Item 8. Financial Statements and Supplementary Data

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Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Welltower Inc.

We have audited the accompanying consolidated balance sheets of Welltower Inc. and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the financial statement schedules listed in Item 15(a)(2) of this Form 10-K. These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Welltower Inc. and subsidiaries at December 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Welltower Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 22, 2017 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Toledo, Ohio

February 22, 2017

CONSOLIDATED BALANCE SHEETS

WELLTOWER INC. AND SUBSIDIARIES


				December 31,		December 31,
				2016		2015
Assets				(In thousands)
Real estate investments:
	Real property owned:
		Land and land improvements		$	2,591,071	$	2,563,445
		Buildings and improvements			24,496,153		25,522,542
		Acquired lease intangibles			1,402,884		1,350,585
		Real property held for sale, net of accumulated depreciation			1,044,859		169,950
		Construction in progress			506,091		258,968
			Gross real property owned		30,041,058		29,865,490
		Less accumulated depreciation and amortization			(4,093,494)		(3,796,297)
			Net real property owned		25,947,564		26,069,193
		Real estate loans receivable			622,628		819,492
		Less allowance for losses on loans receivable			(6,563)		-
			Net real estate loans receivable		616,065		819,492
	Net real estate investments				26,563,629		26,888,685
Other assets:
		Investments in unconsolidated entities			457,138		542,281
		Goodwill			68,321		68,321
		Cash and cash equivalents			419,378		360,908
		Restricted cash			187,842		61,782
		Straight-line receivable			342,578		395,562
		Receivables and other assets			826,298		706,306
			Total other assets		2,301,555		2,135,160
Total assets				$	28,865,184	$	29,023,845

Liabilities and equity
Liabilities:
		Borrowings under primary unsecured credit facility		$	645,000	$	835,000
		Senior unsecured notes			8,161,619		8,548,055
		Secured debt			3,477,699		3,509,142
		Capital lease obligations			73,927		75,489
		Accrued expenses and other liabilities			827,034		697,191
Total liabilities					13,185,279		13,664,877

Redeemable noncontrolling interests					398,433		183,083

Equity:
		Preferred stock			1,006,250		1,006,250
		Common stock			363,071		354,811
		Capital in excess of par value			16,999,691		16,478,300
		Treasury stock			(54,741)		(44,372)
		Cumulative net income			4,803,575		3,725,772
		Cumulative dividends			(8,144,981)		(6,846,056)
		Accumulated other comprehensive income (loss)			(169,531)		(88,243)
		Other equity			3,059		4,098
			Total Welltower Inc. stockholders’ equity		14,806,393		14,590,560
		Noncontrolling interests			475,079		585,325
Total equity					15,281,472		15,175,885
Total liabilities and equity				$	28,865,184	$	29,023,845

See accompanying notes

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

WELLTOWER INC. AND SUBSIDIARIES

(In thousands, except per share data)

			Year Ended December 31,
			2016		2015		2014
Revenues:
	Rental income		$	1,648,815	$	1,598,948	$	1,405,767
	Resident fees and services			2,504,731		2,158,031		1,892,237
	Interest income			97,963		84,141		37,667
	Other income			29,651		18,706		7,875
		Total revenues		4,281,160		3,859,826		3,343,546
Expenses:
	Interest expense			521,345		492,169		481,039
	Property operating expenses			1,876,983		1,622,257		1,403,358
	Depreciation and amortization			901,242		826,240		844,130
	General and administrative			155,241		147,416		142,943
	Transaction costs			42,910		110,926		69,538
	Loss (gain) on derivatives, net			(2,448)		(58,427)		(1,495)
	Loss (gain) on extinguishment of debt, net			17,214		34,677		9,558
	Provision for loan losses			10,215		-		-
	Impairment of assets			37,207		2,220		-
	Other expenses			11,998		46,231		10,262
		Total expenses		3,571,907		3,223,709		2,959,333
Income from continuing operations before income taxes
	and income from unconsolidated entities			709,253		636,117		384,213
Income tax (expense) benefit				19,128		(6,451)		1,267
Income (loss) from unconsolidated entities				(10,357)		(21,504)		(27,426)
Income from continuing operations				718,024		608,162		358,054
Discontinued operations:
	Gain (loss) on sales of properties, net			-		-		6,411
	Income (loss) from discontinued operations, net			-		-		724
		Discontinued operations, net		-		-		7,135
Gain (loss) on real estate dispositions, net				364,046		280,387		147,111
Net income				1,082,070		888,549		512,300
Less: Preferred stock dividends				65,406		65,406		65,408
Less: Net income (loss) attributable to noncontrolling interests(1)				4,267		4,799		147

Net income attributable to common stockholders			$	1,012,397	$	818,344	$	446,745

Average number of common shares outstanding:
	Basic			358,275		348,240		306,272
	Diluted			360,227		349,424		307,747

Earnings per share:
	Basic:
	Income from continuing operations attributable to common
		stockholders, including real estate dispositions	$	2.83	$	2.35	$	1.44
	Discontinued operations, net			-		-		0.02
	Net income attributable to common stockholders*		$	2.83	$	2.35	$	1.46

	Diluted:
	Income from continuing operations attributable to common
		stockholders, including real estate dispositions	$	2.81	$	2.34	$	1.43
	Discontinued operations, net			-		-		0.02
	Net income attributable to common stockholders*		$	2.81	$	2.34	$	1.45

Amounts may not sum due to rounding

(1) Includes amounts attributable to redeemable noncontrolling interests

See accompanying notes

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (CONTINUED)

WELLTOWER INC. AND SUBSIDIARIES

(In thousands)

		Year Ended December 31,
		2016		2015		2014

Net income		$	1,082,070	$	888,549	$	512,300

Other comprehensive income (loss):
	Unrecognized gain/(loss) on equity investments		5,120		-		389
	Unrecognized gain/(loss) on cash flow hedges		1,414		(766)		4,409
	Unrecognized actuarial gain/(loss)		190		246		(137)
	Foreign currency translation gain/(loss)		(85,557)		(46,679)		(71,964)
Total other comprehensive income (loss)			(78,833)		(47,199)		(67,303)

Total comprehensive income			1,003,237		841,350		444,997
Less: Total comprehensive income (loss) attributable to noncontrolling interests(1)			6,722		(31,166)		(14,678)
Total comprehensive income attributable to stockholders		$	996,515	$	872,516	$	459,675

(1) Includes amounts attributable to redeemable noncontrolling interests.

See accompanying notes

CONSOLIDATED STATEMENTS OF EQUITY

WELLTOWER INC. AND SUBSIDIARIES

(in thousands)														Accumulated
						Capital in								Other
		Preferred		Common		Excess of		Treasury		Cumulative		Cumulative		Comprehensive		Other		Noncontrolling
		Stock		Stock		Par Value		Stock		Net Income		Dividends		Income		Equity		Interests		Total
Balances at December 31, 2013		$	1,017,361	$	289,461	$	12,418,520	$	(21,263)	$	2,329,869	$	(4,600,854)	$	(24,531)	$	6,020	$	341,748	$	11,756,331
Comprehensive income:
	Net income										512,153								(342)		511,811
	Other comprehensive income:														(52,478)				(14,825)		(67,303)
Total comprehensive income																					444,508
Net change in noncontrolling interests							(17,653)												(28,685)		(46,338)
Amounts related to issuance of common stock
	from dividend reinvestment and stock
	incentive plans, net of forfeitures				337		22,710		(13,978)								(1,425)				7,644
Net proceeds from sale of common stock					38,546		2,305,322														2,343,868
Equity component of convertible debt					258		935														1,193
Conversion of preferred stock			(11,111)		233		10,878														-
Option compensation expense																	912				912
Cash dividends paid:
	Common stock cash dividends												(969,661)								(969,661)
	Preferred stock cash dividends												(65,408)								(65,408)
Balances at December 31, 2014			1,006,250		328,835		14,740,712		(35,241)		2,842,022		(5,635,923)		(77,009)		5,507		297,896		13,473,049
Comprehensive income:
	Net income										883,750								4,878		888,628
	Other comprehensive income:														(11,234)				(35,965)		(47,199)
Total comprehensive income																					841,429
Net change in noncontrolling interests							(23,077)												318,516		295,439
Amounts related to issuance of common stock
	incentive plans, net of forfeitures				126		25,053		(9,131)								(2,107)				13,941
Net proceeds from sale of common stock					24,520		1,730,181														1,754,701
Equity component of convertible debt					1,330		5,431														6,761
Option compensation expense																	698				698
Cash dividends paid:
	Common stock cash dividends												(1,144,727)								(1,144,727)
	Preferred stock cash dividends												(65,406)								(65,406)
Balances at December 31, 2015			1,006,250		354,811		16,478,300		(44,372)		3,725,772		(6,846,056)		(88,243)		4,098		585,325		15,175,885
Comprehensive income:
	Net income										1,077,803								9,277		1,087,080
	Other comprehensive income:														(81,288)				2,455		(78,833)
Total comprehensive income																					1,008,247
Net change in noncontrolling interests							(51,478)												(121,978)		(173,456)
Amounts related to issuance of common stock
	from dividend reinvestment and stock
	incentive plans, net of forfeitures				839		46,938		(10,369)								(1,305)				36,103
Net proceeds from sale of common stock					7,421		525,931														533,352
Option compensation expense																	266				266
Cash dividends paid:
	Common stock cash dividends												(1,233,519)								(1,233,519)
	Preferred stock cash dividends												(65,406)								(65,406)
Balances at December 31, 2016		$	1,006,250	$	363,071	$	16,999,691	$	(54,741)	$	4,803,575	$	(8,144,981)	$	(169,531)	$	3,059	$	475,079	$	15,281,472

See accompanying notes

CONSOLIDATED STATEMENTS OF CASH FLOWS

WELLTOWER INC. AND SUBSIDIARIES

			Year Ended December 31,
(In thousands)			2016		2015		2014
Operating activities
Net income			$	1,082,070	$	888,549	$	512,300
Adjustments to reconcile net income to
	net cash provided from (used in) operating activities:
		Depreciation and amortization		901,242		826,240		844,130
		Other amortization expenses		8,822		4,991		6,971
		Provision for loan losses		10,215		-		-
		Impairment of assets		37,207		2,220		-
		Stock-based compensation expense		28,869		30,844		32,075
		Loss (gain) on derivatives, net		(2,448)		(58,427)		(1,495)
		Loss (gain) on extinguishment of debt, net		17,214		34,677		9,558
		Loss (income) from unconsolidated entities		10,357		21,504		27,426
		Rental income in excess of cash received		(83,233)		(115,756)		(74,552)
		Amortization related to above (below) market leases, net		322		4,018		739
		Loss (gain) on sales of properties, net		(364,046)		(280,387)		(153,522)
		Other (income) expense, net		(4,853)		31,979		-
		Distributions by unconsolidated entities		1,065		637		9,060
		Increase (decrease) in accrued expenses and other liabilities		3,929		(18,099)		(48,381)
		Decrease (increase) in receivables and other assets		(18,037)		478		(25,639)
Net cash provided from (used in) operating activities				1,628,695		1,373,468		1,138,670

Investing activities
	Cash disbursed for acquisitions			(2,145,590)		(3,364,891)		(2,210,600)
	Cash disbursed for capital improvements to existing properties			(219,146)		(187,752)		(132,780)
	Cash disbursed for construction in progress			(403,131)		(244,561)		(197,881)
	Capitalized interest			(16,943)		(8,670)		(7,150)
	Investment in real estate loans receivable			(129,884)		(598,722)		(202,207)
	Other investments, net of payments			4,760		(141,994)		(100,033)
	Principal collected on real estate loans receivable			249,552		131,830		105,496
	Contributions to unconsolidated entities			(101,415)		(160,323)		(353,496)
	Distributions by unconsolidated entities			119,723		130,880		57,183
	Proceeds from (payments on) derivatives			108,347		106,360		10,269
	Decrease (increase) in restricted cash			(125,844)		29,719		(6,072)
	Proceeds from sales of real property			2,350,068		823,964		911,065
Net cash provided from (used in) investing activities				(309,503)		(3,484,160)		(2,126,206)

Financing activities
	Net increase (decrease) under unsecured credit facilities			(190,000)		835,000		(130,000)
	Proceeds from issuance of senior unsecured notes			693,560		1,451,434		773,992
	Payments to extinguish senior unsecured notes			(865,863)		(558,830)		(365,188)
	Net proceeds from the issuance of secured debt			460,015		228,685		109,503
	Payments on secured debt			(563,759)		(573,390)		(341,839)
	Net proceeds from the issuance of common stock			534,194		1,755,722		2,343,868
	Decrease (increase) in deferred loan expenses			(22,196)		(11,513)		(16,782)
	Contributions by noncontrolling interests(1)			148,666		173,018		9,962
	Distributions to noncontrolling interests(1)			(134,578)		(50,877)		(43,691)
	Acquisitions of noncontrolling interests			-		(5,663)		(1,175)
	Cash distributions to stockholders			(1,298,925)		(1,210,133)		(1,035,069)
	Other financing activities			(1,562)		(27,004)		(409)
Net cash provided from (used in) financing activities				(1,240,448)		2,006,449		1,303,172

Effect of foreign currency translation on cash and cash equivalents				(20,274)		(8,575)		(690)

Increase (decrease) in cash and cash equivalents				58,470		(112,818)		314,946
Cash and cash equivalents at beginning of period				360,908		473,726		158,780
Cash and cash equivalents at end of period			$	419,378	$	360,908	$	473,726

Supplemental cash flow information:
	Interest paid		$	541,545	$	492,771	$	504,165
	Income taxes paid			8,011		12,214		18,548

(1) Includes amounts attributable to redeemable noncontrolling interests.

