recoveries)	—		—		—		0.03		0.01
Casualty-related charges (recoveries), net	—		(0.01)		—		0.02		—

Valuation allowance on deferred tax assets(6)	0.06		—		—		—		—
Tax rate legislation impact(7)	(0.01)		—		—		0.04		—
Diluted FFO as Adjusted per common share	$	1.64	$	1.76	$	1.82	$	1.95	$	2.74

_______________________________________

(1)For the year ended December 31, 2020, includes a $170 million gain upon consolidation of 13 CCRCs in which we acquired Brookdale's interest and began consolidating during the first quarter of 2020. For the year ended December 31, 2019, includes a $161 million gain upon deconsolidation of 19 previously consolidated SHOP assets that were contributed into a new unconsolidated senior housing joint venture with a sovereign wealth fund. For the year ended December 31, 2018, represents the gain upon consolidation related to the acquisition of our partner's interests in four previously unconsolidated life science assets, partially offset by the loss upon consolidation of seven U.K. care homes. Gains and losses upon change of control are included in other income (expense), net in the consolidated statements of operations.

(2)For the year ended December 31, 2016, represents income tax expense associated with the state built-in gain tax payable upon the disposition of specific real estate assets, of which $49 million relates to the HCR ManorCare, Inc. ("HCRMC") real estate portfolio that we spun-off in 2016.

(3)For the year ended December 31, 2020, includes the termination fee and transition fee expenses related to terminating the management agreements with Brookdale for 13 CCRCs and transitioning those communities to LCS, partially offset by the tax benefit related to those expenses. The expenses related to terminating management agreements are included in operating expenses in the consolidated statements of operations. For the year ended December 31, 2017, includes $55 million of net non-cash charges related to the right to terminate certain triple-net leases and management agreements in conjunction with the 2017 Brookdale Transactions. For the year ended December 31, 2016, primarily relates to the spin-off of Quality Care Properties, Inc.

(4)For the year ended December 31, 2020, includes reserves for loan losses under the current expected credit losses accounting standard in accordance with Accounting Standards Codification 326, Financial Instruments – Credit Losses ("ASC 326"). The year ended December 31, 2020 also includes a gain on sale of a hospital that was in a DFL and the impairment of an undeveloped MOB land parcel, which was sold during the third quarter. For the year ended December 31, 2019, represents the impairment of 13 senior housing triple-net facilities under DFLs recognized as a result of entering into sales agreements. For the year ended December 31, 2018, primarily relates to the impairment of an undeveloped life science land parcel classified as held for sale, partially offset by an impairment recovery upon the sale of a mezzanine loan investment in March 2018. For the year ended December 31, 2017, relates to $144 million of impairments on our Tandem Mezzanine Loan, net of a $51 million impairment recovery upon the sale of a senior notes investment.

(5)For the year ended December 31, 2018, primarily relates to the departure of our former Executive Chairman and corporate restructuring activities. For the year ended December 31, 2017, primarily relates to the departure of our former Chief Accounting Officer. For the year ended December 31, 2016, primarily relates to the departure of our former President and Chief Executive Officer.

(6)For the year ended December 31, 2020, represents the valuation allowance and corresponding income tax expense related to deferred tax assets that are no longer expected to be realized as a result of our plan to dispose of our SHOP portfolio. We determined we were unlikely to hold the assets long enough to realize the future value of certain deferred tax assets generated by the net operating losses of our taxable REIT subsidiaries.

(7)For the year ended December 31, 2020, represents the tax benefit from the CARES Act, which extended the net operating loss carryback period to five years. For the year ended December 31, 2017, represents the remeasurement of deferred tax assets and liabilities as a result of the Tax Cuts and Jobs Act that was signed into legislation on December 22, 2017.

(8)In connection with the acquisition of the remaining 51% interest in the CCRC JV in January 2020, we consolidated the 13 communities in the CCRC JV and recorded the assets and liabilities at their acquisition date relative fair values, including the CCRC contract liabilities associated with previously collected non-refundable entrance fees. In conjunction with increasing those CCRC contract liabilities to their fair value, we concluded that we will no longer adjust for the timing difference between non-refundable entrance fees collected and amortized as we believe the amortization of these fees is a meaningful representation of how we satisfy the performance obligations of the fees. As such, upon consolidation of the CCRC assets, we no longer exclude the difference between CCRC entrance fees collected and amortized from the calculation of AFFO. For comparative periods presented, the adjustment continues to represent our 49% share of non-refundable entrance fees collected by the CCRC JV, net of reserves and net of CCRC JV entrance fee amortization.

