Welltower Inc. — Q3 2017 Form 10-Q
Business and period: Welltower is a healthcare real estate investment trust (REIT) with seniors housing and post-acute, outpatient medical, and triple-net properties in the United States, Canada, and the United Kingdom. This unaudited filing covers the three and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods. Unless noted otherwise, dollar amounts below are in millions.
Financial results and key metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $1,091.5 | $1,079.1 | $3,212.4 | $3,202.8 |
| Net income attributable to common stockholders | $74.0 | $334.9 | $575.1 | $679.4 |
| Diluted GAAP EPS | $0.20 | $0.93 | $1.56 | $1.89 |
| FFO | $295.7 | $401.9 | $986.4 | $1,210.1 |
| Diluted FFO per share | $0.80 | $1.11 | $2.68 | $3.37 |
| Consolidated NOI | $567.5 | $605.5 | $1,676.4 | $1,820.7 |
| Same-store NOI | $464.1 | $447.0 | $1,366.0 | $1,345.9 |
| Net cash from operating activities | Not stated for quarter | Not stated for quarter | $1,162.5 | $1,280.2 |
Q3 revenue increased 1% year over year, while common-stockholder net income, diluted EPS, FFO, and consolidated NOI declined. Same-store NOI increased 4% in Q3 and 1% year to date. Segment Q3 NOI was $244.9 million for triple-net, $225.1 million for seniors housing operating, and $96.8 million for outpatient medical. Compared with Q3 2016, segment NOI changed by -21%, +13%, and +2%, respectively; same-store NOI rose 4% in triple-net, 5% in seniors housing operating, and 1% in outpatient medical.
The earnings decline reflects, among other factors, the prior-year quarter’s $162.4 million real estate disposition gain versus $1.6 million in Q3 2017. Nine-month disposition gains were $287.9 million versus $163.9 million. FFO, NOI, and same-store NOI are non-GAAP measures as defined by the company.
Balance sheet, debt, and liquidity
- At September 30, 2017, total assets were $28.18 billion and total liabilities were $12.55 billion. Cash and cash equivalents were $236.2 million; restricted cash was $59.1 million.
- Balance-sheet borrowings included $420.0 million under the primary unsecured credit facility, $8.32 billion of senior unsecured notes, $2.71 billion of secured debt, and $72.7 million of capital lease obligations. The filing reports $11.12 billion of principal due on senior unsecured notes and secured debt, excluding credit-facility borrowings and capital leases.
- Available borrowing capacity under the primary unsecured credit facility was $2.55 billion. The facility had a $3.0 billion revolving commitment; $25.6 million of letters of credit reduced its availability.
- Net debt to book capitalization was 42%; net debt to undepreciated book capitalization was 36%; and net debt to market capitalization was 29%. Q3 interest coverage was 3.63x and fixed-charge coverage was 2.97x, down from 5.24x and 4.17x, respectively, in Q3 2016.
- Nine-month operating cash flow of $1.16 billion was below $1.28 billion in 2016. Cash distributions to stockholders were $992.6 million. Investing cash flow was positive $529.2 million, mainly reflecting $1.24 billion of property-sale proceeds; financing cash flow was negative $1.90 billion.
- The company reported compliance with all debt covenants at quarter-end. Secured debt principal was reduced through $1.00 billion of extinguishments during the first nine months, at a blended average rate of 5.3%.
Material changes and unusual items
- Welltower acquired 18 properties or joint-venture interests for a stated pro-rata investment amount of $519.4 million during the first nine months, and disposed of 61 properties for reported proceeds of $1.21 billion. Dispositions exceeded acquisitions, contributing to lower triple-net rental revenue and NOI.
- Q3 other expenses were $99.6 million, including $89.2 million of non-capitalizable transaction costs related primarily to a joint-venture transaction, property conversions from triple-net to seniors housing operating, and restructuring or termination of existing relationships. Nine-month other expenses were $117.6 million. The company also reported severance-related costs associated with certain executive and employee departures.
- Welltower redeemed all 11.5 million shares of its 6.5% Series J preferred stock for $287.5 million and recorded a $9.8 million redemption charge. Preferred stock dividends declined year over year.
- Foreign-currency translation contributed $70.8 million of other comprehensive income for the first nine months, compared with a $48.5 million loss in 2016. The company uses foreign-currency debt and derivatives to manage exposure.
Outlook, risks, and contingencies
The filing provides no quantified earnings or FFO guidance. Management stated that it believes liquidity is sufficient for expected uses of cash and that disposition proceeds are generally expected to be reinvested; it may use the credit facility and issue debt or equity to fund investments or repay borrowings. The board had increased the annual common dividend to $3.48 per share, paid quarterly at $0.87. These statements are forward-looking and are not assurances of future results.
- Management identifies tenant and operator financial health and ability to pay rent, healthcare regulations and reimbursement policy, capital-market access and refinancing costs, interest rates, foreign exchange, property re-leasing, and the timing and returns on reinvested sale proceeds as important risks.
- Construction in progress totaled $344.7 million, with approximately $317.5 million of additional funding commitments to complete projects. Contractual purchase obligations totaled $333.6 million, including construction and other commitments.
- Operating lease obligations were $1.11 billion and capital lease obligations were $90.3 million. Outstanding letters of credit totaled $162.6 million. These obligations are distinct from reported debt balances.
- A proposed gift of the corporate headquarters to the University of Toledo Foundation was conditional on terms expiring November 30, 2017; the company expected to record an expense once the conditions were satisfied.
- Management stated that ordinary-course legal proceedings were not expected to have a material adverse effect, while noting that outcomes are uncertain and defense costs may be significant. The filing reported no material changes to the risk factors in the 2016 Form 10-K.
- A hypothetical 1% increase in interest rates was estimated to raise annual interest expense by approximately $20.6 million on variable-rate debt outstanding at quarter-end. A 10% currency-rate movement was estimated to change net income from UK and Canadian investments by less than $4.5 million, including existing hedges.
Important facts for investors to verify
- How much of the steep year-over-year decline in GAAP earnings and FFO reflects prior-year disposition gains, the 2017 transaction and debt-extinguishment costs, and underlying operating performance.
- Whether the improvement in same-store NOI continues, particularly in seniors housing, and how it compares with total NOI trends amid portfolio sales and conversions.
- The sustainability of rent and resident-fee collections, operator and tenant financial condition, and exposure to major relationships; Sunrise represented 14% and Genesis 9% of nine-month NOI.
- Debt maturities, refinancing terms, interest-rate exposure, and the effect of further changes in capital availability or credit ratings on liquidity and investment plans.
- Whether planned construction funding, other contractual commitments, and the conditional headquarters gift proceed on the terms and timing described.
- The reported cash-flow and non-GAAP measures against the full financial statements and reconciliations; management cautions that interim results are not necessarily indicative of full-year results.