See accompanying notes.

WELLTOWER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Business

Welltower Inc., an S&P 500 company headquartered in Toledo, Ohio, is driving the transformation of health care infrastructure. The Company invests with leading seniors housing operators, post-acute providers and health systems to fund the real estate and infrastructure needed to scale innovative care delivery models and improve people’s wellness and overall health care experience. WelltowerTM, a real estate investment trust (“REIT”), owns interests in properties concentrated in major, high-growth markets in the United States, Canada and the United Kingdom, consisting of seniors housing and post-acute communities and outpatient medical properties. Founded in 1970, we were the first REIT to invest exclusively in health care facilities.

2. Accounting Policies and Related Matters

Principles of Consolidation

The consolidated financial statements include the accounts of our wholly-owned subsidiaries and joint venture (“JV”) entities that we control, through voting rights or other means. All material intercompany transactions and balances have been eliminated in consolidation. At inception of JV transactions, we identify entities for which control is achieved through means other than voting rights (“variable interest entities” or “VIEs”) and determine which business enterprise is the primary beneficiary of its operations. A VIE is broadly defined as an entity where either (i) the equity investors as a group, if any, do not have a controlling financial interest, or (ii) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support. We consolidate investments in VIEs when we are determined to be the primary beneficiary. Accounting Standards Codification Topic 810, Consolidations (“ASC 810”), requires enterprises to perform a qualitative approach to determining whether or not a VIE will need to be consolidated on a continuous basis. This evaluation is based on an enterprise’s ability to direct and influence the activities of a VIE that most significantly impact that entity’s economic performance. For investments in JVs, GAAP may preclude consolidation by the sole general partner in certain circumstances based on the type of rights held by the limited partner(s). We assess the limited partners’ rights and their impact on our consolidation conclusions, and we reassess if there is a change to the terms or in the exercisability of the rights of the limited partners, the sole general partner increases or decreases its ownership of limited partnership interests, or there is an increase or decrease in the number of outstanding limited partnership interests. We similarly evaluate the rights of managing members of limited liability companies.

Use of Estimates

The preparation of the financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Revenue Recognition

Revenue is recorded in accordance with U.S. GAAP, which requires that revenue be recognized after four basic criteria are met. These four criteria include persuasive evidence of an arrangement, the rendering of service, fixed and determinable income and reasonably assured collectability. Interest income on loans is recognized as earned based upon the principal amount outstanding subject to an evaluation of collectability risk. Substantially all of our operating leases contain escalating rent structures. Leases with fixed annual rental escalators are generally recognized on a straight-line basis over the initial lease period, subject to a collectability assessment. Rental income related to leases with contingent rental escalators is generally recorded based on the contractual cash rental payments due for the period. Leases in our outpatient medical portfolio typically include some form of operating expense reimbursement by the tenant. Certain payments made to operators are treated as lease incentives and amortized as a reduction of revenue over the lease term. We recognize resident fees and services, other than move-in fees, monthly as services are provided. Lease agreements with residents generally have a term of one year and are cancelable by the resident with 30 days’ notice.

Cash and Cash Equivalents

Cash and cash equivalents consist of all highly liquid investments with an original maturity of three months or less.

Restricted Cash

Restricted cash primarily consists of amounts held by lenders to provide future payments for real estate taxes, insurance, tenant and capital improvements, amounts held in escrow relating to acquisitions we are entitled to receive over a period of time as outlined in the escrow agreement and net proceeds from property sales that were executed as tax-deferred dispositions. At December 31, 2016, $138,281,000 of sales proceeds is on deposit in an Internal Revenue Code Section 1031 exchange escrow account with a qualified intermediary.

Deferred Loan Expenses

WELLTOWER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Deferred loan expenses are costs incurred by us in connection with the issuance, assumption and amendments of debt arrangements. Deferred loan expenses related to debt instruments, excluding the primary unsecured credit facility, are recorded as a reduction of the related debt liability. Deferred loan expenses related to the primary unsecured credit facility are included in other assets. We amortize these costs over the term of the debt using the straight-line method, which approximates the effective interest method.

Investments in Unconsolidated Entities

Investments in entities that we do not consolidate but have the ability to exercise significant influence over operating and financial policies are reported under the equity method of accounting. Under the equity method, our share of the investee’s earnings or losses is included in our consolidated results of operations. The initial carrying value of investments in unconsolidated entities is based on the amount paid to purchase the entity interest inclusive of transaction costs. To the extent that our cost basis is different from the basis reflected at the entity level, the basis difference is generally amortized over the lives of the related assets and liabilities, and such amortization is included in our share of equity in earnings of the entity. We evaluate our equity method investments for impairment based upon a comparison of the estimated fair value of the equity method investment to its carrying value. When we determine a decline in the estimated fair value of such an investment below its carrying value is other-than-temporary, an impairment is recorded.

Marketable Securities

We classify marketable securities as available-for-sale. These securities are carried at their fair value with unrealized gains and losses recognized in stockholders’ equity as a component of accumulated other comprehensive income (loss). When we determine declines in fair value of marketable securities are other-than-temporary, a loss is recognized in earnings.

Redeemable Noncontrolling Interests

Certain noncontrolling interests are redeemable at fair value. Accordingly, we record the carrying amount of the noncontrolling interests at the greater of (i) the initial carrying amount, increased or decreased for the noncontrolling interest’s share of net income or loss and its share of other comprehensive income or loss and dividends or (ii) the redemption value. If it is probable that the interests will be redeemed in the future, we accrete the carrying value to the redemption value over the period until expected redemption, currently a weighted-average period of approximately four years. In accordance with ASC 810, the redeemable noncontrolling interests are classified outside of permanent equity, as a mezzanine item, in the balance sheet. At December 31, 2016, the current redemption value of redeemable noncontrolling interests exceeded the carrying value of $398,433,000 by $70,818,000.

During the year ended December 31, 2016, we determined that an immaterial portion of our noncontrolling interests related to a 2015 transaction was misclassified in permanent equity rather than temporary equity based on a redemption feature of the partnership agreement. We have corrected the $114,714,000 misclassification by recording the change in the consolidated statement of equity for the year ended December 31, 2016.

During 2014 and 2015, we entered into DownREIT partnerships which give a real estate seller the ability to exchange its property on a tax deferred basis for equity membership interests (“OP units”). The OP units may be redeemed any time following the first anniversary of the date of issuance at the election of the holders for one share of our common stock per unit or, at our option, cash.

Real Property Owned

Real property developed by us is recorded at cost, including the capitalization of construction period interest. Expenditures for repairs and maintenance are expensed as incurred. Property acquisitions are accounted for as business combinations where we measure the assets acquired, liabilities (including assumed debt and contingencies) and any noncontrolling interests at their fair values on the acquisition date. The cost of real property acquired, which represents substantially all of the purchase price, is allocated to net tangible and identifiable intangible assets based on their respective fair values. These properties are depreciated on a straight-line basis over their estimated useful lives which range from 15 to 40 years for buildings and 5 to 15 years for improvements. Tangible assets primarily consist of land, buildings and improvements, including those related to capital leases. We consider costs incurred in conjunction with re-leasing properties, including tenant improvements and lease commissions, to represent the acquisition of productive assets and, accordingly, such costs are reflected as investment activities in our statement of cash flows.

The remaining purchase price is allocated among identifiable intangible assets primarily consisting of the above or below market component of in-place leases and the value associated with the presence of in-place tenants or residents. The value allocable to the above or below market component of the acquired in-place lease is determined based upon the present value (using a discount rate which reflects the risks associated with the acquired leases) of the difference between (i) the contractual amounts to be paid pursuant to the lease over its remaining term, and (ii) management’s estimate of the amounts that would be paid using fair market rates over the remaining term of the lease. The amounts allocated to above market leases are included in acquired lease intangibles and below market leases are included in other liabilities in the balance sheet and are amortized to rental income over the remaining terms of the respective leases.

WELLTOWER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The total amount of other intangible assets acquired is further allocated to in-place lease values and customer relationship values for in-place tenants based on management’s evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant. Characteristics considered by management in allocating these values include the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals, among other factors. The total amount of other intangible assets acquired is further allocated to in-place lease values for in-place residents with such value representing (i) value associated with lost revenue related to tenant reimbursable operating costs that would be incurred in an assumed re-leasing period, and (ii) value associated with lost rental revenue from existing leases during an assumed re-leasing period. This intangible asset will be amortized over the remaining life of the lease.

The net book value of long-lived assets is reviewed quarterly on a property by property basis to determine if facts and circumstances suggest that the assets may be impaired or that the depreciable life may need to be changed. We consider external factors relating to each asset and the existence of a master lease which may link the cash flows of an individual asset to a larger portfolio of assets leased to the same tenant. If these factors and the projected undiscounted cash flows of the asset over the remaining depreciation period indicate that the asset will not be recoverable, the carrying value is reduced to the estimated fair market value. In addition, we are exposed to the risks inherent in concentrating investments in real estate, and in particular, the seniors housing and health care industries. A downturn in the real estate industry could adversely affect the value of our properties and our ability to sell properties for a price or on terms acceptable to us.

Capitalization of Construction Period Interest

We capitalize interest costs associated with funds used for the construction of properties owned directly by us. The amount capitalized is based upon the balance outstanding during the construction period using the rate of interest which approximates our cost of financing. Our interest expense reflected in the consolidated statements of comprehensive income has been reduced by the amounts capitalized.

Gain on Sale of Assets

We recognize sales of assets only upon the closing of the transaction with the purchaser. Payments received from purchasers prior to closing are recorded as deposits and classified as other assets on our consolidated balance sheets. Gains on assets sold are recognized using the full accrual method upon closing when (i) the collectability of the sales price is reasonably assured, (ii) we are not obligated to perform significant activities after the sale to earn the profit, (iii) we have received adequate initial investment from the purchaser and (iv) other profit recognition criteria have been satisfied. Gains may be deferred in whole or in part until the sales satisfy the requirements of gain recognition on sales of real estate.

Real Estate Loans Receivable

Real estate loans receivable consist of mortgage loans and other real estate loans. Interest income on loans is recognized as earned based upon the principal amount outstanding subject to an evaluation of collectability risks. The loans are primarily collateralized by a first, second or third mortgage lien, a leasehold mortgage on, or an assignment of the partnership interest in, the related properties, corporate guaranties and/or personal guaranties.

