Welltower Inc. — 2018 Form 10-K
Business context and reporting period. Welltower is a healthcare real estate investment trust with seniors housing operating, triple-net, and outpatient medical properties in the U.S., Canada, and U.K. This filing covers the fiscal year ended December 31, 2018; fourth-quarter figures are identified separately below.
Financial and operating highlights
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $4.700 billion | $4.317 billion | +9% |
| Net income | $829.8 million | $540.6 million | +53% |
| Net income attributable to common stockholders | $758.3 million; $2.02 diluted EPS | $463.6 million; $1.26 diluted EPS | +64% in income |
| Funds from operations (FFO), attributable to common stockholders | $1.392 billion; $3.71 diluted per share | $1.166 billion; $3.16 diluted per share | +19% in FFO |
| Net cash from operating activities | $1.584 billion | $1.434 billion | +10% |
| Consolidated net operating income (NOI) | $2.267 billion | $2.233 billion | +2% |
| Same-store NOI | $1.551 billion | $1.544 billion | Approximately flat |
| Common dividends | $3.48 per share | $3.48 per share | Unchanged |
Derived from reported figures, GAAP net margin was approximately 17.7% in 2018 versus 12.5% in 2017. The comparison reflects, among other items, higher real estate disposition gains and substantial impairment charges; it should not be read as a measure of recurring operating profitability. FFO and NOI are non-GAAP measures, not substitutes for GAAP earnings or cash flow.
Fourth quarter: Revenue was $1.241 billion, and net income attributable to common stockholders was $101.8 million, or $0.27 per diluted share. In Q4 2017, revenue was $1.104 billion and common stockholders recorded a loss of $111.5 million, or $0.31 per share. The prior-year quarter included $99.8 million of asset impairments and a $63.0 million loan-loss provision.
Liquidity and debt: At year-end, cash and cash equivalents were $215.4 million, restricted cash was $100.8 million, and reported available borrowing capacity under the primary unsecured credit facility was $1.853 billion. Long-term obligations were $13.297 billion, including $1.147 billion outstanding under the unsecured credit facility, $9.603 billion of senior unsecured notes, and $2.476 billion of secured debt. Net debt to book capitalization was 45.0%, up from 42.9%; adjusted interest coverage was 4.11x versus 4.36x. The company reported compliance with all debt covenants.
Operating cash flow exceeded cash distributions to stockholders in 2018. Investing activities used $2.386 billion of cash, reflecting acquisition and investment activity; financing activities provided $818.4 million. The company reported $3.718 billion of 2018 property acquisitions and joint venture investments and $1.555 billion of dispositions.
Material changes and notable items
- Welltower completed the approximately $3.5 billion acquisition of Quality Care Properties in July 2018. It formed an 80/20 joint venture with ProMedica for 218 properties under a 15-year triple-net master lease, with initial annual cash rent of $179 million and a full corporate guarantee.
- Segment revenue mix shifted toward Seniors Housing Operating: 69% of total revenue in 2018 versus 65% in 2017; Triple-net fell to 19% from 22%. Seniors Housing Operating NOI rose 12%, while Triple-net NOI declined 7% and Outpatient Medical NOI declined 1%.
- 2018 net income included a $415.6 million net gain on real estate dispositions and $115.6 million of asset impairment charges. The Triple-net segment recorded $108.0 million of impairment; the filing also reports $10.8 million of net lease termination fees in that segment.
- Welltower issued senior unsecured notes during 2018, including $1.35 billion in August, and repaid $450 million of 2.25% notes at maturity. It also established a new $3.7 billion unsecured credit facility in July.
- Average occupancy was 87.5% for Seniors Housing Operating (86.5% in 2017), 84.9% for Triple-net (85.8%), and 93.1% for Outpatient Medical (93.7%). Triple-net customer coverage increased to 1.39x from 1.34x.
Outlook, risks, and contingencies
Management’s stated priorities are protecting capital, enhancing stockholder value, and paying consistent cash dividends. The Board announced a 2019 annual common dividend of $3.48 per share, unchanged from 2018. The filing does not provide a specific earnings or FFO forecast.
Management said liquidity was sufficient for expected uses, subject to the availability and cost of external capital. Key risks include operator performance and ability to pay rent or repay loans; government reimbursement, regulation, and care-facility compliance; seniors housing occupancy, labor costs, and local oversupply; financing costs, refinancing and covenant exposure; and foreign currency, Brexit, and international tax uncertainty. Sunrise-managed properties represented approximately 15% of NOI; Sunrise-related revenue was approximately 25% of total revenue. Genesis represented approximately 6% of NOI, and Welltower reported a $187 million loan balance related to Genesis in its business disclosure.
At year-end, the company had $436.984 million of additional construction funding commitments and $1.25 billion of purchase obligations for a definitive agreement to acquire outpatient medical facilities in 2019. It also disclosed $1.138 billion of future operating lease obligations, primarily for ground leases and offices. Management said ordinary-course legal proceedings were not expected to have a material adverse effect; outcomes remain uncertain.
Subsequent events included a February 2019 issuance of $1.05 billion of senior notes and announced redemptions of $1.05 billion of notes. Welltower also announced conversion of all outstanding Series I preferred stock into common stock. The financial statements received an unqualified audit opinion, and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether QCP/ProMedica lease performance, rent escalators, and the transition of acquired or held-for-sale properties meet expectations.
- Trends in same-store NOI, occupancy, and costs in Seniors Housing Operating, particularly given its growing share of revenue and reliance on operators such as Sunrise.
- Triple-net tenant coverage, lease collections, and exposure to Genesis, Brookdale, ProMedica, and government-reimbursement pressures.
- Debt maturities, variable-rate exposure, credit-facility availability, and the effect of higher financing costs on leverage and coverage.
- The realizability of the $115.6 million of 2018 impairment charges and the status and valuation of properties classified as held for sale.
- Execution, funding, and returns on the disclosed 2019 outpatient medical acquisition and construction commitments.