(9)Primarily includes our share of AFFO capital expenditures from unconsolidated joint ventures, partially offset by noncontrolling interests' share of AFFO capital expenditures from consolidated joint ventures. For the year ended December 31, 2020, includes an increase to insurance claims that have been incurred but not yet reported on the 13 CCRCs in which we acquired Brookdale's interest and began consolidating during the first quarter of 2020 and senior housing triple-net assets that transitioned to RIDEA structures during the year.

Critical Accounting Policies

The preparation of financial statements in conformity with U.S. GAAP requires our management to use judgment in the application of accounting policies, including making estimates and assumptions. We base estimates on the best information available to us at the time, our experience and on various other assumptions believed to be reasonable under the circumstances. These estimates affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, it is possible that different accounting would have been applied, resulting in a different presentation of our consolidated financial statements. From time to time, we re-evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. For a more detailed discussion of our significant accounting policies, see Note 2 to the Consolidated Financial Statements. Below is a discussion of accounting policies that we consider critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.

Principles of Consolidation

The consolidated financial statements include the accounts of Healthpeak Properties, Inc., our wholly-owned subsidiaries, and joint ventures and variable interest entities (“VIEs”) that we control, through voting rights or other means. We consolidate investments in VIEs when we are the primary beneficiary of the VIE. A variable interest holder is considered to be the primary beneficiary of a VIE if it has the power to direct the activities that most significantly impact the entity’s economic performance and has the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE.

We make judgments about which entities are VIEs based on an assessment of whether: (i) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support, (ii) substantially all of an entity’s activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights, or (iii) the equity investors as a group lack any of the following: (a) the power through voting or similar rights to direct the activities of an entity that most significantly impact the entity’s economic performance, (b) the obligation to absorb the expected losses of an entity, or (c) the right to receive the expected residual returns of an entity. Criterion (iii) above is generally applied to limited partnerships and similarly structured entities by assessing whether a simple majority of the limited partners hold substantive rights to participate in the significant decisions of the entity or have the ability to remove the decision maker or liquidate the entity without cause. If neither of those criteria are met, the entity is a VIE.

We continually assess whether events have occurred that require us to reconsider the initial determination of whether an entity is a VIE. Such events include, but are not limited to: (i) a change to the contractual arrangements of the entity or in the ability of a party to exercise its participation or kick-out rights, (ii) a change to the capitalization structure of the entity, or (iii) acquisitions or sales of interests that constitute a change in control. When a reconsideration event occurs, we reassess whether the entity is a VIE.

We also make judgments with respect to our level of influence or control over an entity and whether we are (or are not) the primary beneficiary of a VIE. Consideration of various factors includes, but is not limited to:

which activities most significantly impact the entity’s economic performance, and our ability to direct those activities;
our form of ownership interest;
our representation on the entity’s governing body;
the size and seniority of our investment;
our ability to manage our ownership interest relative to other interest holders; and
our ability and the rights of other investors to participate in policy making decisions, replace the manager, and/or liquidate the entity, if applicable.

Our ability to correctly assess our influence or control over an entity when determining the primary beneficiary of a VIE affects the presentation of these entities in our consolidated financial statements. When we perform a reassessment of the primary beneficiary at a date other than at inception of the VIE, our assumptions may be different and may result in the identification of a different primary beneficiary.

If we determine that we are the primary beneficiary of a VIE, our consolidated financial statements include the operating results of the VIE rather than the results of our variable interest in the VIE. We require VIEs to provide us timely financial information and review the internal controls of VIEs to determine if we can rely on the financial information it provides. If a VIE has deficiencies in its internal controls over financial reporting, or does not provide us with timely financial information, it may adversely impact the quality and/or timing of our financial reporting and our internal controls over financial reporting.

