Welltower Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Welltower is a healthcare real estate REIT with Seniors Housing Operating, Triple-net and Outpatient Medical segments across the U.S., U.K. and Canada. Unless indicated otherwise, dollar amounts below are U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $1.474 billion | $1.240 billion | $4.342 billion | $3.433 billion |
| Net income (loss) | $(2.7) million | $190.3 million | $158.8 million | $308.3 million |
| Net income (loss) attributable to common stockholders | $(6.8) million; $(0.01) per diluted share | $179.7 million; $0.42 | $144.9 million; $0.32 | $277.5 million; $0.65 |
| FFO, a non-GAAP measure | $362.9 million; $0.78 per diluted share | $345.7 million; $0.80 | $1.120 billion; $2.45 | $881.7 million; $2.09 |
| Consolidated NOI, a non-GAAP measure | $561.7 million | $510.4 million | $1.722 billion | $1.443 billion |
| Same-store NOI at Welltower’s share, a non-GAAP measure | $409.8 million | $384.5 million | $1.184 billion | $1.125 billion |
Revenue increased 19% year over year in Q3 and 26% for the nine-month period. Growth reflects portfolio expansion and higher Seniors Housing Operating revenue; it should not be read as same-property growth. Q3 net loss contrasted with prior-year profit, which included $120.0 million of real estate disposition gains. Nine-month net income also declined, in part because prior-year results included larger disposition gains and a debt-extinguishment gain. Nine-month FFO increased 27%, while Q3 FFO per share declined 3% year over year.
Nine-month operating cash flow was $1.075 billion, versus $992.0 million a year earlier. Investing used $3.285 billion, principally for acquisitions, development and other investments; financing provided $2.304 billion. Cash, cash equivalents and restricted cash totaled $425.2 million at period end. Dividends were $0.61 per share for Q3 and $1.83 per share for the nine months, unchanged from comparable 2021 periods.
At September 30, 2022, balance-sheet debt comprised $654.7 million of unsecured credit facility and commercial paper borrowings, $12.325 billion of senior unsecured notes and $2.122 billion of secured debt. Cash and restricted cash were $425.2 million. Management reported approximately $3.8 billion of near-term available liquidity, including $3.345 billion of available revolver capacity. Net debt to book capitalization was 42%; interest coverage was 3.39x for Q3. The company was in material compliance with debt covenants.
Material changes and operating trends
- Average seniors housing occupancy rose from 74.9% in Q3 2021 to 78.0% in Q3 2022, continuing a quarterly improvement from 76.3% at year-end 2021.
- Q3 Seniors Housing Operating same-store NOI grew 15.4%; Triple-net grew 2.3%; Outpatient Medical grew 1.3%. The filing attributes overall growth to recovery and portfolio changes, including acquisitions. The 2021 Holiday Retirement acquisition contributed to higher reported Seniors Housing revenue and expenses.
- The company invested $2.293 billion in acquisitions during the first nine months and issued $2.185 billion net from common stock, primarily through its at-the-market program. It had $2.571 billion of remaining ATM capacity at September 30, excluding outstanding forward-sale agreements.
- In March, Welltower issued $550 million of 3.85% senior notes due 2032. It amended its unsecured credit facility in June, with $4.0 billion of revolving capacity and term-loan facilities. Commercial paper outstanding was $614.7 million, with a six-day weighted-average maturity and 3.43% weighted-average rate at quarter end.
Outlook, risks and unusual items
- No specific earnings or FFO guidance is provided in the supplied filing text. Management said liquidity was sufficient for expected uses, subject to availability and cost of external capital.
- COVID-19, operator and tenant finances, occupancy, labor and health-and-safety costs remain risks. Management expects Seniors Housing Operating expenses to remain elevated during the pandemic and potentially beyond. Nine-month COVID-related property expenses were $28.2 million, partly offset by $33.1 million of government grants recognized as a reduction in operating expenses. Long-term/post-acute operators faced comparatively greater occupancy pressure, which could affect rent payments.
- Rising rates are a sensitivity: the filing estimates that a 1% increase would raise annual interest expense by $30.5 million on variable-rate debt outstanding at September 30, assuming balances unchanged. Refinancing access and cost, foreign-exchange movements and REIT qualification are also identified risks.
- Construction in progress was $1.012 billion, with approximately $1.860 billion of additional funding commitments to complete construction. Additional commitments for in-substance real estate investments were $236.5 million.
- A Q2 2022 agreement resolving litigation with National Health Investors terminated a leasehold interest and generated $58.6 million of other income from derecognizing a right-of-use asset and lease liability; this is a nonrecurring item.
- In November 2022, Welltower agreed to transition 147 ProMedica skilled nursing facilities and sell them to a new joint venture in which Welltower would own 85% and Integra Health 15%. ProMedica would surrender its 15% interest and receive release from the skilled-nursing lease obligation; working-capital support and regulatory approvals are part of the transition. This post-quarter transaction merits review for terms, execution and operating impacts.
- Management reported effective disclosure controls. New enterprise resource planning and performance-management systems were implemented during Q3; management said it would continue monitoring related internal controls. No material change to previously disclosed risk factors was reported.
Key facts for investors to verify
- How much of revenue and NOI growth reflects acquisitions, occupancy recovery and other portfolio changes versus durable same-store performance.
- Whether occupancy gains continue and whether labor costs, COVID-related expenses and operator liquidity affect operating margins and rent collections.
- The final terms, regulatory approvals, transition costs and expected financial effects of the ProMedica skilled-nursing transaction.
- Debt maturity and refinancing plans, variable-rate exposure, liquidity availability and the funding needs for construction and other commitments.
- Potential dilution and settlement timing from ATM issuances and outstanding forward-sale agreements, alongside the company’s dividend coverage.