Allowance for Losses on Loans Receivable

The allowance for losses on loans receivable is maintained at a level believed adequate to absorb potential losses in our loans receivable. The determination of the allowance is based on a quarterly evaluation of these loans, including general economic conditions and estimated collectability of loan payments. We evaluate the collectability of our loans receivable based on a combination of factors, including, but not limited to, delinquency status, historical loan charge-offs, financial strength of the borrower and guarantors and value of the underlying collateral. If such factors indicate that there is greater risk of loan charge-offs, additional allowances or placement on non-accrual status may be required. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due as scheduled according to the contractual terms of the original loan agreement. Consistent with this definition, all loans on non-accrual are deemed impaired. To the extent circumstances improve and the risk of collectability is diminished, we will return these loans to full accrual status. While a loan is on non-accrual status, any cash receipts are applied against the outstanding principal balance. Any loans with collectability concerns are subjected to a projected payoff valuation. The valuation is based on the expected future cash flows and/or the estimated fair value of the underlying collateral. The valuation is compared to the outstanding balance to determine the reserve needed for each loan. We may base our valuation on a loan’s observable market price, if any, or the fair value of collateral, net of sales costs, if the repayment of the loan is expected to be provided solely by the collateral.

Goodwill

We account for goodwill in accordance with U.S. GAAP. Goodwill is tested annually for impairment and is tested for impairment

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount, including goodwill, exceeds the reporting unit’s fair value and the implied fair value of goodwill is less than the carrying amount of that goodwill. We have not had any goodwill impairments.

Fair Value of Derivative Instruments

Derivatives are recorded at fair value on the balance sheet as assets or liabilities. The valuation of derivative instruments requires us to make estimates and judgments that affect the fair value of the instruments. Fair values of our derivatives are estimated by pricing models that consider the forward yield curves and discount rates. The fair value of our forward exchange contracts are estimated by pricing models that consider foreign currency spot rates, forward trade rates and discount rates. Such amounts and the recognition of such amounts are subject to significant estimates that may change in the future. See Note 11 for additional information.

Federal Income Tax

We have elected to be treated as a REIT under the applicable provisions of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with our first taxable year, and made no provision for federal income tax purposes prior to our acquisition of our “taxable REIT subsidiaries.” As a result of these as well as subsequent acquisitions, we now record income tax expense or benefit with respect to certain of our entities that are taxed as taxable REIT subsidiaries under provisions similar to those applicable to regular corporations and not under the REIT provisions. We account for deferred income taxes using the asset and liability method and recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in our financial statements or tax returns. Under this method, we determine deferred tax assets and liabilities based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Any increase or decrease in the deferred tax liability that results from a change in circumstances, and that causes a change in our judgment about expected future tax consequences of events, is included in the tax provision when such changes occur. Deferred income taxes also reflect the impact of operating loss and tax credit carryforwards. A valuation allowance is provided if we believe it is more likely than not that all or some portion of the deferred tax asset will not be realized. Any increase or decrease in the valuation allowance that results from a change in circumstances, and that causes a change in our judgment about the realizability of the related deferred tax asset, is included in the tax provision when such changes occur. See Note 18 for additional information.

Foreign Currency

Certain of our subsidiaries’ functional currencies are the local currencies of their respective countries. We translate the results of operations of our foreign subsidiaries into U.S. dollars using average rates of exchange in effect during the period, and we translate balance sheet accounts using exchange rates in effect at the end of the period. We record resulting currency translation adjustments in accumulated other comprehensive income, a component of stockholders’ equity, on our consolidated balance sheets. We record transaction gains and losses in our consolidated statements of comprehensive income.

Earnings Per Share

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of shares outstanding for the period adjusted for non-vested shares of restricted stock. The computation of diluted earnings per share is similar to basic earnings per share, except that the number of shares is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued.

Reclassifications

Certain amounts in prior years have been reclassified to conform to current year presentation.

Immaterial Error Correction

During the year ended December 31, 2016, we identified and corrected an immaterial mathematical error in the Consolidated Statement of Comprehensive Income for the years ended December 31, 2015, 2014 and 2013. The error affected only the financial statement line item of “total comprehensive income attributable to stockholders” in the Consolidated Statement of Comprehensive Income. Total comprehensive income and total accumulated comprehensive income for all periods presented were not impacted. Additionally, no other line items within any of the other financial statements and none of the footnotes were impacted. The error resulted in an understatement of total comprehensive income attributable to stockholders of $62,332,000, $29,356,000 and $26,534,000 for the years ended December 31, 2015, 2014 and 2013, respectively. See the Consolidated Statement of Comprehensive Income for corrected total comprehensive income attributable to stockholders.

New Accounting Standards

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). The standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted beginning after December 15, 2016. A reporting entity may apply the new standard using either a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or a full retrospective approach. We are currently evaluating the impact of the adoption on our consolidated financial statements and have not yet determined the method by which we will adopt the standard. A significant source of revenue for the Company is generated through leasing arrangements, which are specifically excluded from the new standard. We expect that the new standard will affect our accounting policies related to non-lease revenue, including certain fees in our RIDEA joint ventures, common area maintenance in our outpatient medical properties and real estate sales. Under 2014-09, revenue recognition for real estate sales is mainly based on the transfer of control versus current guidance of continuing involvement. We expect that the new guidance will result in more transactions qualifying as sales of real estate and being recognized at an earlier date than under the current guidance.

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis” (“ASU 2015-02”), which makes certain changes to both the variable interest model and the voting interest model, including changes to (1) the identification of variable interests (fees paid to a decision maker or service provider), (2) the variable interest entity characteristics for a limited partnership or similar entity and (3) the primary beneficiary determination. We adopted ASU 2015-02 on January 1, 2016. This guidance did not have a significant impact on our consolidated financial statements.

In September 2015, the FASB issued ASU No. 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments” (“ASU 2015-16”) to simplify the accounting for business combinations, specifically as it relates to measurement-period adjustments. Acquiring entities in a business combination must recognize measurement-period adjustments in the reporting period in which the adjustment amounts are determined. Also, ASU 2015-16 requires entities to present separately on the face of the income statement (or disclose in the notes to the financial statements) the portion of the amount recorded in the current period earnings, by line item, that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. We adopted ASU 2015-16 on January 1, 2016. This guidance did not have a significant impact on our consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities,” which will require entities to measure their investments at fair value and recognize any changes in fair value in net income unless the investments qualify for the new practicability exception. The practicability exception will be available for equity investments that do not have readily determinable fair values. ASU 2016-01 is effective for fiscal years and interim periods within those years, beginning after December 15, 2017. We are currently evaluating the impact that the standard will have on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which requires lessees to recognize assets and liabilities on their balance sheet related to the rights and obligations created by most leases, while continuing to recognize expenses on their income statements over the lease term. It will also require disclosures designed to give financial statement users information regarding amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. We are currently evaluating the impact of this guidance on our consolidated financial statements. We believe that the adoption of this standard will likely have a material impact to our consolidated balance sheet for the recognition of certain operating leases as right-of-use assets and lease liabilities. Our operating lease obligations are described in Note 12 of the consolidated financial statements. We are in the process of analyzing our lease portfolio and evaluating systems to comply with the standard’s retrospective adoption requirements.

In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting”. This standard simplifies the accounting treatment for excess tax benefits and deficiencies, forfeitures, and cash flow considerations related to share-based compensation. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. We are currently evaluating the impact of the standard; however, we do not expect its adoption to have a significant impact on our consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments”. This standard requires a new forward-looking “expected loss” model to be used for receivables, held-to-maturity debt, loans, and other instruments. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, and early adoption is permitted for fiscal years beginning after December 15, 2018. We are currently evaluating the impact that the standard will have on our consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01, “Clarifying the Definition of a Business”. This standard changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. ASU 2017-01 is

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted. A reporting entity must apply ASU 2017-01 using a prospective approach. Upon adoption, we expect that the majority of our real estate acquisitions will be deemed asset acquisitions rather than business combinations. We will record identifiable assets acquired, liabilities assumed and any noncontrolling interests associated with any asset acquisitions at cost on a relative fair value basis and will capitalize transaction costs. Furthermore, contingent considerations associated with asset acquisitions will be recorded when the contingency is resolved.

3. Real Property Acquisitions and Development

The total purchase price for all properties acquired has been allocated to the tangible and identifiable intangible assets, liabilities and noncontrolling interests based upon their respective fair values in accordance with our accounting policies. The results of operations for these acquisitions have been included in our consolidated results of operations since the date of acquisition and are a component of the appropriate segments. Transaction costs primarily represent costs incurred with property acquisitions, including due diligence costs, fees for legal and valuation services and termination of pre-existing relationships computed based on the fair value of the assets acquired, lease termination fees and other acquisition-related costs. Certain of our subsidiaries’ functional currencies are the local currencies of their respective countries. See Note 2 for information regarding our foreign currency policies. During the year ended December 31, 2016, we finalized our purchase price allocation of certain previously reported acquisitions and there were no material changes from those previously disclosed.

Triple-Net Activity

The following provides our purchase price allocations and other triple-net real property investment activity for the periods presented (in thousands):


		Year Ended December 31,
			2016(1)		2015		2014
Land and land improvements		$	104,754	$	95,835	$	141,387
Buildings and improvements			418,633		1,061,431		1,365,638
Acquired lease intangibles			2,876		4,408		19,196
Restricted cash			-		6		-
Receivables and other assets			551		194		4,895
	Total assets acquired(2)		526,814		1,161,874		1,531,116
Secured debt			-		(47,741)		(130,638)
Senior unsecured notes			-		-		(48,567)
Accrued expenses and other liabilities			(3,384)		(2,905)		(9,067)
	Total liabilities assumed		(3,384)		(50,646)		(188,272)
Noncontrolling interests			(26,771)		(13,465)		-
Non-cash acquisition related activity(3)			(51,733)		(38,355)		(3,453)
	Cash disbursed for acquisitions		444,926		1,059,408		1,339,391
Construction in progress additions			181,084		143,140		135,349
Less: Capitalized interest			(8,729)		(5,699)		(4,582)
Accruals	Foreign currency translation		(3,665)		(167)		421
	Non-cash related activity		-		-		(14,459)
Cash disbursed for construction in progress			168,690		137,274		116,729
Capital improvements to existing properties			32,603		45,293		18,901
	Total cash invested in real property, net of cash acquired	$	646,219	$	1,241,975	$	1,475,021

	(1) Includes acquisitions with an aggregate purchase price of $67,847,000 for which the allocation of the purchase price consideration is preliminary and subject to change.
	(2) Excludes $682,000, $16,572,000 and $1,382,000 of cash acquired during the years ended December 31, 2016, 2015 and 2014, respectively.
	(3) For the year ended December 31, 2016, primarily relates to $45,044,000 for the acquisition of assets previously financed as real estate loans receivable and $6,630,000 previously financed as an equity investment. For the year ended December 31, 2015, primarily relates to $23,288,000 for the acquisition of assets previously financed as real estate loans receivable and $6,743,000 previously financed as equity investments.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Seniors Housing Operating Activity

Acquisitions of seniors housing operating properties are structured under RIDEA, which is described in Note 18. This structure results in the inclusion of all resident revenues and related property operating expenses from the operation of these qualified health care properties in our consolidated statements of comprehensive income.

The following is a summary of our seniors housing operating real property investment activity for the periods presented (in thousands):


		Year Ended December 31,
			2016(1)		2015		2014
Land and land improvements		$	164,653	$	218,581	$	57,534
Buildings and improvements			1,518,472		2,367,486		297,314
Acquired lease intangibles			115,643		187,512		12,983
Construction in progress			-		-		27,957
Restricted cash			216		11,798		804
Receivables and other assets			2,462		29,501		9,327
	Total assets acquired(2)		1,801,446		2,814,878		405,919
Secured debt			(63,732)		(871,471)		(19,834)
Senior unsecured notes			-		(24,621)		-
Accrued expenses and other liabilities			(23,681)		(81,778)		(17,802)
	Total liabilities assumed		(87,413)		(977,870)		(37,636)
Noncontrolling interests			(6,007)		(183,854)		(482)
Non-cash acquisition related activity(3)			(47,065)		-		-
Cash disbursed for acquisitions			1,660,961		1,653,154		367,801
Construction in progress additions			157,845		44,173		12,291
Less: Capitalized interest			(5,793)		(1,740)		(714)
Less: Foreign currency translation			(8,500)		(2,499)		(2,012)
Cash disbursed for construction in progress			143,552		39,934		9,565
Capital improvements to existing properties			138,673		104,308		86,803
	Total cash invested in real property, net of cash acquired	$	1,943,186	$	1,797,396	$	464,169

	(1) Includes an aggregate purchase price of $1,672,961,000 relating to acquisitions for which the allocation of the purchase price consideration is preliminary and subject to change.
	(2) Excludes $135,000, $30,930,000 and $9,060,000 of cash acquired during the years ended December 31, 2016, 2015 and 2014, respectively.
	(3) Primarily relates to the acquisition of assets previously financed as an equity investment.

