Welltower Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017; filed July 28, 2017. Welltower is a healthcare-focused REIT operating seniors housing, post-acute and outpatient medical properties in the United States, Canada and the United Kingdom. Amounts below are in U.S. dollars; financial statement amounts have been converted from thousands to millions where shown.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $1,058.6m | $1,076.7m | $2,120.9m | $2,123.7m |
| Net income | $203.4m | $210.7m | $541.1m | $376.2m |
| Net income attributable to common stockholders | $188.4m | $195.5m | $501.1m | $344.4m |
| Diluted EPS | $0.51 | $0.54 | $1.37 | $0.96 |
| FFO attributable to common stockholders, a non-GAAP measure | $384.4m | $417.0m | $690.6m | $808.2m |
| Consolidated NOI, a non-GAAP measure | $556.7m | $617.8m | $1,108.9m | $1,215.2m |
- Q2 revenue declined 2%; resident fees and services rose 10% to $677.0m, while rental income fell 16% to $355.6m, mainly reflecting property dispositions. Six-month revenue was nearly unchanged.
- Q2 common-stockholder earnings and diluted EPS declined 4% and 6%, respectively. Six-month common earnings rose 45%, substantially reflecting a $286.2m net gain on real estate dispositions; FFO fell 15%.
- Six-month NOI decreased 9%; same-store NOI declined 1% to $945.8m. In Q2, seniors housing operating NOI rose 6%, while triple-net NOI fell 22% and outpatient medical NOI fell 4%.
- Calculated consolidated NOI as a share of revenue was about 52.6% in Q2 2017 versus 57.4% in Q2 2016, and 52.3% versus 57.2% for the six-month periods. This is a derived ratio, not a company-reported GAAP margin.
- Six-month operating cash flow was $844.1m, compared with $855.7m. Investing activities provided $899.1m, mainly reflecting $1,203.8m of real estate sale proceeds. Financing activities used $1,732.0m, including $660.4m of cash distributions to stockholders.
- At June 30, cash was $442.3m and restricted cash $45.4m. The company reported $2,582.5m of available borrowing capacity under its primary unsecured credit facility.
- Balance-sheet debt included $385.0m drawn on the primary unsecured facility, $8,250.9m of senior notes, $2,670.9m of secured debt and $73.1m of capital leases. Management reported net debt of $10,937.7m and a 41% net-debt-to-book-capitalization ratio. Debt covenants were met.
Material changes and unusual items
- Welltower sold 55 properties during the first six months for reported proceeds of $1,172.5m and recorded a $286.2m net gain. Dispositions exceeded acquisitions, weighing on triple-net rental revenue and NOI.
- The company extinguished $987.9m of secured debt during the six-month period and recorded a $36.9m loss on extinguishment of debt. Secured debt on the balance sheet declined from $3,477.7m at year-end 2016 to $2,670.9m.
- Welltower redeemed all 11.5m shares of its 6.5% Series J preferred stock for $287.5m and recorded a $9.8m redemption charge. The annual common dividend increased to $3.48 per share, or $0.87 quarterly.
- Impairment charges were $24.7m for the six-month period. Results from unconsolidated entities included a $27.1m loss, with management citing goodwill and intangible impairments and nonrecurring tax adjustments among the factors.
- Common shares outstanding increased to about 368.9m at June 30 from 362.6m at year-end 2016; the company raised $424.5m net from common-stock issuances during the first half.
Outlook, management commentary and risks
- No specific numerical earnings or FFO guidance is provided in the supplied filing text. Management says liquidity is sufficient for expected uses of cash, subject to the availability and cost of external capital, and expects disposition proceeds to be reinvested in new investments. Investment activity, financing and reinvestment remain dependent on market conditions.
- Management’s stated objectives include protecting capital, pursuing portfolio growth and paying consistent dividends. The company expects to maintain a capital structure consistent with its current profile; this is not a quantified forecast.
- Key exposures include tenants’ and operators’ ability to pay rent and generate operating cash, reimbursement and regulatory changes affecting healthcare, property and relationship concentration, lease renewals and expirations, access to and cost of capital, construction execution, and foreign-exchange and interest-rate movements.
- Five operator relationships represented 41% of six-month consolidated NOI: Sunrise 14%, Genesis 9%, Brookdale 7%, Revera 7% and Benchmark 4%. The filing notes Revera controls Sunrise.
- A 1% rise in rates, assuming unchanged balances, would increase annual interest expense on variable-rate debt by approximately $20.0m. Management estimated a 10% currency-rate movement would change quarterly net income from Canadian and U.K. investments by less than $3.5m, including existing hedges.
- Construction in progress was $321.7m, with approximately $354.9m of additional funding commitments to complete it. Ordinary-course legal proceedings were reported; management did not expect their resolution to have a material adverse effect, while noting outcomes cannot be predicted. No material risk-factor changes from the 2016 Form 10-K were reported.
- Management said adoption of the new lease accounting standard was expected to materially affect the balance sheet through recognition of certain operating-lease assets and liabilities. The company was still evaluating the impact of other pending accounting standards.
Important facts for investors to verify
- Whether ongoing FFO, same-store NOI and cash generation support the dividend after the substantial asset sales and portfolio changes.
- How much of the six-month earnings increase depends on disposition gains, and whether sale proceeds can be reinvested at attractive returns.
- Operator and tenant performance, particularly exposure to major relationships, and any subsequent developments affecting rent collections or property operations.
- Debt maturities, refinancing costs, variable-rate exposure, covenant headroom and the continued availability of the unsecured credit facility and equity-market funding.
- Progress, remaining commitments and expected returns on development projects, alongside impairments and the performance of unconsolidated investments.