Business context and reporting period
Welltower Inc. is a healthcare real estate investment trust with seniors housing operating, triple-net and outpatient medical properties in the U.S., Canada and the U.K. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods.
Financial performance and position
Amounts below are in millions of dollars unless noted otherwise. Per-share amounts are actual.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $1,188.5 | $1,320.1 | $2,447.1 | $2,592.4 |
| Net income | $159.2 | $150.0 | $488.6 | $442.3 |
| Net income attributable to common stockholders | $179.2 | $137.8 | $489.5 | $418.2 |
| Diluted EPS attributable to common stockholders | $0.42 | $0.34 | $1.17 | $1.05 |
| FFO per diluted share | $0.80 | $0.96 | $1.66 | $1.87 |
| Consolidated NOI | $527.7 | $619.0 | $1,104.5 | $1,220.4 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $811.6 | $854.5 |
- Profit and operating trends: Q2 common-stockholder income rose despite lower revenue, principally because of a $155.9 million net gain on real estate dispositions. Six-month disposition gains were $418.7 million, versus $165.7 million in 2019. Excluding gains and other adjustments, FFO declined: Q2 FFO was $335.6 million, down 14%, and six-month FFO was $691.7 million, down 8%.
- NOI and margins: NOI fell 15% in Q2 and 9% for the first half. Approximate consolidated NOI as a share of revenue was 44.4% in Q2 2020 versus 46.9% in Q2 2019; this is a simple calculation, not a company-reported margin. Q2 same-store NOI declined 11% overall: seniors housing operating fell 24.7%, triple-net increased 0.6%, and outpatient medical increased 3.1% at Welltower’s share.
- Cash flow and investing: First-half investing activities provided $1,142.2 million, largely reflecting $1,998.1 million of property-sale proceeds, compared with $2,531.4 million used in investing in 2019. Financing activities used $504.3 million. Cash, cash equivalents and restricted cash ended the period at $1,826.2 million.
- Debt and liquidity: At June 30, cash and cash equivalents were $1,678.8 million and restricted cash was $147.5 million. Senior unsecured notes carried at $11,816.0 million and secured debt at $2,619.7 million; no revolving-credit or commercial-paper balance was outstanding. The company reported $3.0 billion of available revolving capacity and approximately $4.2 billion of near-term available liquidity as of July 2. Net debt to book capitalization was 43%; interest coverage was 4.29x and fixed-charge coverage was 3.84x. Welltower reported compliance with debt covenants.
- Dividends: The quarterly dividend was reduced to $0.61 per share beginning with Q1 2020; first-half dividends were $1.48 per share versus $1.74 a year earlier.
Material changes versus the prior comparable period
- COVID-19-related occupancy declines and higher operating costs weighed on seniors housing results. Seniors Housing Operating Q2 revenue declined 15% and NOI declined 36% year over year.
- Outpatient medical revenue rose 11% and NOI 15% in Q2, supported in part by acquisitions and development conversions, including the 2019 CNL Healthcare Properties portfolio acquisition. Triple-net Q2 revenue decreased 3% and NOI decreased 3%.
- Depreciation and amortization increased to $265.4 million in Q2 from $248.1 million. Q2 impairment expense rose to $75.2 million from $9.9 million; first-half impairment expense was $103.0 million versus $9.9 million.
- The company sold 73 properties during the first half, reporting $1,998.1 million of cash proceeds and a $418.7 million net disposition gain. First-half acquisitions required $390.8 million of cash, compared with $2,718.8 million in the prior-year period.
- Welltower issued $1.6 billion of senior unsecured notes in the first half and entered into a $1.0 billion two-year unsecured term loan in April. On June 30 it issued $600 million of 2.75% notes due 2031. After quarter-end, proceeds funded tender offers for $426 million of 2023 notes; the company also repaid $140 million of the term loan on July 2.
Outlook, management commentary and risks
- COVID-19: Spot occupancy in the Seniors Housing Operating portfolio declined from 85.8% in February to 80.1% in June and 79.4% in July. Management expected further occupancy losses in Q3, but at a lesser rate than in Q2. Seniors Housing Operating incurred incremental COVID-related costs of $43.1 million in Q2 and $50.4 million in the first half; management expected costs to remain elevated during the pandemic and potentially beyond.
- Rent collections: Triple-net rent collections from March through July were described as consistent with historical rates, with no significant concessions or deferrals to date; management noted that operators, particularly long-term/post-acute providers, could face further pressure. For outpatient medical, over 99% of Q2 rent due was collected or approved for short-term deferral: 87% collected and 12% deferred. Approximately 98% of July rent was collected or approved for deferral, with about 95% collected. Repayment of deferred rent and future tenant requests remain risks.
- Uncertainty and contingencies: Management said pandemic duration and effects could materially adversely affect results, cash flows and financial condition. Risks include further occupancy declines, operator or tenant payment difficulties, uncollectible receivables and loans, additional impairments, construction delays, and disruption to acquisitions and dispositions. The filing provides no specific earnings or FFO guidance.
- Unusual items and commitments: The company recorded $32.3 million of straight-line rent receivable write-offs in Q1 in connection with a lease amendment, in addition to a Q2 reserve of $1.8 million. It had $411.7 million of construction in progress and approximately $332.1 million of additional construction funding commitments; it also expected to fund another $212.3 million related to in-substance real estate investments.
- Other disclosures: The filing reported no material change to previously disclosed risk factors and no legal proceedings believed likely to have a material adverse effect. Management stated disclosure controls were effective.
Important facts for investors to verify
- Whether seniors housing occupancy stabilizes or continues to fall, and how that affects revenue, NOI and operator viability.
- Whether COVID-related labor, cleaning and protective-equipment costs remain elevated, and whether rent deferrals and other receivables are repaid as expected.
- How much reported earnings depended on property-sale gains, and whether impairment charges or loan-loss provisions increase.
- Liquidity after the July debt transactions, upcoming maturities, covenant headroom and the company’s ability to fund construction and other commitments.
- The sustainability of FFO and the reduced dividend relative to operating cash flow and ongoing capital needs.