WELLTOWER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Outpatient Medical Activity

Accrued contingent consideration related to certain outpatient medical acquisitions was $0, $0 and $27,374,000 as of December 31, 2016, 2015 and 2014, respectively. The following is a summary of our outpatient medical real property investment activity for the periods presented (in thousands):


		Year Ended December 31,
			2016(1)		2015		2014
Land and land improvements		$	5,738	$	223,708	$	63,129
Buildings and improvements			46,056		614,770		567,847
Acquired lease intangibles			4,592		45,226		46,661
Receivables and other assets			-		939		-
	Total assets acquired(2)		56,386		884,643		677,637
Secured debt			-		(120,977)		(66,113)
Accrued expenses and other liabilities			(1,670)		(7,777)		(22,293)
	Total liabilities assumed		(1,670)		(128,754)		(88,406)
Noncontrolling interests			-		(76,535)		(39,987)
Non-cash acquisition related activity			(15,013)(3)		(27,025)(4)		(45,836)(3)
Cash disbursed for acquisitions			39,703		652,329		503,408
Construction in progress additions			113,933		70,560		99,878
Less: Capitalized interest			(3,723)		(1,286)		(1,854)
Accruals(5)			(19,321)		(1,921)		(26,437)
Cash disbursed for construction in progress			90,889		67,353		71,587
Capital improvements to existing properties			47,870		38,151		27,076
	Total cash invested in real property, net of cash acquired	$	178,462	$	757,833	$	602,071

	(1) Includes acquisitions with an aggregate purchase price of $18,784,000 for which the allocation of the purchase price consideration is preliminary and subject to change.
	(2) Excludes $0, $5,522,000 and $0 of cash acquired during the years ended December 31, 2016, 2015 and 2014, respectively.
	(3) The non-cash activity relates to the acquisition of assets previously financed as real estate loans. Please refer to Note 6 for additional information.
	(4) The non-cash activity relates to the acquisition of a controlling interest in a portfolio of properties that was historically reported as an unconsolidated property investment.
	(5) Represents non-cash consideration accruals for amounts to be paid in future periods relating to properties that converted in the periods noted above.

Construction Activity

The following is a summary of the construction projects that were placed into service and began generating revenues during the periods presented:


			Year Ended
			December 31, 2016		December 31, 2015		December 31, 2014
	Development projects:
		Triple-net	$	46,094	$	104,844	$	71,569
		Seniors housing operating		18,979		19,869		-
		Outpatient medical		108,001		16,592		127,290
		Total development projects		173,074		141,305		198,859
	Expansion projects			11,363		38,808		24,804
Total construction in progress conversions			$	184,437	$	180,113	$	223,663

At December 31, 2016, future minimum lease payments receivable under operating leases (excluding properties in our seniors housing operating partnerships and excluding any operating expense reimbursements) are as follows (in thousands):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2017	$	1,258,565
2018		1,243,041
2019		1,196,065
2020		1,178,410
2021		1,126,074
Thereafter		8,459,291
Totals	$	14,461,446

4. Real Estate Intangibles

The following is a summary of our real estate intangibles, excluding those classified as held for sale, as of the dates indicated (dollars in thousands):


		December 31, 2016		December 31, 2015
Assets:
	In place lease intangibles	$	1,252,143	$	1,179,537
	Above market tenant leases		61,700		67,529
	Below market ground leases		61,628		80,224
	Lease commissions		27,413		23,295
	Gross historical cost		1,402,884		1,350,585
	Accumulated amortization		(966,714)		(881,096)
	Net book value	$	436,170	$	469,489

	Weighted-average amortization period in years		13.7		13.4

Liabilities:
	Below market tenant leases	$	89,468	$	93,089
	Above market ground leases		8,107		7,907
	Gross historical cost		97,575		100,996
	Accumulated amortization		(52,134)		(46,048)
	Net book value	$	45,441	$	54,948

	Weighted-average amortization period in years		15.2		14.5

The following is a summary of real estate intangible amortization for the periods presented (in thousands):


	Year Ended December 31,
	2016		2015		2014
Rental income related to above/below market tenant leases, net	$	919	$	(2,746)	$	509
Property operating expenses related to above/below market ground leases, net		(1,241)		(1,272)		(1,248)
Depreciation and amortization related to in place lease intangibles and lease commissions		(132,141)		(115,855)		(214,966)

The future estimated aggregate amortization of intangible assets and liabilities is as follows for the periods presented (in thousands):

WELLTOWER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


		Assets		Liabilities
2017	$	141,094	$	6,544
2018		78,905		5,959
2019		33,228		5,551
2020		22,958		5,074
2021		19,045		4,586
Thereafter		140,940		17,727
Totals	$	436,170	$	45,441

5. Dispositions, Assets Held for Sale and Discontinued Operations

We periodically sell properties for various reasons, including favorable market conditions, the exercise of tenant purchase options or reduction of concentrations (e.g. property type, operator or geography). Impairment of assets, as reflected in our consolidated statements of comprehensive income, primarily represents the charges necessary to adjust the carrying values of certain properties to estimated fair values less costs to sell. The following is a summary of our real property disposition activity for the periods presented (in thousands):


		Year Ended
		December 31, 2016		December 31, 2015		December 31, 2014
Real property dispositions:
	Triple-net	$	1,773,614	$	356,300	$	747,720
	Outpatient medical(1)		78,786		181,553		45,695
	Land parcels		-		5,724		-
	Total dispositions		1,852,400		543,577		793,415
Gain (loss) on sales of real property, net			364,046		280,387		153,522
Net other assets/liabilities disposed			133,622		-		(35,872)
Proceeds from real property sales		$	2,350,068	$	823,964	$	911,065

	(1) Dispositions occurring in the year ended December 31, 2015 primarily relate to the disposition of an unconsolidated equity investment with Forest City Enterprises.

During the year ended December 31, 2016, we completed two portfolio dispositions of properties leased to Genesis Healthcare for which we received loans for termination fees relating to the properties sold under the master lease. At December 31, 2016, $74,445,000 of principal is outstanding on the loans. The related termination fee income will be deferred and recognized as the principal balance of the loans are repaid.

Dispositions and Assets Held for Sale

Pursuant to our adoption of ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (ASU 2014-08”), operating results attributable to properties sold subsequent to or classified as held for sale after January 1, 2014 and which do not meet the definition of discontinued operations are no longer reclassified on our Consolidated Statements of Comprehensive Income. The following represents the activity related to these properties for the periods presented (in thousands):


		Year Ended
		December 31,
		2016		2015		2014
Revenues:
	Rental income	$	310,390	$	352,615	$	401,640
Expenses:
	Interest expense		49,599		64,741		80,893
	Property operating expenses		10,846		12,117		14,127
	Provision for depreciation		68,280		88,580		111,593
	Total expenses		128,725		165,438		206,613
Income (loss) from real estate dispositions, net		$	181,665	$	187,177	$	195,027

WELLTOWER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. Real Estate Loans Receivable

The following is a summary of our real estate loans receivable (in thousands):


		December 31,
	2016		2015
Mortgage loans	$	485,735	$	635,492
Other real estate loans		136,893		184,000
Totals	$	622,628	$	819,492

The following is a summary of our real estate loan activity for the periods presented (in thousands):


		Year Ended
		December 31, 2016						December 31, 2015						December 31, 2014

				Outpatient						Outpatient						Outpatient
		Triple-net		Medical		Totals		Triple-net		Medical		Totals		Triple-net		Medical		Totals
Advances on real estate loans receivable:
	Investments in new loans	$	8,445	$	-	$	8,445	$	530,497	$	-	$	530,497	$	61,730	$	60,902	$	122,632
	Draws on existing loans		118,788		2,651		121,439		65,614		2,611		68,225		59,420		20,155		79,575
	Net cash advances on real estate loans		127,233		2,651		129,884		596,111		2,611		598,722		121,150		81,057		202,207
Receipts on real estate loans receivable:
	Loan payoffs		275,439		27,303		302,742		121,778		-		121,778		71,004		48,258		119,262
	Principal payments on loans		6,867		-		6,867		33,340		-		33,340		31,998		72		32,070
	Sub-total		282,306		27,303		309,609		155,118		-		155,118		103,002		48,330		151,332
	Less: Non-cash activity(1)		(45,044)		(15,013)		(60,057)		(23,288)		-		(23,288)		-		(45,836)		(45,836)
	Net cash receipts on real estate loans		237,262		12,290		249,552		131,830		-		131,830		103,002		2,494		105,496
Net cash advances (receipts) on real estate loans			(110,029)		(9,639)		(119,668)		464,281		2,611		466,892		18,148		78,563		96,711

Change in balance due to foreign currency translation			(14,086)		-		(14,086)		(4,281)		-		(4,281)		(2,852)		-		(2,852)
Loan impairments(2)			-		(3,053)		(3,053)		-		-		-		-		-		-
Net change in real estate loans receivable		$	(169,159)	$	(27,705)	$	(196,864)	$	436,712	$	2,611	$	439,323	$	15,296	$	32,727	$	48,023

(1) Represents an acquisition of assets previously financed as a real estate loan. Please see Note 3 for additional information.
(2) Represents a direct write down of an impaired loan receivable.

The Company restructured two existing real estate loans in the triple-net segment to Genesis Healthcare. The two existing loans, with a combined principal balance of $317,000,000, were scheduled to mature in 2017 and 2018. These loans were restructured into four separate loans effective October 1, 2016. Each loan has a five year term, a 10% interest rate and 25 basis point annual escalator. We recorded a loan loss charge in the amount of $6,935,000 on one of the loans as the present value of expected future cash flows was less than the carrying value of the loan. We expect to collect all principal amounts due under the loans.

The following is a summary of the allowance for losses on loans receivable for the periods presented (in thousands):

WELLTOWER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


		Year Ended December 31,
	2016		2015		2014
Balance at beginning of year	$	-	$	-	$	-
Provision for loan losses(1)		6,935		-		-
Change in present value		(372)		-		-
Balance at end of year	$	6,563	$	-	$	-
(1) Excludes direct write down of an impaired loan receivable.

The following is a summary of our loan impairments (in thousands):


		Year Ended December 31,
	2016		2015		2014
Balance of impaired loans at end of year	$	377,549	$	-	$	21,000
Allowance for loan losses		6,563		-		-
Balance of impaired loans not reserved	$	370,986	$	-	$	21,000
Average impaired loans for the year	$	188,775	$	10,500	$	10,750
Interest recognized on impaired loans(1)		8,707		-		757

(1) Represents interest recognized in period since loans were identified as impaired.

7. Investments in Unconsolidated Entities

We participate in a number of joint ventures, which generally invest in seniors housing and health care real estate. The results of operations for these properties have been included in our consolidated results of operations from the date of acquisition by the joint ventures and are reflected in our Consolidated Statements of Comprehensive Income as income or loss from unconsolidated entities. The following is a summary of our investments in unconsolidated entities (dollars in thousands):


	Percentage Ownership(1)	December 31, 2016		December 31, 2015
Triple-net	10% to 49%	$	27,005	$	36,351
Seniors housing operating	10% to 50%		407,172		499,537
Outpatient medical	43%		22,961		6,393
Total		$	457,138	$	542,281
(1) Excludes ownership of in-substance real estate.

At December 31, 2016, the aggregate unamortized basis difference of our joint venture investments of $149,147,000 is primarily attributable to the difference between the amount for which we purchased our interest in the entity, including transaction costs, and the historical carrying value of the net assets of the entity. This difference will be amortized over the remaining useful life of the related properties and included in the reported amount of income from unconsolidated entities.

