WELLTOWER INC. quarterly report, Q1 FY2018

Welltower Inc. — Q1 2018 Form 10-Q

Business context and reporting period. Unaudited results for the three months ended March 31, 2018; comparisons are with Q1 2017 unless noted. Welltower is a healthcare-focused REIT with 1,257 properties across the U.S., Canada and the U.K., operating in triple-net, seniors housing operating and outpatient medical segments.

Key financial metrics

• Revenue increased 3%. Resident fees and services rose 10% to $736 million, while rental income declined 6% to $343 million and interest income fell 29% to $15 million.
• Common-stock dividends were $0.87 per share, unchanged year over year. Operating cash flow exceeded the $336 million of cash distributions to stockholders.
• Net income included a $338 million net gain on real estate dispositions. Impairment charges were $28 million. Accordingly, GAAP earnings growth materially reflects property-sale gains and should be distinguished from recurring operating performance.
• NOI margin was approximately 49% of revenue versus 52% in Q1 2017; portfolio mix and dispositions affected the comparison. Same-store NOI increased 3%.

Material changes and operating performance

• Total NOI fell 2%, chiefly reflecting portfolio changes and dispositions. By segment, triple-net NOI decreased 11% to $223 million; seniors housing operating NOI increased 8% to $225 million; outpatient medical NOI was down 1% to $92 million.
• Same-store NOI was flat in triple-net, up 3% in seniors housing operating and up 7% in outpatient medical.
• Investments in property acquisitions totaled approximately $476 million, while property disposition proceeds were approximately $895 million. Disposition gains were higher than in Q1 2017, at $338 million versus $244 million.
• Operating expenses rose 9% to $556 million, principally reflecting higher seniors housing operating costs. Interest expense increased 4% to $123 million.
• Cash from operations declined 4%. Investing cash inflow was $421 million, primarily reflecting property-sale proceeds; financing cash outflow was $835 million, including debt repayment and stockholder distributions.

Debt, liquidity and commitments

• At March 31, total reported debt, including the revolving facility, senior unsecured notes, secured debt and capital leases, was approximately $11.35 billion, versus $11.73 billion at year-end 2017. Total liabilities were $12.30 billion.
• Cash and cash equivalents were $203 million, with an additional $61 million of restricted cash. The company reported $2.11 billion of available borrowing capacity under its primary unsecured credit facility.
• Net debt to book capitalization was 42%; net debt to undepreciated book capitalization was 35%. Quarterly interest coverage was 6.67x and fixed-charge coverage was 5.49x. The company reported compliance with all debt covenants.
• During the quarter, Welltower repaid $450 million of 2.25% senior notes at maturity and extinguished $183 million of secured debt. After quarter-end, it issued $550 million of 4.25% senior notes due 2028, generating approximately $545 million net proceeds.
• Contractual obligations totaled $17.63 billion, including debt principal and interest, leases and purchase obligations. The company had $181 million of construction in progress and committed approximately $393 million of additional construction funding.

Outlook, risks and unusual items

• The filing provides no specific quantified earnings or FFO guidance. Management stated that liquidity was sufficient for expected uses of cash, subject to capital availability and cost, and expects disposition proceeds generally to be reinvested.
• After quarter-end, Welltower agreed to acquire Quality Care Properties for $20.75 per share and announced an 80/20 real estate joint venture with ProMedica. Welltower’s estimated JV investment is $2.2 billion; the proposed 15-year absolute triple-net lease has an 8% initial cash yield and specified rent escalators. A $1.0 billion unsecured bridge facility was committed to help fund the transaction. Completion and financing remain subject to execution and transaction risks.
• Operator and tenant credit, occupancy and operating performance, healthcare reimbursement and regulation, access to capital, interest rates, foreign exchange, property dispositions and reinvestment are cited risks. Sunrise represented 15% of reported NOI, Revera 7%, Brookdale 7% and Genesis 6%; the filing notes Revera controls Sunrise.
• A $7 million gain on derivatives and financial instruments reflected, in part, fair-value accounting for an available-for-sale equity investment. Debt-extinguishment losses were $12 million. A $68 million allowance for Genesis-related loan losses remained in place; management considered it sufficient, and no loans were on non-accrual at quarter-end.
• Adoption of revenue-recognition guidance did not have a significant impact. The company expected the forthcoming lease-accounting standard to have a material balance-sheet impact, including recognition of certain right-of-use assets and lease liabilities.

Important facts for investors to verify

• Whether the QCP acquisition and ProMedica joint venture close on the announced terms, and the resulting funding, leverage and lease economics.
• Whether same-store NOI growth persists and how ongoing dispositions, acquisitions and property transitions affect total NOI and cash generation.
• The financial condition and payment capacity of major operators and tenants, including exposure to Sunrise/Revera, Brookdale and Genesis.
• Debt maturities, refinancing costs, variable-rate exposure and capacity to meet construction and other contractual commitments.
• How much reported earnings growth is attributable to disposition gains and other nonrecurring or accounting items versus recurring operating performance.