Business context and reporting period
Welltower Inc. is a healthcare real estate investment trust (REIT) with seniors housing operating, triple-net and outpatient medical properties in the United States, Canada and the United Kingdom. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods unless noted. Financial statement amounts below are in U.S. dollars.
Financial results and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $1.320bn | $1.126bn | $2.592bn | $2.223bn |
| Net income | $150.0m | $167.3m | $442.3m | $620.8m |
| Net income attributable to common stockholders | $137.8m | $154.4m | $418.2m | $592.1m |
| Diluted earnings per common share | $0.34 | $0.41 | $1.05 | $1.59 |
| FFO, a non-GAAP measure | $390.0m | $378.7m | $748.4m | $731.9m |
| Diluted FFO per share | $0.96 | $1.02 | $1.87 | $1.96 |
| Consolidated NOI, a non-GAAP measure | $619.0m | $557.2m | $1.220bn | $1.098bn |
| Same-store NOI, a non-GAAP measure | $409.8m | $417.4m | $826.5m | $825.0m |
| Cash provided by operating activities | Not presented separately | Not presented separately | $854.5m | $838.4m |
At June 30, 2019, total assets were $33.149bn and total liabilities were $16.696bn. Cash and cash equivalents were $268.7m, restricted cash $91.1m, and reported available borrowing capacity under the unsecured revolving credit facility was $1.130bn. Debt on the balance sheet comprised $1.869bn of unsecured credit facility and commercial paper, $10.606bn of senior unsecured notes, and $2.676bn of secured debt. The company reported net debt to book capitalization of 48%, interest coverage of 3.74x and fixed-charge coverage of 3.42x. It was in compliance with debt covenants.
Common dividends declared and paid were $0.87 per share in the quarter ($1.74 for six months), unchanged from 2018. Operating cash flow for the first half exceeded cash distributions to stockholders.
Material changes versus comparable periods
- Q2 revenue rose about 17% and consolidated NOI rose 11%; six-month revenue and NOI each increased about 17% and 11%, respectively. Acquisitions and portfolio growth contributed to the increases. Same-store NOI was down 1.8% in Q2 and up 0.2% for the first half.
- Common-stockholder net income fell 11% in Q2 and 29% for the first half, while diluted EPS declined to $0.34 and $1.05, respectively. Prior-year results included substantially higher gains on real estate dispositions: $348.9m in first-half 2018 versus $165.7m in first-half 2019. The 2019 first half also included an $18.7m provision for loan losses and $15.7m of debt-extinguishment losses.
- FFO increased 3% in Q2 and 2% for the first half in total, but diluted FFO per share decreased, reflecting the higher weighted-average share count. Shares issued increased following the conversion of all outstanding Series I preferred stock into common stock and common-equity issuance.
- First-half investing cash outflow was $2.531bn, compared with $130.3m of investing cash inflow in 2018, primarily reflecting higher acquisition spending. Cash disbursed for acquisitions was $2.719bn versus $595.6m.
- Debt and short-term borrowings increased. The company issued $1.05bn of senior notes, repaid $1.05bn of senior notes, drew on a $1bn bridge loan, and established a commercial paper program. Commercial paper outstanding was approximately $934m at quarter-end, with a weighted-average maturity of 31 days.
Outlook, commentary, risks and unusual items
- Management said liquidity was sufficient for expected uses and described plans to fund investments with operating cash, dispositions, equity and debt. It expects to reinvest disposition proceeds and may borrow to meet investment needs. The filing does not provide a clear numerical earnings or FFO outlook for the year.
- On July 16, 2019, after quarter-end, Welltower sold its 48-property Benchmark Senior Living portfolio for a gross sale price of $1.8bn. Proceeds were used to repay the $1bn bridge loan and $24m of secured debt.
- At quarter-end, 89 properties were classified as held for sale, with $1.704bn of real estate carrying value. The company recorded $9.9m of property impairment charges. It also wrote off loans previously fully reserved after recording an $18.7m loan-loss provision earlier in 2019; one loan with a $2.5m balance remained on non-accrual status.
- Welltower was committed to provide approximately $483.2m to complete construction projects. It also disclosed $48.1m of outstanding letters of credit.
- Risks include tenant/operator financial performance and ability to pay rent, healthcare regulation and reimbursement, capital-market access and borrowing costs, refinancing and short-term commercial-paper exposure, interest-rate and foreign-currency movements, property dispositions and reinvestment, and execution of acquisitions and developments. A 1% increase in interest rates was estimated to raise annual interest expense by $47.2m on variable-rate debt outstanding at June 30. The filing also notes potential exposure to LIBOR transition.
- Welltower adopted the new lease accounting standard in 2019. It recognized right-of-use assets and lease liabilities; management said adoption did not materially affect the income or cash-flow statements. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the Benchmark sale proceeds and subsequent debt repayment were completed as described, and how remaining proceeds are deployed.
- Whether reported NOI growth translates into durable same-store performance; Q2 same-store NOI declined 1.8% despite acquisition-driven portfolio growth.
- The quality and collectability of real estate loans, including the adequacy of the $68.4m allowance and the status of the non-accrual loan.
- Near-term refinancing and liquidity exposure, including commercial paper maturity and the impact of variable-rate borrowing costs.
- The effect of share issuance and preferred-stock conversion on per-share FFO, earnings and dividend coverage.
- Completion costs and timing for committed development projects, as well as the valuation and timing of properties held for sale.