WELLTOWER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. Credit Concentration

We use net operating income from continuing operations (“NOI”) as our credit concentration metric. See Note 17 for additional information and reconciliation. The following table summarizes certain information about our credit concentration for the year ended December 31, 2016, excluding our share of NOI in unconsolidated entities (dollars in thousands):


		Number of	Total		Percent of
Concentration by relationship:(1)		Properties	NOI		NOI(2)
	Genesis Healthcare	86	$	373,577	16%
	Sunrise Senior Living(3)	152		308,771	13%
	Revera	98		153,712	6%
	Brookdale Senior Living	148		151,337	6%
	Benchmark Senior Living	48		96,958	4%
	Remaining portfolio	781		1,319,822	55%
	Totals	1,313	$	2,404,177	100%

	(1) Genesis Healthcare is in our triple-net segment. Sunrise Senior Living and Revera are in our seniors housing operating segment. Brookdale Senior Living and Benchmark Senior Living are in both our triple-net and seniors housing operating segments.
	(2) Investments with our top five relationships comprised 46% of total NOI in 2015.
	(3) Revera owns a controlling interest in Sunrise Senior Living. For the year ended December 31, 2016, we recognized $998,783,000 of revenue from Sunrise Senior Living.

9. Borrowings Under Credit Facilities and Related Items

At December 31, 2016, we had a primary unsecured credit facility with a consortium of 29 banks that includes a $3,000,000,000 unsecured revolving credit facility, a $500,000,000 unsecured term credit facility and a $250,000,000 Canadian-denominated unsecured term credit facility. We have an option, through an accordion feature, to upsize the unsecured revolving credit facility and the $500,000,000 unsecured term credit facility by up to an additional $1,000,000,000, in the aggregate, and the $250,000,000 Canadian-denominated unsecured term credit facility by up to an additional $250,000,000. The primary unsecured credit facility also allows us to borrow up to $1,000,000,000 in alternate currencies (none outstanding at December 31, 2016). Borrowings under the unsecured revolving credit facility are subject to interest payable at the applicable margin over LIBOR interest rate (1.66% at December 31, 2016). The applicable margin is based on certain of our debt ratings and was 0.90% at December 31, 2016. In addition, we pay a facility fee quarterly to each bank based on the bank’s commitment amount. The facility fee depends on certain of our debt ratings and was 0.15% at December 31, 2016. The term credit facilities mature on May 13, 2021. The revolving credit facility is scheduled to mature on May 13, 2020 and can be extended for two successive terms of six months each at our option.

The following information relates to aggregate borrowings under the primary unsecured revolving credit facility for the periods presented (dollars in thousands):


		Year Ended December 31,
		2016		2015		2014
Balance outstanding at year end(1)		$	645,000	$	835,000	$	-
Maximum amount outstanding at any month end		$	1,560,000	$	835,000	$	637,000
Average amount outstanding (total of daily
	principal balances divided by days in period)	$	762,896	$	452,644	$	207,452
Weighted-average interest rate (actual interest
	expense divided by average borrowings outstanding)		1.39%		1.17%		1.50%

(1) As of December 31, 2016, letters of credit in the aggregate amount of $41,878,000 have been issued, which reduce the available borrowing capacity on our primary unsecured revolving credit facility.

10. Senior Unsecured Notes and Secured Debt

We may repurchase, redeem or refinance senior unsecured notes from time to time, taking advantage of favorable market conditions when available. We may purchase senior notes for cash through open market purchases, privately negotiated transactions, a tender offer or, in some cases, through the early redemption of such securities pursuant to their terms. The senior unsecured notes are redeemable at our option, at any time in whole or from time to time in part, at a redemption price equal to the sum of (1) the principal amount of the notes (or portion of such notes) being redeemed plus accrued and unpaid interest thereon up to the redemption date and (2) any “make-whole” amount due under the terms of the notes in connection with early redemptions. Redemptions and repurchases of debt, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. At

WELLTOWER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2016, the annual principal payments due on these debt obligations were as follows (in thousands):


	Senior		Secured
	Unsecured Notes(1,2)		Debt (1,3)		Totals
2017	$	-	$	550,620	$	550,620
2018		450,000		697,557		1,147,557
2019		605,000		623,753		1,228,753
2020(4)		673,447		166,932		840,379
2021(5,6)		1,136,206		349,106		1,485,312
Thereafter(7,8,9,10)		5,395,385		1,077,098		6,472,483
Totals	$	8,260,038	$	3,465,066	$	11,725,104

(1) Amounts represent principal amounts due and do not include unamortized premiums/discounts, debt issuance costs, or other fair value adjustments as reflected on the consolidated balance sheet.
(2) Annual interest rates range from 1.4% to 6.5%.
(3) Annual interest rates range from 1.24% to 7.98%. Carrying value of the properties securing the debt totaled $6,149,872,000 at December 31, 2016.
(4) In November 2015, one of our wholly-owned subsidiaries issued and we guaranteed $300,000,000 of Canadian-denominated 3.35% senior unsecured notes due 2020 (approximately $223,447,000 based on the Canadian/U.S. Dollar exchange rate on December 31, 2016).
(5) On May 13, 2016, we refinanced the funding on a $250,000,000 Canadian-denominated unsecured term credit facility (approximately $186,206,000 based on the Canadian/U.S. Dollar exchange rate on December 31, 2016). The loan matures on May 13, 2021 and bears interest at the Canadian Dealer Offered Rate plus 95 basis points (1.84% at December 31, 2016).
(6) On May 13, 2016, we refinanced the funding on a $500,000,000 unsecured term credit facility. The loan matures on May 13, 2021 and bears interest at LIBOR plus 95 basis points (1.63% at December 31, 2016).
(7) On November 20, 2013, we completed the sale of £550,000,000 (approximately $678,535,000 based on the Sterling/U.S. Dollar exchange rate in effect on December 31, 2016) of 4.8% senior unsecured notes due 2028.
(8) On November 25, 2014, we completed the sale of £500,000,000 (approximately $616,850,000 based on the Sterling/U.S. Dollar exchange rate in effect on December 31, 2016) of 4.5% senior unsecured notes due 2034.
(9) In May 2015, we issued $750,000,000 of 4.0% senior unsecured notes due 2025. In October 2015, we issued an additional $500,000,000 of these notes under a re-opening of the offer.
(10) In March 2016, we issued $700,000,000 of 4.25% senior unsecured notes due 2026.

The following is a summary of our senior unsecured note principal activity during the periods presented (dollars in thousands):


	Year Ended
	December 31, 2016			December 31, 2015			December 31, 2014
			Weighted Avg.			Weighted Avg.			Weighted Avg.
	Amount		Interest Rate	Amount		Interest Rate	Amount		Interest Rate

Beginning balance	$	8,645,758	4.237%	$	7,817,154	4.385%	$	7,421,707	4.395%
Debt issued		705,000	4.228%		1,475,540	3.901%		838,804	4.572%
Debt assumed		-	0.000%		24,621	6.000%		-	0.000%
Debt extinguished		(850,000)	4.194%		(300,000)	6.200%		(298,567)	5.855%
Debt redeemed		-	0.000%		(240,249)	3.303%		(59,143)	3.000%
Foreign currency		(240,720)	4.565%		(131,308)	3.966%		(85,647)	4.222%
Ending balance	$	8,260,038	4.245%	$	8,645,758	4.237%	$	7,817,154	4.385%

The following is a summary of our secured debt principal activity for the periods presented (dollars in thousands):

WELLTOWER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


	Year Ended
		December 31, 2016		December 31, 2015			December 31, 2014
			Weighted Avg.			Weighted Avg.			Weighted Avg.
	Amount		Interest Rate	Amount		Interest Rate	Amount		Interest Rate
Beginning balance	$	3,478,207	4.440%	$	2,941,765	4.940%	$	3,010,711	5.095%
Debt issued		460,015	2.646%		228,685	2.776%		109,503	3.374%
Debt assumed		60,898	4.301%		1,007,482	3.334%		204,949	4.750%
Debt extinguished		(489,293)	5.105%		(506,326)	4.506%		(279,559)	4.824%
Principal payments		(74,466)	4.663%		(67,064)	4.801%		(62,280)	4.930%
Foreign currency		29,705	3.670%		(126,335)	3.834%		(41,559)	3.811%
Ending balance	$	3,465,066	4.094%	$	3,478,207	4.440%	$	2,941,765	4.940%

Our debt agreements contain various covenants, restrictions and events of default. Certain agreements require us to maintain certain financial ratios and minimum net worth and impose certain limits on our ability to incur indebtedness, create liens and make investments or acquisitions. As of December 31, 2016, we were in compliance with all of the covenants under our debt agreements.

11. Derivative Instruments

We are exposed to various market risks, including the potential loss arising from adverse changes in interest rates. We may elect to use financial derivative instruments to hedge interest rate exposure. These decisions are principally based on our policy to manage the general trend in interest rates at the applicable dates and our perception of the future volatility of interest rates. In addition, non-U.S. investments expose us to the potential losses associated with adverse changes in foreign currency to U.S. Dollar exchange rates. We have elected to manage these risks through the use of forward exchange contracts and issuing debt in the foreign currency.

I__nterest Rate Swap Contracts and Foreign Currency Forward Contracts Designated as Cash Flow Hedges

For instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (“OCI”), and reclassified into earnings in the same period, or periods, during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in earnings. Approximately $7,650,000 of gains, which are included in accumulated other comprehensive income (“AOCI”), are expected to be reclassified into earnings in the next 12 months.

Foreign Currency Hedges

For instruments that are designated and qualify as net investment hedges, the variability in the foreign currency to U.S. dollar of the instrument is recorded as a cumulative translation adjustment component of OCI. During the years ended December 31, 2016 and 2015, we settled certain net investment hedges generating cash proceeds of $108,347,000 and $106,360,000, respectively. The balance of the cumulative translation adjustment will be reclassified to earnings when the hedged investment is sold or substantially liquidated.

The following presents the notional amount of derivatives and other financial instruments as of the dates indicated (in thousands):

WELLTOWER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


		December 31, 2016		December 31, 2015
Derivatives designated as net investment hedges:
Denominated in Canadian Dollars	$	900,000	$	1,175,000
Denominated in Pounds Sterling	£	550,000	£	550,000

Financial instruments designated as net investment hedges:
Denominated in Canadian Dollars	$	250,000	$	250,000
Denominated in Pounds Sterling	£	1,050,000	£	1,050,000

Derivatives designated as cash flow hedges
Denominated in U.S. Dollars	$	57,000	$	57,000
Denominated in Canadian Dollars	$	54,000	$	72,000
Denominated in Pounds Sterling	£	48,000	£	60,000

Derivative instruments not designated:
Denominated in Canadian Dollars	$	37,000	$	47,000

The following presents the impact of derivative instruments on the Consolidated Statements of Comprehensive Income for the periods presented (in thousands):


		Year Ended
	Location	December 31, 2016		December 31, 2015		December 31, 2014

Gain (loss) on forward exchange contracts recognized in income	Interest expense	$	8,544	$	14,474	$	-

Loss (gain) on option exercise(1)	Loss (gain) on derivatives, net	$	-	$	(58,427)	$	-
Gain on release of cumulative translation adjustment related to ineffectiveness on net investment hedge	Loss (gain) on derivatives, net	$	(2,516)	$	-	$	-

Gain (loss) on forward exchange contracts and term loans designated as net investment hedge recognized in OCI	OCI	$	357,021	$	298,116	$	103,140

(1) In April 2011, we completed the acquisition of substantially all of the real estate assets of privately-owned Genesis Healthcare Corporation. In conjunction with this transaction, we received the option to acquire an ownership interest in Genesis Healthcare. In February 2015, Genesis Healthcare closed on a transaction to merge with Skilled Healthcare Group to become a publicly traded company which required us to record the value of the derivative asset due to the net settlement feature.

12. Commitments and Contingencies

At December 31, 2016, we had twelve outstanding letter of credit obligations totaling $174,799,000 and expiring between 2017 and 2024. At December 31, 2016, we had outstanding construction in process of $506,091,000 for leased properties and were committed to providing additional funds of approximately $493,972,000 to complete construction. At December 31, 2016, we had contingent purchase obligations totaling $29,127,000. These contingent purchase obligations relate to unfunded capital improvement obligations and contingent obligations on acquisitions. Rents due from the tenant are increased to reflect the additional investment in the property.

We evaluate our leases for operating versus capital lease treatment in accordance with ASC Topic 840 “Leases.” A lease is classified as a capital lease if it provides for transfer of ownership of the leased asset at the end of the lease term, contains a bargain purchase option, has a lease term greater than 75% of the economic life of the leased asset, or if the net present value of the future minimum lease payments are in excess of 90% of the fair value of the leased asset. Certain leases contain bargain purchase options

WELLTOWER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

and have been classified as capital leases. At December 31, 2016, we had operating lease obligations of $1,105,992,000 relating to certain ground leases and Company office space. Regarding the ground leases, we have sublease agreements with certain of our operators that require the operators to reimburse us for our monthly operating lease obligations. At December 31, 2016, aggregate future minimum rentals to be received under these noncancelable subleases totaled $74,744,000.

