Welltower Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Welltower is a REIT investing in seniors housing, post-acute care and outpatient medical properties in the U.S., Canada and the U.K. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless noted.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $1,266.1m | $1,236.4m | $3,858.5m | $3,459.3m |
| Net income | $647.9m | $84.2m | $1,090.3m | $705.1m |
| Net income attributable to common stockholders | $589.9m | $64.4m | $1,008.1m | $656.5m |
| Diluted EPS attributable to common stockholders | $1.45 | $0.17 | $2.51 | $1.76 |
| FFO per diluted share | $0.87 | $0.76 | $2.74 | $2.72 |
| Operating cash flow | — | $1,209.9m | $1,211.1m |
- Revenue mix and trends: Q3 resident fees and services were $834.1m, down 4.7%; rental income was $412.1m, up 20.2%. Nine-month revenue rose 11.5%, reflecting portfolio changes and acquisitions.
- Property operations: Q3 consolidated NOI, a non-GAAP measure, was $610.5m, up 5.4%; same-store NOI was $440.8m, up 0.7%. Nine-month NOI was $1,831.0m, up 9.2%, while same-store NOI increased 0.5% to $1,217.4m. Q3 NOI was approximately 48.2% of revenue; NOI is not a GAAP profit measure.
- Cash flow and investment: Nine-month operating cash flow was essentially flat year over year. Investing activities used $1,058.3m, including $3,004.8m of acquisition spending and $2,601.1m of property-sale proceeds. Financing activities used $132.5m. Cash, cash equivalents and restricted cash totaled $330.7m at period-end.
- Debt and liquidity: Balance-sheet debt was approximately $13.69bn, excluding lease liabilities; lease liabilities were $454.5m. Management reported net debt to book capitalization of 45%, net debt to market capitalization of 26%, and Q3 interest and fixed-charge coverage of 7.61x and 6.96x, respectively. The company had $265.8m cash and $1.665bn available under its revolving facility. It reported compliance with debt covenants.
- Dividends: Common dividends were $0.87 per share quarterly, or $2.61 per share for the first nine months, unchanged from 2018. The board announced an annual dividend of $3.48 per common share.
Material changes versus the prior comparable period
- Reported earnings rose sharply, principally because Q3 included a $570.3m net gain on real estate dispositions. The Benchmark Senior Living portfolio sale generated a $520m gain on sale and gross proceeds of $1.8bn. Disposal-related gains are not a recurring operating result.
- Q3 also included $65.8m of net debt-extinguishment losses; nine-month losses were $81.5m. The company repaid or extinguished substantial debt, including four senior note issues during 2019.
- FFO, which excludes real estate disposition gains and other specified items, increased 8.2% for the first nine months, but FFO per diluted share increased only 0.7%, to $2.74. Average diluted shares rose to 402.4m from 373.6m.
- Q3 Seniors Housing Operating NOI declined 4.4% year over year, while its same-store NOI was nearly flat. Triple-net same-store NOI grew 1.2% and Outpatient Medical same-store NOI grew 1.2%.
- Welltower adopted the new lease accounting standard on January 1, 2019, recognizing right-of-use assets and lease liabilities. Management stated adoption did not materially affect the income statement or cash flows. The company also converted all outstanding Series I preferred stock into common shares.
Outlook, commentary and risks
- The filing provides no specific numerical earnings or FFO guidance. Management said liquidity was sufficient for expected uses of cash, anticipated reinvesting disposition proceeds, and expected to use its revolving facility and commercial paper program when investment needs exceed available cash.
- Management’s strategy emphasizes consistent cash dividends, portfolio diversification and growth in NOI. These expectations depend on access to capital and on tenants, operators and joint-venture partners making contractual payments and sustaining property performance.
- Key risks identified include operator or tenant financial distress, health-care regulation and reimbursement changes, capital-market access and cost, interest-rate and foreign-currency movements, lease renewals and expirations, competition, and the ability to reinvest property-sale proceeds at comparable returns. The company estimated that a 1% rise in rates would increase annual interest expense by about $31.9m on then-outstanding variable-rate debt.
- At September 30, five largest operator relationships represented approximately 37% of NOI, led by Sunrise Senior Living at 14% and ProMedica at 9%. Construction in progress was $466.3m, with approximately $460.8m of additional funding commitments to complete construction.
- Other items to monitor include a $18.7m nine-month provision for loan losses, recorded to fully reserve certain loans later written off; $28.0m of nine-month asset impairment charges; and $24.3m of secured debt associated with properties held for sale. Management reported no material change in previously disclosed risk factors and no pending legal proceeding it believed would have a material adverse effect.
Important facts for investors to verify
- How much of the reported earnings increase reflects property-sale gains versus recurring property operations; compare GAAP earnings with FFO and same-store NOI.
- Whether modest same-store NOI growth, particularly in Seniors Housing Operating, persists after the Benchmark sale and portfolio transitions.
- Debt maturities, refinancing costs and liquidity needs alongside acquisition, construction and dividend commitments.
- Tenant/operator credit quality and concentration, including Sunrise, ProMedica, Revera and Genesis HealthCare, and the collectability of loans and rent.
- Effects of share issuance and preferred-stock conversion on per-share results, dividends and future capital requirements.
- Potential impacts of lease expirations, interest rates, foreign-exchange movements and the expected adoption of the credit-loss accounting standard in 2020.