Welltower Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. Welltower is a REIT investing in seniors housing, post-acute care and outpatient medical real estate in the U.S., Canada and the U.K. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $1,236.4M | $1,091.5M | $3,459.3M | $3,212.4M |
| Net income | $84.2M | $89.3M | $705.1M | $630.4M |
| Net income attributable to common stockholders | $64.4M | $74.0M | $656.5M | $575.1M |
| Diluted EPS attributable to common stockholders | $0.17 | $0.20 | $1.76 | $1.56 |
| FFO, a non-GAAP measure | $285.3M | $295.7M | $1,017.2M | $986.4M |
| Consolidated NOI, a non-GAAP measure | $579.2M | $567.5M | $1,676.9M | $1,676.4M |
| Cash provided by operating activities | Not stated separately | Not stated separately | $1,211.1M | $1,162.5M |
- Q3 revenue growth reflected a 25% increase in seniors housing operating revenue, partly associated with acquisitions. Q3 common-stockholder earnings and FFO declined year over year; diluted FFO per share was $0.76 versus $0.80.
- For the first nine months, net income increased 12%, while common-stockholder earnings increased 14% and diluted FFO per share rose to $2.72 from $2.68. Net income included $373.7M of real estate disposition gains, versus $287.9M in 2017.
- Q3 segment NOI was $218.7M triple-net, $265.8M seniors housing operating and $94.0M outpatient medical. Same-store NOI declined 1% in Q3 to $433.5M; for the nine-month period it increased 1% to $1,303.6M.
- Cash provided by operations exceeded stockholder cash distributions in the first nine months. Investing used $2,133.3M, principally reflecting acquisitions; financing provided $899.6M. Cash, cash equivalents and restricted cash ended at $281.3M.
- At September 30, total assets were $30.25B and total liabilities $14.58B. Balance-sheet debt comprised $1.312B under the primary unsecured credit facility, $9.655B senior unsecured notes, $2.466B secured debt and $71.4M capital leases. These balances increased overall from year-end 2017.
- Cash and cash equivalents were $191.2M, with $90.1M restricted cash. The company reported $1.688B of available borrowing capacity under its primary unsecured credit facility. Net debt/book capitalization was 46%, versus 42% at September 2017; interest coverage was 3.38x and fixed-charge coverage 2.85x for Q3.
Material changes, transactions and outlook
- On July 26, 2018, Welltower completed its approximately $3.5B acquisition of Quality Care Properties (QCP), including repayment of QCP debt. It formed an 80/20 joint venture with ProMedica for real estate associated with 218 seniors housing properties. The 15-year absolute triple-net master lease starts at $179M annual cash rent, includes annual escalators and is backed by a full ProMedica corporate guarantee.
- The acquisition drove substantial portfolio growth and increased seniors housing operating revenue, while increasing borrowing needs. Welltower used a $1.0B term-loan facility and its credit facility; subsequent senior-note issuances helped repay those borrowings. In July, it also replaced its unsecured credit facility with a new $3.7B facility.
- Q3 total revenue rose 13% year over year, but net income fell 6% and common-stockholder income fell 13%. Nine-month rental income and interest income declined, reflecting dispositions, the Genesis lease restructuring and loan payoffs; seniors housing resident fees increased.
- Management announced a 2018 annual common dividend of $3.48 per share, or $0.87 quarterly, unchanged from 2017. No specific earnings or operating guidance is provided in the supplied filing text. Management stated liquidity was sufficient for expected uses, subject to capital availability and cost.
- Risks include operator/tenant inability to pay rent, healthcare regulation and reimbursement changes, access to capital and refinancing costs, interest-rate and foreign-currency movements, and the ability to reinvest disposition proceeds. Sunrise represented 15% of nine-month NOI; ProMedica and Revera each represented 7%, Genesis 6%, and Brookdale 7%.
- Unusual items included $39.6M of nine-month asset impairment charges, $16.0M of debt-extinguishment losses, and $5.6M of gains on derivatives and financial instruments. The company had $332.8M of remaining construction funding commitments and $343.1M of purchase obligations; total disclosed contractual obligations were $20.9B.
- Management reported compliance with debt covenants. The filing states that adoption of the new lease standard, effective for Welltower January 1, 2019, is expected to materially affect the balance sheet through recognition of certain operating-lease assets and liabilities. Routine legal proceedings were not expected by management to have a material adverse effect; no material risk-factor changes were reported.
Important facts for investors to verify
- QCP integration and ProMedica’s operating performance, rent coverage and ability to meet lease obligations, including the lease’s escalators and guarantee.
- Whether the acquisition-driven revenue and NOI gains translate into sustainable FFO and cash flow, given Q3 declines in common-stockholder earnings, FFO and same-store NOI.
- Debt growth, variable-rate exposure and refinancing needs. The filing estimates that a 1% rate increase would raise annual interest expense by about $28.7M on outstanding variable-rate debt.
- Tenant and operator concentration, particularly Sunrise, ProMedica, Revera, Brookdale and Genesis, and the status of impaired loans, including the $68.4M allowance.
- Disposition gains and impairment assumptions, held-for-sale assets, construction commitments, and the expected balance-sheet effects of adopting lease accounting in 2019.