At December 31, 2016, future minimum lease payments due under operating and capital leases are as follows (in thousands):


	Operating Leases		Capital Leases(1)
2017	$	16,939	$	4,731
2018		17,063		4,678
2019		17,269		4,334
2020		16,810		4,173
2021		16,647		4,173
Thereafter		1,021,264		71,747
Totals	$	1,105,992	$	93,836

(1) Amounts above represent principal and interest obligations under capital lease arrangements. Related assets with a gross value of $167,324,000 and accumulated depreciation of $24,929,000 are recorded in real property.

13. Stockholders’ Equity

The following is a summary of our stockholder’s equity capital accounts as of the dates indicated:


		December 31, 2016	December 31, 2015
Preferred Stock, $1.00 par value:
	Authorized shares	50,000,000	50,000,000
	Issued shares	25,875,000	25,875,000
	Outstanding shares	25,875,000	25,875,000

Common Stock, $1.00 par value:
	Authorized shares	700,000,000	700,000,000
	Issued shares	363,576,924	355,594,373
	Outstanding shares	362,602,173	354,777,670

Preferred Stock. The following is a summary of our preferred stock activity during the periods presented:


	Year Ended
	December 31, 2016		December 31, 2015		December 31, 2014
		Weighted Avg.		Weighted Avg.		Weighted Avg.
	Shares	Dividend Rate	Shares	Dividend Rate	Shares	Dividend Rate

Beginning balance	25,875,000	6.500%	25,875,000	6.500%	26,108,236	6.496%
Shares converted	-	0.000%	-	0.000%	(233,236)	6.000%
Ending balance	25,875,000	6.500%	25,875,000	6.500%	25,875,000	6.500%

During the three months ended December 31, 2010, we issued 349,854 shares of 6.00% Series H Cumulative Convertible and Redeemable Preferred Stock in connection with a business combination. During the years ended December 31, 2013 and 2014, all shares were converted into common stock, leaving zero shares outstanding.

During the three months ended March 31, 2011, we issued 14,375,000 of 6.50% Series I Cumulative Convertible Perpetual Preferred Stock. These shares have a liquidation value of $50.00 per share. Dividends are payable quarterly in arrears. The preferred stock is not redeemable by us. The preferred shares are convertible, at the holder’s option, into 0.8460 shares of common stock (equal to an initial conversion price of approximately $59.10).

During the three months ended March 31, 2012, we issued 11,500,000 of 6.50% Series J Cumulative Redeemable Preferred Stock. Dividends are payable quarterly in arrears. On February 2, 2017, we announced that we will redeem all 11,500,000 shares outstanding

WELLTOWER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

on March 7, 2017 at a redemption price of $25.00 per share plus accrued and unpaid dividends to, but not including, March 7, 2017.

Common Stock. The following is a summary of our common stock issuances during the periods indicated (dollars in thousands, except per share amounts):


	Shares Issued		Average Price		Gross Proceeds		Net Proceeds

June 2014 public issuance	16,100,000	$	62.35	$	1,003,835	$	968,517
September 2014 public issuance	17,825,000		63.75		1,136,344		1,095,465
2014 Dividend reinvestment plan issuances	4,122,941		62.35		257,055		257,055
2014 Option exercises	498,549		45.79		22,831		22,831
2014 Preferred stock conversions	233,236				-		-
2014 Stock incentive plans, net of forfeitures	188,147				-		-
2014 Senior note conversions	258,542				-		-
2014 Totals	39,226,415			$	2,420,065	$	2,343,868

February 2015 public issuance	19,550,000	$	75.50	$	1,476,025	$	1,423,935
2015 Dividend reinvestment plan issuances	4,024,169		67.72		272,531		272,531
2015 Option exercises	249,054		47.35		11,793		11,793
2015 Equity Shelf Program issuances	696,070		69.23		48,186		47,463
2015 Stock incentive plans, net of forfeitures	137,837				-		-
2015 Senior note conversions	1,330,474				-		-
2015 Totals	25,987,604			$	1,808,535	$	1,755,722

2016 Dividend reinvestment plan issuances	4,145,457	$	70.34	$	291,852	$	291,571
2016 Option exercises	141,405		47.13		6,664		6,664
2016 Equity Shelf Program issuances	3,134,901		75.27		238,286		235,959
2016 Stock incentive plans, net of forfeitures	402,740				-		-
2016 Totals	7,824,503			$	536,802	$	534,194

Dividends. The increase in dividends is primarily attributable to increases in our common shares outstanding as described above. Please refer to Notes 2 and 18 for information related to federal income tax of dividends. The following is a summary of our dividend payments (in thousands, except per share amounts):


	Year Ended
	December 31, 2016				December 31, 2015				December 31, 2014
	Per Share		Amount		Per Share		Amount		Per Share		Amount

Common Stock	$	3.44000	$	1,233,519	$	3.30000	$	1,144,727	$	3.18000	$	969,661
Series H Preferred Stock		-		-		-		-		0.00794		1
Series I Preferred Stock		3.25000		46,719		3.25000		46,719		3.25000		46,719
Series J Preferred Stock		1.62510		18,687		1.62510		18,687		1.62510		18,688
Totals			$	1,298,925			$	1,210,133			$	1,035,069

Accumulated Other Comprehensive Income. The following is a summary of accumulated other comprehensive income/(loss) for the periods presented (in thousands):

WELLTOWER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


		Unrecognized gains (losses) related to:
		Foreign Currency Translation		Equity Investments		Actuarial losses		Cash Flow Hedges		Total
Balance at December 31, 2015	$	(85,484)	$	-	$	(1,343)	$	(1,416)	$	(88,243)
Other comprehensive income (loss) before reclassification adjustments		(90,528)		5,120		190		1,414		(83,804)
Reclassification amount to net income		2,516		-		-		-		2,516
Net current-period other comprehensive income (loss)		(88,012)		5,120		190		1,414		(81,288)
Balance at December 31, 2016	$	(173,496)	$	5,120	$	(1,153)	$	(2)	$	(169,531)

Balance at December 31, 2014	$	(74,770)	$	-	$	(1,589)	$	(650)	$	(77,009)
Other comprehensive income (loss) before reclassification adjustments		(10,714)		-		246		(2,626)		(13,094)
Reclassification amount to net income		-		-		-		1,860		1,860
Net current-period other comprehensive income (loss)		(10,714)		-		246		(766)		(11,234)
Balance at December 31, 2015	$	(85,484)	$	-	$	(1,343)	$	(1,416)	$	(88,243)

Other Equity. Other equity consists of accumulated option compensation expense, which represents the amount of amortized compensation costs related to stock options awarded to employees and directors.

14. Stock Incentive Plans

In May 2016, our shareholders approved the 2016 Long-Term Incentive Plan (“2016 Plan”), which authorizes up to 10,000,000 shares of common stock to be issued at the discretion of the Compensation Committee of the Board of Directors. Awards granted after May 5, 2016 will be issued out of the 2016 Plan. The awards granted under the Amended and Restated 2005 Long-Term Incentive Plan continue to vest and options expire ten years from the date of grant. Our non-employee directors, officers and key employees are eligible to participate in the 2016 Plan. The 2016 Plan allows for the issuance of, among other things, stock options, stock appreciation rights, restricted stock, deferred stock units and dividend equivalent rights. Vesting periods for options, deferred stock units and restricted shares generally range from three to five years. Options expire ten years from the date of grant.

Under our long-term incentive plan, certain restricted stock awards are performance based. We will grant a target number of restricted stock units, with the ultimate award determined by the total shareholder return and operating performance metrics, measured in each case over a measurement period of three years. One third of the award will vest immediately at the end of the three year performance period, one third will vest a year after the performance period, and the remaining one third will vest two years after the performance period. Compensation expense for these performance grants is measured based on the probability of achievement of certain performance goals and is recognized over both the performance period and vesting period. For the portion of the grant for which the award is determined by the operating performance metrics, the estimated compensation cost was based on the grant date closing price and management’s estimate of corporate achievement for the financial metrics. If the estimated number of performance based restricted stock to be earned changes, an adjustment will be recorded to recognize the accumulated difference between the revised and previous estimates. For the portion of the grant determined by the total shareholder return, management used a Monte Carlo model to assess the compensation cost. The expected term represents the period from the grant date to the end of the three-year performance period.

The estimated compensation cost for each performance based plan was derived using the assumptions presented in the following table:

	Risk Free Rates	Volatility(1)	Dividend Yield
2015-2017 Program	0.16% - 1.16%	13.64% - 42.75%	4.818%
2016-2018 Program	0.40% - 1.07%	15.75% - 38.61%	5.039%

(1) Figures use 50% historical and 50% implied volatility.

The following table summarizes compensation expense recognized for the periods presented (in thousands):

WELLTOWER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


		Year Ended December 31,
	2016		2015		2014
Stock options	$	266	$	698	$	912
Restricted stock		28,603		30,146		31,163
	$	28,869	$	30,844	$	32,075

Stock Options

We have not granted stock options since the year ended December 31, 2012 but some remain outstanding. As of December 31, 2016, there was no unrecognized compensation expense related to unvested stock options. Stock options outstanding at December 31, 2016 have an aggregate intrinsic value of $5,553,000.

Restricted Stock

The fair value of the restricted stock is equal to the market price of the Company’s common stock on the date of grant and is amortized over the vesting periods. As of December 31, 2016, there was $32,830,000 of total unrecognized compensation expense related to unvested restricted stock that is expected to be recognized over a weighted-average period of three years. The following table summarizes information about non-vested restricted stock incentive awards as of and for the year ended December 31, 2016:


	Restricted Stock
	Number of	Weighted-Average
	Shares	Grant Date
	(000's)	Fair Value
Non-vested at December 31, 2015	638	$	62.00
Vested	(396)		64.36
Granted	785		59.42
Terminated	(40)		62.64
Non-vested at December 31, 2016	987	$	58.98

WELLTOWER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):


		Year Ended December 31,
		2016		2015		2014
Numerator for basic and diluted earnings per share -
	net income attributable to common stockholders	$	1,012,397	$	818,344	$	446,745

Denominator for basic earnings per
	share: weighted-average shares		358,275		348,240		306,272
Effect of dilutive securities:
	Employee stock options		110		143		188
	Non-vested restricted shares		449		535		500
	Redeemable shares		1,393		310		-
	Convertible senior unsecured notes		-		196		787
Dilutive potential common shares			1,952		1,184		1,475
Denominator for diluted earnings per
	share: adjusted-weighted average shares		360,227		349,424		307,747

Basic earnings per share		$	2.83	$	2.35	$	1.46
Diluted earnings per share		$	2.81	$	2.34	$	1.45

Stock options outstanding were anti-dilutive for the years ended December 31, 2016, 2015 and 2014. The Series H Cumulative Convertible and Redeemable Preferred Stock and the Series I Cumulative Convertible Perpetual Preferred Stock were excluded from the calculations as the effect of the conversions also were anti-dilutive.

16. Disclosure about Fair Value of Financial Instruments

U.S. GAAP provides authoritative guidance for measuring and disclosing fair value measurements of assets and liabilities. The guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:

· Level 1 - Quoted prices in active markets for identical assets or liabilities.

· Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

· Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.

Mortgage Loans and Other Real Estate Loans Receivable — The fair value of mortgage loans and other real estate loans receivable is generally estimated by using Level 2 and Level 3 inputs such as discounting the estimated future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Cash and Cash Equivalents — The carrying amount approximates fair value.

Available-for-sale Equity Investments — Available-for-sale equity investments are recorded at their fair value based on Level 1 publicly available trading prices.

Borrowings Under Primary Unsecured Credit Facility — The carrying amount of the primary unsecured credit facility approximates fair value because the borrowings are interest rate adjustable.

WELLTOWER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Senior Unsecured Notes — The fair value of the senior unsecured notes payable was estimated based on Level 1 publicly available trading prices. The carrying amount of the variable rate senior unsecured notes approximates fair value because they are interest rate adjustable.

