Welltower Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Welltower, formerly Health Care REIT, Inc., is a healthcare REIT with seniors housing, post-acute and outpatient medical properties in the U.S., Canada and the U.K. Unless otherwise stated, dollar amounts below are in millions.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $979.0 | $847.5 | $2,830.3 | $2,475.8 |
| Net income attributable to common stockholders | $182.0 | $136.3 | $685.4 | $258.1 |
| Diluted EPS | $0.52 | $0.44 | $1.97 | $0.86 |
| Funds from operations (FFO), diluted per share | $392.3; $1.11 | $316.5; $1.01 | $1,077.1; $3.10 | $889.6; $2.96 |
| Net operating income (NOI) | $570.3 | $492.4 | $1,646.8 | $1,435.4 |
| Same-store cash NOI | $427.9 | $426.3 | $1,273.1 | $1,258.2 |
- Revenue grew 15.5% in the quarter and 14.3% year to date. Q3 NOI increased 16%; FFO increased 24%, or 10% per diluted share. Nine-month NOI increased 15% and FFO 21%, or 5% per diluted share.
- NOI was approximately 58% of revenue in both comparable periods. Same-store cash NOI was essentially flat in Q3 and up 1% for the first nine months.
- Segment NOI increased year over year in Q3: triple-net $305.5 million (+18%), seniors housing operating $179.0 million (+10%) and outpatient medical $85.8 million (+22%). Seniors housing same-store cash NOI declined 4% in Q3 and 2% year to date; management cited adverse currency movements. Triple-net and outpatient medical same-store cash NOI rose 3% and 2%, respectively, year to date.
- Operating cash flow for the first nine months was $1,036.3 million, versus $854.2 million. Investing activities used $2,505.6 million, principally reflecting acquisitions, property investment and loan advances; financing activities provided $1,289.9 million. Cash distributions to stockholders were $901.6 million.
Balance sheet, debt and liquidity
- At September 30, total assets were $27.46 billion, total liabilities $12.15 billion and total equity $15.14 billion. Cash and cash equivalents were $292.0 million, with restricted cash of $74.8 million.
- Balance-sheet debt comprised $490.0 million drawn on the unsecured credit facility, $7.93 billion of senior unsecured notes and $2.98 billion of secured debt. Management reported debt to book capitalization of 43%; the filing also reported interest coverage of 4.39x and fixed-charge coverage of 3.45x for Q3.
- The company reported $1.95 billion of available borrowing capacity under its primary unsecured credit facility. The $2.5 billion revolver, together with term facilities, is scheduled to expire in October 2018, with an extension option. The company was in compliance with debt covenants at quarter-end.
- Debt principal maturities total approximately $10.92 billion for senior unsecured notes and consolidated secured debt; the largest stated annual amounts are $1.66 billion in 2019 and $6.43 billion thereafter. These figures exclude interest and certain other contractual obligations.
Changes, transactions and unusual items
- Net income growth substantially exceeded FFO growth, partly reflecting nonrecurring and disposition-related gains. Nine-month results included $249.0 million of net real estate disposition gains, compared with $36.3 million in 2014, and a $58.4 million gain from exercising an option related to Genesis Healthcare. Q3 disposition gains were $2.0 million, versus $29.6 million a year earlier.
- Welltower invested $2.53 billion in acquisitions and joint venture investments on a stated pro-rata purchase-price basis during the first nine months. It raised approximately $1.48 billion gross from a February common-stock offering and issued $750 million of 4.0% notes due 2025 in May. Common shares outstanding increased to approximately 353.0 million from 328.8 million at year-end 2014.
- After quarter-end, the company issued an additional $500 million of 4.0% notes due 2025 and reported an October acquisition with a $236.1 million cash component. The company’s name was changed from Health Care REIT, Inc. to Welltower Inc.
- The quarterly common dividend was $0.825 per share, up from $0.795 in Q3 2014. The annualized rate was $3.30 per share.
Outlook, commentary and risks
- Management said liquidity was sufficient for expected cash uses and that it anticipated further investment opportunities. It expected to reinvest disposition proceeds and use the credit facility for investment needs where required. The filing provides no quantified earnings forecast; management cautioned that interim results do not necessarily indicate full-year results.
- Key exposures include operators’ and tenants’ ability to pay rent and service loans, healthcare reimbursement and regulatory changes, interest rates, foreign exchange, access to capital, and the ability to acquire, sell or reinvest properties on favorable terms. The top five operator relationships represented 48% of reported nine-month NOI; Genesis alone represented 17%.
- At quarter-end, the company had $197.6 million of construction in progress and was committed to provide approximately $408.4 million more to complete construction. It also reported $73.7 million of letters of credit and $673.9 million of purchase obligations, including the post-quarter acquisition amount.
- A 1% increase in interest rates was estimated to increase annual interest expense on then-outstanding variable-rate debt by approximately $15.5 million. Management estimated that a 1% currency-rate movement would change annualized net income from Canadian and U.K. investments by less than $1 million, before considering other effects.
- The company reported no material change in risk factors from its 2014 Form 10-K. It stated that ordinary-course legal proceedings were not expected to have a material adverse effect. Disclosure controls were judged effective, with no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- How much reported earnings growth is sustainable after excluding the $249.0 million year-to-date property-disposition gains and $58.4 million Genesis-related option gain.
- Whether seniors housing operating performance and same-store cash NOI improve, particularly given the Q3 decline and reported foreign-exchange pressure.
- Operator concentration and credit quality, including Genesis’s 17% share of reported NOI and the capacity of operators to meet lease and loan obligations.
- Funding needs and dilution from acquisitions, construction commitments, debt maturities and further equity issuance; confirm post-quarter financing and acquisition details.
- Exposure to healthcare reimbursement or regulatory changes, variable-rate debt and foreign currency, and continued compliance with debt covenants.