Business context and reporting period
Welltower Inc. is a healthcare and seniors housing REIT with properties in the U.S., Canada and the U.K. Its three segments are Seniors Housing Operating, Triple-net and Outpatient Medical. This is the 10-K for the fiscal year ended December 31, 2019; the filing also reports unaudited fourth-quarter results.
Financial performance and position
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $5.121 billion | $4.700 billion | +9% |
| Net income | $1.330 billion | $829.8 million | +60% |
| Net income attributable to common stockholders | $1.232 billion; $3.05 diluted EPS | $758.3 million; $2.02 diluted EPS | +63% total; +51% per share |
| FFO attributable to common stockholders | $1.577 billion; $3.91 per diluted share | $1.392 billion; $3.71 per diluted share | +13% total; +5% per share |
| Consolidated NOI | $2.431 billion | $2.267 billion | +7% |
| Cash from operating activities | $1.536 billion | $1.584 billion | -3% |
| Cash distributions to stockholders | $1.401 billion | $1.349 billion | +4% |
Consolidated NOI was about 47% of revenue. Net income includes $748.0 million of net gains on real estate dispositions, so the increase in GAAP earnings substantially reflects property sales, not just recurring operations. Fourth-quarter revenue was $1.263 billion and net income attributable to common stockholders was $224.3 million, or $0.55 diluted EPS.
At year-end, total assets were $33.381 billion and net real estate investments were $31.119 billion. Debt and lease obligations totaled $15.389 billion, including $1.588 billion of unsecured credit facility and commercial paper borrowings, $10.337 billion of senior unsecured notes, $2.991 billion of secured debt and $474 million of lease liabilities. Cash and cash equivalents were $284.9 million; restricted cash was $100.8 million. Available borrowing capacity under the unsecured revolving credit facility was $1.411 billion. Net debt/book capitalization was 46.5%, versus 45.0% in 2018; adjusted interest coverage was 4.14x.
Material changes versus the prior comparable period
- Revenue growth reflected portfolio activity, including the May 2019 acquisition of the CNL Healthcare Properties portfolio for approximately $1.25 billion, as well as other acquisitions. Total property acquisition investment was reported at $4.074 billion.
- Welltower sold its Benchmark Senior Living portfolio for approximately $1.8 billion, recognizing a gain of about $520 million. Total 2019 property disposition proceeds were $2.651 billion.
- Same-store NOI was mixed: Seniors Housing Operating fell 0.2%; Triple-net rose 1.5%; Outpatient Medical rose 1.1%. Reported year-end occupancy was 86.9% for Seniors Housing Operating (87.5% in 2018), 84.3% for Triple-net (84.9%), and 94.1% for Outpatient Medical (93.1%).
- Welltower converted all outstanding 6.50% Series I convertible preferred stock into common shares in February 2019. Average diluted shares rose to 403.8 million from 375.3 million.
- Net debt/book capitalization increased, while net debt/market capitalization declined to 29.6% from 31.3%, reflecting the higher year-end share price and market capitalization.
Outlook, commentary, risks and unusual items
- The board announced a 2020 annual common dividend of $3.48 per share, unchanged from 2019. The filing provides no specific earnings, FFO or same-store growth guidance.
- Management said liquidity was sufficient for expected uses, subject to the availability and cost of external capital, and stated its intention to reinvest disposition proceeds. Planned uses include property investment, capital improvements, debt service and dividends.
- Unusual items include $84.2 million of losses on debt extinguishment, $28.1 million of asset impairment charges, and an $18.7 million provision for loan losses that was charged off. Held-for-sale properties had a net carrying value of $1.253 billion, with expected gross proceeds of approximately $1.961 billion.
- Construction in progress was $507.9 million, with a further $446.6 million committed to complete projects. Purchase obligations included $261 million for a definitive agreement to acquire outpatient medical facilities in 2020.
- Key risks include operator and tenant financial distress, labor and operating-cost pressures, occupancy and oversupply, Medicare/Medicaid reimbursement and regulatory changes, and exposure to Sunrise, ProMedica and Genesis. Sunrise represented 14% of consolidated NOI; ProMedica 9%. Foreign currency and Brexit-related uncertainty also affect international operations. A 1% increase in rates would add an estimated $34.7 million to annual interest expense on year-end variable-rate debt, assuming balances were unchanged.
- Management and the independent auditor reported effective internal controls; the auditor gave an unqualified opinion on the financial statements. Management said pending legal matters were not expected to have a material adverse effect, while noting that outcomes and indemnitor capacity remain uncertain.
Important facts for investors to verify
- How much of 2019 earnings growth is recurring: distinguish disposition gains and other one-time items from FFO, same-store NOI and operating cash flow.
- Whether occupancy and operating trends improve, particularly in Seniors Housing Operating, where same-store NOI declined and occupancy eased.
- Operator credit and concentration exposure, including Sunrise’s 14% NOI share and ProMedica’s 9% share, and Genesis-related loans and investments.
- Debt maturity, refinancing and liquidity needs, including $354 million of consolidated secured debt due in 2020, variable-rate exposure and contractual obligations.
- Execution and funding of the held-for-sale pipeline, construction commitments and announced outpatient medical acquisition; compare realized proceeds and costs with stated expectations.
- Whether the unchanged $3.48 dividend remains supported by cash generation and capital needs; REIT distributions are subject to board discretion.