Revenue Recognition

Lease Classification

At the inception of a new lease arrangement, including new leases that arise from amendments, we assess the terms and conditions to determine the proper lease classification. For leases entered into prior to January 1, 2019, the lease arrangement was classified as an operating lease if none of the following criteria were met: (i) transfer of ownership to the lessee prior to or shortly after the end of the lease term, (ii) the lessee had a bargain purchase option during or at the end of the lease term, (iii) the lease term was equal to 75% or more of the underlying property’s economic life, or (iv) the present value of future minimum lease payments (excluding executory costs) was equal to 90% or more of the estimated fair value of the leased asset. If one of the four criteria was met and the minimum lease payments were determined to be reasonably predictable and collectible, the lease arrangement was generally accounted for as a DFL.

Concurrent with our adoption of Accounting Standards Update ("ASU") No. 2016-02, Leases (“ASU 2016-02”) on January 1, 2019, we began classifying a lease entered into subsequent to adoption as an operating lease if none of the following criteria are met: (i) transfer of ownership to the lessee by the end of the lease term, (ii) lessee has a purchase option during or at the end of the lease term that it is reasonably certain to exercise, (iii) the lease term is for the major part of the remaining economic life of the underlying asset, (iv) the present value of future minimum lease payments is equal to substantially all of the fair value of the underlying asset, or (v) the underlying asset is of such a specialized nature that it is expected to have no alternative use to us at the end of the lease term.

If the assumptions utilized in the above classification assessments were different, our lease classification for accounting purposes may have been different; thus the timing and amount of our revenue recognized would have been impacted, which may be material to our consolidated financial statements.

Rental and Related Revenues

We recognize rental revenue for operating leases on a straight-line basis over the lease term when collectibility of all minimum lease payments is probable and the tenant has taken possession or controls the physical use of a leased asset. If the lease provides for tenant improvements, we determine whether the tenant improvements are owned by the tenant or us. When we are the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the leased asset until the tenant improvements are substantially complete. When the tenant is the owner of the tenant improvements, any tenant improvement allowance funded is treated as a lease incentive and amortized as a reduction of revenue over the lease term. The determination of ownership of a tenant improvement is subject to significant judgment. If our assessment of the owner of the tenant improvements was different, the timing and amount of our revenue recognized would be impacted.

Certain leases provide for additional rents that are contingent upon a percentage of the facility’s revenue in excess of specified base amounts or other thresholds. Such revenue is recognized when actual results reported by the tenant, or estimates of tenant results, exceed the base amount or other thresholds. The recognition of additional rents requires us to make estimates of amounts owed and, to a certain extent, is dependent on the accuracy of the facility results reported to us. Our estimates may differ from actual results, which could be material to our consolidated financial statements.

Resident Fees and Services

Resident fee revenue is recorded when services are rendered and includes resident room and care charges, community fees and other resident charges. Residency agreements are generally for a term of 30 days to one year, with resident fees billed monthly, in advance. Revenue for certain care related services is recognized as services are provided and is billed monthly in arrears.

Certain of our CCRCs are operated as entrance fee communities, which typically require a resident to pay an upfront entrance fee that includes both a refundable portion and non-refundable portion. When we receive a nonrefundable entrance fee, it is recognized as deferred revenue and amortized into revenue over the estimated stay of the resident.

Credit Losses

We continuously assess the collectibility of operating lease straight-line rent receivables. If it is no longer probable that substantially all future minimum lease payments will be received, the straight-line rent receivable balance is written off and recognized as a decrease in revenue in that period. We monitor the liquidity and creditworthiness of our tenants and operators on a continuous basis. This evaluation considers industry and economic conditions, property performance, credit enhancements, and other factors. We exercise judgment in this assessment and consider payment history and current credit status in developing these estimates. These estimates may differ from actual results, which could be material to our consolidated financial statements.

Loans receivable and DFLs (collectively, “finance receivables”), are reviewed and assigned an internal rating of Performing, Watch List, or Workout. Finance receivables that are deemed Performing meet all present contractual obligations, and collection and timing of all amounts owed is reasonably assured. Watch List finance receivables are defined as finance receivables that do not meet the definition of Performing or Workout. Workout finance receivables are defined as finance receivables in which we have determined, based on current information and events, that: (i) it is probable we will be unable to collect all amounts due according to the contractual terms of the agreement, (ii) the tenant, operator, or borrower is delinquent on making payments under the contractual terms of the agreement, and (iii) we have commenced action or anticipate pursuing action in the near term to seek recovery of our investment.