Secured Debt — The fair value of fixed rate secured debt is estimated using Level 2 inputs by discounting the estimated future cash flows using the current rates at which similar loans would be made with similar credit ratings and for the same remaining maturities. The carrying amount of variable rate secured debt approximates fair value because the borrowings are interest rate adjustable.

Foreign Currency Forward Contracts — Foreign currency forward contracts are recorded in other assets or other liabilities on the balance sheet at fair market value. Fair market value is determined using Level 2 inputs by estimating the future value of the currency pair based on existing exchange rates, comprised of current spot and traded forward points, and calculating a present value of the net amount using a discount factor based on observable traded interest rates.

Redeemable OP Unitholder Interests — Our redeemable unitholder interests are recorded on the balance sheet at fair value using Level 2 inputs. The fair value is measured using the closing price of our common stock, as units may be redeemed at the election of the holder for cash or, at our option, one share of our common stock per unit, subject to adjustment in certain circumstances.

The carrying amounts and estimated fair values of our financial instruments are as follows (in thousands):


		December 31, 2016				December 31, 2015
		Carrying		Fair		Carrying		Fair
		Amount		Value		Amount		Value
Financial Assets:
	Mortgage loans receivable	$	485,735	$	521,773	$	635,492	$	663,501
	Other real estate loans receivable		136,893		138,050		184,000		185,693
	Available-for-sale equity investments		27,899		27,899		22,779		22,779
	Cash and cash equivalents		419,378		419,378		360,908		360,908
	Foreign currency forward contracts		135,561		135,561		129,520		129,520

Financial Liabilities:
	Borrowings under unsecured lines of credit arrangements	$	645,000	$	645,000	$	835,000	$	835,000
	Senior unsecured notes		8,161,619		8,879,176		8,548,055		9,020,529
	Secured debt		3,477,699		3,558,378		3,509,142		3,678,564
	Foreign currency forward contracts		4,342		4,342		-		-

Redeemable OP unitholder interests		$	110,502	$	110,502	$	112,029	$	112,029

Items Measured at Fair Value on a Recurring Basis

The market approach is utilized to measure fair value for our financial assets and liabilities reported at fair value on a recurring basis. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The following summarizes items measured at fair value on a recurring basis (in thousands):


	Fair Value Measurements as of December 31, 2016
	Total		Level 1		Level 2		Level 3
Available-for-sale equity investments(1)	$	27,899	$	27,899	$	-	$	-
Foreign currency forward contracts, net(2)		131,219		-		131,219		-
Redeemable OP unitholder interests		110,502		-		110,502		-
Totals	$	269,620	$	27,899	$	241,721	$	-

(1) Unrealized gains or losses on equity investments are recorded in accumulated other comprehensive income (loss) at each measurement date. During the year ended December 31, 2015, we recognized an other than temporary impairment charge of $35,648,000 on the Genesis Healthcare stock investment. Also, see Note 11 for details related to the gain on the derivative asset originally recognized.
(2) Please see Note 11 for additional information.

Items Measured at Fair Value on a Nonrecurring Basis

WELLTOWER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In addition to items that are measured at fair value on a recurring basis, we also have assets and liabilities in our balance sheet that are measured at fair value on a nonrecurring basis. As these assets and liabilities are not measured at fair value on a recurring basis, they are not included in the tables above. Assets, liabilities and noncontrolling interests that are measured at fair value on a nonrecurring basis include those acquired/assumed in business combinations (see Note 3) and asset impairments (see Note 5 for impairments of real property and Note 6 for impairments of loans receivable). We have determined that the fair value measurements included in each of these assets and liabilities rely primarily on Company-specific inputs and our assumptions about the use of the assets and settlement of liabilities, as observable inputs are not available. As such, we have determined that each of these fair value measurements generally reside within Level 3 of the fair value hierarchy. We estimate the fair value of real estate and related intangibles using the income approach and unobservable data such as net operating income and estimated capitalization and discount rates. We also consider local and national industry market data including comparable sales, and commonly engage an external real estate appraiser to assist us in our estimation of fair value. We estimate the fair value of assets held for sale based on current sales price expectations or, in the absence of such price expectations, Level 3 inputs described above. We estimate the fair value of secured debt assumed in business combinations using current interest rates at which similar borrowings could be obtained on the transaction date.

17. Segment Reporting

We invest in seniors housing and health care real estate. We evaluate our business and make resource allocations on our three operating segments: triple-net, seniors housing operating and outpatient medical. During the year ended December 31, 2016, we reclassified four properties previously classified in the triple-net segment to the outpatient medical segment. In addition, we reclassified interest expense on our foreign-denominated senior notes from the seniors housing operating segment to non-segment. Accordingly, the segment information provided in this Note has been reclassified to conform to the current presentation for all periods presented.

Our triple-net properties include long-term/post-acute care facilities, assisted living facilities, independent living/continuing care retirement communities, care homes (United Kingdom), independent support living facilities (Canada), care homes with nursing (United Kingdom) and combinations thereof. Under the triple-net segment, we invest in seniors housing and health care real estate through acquisition and financing of primarily single tenant properties. Properties acquired are primarily leased under triple-net leases and we are not involved in the management of the property. Our seniors housing operating properties include the seniors housing communities referenced above that are owned and/or operated through RIDEA structures (see Notes 3 and 18).

Our outpatient medical properties include outpatient medical buildings and, during past years, life science buildings which are aggregated into our outpatient medical reportable segment. Our outpatient medical buildings are typically leased to multiple tenants and generally require a certain level of property management. During the year ended December 31, 2015, we disposed of our life science investments.

We evaluate performance based upon NOI of each segment. We define NOI as total revenues, including tenant reimbursements, less property operating expenses. We believe NOI provides investors relevant and useful information because it measures the operating performance of our properties at the property level on an unleveraged basis. We use NOI to make decisions about resource allocations and to assess the property level performance of our properties.

Non-segment revenue consists mainly of interest income on certain non-real estate investments and other income. Non-segment assets consist of corporate assets including cash, deferred loan expenses and corporate offices and equipment among others. Non-property specific revenues and expenses are not allocated to individual segments in determining NOI.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2). The results of operations for all acquisitions described in Note 3 are included in our consolidated results of operations from the acquisition dates and are components of the appropriate segments. There are no intersegment sales or transfers.

Summary information for the reportable segments (which excludes unconsolidated entities) during the years ended December 31, 2016, 2015 and 2014 is as follows (in thousands):

WELLTOWER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Year Ended December 31, 2016:		Triple-net		Seniors Housing Operating		Outpatient Medical		Non-segment / Corporate		Total
Rental income	$	1,112,325	$	-	$	536,490	$	-	$	1,648,815
Resident fees and services		-		2,504,731		-		-		2,504,731
Interest income		90,476		4,180		3,307		-		97,963
Other income		6,059		17,085		5,568		939		29,651
Total revenues		1,208,860		2,525,996		545,365		939		4,281,160
Property operating expenses		-		1,711,882		165,101		-		1,876,983
Net operating income from continuing operations		1,208,860		814,114		380,264		939		2,404,177
Interest expense		21,370		81,853		19,087		399,035		521,345
Loss (gain) on derivatives, net		68		-		-		(2,516)		(2,448)
Depreciation and amortization		297,197		415,429		188,616		-		901,242
General and administrative		-		-		-		155,241		155,241
Transaction costs		10,016		29,207		3,687		-		42,910
Loss (gain) on extinguishment of debt, net		863		(88)		-		16,439		17,214
Provision for loan losses		6,935		-		3,280		-		10,215
Impairment of assets		20,169		12,403		4,635		-		37,207
Other expenses		-		-		-		11,998		11,998
Income (loss) from continuing operations before income taxes and income (loss) from unconsolidated entities		852,242		275,310		160,959		(579,258)		709,253
Income tax expense		(1,087)		(3,762)		(511)		24,488		19,128
(Loss) income from unconsolidated entities		9,767		(20,442)		318		-		(10,357)
Income (loss) from continuing operations		860,922		251,106		160,766		(554,770)		718,024
Gain (loss) on real estate dispositions, net		355,394		9,880		(1,228)		-		364,046
Net income (loss)	$	1,216,316	$	260,986	$	159,538	$	(554,770)	$	1,082,070

Total assets	$	10,713,032	$	12,851,414	$	4,951,538	$	349,200	$	28,865,184

WELLTOWER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Year Ended December 31, 2015:		Triple-net		Seniors Housing Operating		Outpatient Medical		Non-segment / Corporate		Total
Rental income	$	1,094,827	$	-	$	504,121	$	-	$	1,598,948
Resident fees and services		-		2,158,031		-		-		2,158,031
Interest income		74,108		4,180		5,853		-		84,141
Other income		6,871		6,060		4,684		1,091		18,706
Total revenues		1,175,806		2,168,271		514,658		1,091		3,859,826
Property operating expenses		-		1,467,009		155,248		-		1,622,257
Net operating income from continuing operations		1,175,806		701,262		359,410		1,091		2,237,569
Interest expense		28,384		70,388		27,542		365,855		492,169
Loss (gain) on derivatives, net		(58,427)		-		-		-		(58,427)
Depreciation and amortization		288,242		351,733		186,265		-		826,240
General and administrative		-		-		-		147,416		147,416
Transaction costs		53,195		54,966		2,765		-		110,926
Loss (gain) on extinguishment of debt, net		10,095		(195)		-		24,777		34,677
Impairment of Assets		2,220		-		-		-		2,220
Other expenses		35,648		-		-		10,583		46,231
Income (loss) from continuing operations before income taxes and income (loss) from unconsolidated entities		816,449		224,370		142,838		(547,540)		636,117
Income tax expense		(4,244)		986		245		(3,438)		(6,451)
(Loss) income from unconsolidated entities		8,260		(32,672)		2,908		-		(21,504)
Income (loss) from continuing operations		820,465		192,684		145,991		(550,978)		608,162
Gain (loss) on real estate dispositions, net		86,261		-		194,126		-		280,387
Net income (loss)	$	906,726	$	192,684	$	340,117	$	(550,978)	$	888,549

Total assets	$	12,358,605	$	11,519,902	$	5,060,676	$	84,662	$	29,023,845

WELLTOWER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Year Ended December 31, 2014:		Triple-net		Seniors Housing Operating		Outpatient Medical		Non-segment / Corporate		Total
Rental income	$	992,638	$	-	$	413,129	$	-	$	1,405,767
Resident fees and services		-		1,892,237		-		-		1,892,237
Interest income		32,255		2,119		3,293		-		37,667
Other income		2,973		3,215		1,010		677		7,875
Total revenues		1,027,866		1,897,571		417,432		677		3,343,546
Property operating expenses		732		1,266,308		136,318		-		1,403,358
Net operating income from continuing operations		1,027,134		631,263		281,114		677		1,940,188
Interest expense		32,135		64,130		31,050		353,724		481,039
Loss (gain) on derivatives, net		(1,770)		275		-		-		(1,495)
Depreciation and amortization		273,296		418,199		152,635		-		844,130
General and administrative		-		-		-		142,943		142,943
Transaction costs		45,146		16,880		7,512		-		69,538
Loss (gain) on extinguishment of debt, net		98		383		405		8,672		9,558
Other expenses		8,825		1,437		-		-		10,262
Income (loss) from continuing operations before income taxes and income (loss) from unconsolidated entities		669,404		129,959		89,512		(504,662)		384,213
Income tax expense		6,141		(3,047)		(1,827)		-		1,267
(Loss) income from unconsolidated entities		5,423		(38,204)		5,355		-		(27,426)
Income from continuing operations		680,968		88,708		93,040		(504,662)		358,054
Income (loss) from discontinued operations		7,135		-		-		-		7,135
Gain (loss) on real estate dispositions, net		146,205		-		906		-		147,111
Net income (loss)	$	834,308	$	88,708	$	93,946	$	(504,662)	$	512,300

Our portfolio of properties and other investments are located in the United States, the United Kingdom and Canada. Revenues and assets are attributed to the country in which the property is physically located. The following is a summary of geographic information for the periods presented (dollars in thousands):


		Year Ended
		December 31, 2016			December 31, 2015			December 31, 2014
Revenues:		Amount	%		Amount	%		Amount	%
United States	$	3,453,485	80.6%	$	3,133,327	81.2%	$	2,801,474	83.8%
United Kingdom		388,383	9.1%		407,745	10.6%		305,275	9.1%
Canada		439,292	10.3%		318,754	8.3%		236,797	7.1%
Total	$	4,281,160	100.0%	$	3,859,826	100.0%	$	3,343,546	100.0%


		As of
		December 31, 2016			December 31, 2015
Assets:		Amount	%		Amount	%
United States	$	23,572,459	81.7%	$	23,513,498	81.0%
United Kingdom		2,782,489	9.6%		2,958,509	10.2%
Canada		2,510,236	8.7%		2,551,838	8.8%
Total	$	28,865,184	100.0%	$	29,023,845	100.0%

WELLTOWER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

18. Income Taxes and Distributions

We elected to be taxed as a REIT commencing with our first taxable year. To qualify as a REIT for federal income tax purposes, at least 90% of taxable income (excluding 100% of net capital gains) must be distributed to stockholders. REITs that do not distribute a certain amount of current year taxable income are also subject to a 4% federal excise tax. The main differences between net income for federal income tax purposes and financial statement purposes are the recognition of straight-line rent for reporting purposes, basis differences in acquisitions, recording of impairments, differing useful lives and depreciation and amortization methods for real property and the provision for loan losses for reporting purposes versus bad debt expense for tax purposes.

