Welltower Inc. — Q2 2021 Form 10-Q
Business context and reporting period. Welltower is a healthcare real estate investment trust with seniors housing operating, triple-net and outpatient medical businesses across the U.S., U.K. and Canada. This unaudited filing covers the quarter and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. Amounts below are in U.S. dollars unless stated otherwise.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $1,141.0m | $1,188.5m | $2,193.1m | $2,447.1m |
| Net income | $45.8m | $159.2m | $117.9m | $488.6m |
| Net income attributable to common stockholders | $26.3m | $179.2m | $97.8m | $489.5m |
| Diluted EPS attributable to common stockholders | $0.06 | $0.42 | $0.23 | $1.17 |
| Consolidated NOI | $498.3m | $527.7m | $933.1m | $1,104.5m |
| Same-store NOI at Welltower’s share | $391.7m | $410.2m | $778.6m | $861.6m |
| FFO per diluted share | $0.59 | $0.80 | $1.28 | $1.66 |
NOI margin, calculated as consolidated NOI divided by revenue, was approximately 43.7% in Q2 2021 versus 44.4% in Q2 2020, and 42.6% for the first half versus 45.1% in the prior-year period. These are derived ratios, not company-reported GAAP margins.
- Cash flow: First-half operating cash flow was $638.9m, down from $811.6m. Investing activities used $1,205.1m, compared with $1,142.2m provided in 2020, reflecting investment activity and fewer property-sale proceeds. Financing activities used $648.1m.
- Liquidity: June 30 cash and cash equivalents were $513.6m and restricted cash was $295.1m. The $4.0bn revolving credit facility was undrawn at quarter-end; management reported approximately $4.5bn of near-term available liquidity.
- Debt: Balance-sheet carrying amounts were $11.16bn of senior unsecured notes and $2.30bn of secured debt, with no credit-facility or commercial-paper balance at quarter-end. Net debt/book capitalization was 43%; interest coverage was 3.30x and fixed-charge coverage was 2.93x.
- Dividends: $0.61 per common share was declared and paid for Q2; first-half dividends were $1.22 per share, versus $1.48 in 2020.
Material changes versus prior period
- Q2 revenue declined 4% and first-half revenue declined 10% year over year. First-half resident fees fell 10% and rental income fell 16%; lower occupancy, property dispositions and lease collectibility assessments were among the cited factors.
- Q2 common-stockholder net income fell 85%. The quarter included a $55.6m debt-extinguishment loss and a $44.7m gain on real estate dispositions, compared with a $0.2m debt-extinguishment loss and a $155.9m disposition gain in Q2 2020.
- First-half operating cash flow decreased 21%. NOI declined 16% and same-store NOI declined 10% year over year.
- Segment same-store NOI for the first half declined 21.8% in Seniors Housing Operating and 1.6% in Triple-net, while Outpatient Medical increased 3.3%.
- Net debt/book capitalization increased from 41% at December 31, 2020 to 43% at June 30, 2021; net debt/market capitalization improved from 30% to 26%, alongside a higher share price.
Outlook, management commentary, risks and unusual items
- COVID-19 and occupancy: Seniors Housing Operating spot occupancy recovered from a pandemic low of 72.3% on March 12 to 74.6% on June 30. It rose a further approximately 40 basis points month-to-date through July 23. Management warned that the pandemic, new variants, vaccine effectiveness, operating costs and recovery pace remain uncertain; costs may stay elevated.
- Rent collections: Welltower collected approximately 95% of rent due under triple-net leases in the first half and reported no significant rent deferrals or concessions. Operators’ financial health and ability to pay remain risks, particularly for long-term/post-acute care facilities. The company reserved $49.2m of straight-line rent receivables in the first half and uses cash-basis recognition when collectibility is not probable.
- Transactions: A $1.577bn agreement to acquire 86 Holiday Retirement seniors housing properties was expected to close in Q3 2021. Welltower also advanced plans to exit its Genesis Healthcare relationship, including property transfers and sales, an $86m lease-termination fee payable upon successful transitions, and a potential additional $170m debt reduction in exchange for an equity interest, subject to milestones.
- Financing and capital: The company issued $750m of 2.80% notes due 2031 and $500m of 2.05% notes due 2029, and repaid specified 2023 notes and a term loan. It established a new $4.7bn unsecured credit facility. ATM forward sales were also used to raise equity; outstanding forward sales expected to settle for cash may dilute shareholders.
- Other items and risks: First-half impairment charges were $47.3m; the company also reported a $7.6m loan-loss provision. Debt covenants were met in all material respects. Management cited interest-rate and currency exposure, refinancing and capital-market access, operator/tenant credit, regulatory and insurance issues, and COVID-19 uncertainty. No formal earnings guidance is provided in the supplied filing text.
Important facts for investors to verify
- Whether occupancy gains continue and translate into improved Seniors Housing Operating revenue and same-store performance.
- Whether triple-net operators sustain rent payments, and the eventual collectibility and recovery of reserved rent and loan balances, including Genesis-related amounts.
- Completion, financing and operating transition of the Holiday Retirement acquisition, and the conditions and timing of the Genesis exit arrangements.
- Cash flow coverage of dividends and investment commitments, including the substantial construction and acquisition obligations disclosed in the filing.
- Potential dilution and proceeds from outstanding ATM forward sales, and the effect of debt maturities, interest rates and foreign exchange movements on leverage and coverage.