Finance receivables are placed on nonaccrual status when management determines that the collectibility of contractual amounts is not reasonably assured (the asset will have an internal rating of either Watch List or Workout). Further, we perform a credit analysis to support the tenant’s, operator’s, borrower’s, and/or guarantor’s repayment capacity and the underlying collateral values. We use the cash basis method of accounting for finance receivables placed on nonaccrual status unless one of the following conditions exist whereby we utilize the cost recovery method of accounting: (i) if we determine that it is probable that we will only recover the recorded investment in the finance receivable, net of associated allowances or charge-offs (if any) or (ii) we cannot reasonably estimate the amount of an impaired finance receivable. For cash basis method of accounting we apply payments received, excluding principal paydowns, to interest income so long as that amount does not exceed the amount that would have been earned under the original contractual terms. For cost recovery method of accounting any payment received is applied to reduce the recorded investment. Generally, we return a finance receivable to accrual status when all delinquent payments become current under the terms of the loan or lease agreements and collectibility of the remaining contractual loan or lease payments is reasonably assured.

Prior to the adoption of ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) on January 1, 2020, allowances were established for finance receivables on an individual basis utilizing an estimate of probable losses, if they were determined to be impaired. Finance Receivables were impaired when it was deemed probable that we would be unable to collect all amounts due in accordance with the contractual terms of the loan or lease. An allowance was based upon our assessment of the lessee’s or borrower’s overall financial condition, economic resources, payment record, the prospects for support from any financially responsible guarantors and, if appropriate, the net realizable value of any collateral. These estimates considered all available evidence, including the expected future cash flows discounted at the finance receivable’s effective interest rate, fair value of collateral, general economic conditions and trends, historical and industry loss experience, and other relevant factors, as appropriate. If a finance receivable was deemed partially or wholly uncollectible, the uncollectible balance was charged off against the allowance in the period in which the uncollectible determination has been made.

Subsequent to adopting ASU 2016-13 on January 1, 2020, we began using a loss model that relies on future expected credit losses, rather than incurred losses, as was required under historical U.S. GAAP. Under the new model, we are required to recognize future credit losses expected to be incurred over the life of a finance receivable at inception of that instrument. The model emphasizes historical experience and future market expectations to determine a loss to be recognized at inception. However, the model continues to be applied on an individual basis and rely on counter-party specific information to ensure the most accurate estimate is recognized.

Real Estate

We make estimates as part of our process for allocating a purchase price to the various identifiable assets and liabilities of an acquisition based upon the relative fair value of each asset or liability. The most significant components of our allocations are typically buildings as-if-vacant, land, and in-place leases. In the case of allocating fair value to buildings and intangibles, our fair value estimates will affect the amount of depreciation and amortization we record over the estimated useful life of each asset acquired. In the case of allocating fair value to in-place leases, we make our best estimates based on our evaluation of the specific characteristics of each tenant’s lease. Factors considered include estimates of carrying costs during hypothetical expected lease-up periods, market conditions, and costs to execute similar leases. Our assumptions affect the amount of future revenue and/or depreciation and amortization expense that we will recognize over the remaining useful life for the acquired in-place leases.

Certain of our acquisitions involve the assumption of contract liabilities. We typically estimate the fair value of contract liabilities by applying a reasonable profit margin to the total discounted estimated future costs associated with servicing the contract. We consider a variety of market and contract-specific conditions when making assumptions that impact the estimated fair value of the contract liability.

A variety of costs are incurred in the development and leasing of properties. After determination is made to capitalize a cost, it is allocated to the specific component of a project that is benefited. Determination of when a development project is substantially complete and capitalization must cease involves a degree of judgment. The costs of land and buildings under development include specifically identifiable costs. The capitalized costs include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes, and other costs incurred during the period of development. We consider a construction project to be considered substantially complete and available for occupancy and cease capitalization of costs upon the completion of the related tenant improvements.

Assets Held for Sale and Discontinued Operations

We classify a real estate property as held for sale when: (i) management has approved the disposal, (ii) the property is available for sale in its present condition, (iii) an active program to locate a buyer has been initiated, (iv) it is probable that the property will be disposed of within one year, (v) the property is being marketed at a reasonable price relative to its fair value, and (vi) it is unlikely that the disposal plan will significantly change or be withdrawn. If an asset is classified as held for sale, it is reported at the lower of its carrying value or fair value less costs to sell and no longer depreciated.