Cash distributions paid to common stockholders, for federal income tax purposes, are as follows for the periods presented:


			Year Ended December 31,
			2016		2015		2014
Per Share:
	Ordinary income	$	2.5067	$	1.9134	$	1.7861
	Qualified dividend		0.0047		0.0529		-
	Return of capital		0.0573		0.0503		0.8368
	Long-term capital gains		0.4593		0.9352		0.1638
	Unrecaptured section 1250 gains		0.4120		0.3482		0.3933
	Totals	$	3.4400	$	3.3000	$	3.1800

Our consolidated provision for income taxes is as follows for the periods presented (dollars in thousands):


		Year Ended December 31,
		2016		2015		2014
Current	$	14,944	$	10,177	$	2,672
Deferred		(34,072)		(3,726)		(3,939)
Totals	$	(19,128)	$	6,451	$	(1,267)

REITs generally are not subject to U.S. federal income taxes on that portion of REIT taxable income or capital gain that is distributed to stockholders. For the tax year ended December 31, 2016, as a result of acquisitions located in Canada and the United Kingdom, we were subject to foreign income taxes under the respective tax laws of these jurisdictions.

The provision for income taxes for the year ended December 31, 2016 primarily relates to state taxes, foreign taxes, and taxes based on income generated by entities that are structured as taxable REIT subsidiaries. For the tax years ended December 31, 2016, 2015 and 2014, the foreign tax provision/(benefit) amount included in the consolidated provision for income taxes was ($3,315,000), $7,385,000 and ($6,069,000), respectively.

A reconciliation of income tax expense, which is computed by applying the federal corporate tax rate for the years ended December 31, 2016, 2015 and 2014, to the income tax provision/(benefit) is as follows for the periods presented (dollars in thousands):

WELLTOWER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


		Year Ended December 31,
		2016		2015		2014
Tax at statutory rate on earnings from continuing operations before unconsolidated entities, noncontrolling interests and income taxes	$	372,030	$	313,250	$	178,862
Increase / (decrease) in valuation allowance(1)		(2,128)		13,759		9,133
Tax at statutory rate on earnings not subject to federal income taxes		(399,571)		(319,832)		(189,070)
Foreign permanent depreciation		9,205		7,500		4,383
Other differences		1,336		(8,226)		(4,575)
Totals	$	(19,128)	$	6,451	$	(1,267)

(1) Excluding purchase price accounting.

Each TRS and foreign entity subject to income taxes is a tax paying component for purposes of classifying deferred tax assets and liabilities. The tax effects of taxable and deductible temporary differences, as well as tax attributes, are summarized as follows for the periods presented (dollars in thousands):


		Year Ended December 31,
		2016		2015		2014
Investments and property, primarily differences in investment basis, depreciation and amortization, the basis of land assets and the treatment of interests and certain costs	$	(7,089)	$	(30,564)	$	(1,020)
Operating loss and interest deduction carryforwards		82,469		75,455		47,528
Expense accruals and other		15,978		6,259		26,191
Valuation allowance		(96,838)		(98,966)		(85,207)
Totals	$	(5,480)	$	(47,816)	$	(12,508)

We assess the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. As required under the provisions of ASC 740, we apply the concepts on an entity-by-entity, jurisdiction-by-jurisdiction basis. With respect to the analysis of certain entities in multiple jurisdictions, a significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2016. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future growth.

On the basis of the evaluations performed as required by the codification, valuation allowances totaling $96,838,000 were recorded on U.S. taxable REIT subsidiaries as well as entities in other jurisdictions to limit the deferred tax assets to the amount that we believe is more likely that not realizable. However, the amount of the deferred tax asset considered realizable could be adjusted if (i) estimates of future taxable income during the carryforward period are reduced or increased or (ii) objective negative evidence in the form of cumulative losses is no longer present (and additional weight may be given to subjective evidence such as our projections for growth). The valuation allowance rollforward is summarized as follows for the periods presented (dollars in thousands):


		Year Ended December 31,
		2016		2015		2014
Beginning balance	$	98,966	$	85,207	$	71,955
Additions:
Purchase price accounting		-		-		4,119
Expense		(2,128)		13,759		9,133
Ending balance	$	96,838	$	98,966	$	85,207

As a result of certain acquisitions, we are subject to corporate level taxes for any related asset dispositions that may occur during the five-year period immediately after such assets were owned by a C corporation (“built-in gains tax”). The amount of income potentially subject to this special corporate level tax is generally equal to the lesser of (a) the excess of the fair value of the asset over its adjusted tax basis as of the date it became a REIT asset, or (b) the actual amount of gain. Some but not all gains recognized during this period of time could be offset by available net operating losses and capital loss carryforwards. During the year ended December 31, 2016, we acquired certain additional assets with built-in gains as of the date of acquisition that could be subject to the built-in

WELLTOWER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

gains tax if disposed of prior to the expiration of the applicable ten-year period. We have not recorded a deferred tax liability as a result of the potential built-in gains tax based on our intentions with respect to such properties and available tax planning strategies.

Under the provisions of the REIT Investment Diversification and Empowerment Act of 2007 (“RIDEA”), for taxable years beginning after July 30, 2008, the REIT may lease “qualified health care properties” on an arm’s-length basis to a TRS if the property is operated on behalf of such subsidiary by a person who qualifies as an “eligible independent contractor.” Generally, the rent received from the TRS will meet the related party rent exception and will be treated as “rents from real property.” A “qualified health care property” includes real property and any personal property that is, or is necessary or incidental to the use of, a hospital, nursing facility, assisted living facility, congregate care facility, qualified continuing care facility, or other licensed facility which extends medical or nursing or ancillary services to patients. We have entered into various joint ventures that were structured under RIDEA. Resident level rents and related operating expenses for these facilities are reported in the consolidated financial statements and are subject to federal and state income taxes as the operations of such facilities are included in a TRS. Certain net operating loss carryforwards could be utilized to offset taxable income in future years.

Given the applicable statute of limitations, we generally are subject to audit by the Internal Revenue Service (“IRS”) for the year ended December 31, 2013 and subsequent years. The statute of limitations may vary in the states in which we own properties or conduct business. We do not expect to be subject to audit by state taxing authorities for any year prior to the year ended December 31, 2010. We are also subject to audit by the Canada Revenue Agency and provincial authorities generally for periods subsequent to May 2012 related to entities acquired or formed in connection with acquisitions, and by HM Revenue & Customs for periods subsequent to August 2012 related to entities acquired or formed in connection with acquisitions.

At December 31, 2016, we had a net operating loss (“NOL”) carryforward related to the REIT of $418,739,000. Due to our uncertainty regarding the realization of certain deferred tax assets, we have not recorded a deferred tax asset related to NOLs generated by the REIT. These amounts can be used to offset future taxable income (and/or taxable income for prior years if an audit determines that tax is owed), if any. The REIT will be entitled to utilize NOLs and tax credit carryforwards only to the extent that REIT taxable income exceeds our deduction for dividends paid. The NOL carryforwards will expire through 2035.

At December 31, 2016 and 2015, we had a net operating loss carryforward related to Canadian entities of $104,988,000, and $78,680,000, respectively. These Canadian losses have a 20-year carryforward period. At December 31, 2016 and 2015, we had a net operating loss carryforward related to United Kingdom entities of $158,156,000 and $179,598,000, respectively. These United Kingdom losses do not have a finite carryforward period.

19. Retirement Arrangements

We have a Supplemental Executive Retirement Plan (“SERP”), a non-qualified defined benefit pension plan, which provides one former executive officer with supplemental deferred retirement benefits. The SERP provides an opportunity for the participant to receive retirement benefits that cannot be paid under our tax-qualified plans because of the restrictions imposed by ERISA and the Internal Revenue Code of 1986, as amended. Benefits are based on compensation and length of service and the SERP is unfunded. Benefit payments are expected to total $4,179,000 during the next three fiscal years. We use a December 31 measurement date for the SERP. The accrued liability on our balance sheet for the SERP was $4,081,000 at December 31, 2016 ($5,474,000 at December 31, 2015).

On April 13, 2014, George L. Chapman, formerly the Chairman, Chief Executive Officer and President of the Company, informed the Board of Directors that he wished to retire from the Company, effective immediately. As a result of Mr. Chapman’s retirement, general and administrative expenses for the year ended December 31, 2014 included charges of $19,688,000 related to: (i) the acceleration of $9,223,000 of deferred compensation for restricted stock; and (ii) consulting, retirement payments and other costs of $10,465,000.

WELLTOWER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

20. Quarterly Results of Operations (Unaudited)

The following is a summary of our unaudited quarterly results of operations for the years ended December 31, 2016 and 2015 (in thousands, except per share data). The sum of individual quarterly amounts may not agree to the annual amounts included in the consolidated statements of income due to rounding.


		Year Ended December 31, 2016
		1st Quarter		2nd Quarter		3rd Quarter(1)		4th Quarter
Revenues		$	1,047,050	$	1,076,657	$	1,079,133	$	1,078,321
Net income (loss) attributable to common stockholders			148,969		195,474		334,910		333,044
Net income (loss) attributable to common stockholders per share:
	Basic	$	0.42	$	0.55	$	0.93	$	0.92
	Diluted		0.42		0.54		0.93		0.91

		Year Ended December 31, 2015
		1st Quarter		2nd Quarter		3rd Quarter		4th Quarter
Revenues		$	894,177	$	957,169	$	978,997	$	1,029,484
Net income attributable to common stockholders			190,799		312,573		182,043		132,929
Net income attributable to common stockholders per share:
	Basic	$	0.57	$	0.89	$	0.52	$	0.38
	Diluted		0.56		0.89		0.52		0.37

(1) The increase in net income and amounts per share are primarily attributable to gains on sales of real estate of $162,351,000 for the third quarter as compared to gains of $1,530,000 for the second quarter.

21. Variable Interest Entities

We have entered into joint ventures to own certain seniors housing and outpatient medical assets which are deemed to be variable interest entities (“VIE”). We have concluded that we are the primary beneficiary of these VIE’s based on a combination of operational control of the joint venture and the rights to receive residual returns or the obligation to absorb losses arising from the joint ventures. Except for capital contributions associated with the initial joint venture formations, the joint ventures have been and are expected to be funded from the ongoing operations of the underlying properties. Accordingly, such joint ventures have been consolidated, and the table below summarizes the balance sheets of consolidated VIE’s in the aggregate (in thousands):


		December 31, 2016		December 31, 2015
Assets
	Net real property owned	$	989,596	$	453,889
	Cash and cash equivalents		10,501		8,759
	Receivables and other assets		12,102		8,082
	Total assets(1)	$	1,012,199	$	470,730

Liabilities and equity
	Secured debt	$	450,255	$	147,021
	Accrued expenses and other liabilities		13,803		7,732
	Redeemable noncontrolling interests		185,556		70,090
	Total equity		362,585		245,887
	Total liabilities and equity	$	1,012,199	$	470,730

(1) Note that assets of the consolidated variable interest entities can only be used to settle obligations relating to such variable interest entities. Liabilities of the consolidated variable interest entities represent claims against the specific assets of the variable interest entities.

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