Welltower Inc. — Q3 2020 Form 10-Q
Business context and reporting period. Welltower is a healthcare real estate REIT with Seniors Housing Operating, Triple-net and Outpatient Medical segments across the U.S., Canada and U.K. This unaudited filing covers the quarter and nine months ended September 30, 2020; comparisons are with the same 2019 periods.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $1,036.9 million | $1,266.1 million | $3,484.0 million | $3,858.5 million |
| Net income attributable to common stockholders | $325.6 million | $589.9 million | $815.1 million | $1,008.1 million |
| Diluted EPS attributable to common stockholders | $0.77 | $1.45 | $1.94 | $2.51 |
| FFO, a non-GAAP measure | $185.0 million | $352.4 million | $876.7 million | $1,100.8 million |
| FFO per diluted share | $0.44 | $0.87 | $2.10 | $2.74 |
| Consolidated NOI, a non-GAAP measure | $402.2 million | $610.5 million | $1,506.7 million | $1,831.0 million |
| Operating cash flow | Not presented by quarter | $1,109.6 million | $1,209.9 million |
Balance sheet and liquidity at September 30, 2020: Cash and cash equivalents were $1.604 billion and restricted cash was $551.6 million. Senior unsecured notes were $11.322 billion and secured debt was $2.460 billion on the balance sheet; no unsecured revolver or commercial paper balance was outstanding. Management reported approximately $4.6 billion of near-term available liquidity, including $3.0 billion of revolver capacity. Net debt to book capitalization was 41%; interest coverage was 6.23x and fixed-charge coverage was 5.52x for the quarter.
Cash from investing was $2.330 billion for the first nine months, primarily reflecting $3.523 billion of real estate sale proceeds. Financing activities used $1.666 billion. Dividends declared and paid were $0.61 per share in Q3; the nine-month total was $2.09 per share.
Material changes versus the prior comparable period
- Q3 revenue fell 18% and nine-month revenue fell 10% year over year. Nine-month common-stockholder earnings declined 19%; Q3 declined 45%.
- Q3 NOI fell 34% and nine-month NOI fell 18%. Nine-month same-store NOI declined 10%, with Seniors Housing Operating down 20%, Triple-net down 3%, and Outpatient Medical up 3%.
- COVID-19-related occupancy pressure and operating costs weighed on seniors housing. Spot occupancy in the Seniors Housing Operating portfolio declined from 85.6% in February to 78.4% in September.
- Dispositions and gains supported reported GAAP earnings: nine-month property sale proceeds were $3.523 billion and the net gain on real estate dispositions was $903.0 million. Excluding such gains, income from continuing operations before income taxes and other items was a loss of $1.4 million for the nine months, versus income of $377.1 million in 2019.
- Reported net income and cash flow also reflect significant noncash charges, including $126.3 million of asset impairments year to date and write-offs of straight-line rent receivables.
Outlook, commentary and risks
- Management expected Seniors Housing Operating spot occupancy to decline a further 75–125 basis points in Q4 relative to September 30; occupancy had declined about 30 basis points through October 23. No formal earnings or FFO guidance is provided in the supplied filing text.
- Management expected seniors housing expenses to remain elevated during the pandemic and potentially beyond. Incremental COVID-related operating costs, net of reimbursements, were $18.2 million in Q3 and approximately $68.6 million year to date. The company anticipated approximately $46 million of Provider Relief Fund proceeds for its Seniors Housing Operating portfolio in Q4, subject to receipt and recognition.
- Triple-net rent collections from March through September were generally consistent with historical rates, with no significant concessions or deferrals reported. For Outpatient Medical, over 99% of Q3 rent due was collected or approved for short-term deferral; 97% was collected in cash and 2% deferred. Unpaid deferrals or further tenant relief requests could reduce revenue and increase uncollectible receivables.
- Welltower wrote off $112.4 million of straight-line rent receivables in Q3, including $91.0 million related to Genesis Healthcare, which disclosed substantial doubt about its ability to continue as a going concern. Genesis-related loans and tenant credit remain material risks.
- The company recorded $33.0 million of Q3 loss on extinguishment of debt. It reported compliance with debt covenants at September 30. The filing also identifies risks from pandemic duration, occupancy, operator and tenant solvency, asset valuations, capital-market access, interest rates and foreign exchange.
Important facts for investors to verify
- Whether occupancy and resident move-ins recover, and whether the projected Q4 occupancy decline and elevated care costs materialize.
- Genesis Healthcare’s ability to meet rent and loan obligations, and the collectability of remaining receivables, loans and deferred rent.
- Whether the anticipated Provider Relief Funds are received and recognized, and how much pandemic-related expense remains after reimbursements.
- How recurring operating performance compares with reported earnings, given disposition gains, impairment charges and rent-receivable write-offs; review the company’s non-GAAP FFO and NOI reconciliations.
- Debt maturities, refinancing costs and liquidity availability, including the distinction between cash, restricted cash and committed borrowing capacity.