We classify a loan receivable as held for sale when we no longer have the intent and ability to hold the loan receivable for the foreseeable future or until maturity. If a loan receivable is classified as held for sale, it is reported at the lower of amortized cost or fair value.

A discontinued operation represents: (i) a component of an entity or group of components that has been disposed of or is classified as held for sale in a single transaction and represents a strategic shift that has or will have a major effect on our operations and financial results or (ii) an acquired business that is classified as held for sale on the date of acquisition. Examples of a strategic shift may include disposing of: (i) a separate major line of business, (ii) a separate major geographic area of operations, or (iii) other major parts of the Company.

Impairment of Long-Lived Assets

We assess the carrying value of our real estate assets and related intangibles (“real estate assets”) when events or changes in circumstances indicate that the carrying value may not be recoverable. Recoverability of real estate assets is measured by comparing the carrying amount of the real estate assets to the respective estimated future undiscounted cash flows. The expected future undiscounted cash flows reflect external market factors and are probability-weighted to reflect multiple possible cash-flow scenarios, including selling the assets at various points in the future. Additionally, the estimated future undiscounted cash flows are calculated utilizing the lowest level of identifiable cash flows that are largely independent of the cash flows of other assets and liabilities. In order to review our real estate assets for recoverability, we make assumptions regarding external market conditions (including capitalization rates and growth rates), forecasted cash flows and sales prices, and our intent with respect to holding or disposing of the asset. If our analysis indicates that the carrying value of the real estate assets is not recoverable on an undiscounted cash flow basis, we recognize an impairment charge for the amount by which the carrying value exceeds the fair value of the real estate asset.

Determining the fair value of real estate assets, including assets classified as held-for-sale, involves significant judgment and generally utilizes market capitalization rates, comparable market transactions, estimated per-unit or per square foot prices, negotiations with prospective buyers, and forecasted cash flows (lease revenue rates, expense rates, growth rates, etc.). Our ability to accurately predict future operating results and resulting cash flows, and estimate fair values, impacts the timing and recognition of impairments. While we believe our assumptions are reasonable, changes in these assumptions may have a material impact on our consolidated financial statements.

Investments in Unconsolidated Joint Ventures

The initial carrying value of investments in unconsolidated joint ventures is based on the amount paid to purchase the joint venture interest, the fair value of assets contributed to the joint venture, or the fair value of the assets prior to the sale of interests in the joint venture. We evaluate our equity method investments for impairment by first reviewing for indicators of impairment based on the performance of the underlying real estate assets held by the joint venture. If an equity-method investment shows indicators of impairment, we compare the fair value of the investment to the carrying value. If we determine there is a decline in the fair value of our investment in an unconsolidated joint venture below its carrying value and it is other-than-temporary, an impairment charge is recorded. The determination of the fair value of investments in unconsolidated joint ventures and as to whether a deficiency in fair value is other-than-temporary involves significant judgment. Our estimates consider all available evidence including, as appropriate, the present value of the expected future cash flows, discounted at market rates, general economic conditions and trends, severity and duration of a fair value deficiency, and other relevant factors. Capitalization rates, discount rates, and credit spreads utilized in our valuation models are based on rates we believe to be within a reasonable range of current market rates for the respective investments. While we believe our assumptions are reasonable, changes in these assumptions may have a material impact on our consolidated financial statements.

Income Taxes

As part of the process of preparing our consolidated financial statements, significant management judgment is required to evaluate our compliance with REIT requirements. Our determinations are based on interpretation of tax laws and our conclusions may have an impact on the income tax expense recognized. Adjustments to income tax expense may be required as a result of: (i) audits conducted by federal, state, and local tax authorities, (ii) our ability to qualify as a REIT, (iii) the potential for built-in gain recognition, and (iv) changes in tax laws. Adjustments required in any given period are included within the income tax provision.

We are required to evaluate our deferred tax assets for realizability and recognize a valuation allowance, which is recorded against its deferred tax assets, if it is more likely than not that the deferred tax assets will not be realized. We consider all available evidence in its determination of whether a valuation allowance for deferred tax assets is required.

Recent Accounting Pronouncements

See Note 2 to the Consolidated Financial Statements for the impact of new accounting standards.

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