Welltower Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing is an annual report, not a standalone fourth-quarter report; fourth-quarter results are also summarized below. Unless noted, amounts are U.S. dollars.
Business context
Welltower is a healthcare and seniors housing REIT with investments in the United States, Canada and the United Kingdom. At year-end, its consolidated portfolio included 1,426 properties across triple-net, seniors housing operating and outpatient medical segments. Seniors housing operations generate resident fees and incur property operating costs; triple-net properties are generally leased to operators.
Financial and operating performance
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Revenue | $3.860 billion | $3.344 billion | +15% |
| Net income | $888.5 million | $512.3 million | +73% |
| Net income attributable to common stockholders | $818.3 million | $446.7 million | +83% |
| Diluted EPS | $2.34 | $1.45 | +61% |
| Funds from operations (FFO), diluted | $4.03 per share | $3.82 per share | +5% |
| Net operating income (NOI) | $2.238 billion | $1.940 billion | +15% |
| Same-store cash NOI | $1.214 billion | $1.192 billion | +2% |
| Cash provided by operating activities | $1.373 billion | $1.139 billion | +21% |
Reported NOI mix was 53.6% triple-net, 31.4% seniors housing operating and 15.0% outpatient medical. Revenue was 56% resident fees and 41% rental income. Occupancy was 87.2% for triple-net properties (87.7% in 2014), 91.0% for seniors housing operating (90.3%), and 95.1% for outpatient medical (94.4%). Triple-net rent coverage declined to 1.49x from 1.54x; seniors housing operating same-store cash NOI fell 3%, while triple-net and outpatient medical same-store cash NOI each rose 3%.
Fourth-quarter revenue was $1.029 billion versus $867.8 million a year earlier. Common-stockholder net income was $132.9 million, or $0.37 diluted EPS, compared with $188.6 million, or $0.57, in fourth-quarter 2014.
Liquidity, debt and capital
- Year-end cash and cash equivalents were $360.9 million, with restricted cash of $61.8 million. Available borrowing capacity under the primary unsecured credit facility was $1.610 billion.
- Year-end debt included $8.548 billion of senior unsecured notes, $3.509 billion of secured debt and $835 million drawn on the revolving credit facility. Total liabilities were $13.665 billion; total assets were $29.024 billion.
- Debt to book capitalization was 46%, versus 45% in 2014. Adjusted interest coverage improved to 4.57x from 3.86x and fixed-charge coverage to 3.61x from 3.06x. The company reported compliance with debt covenants.
- Operating cash flow exceeded cash distributions to stockholders. Common dividends paid were $3.30 per share for 2015; the board approved a $0.86 quarterly rate, or $3.44 annualized, beginning with the February 2016 dividend, subject to board approval.
- Welltower raised $3.272 billion in gross proceeds from common stock and unsecured debt during 2015 and reported $4.820 billion of pro rata gross new investments. It acquired or invested in 164 properties/JVs for a stated $3.766 billion and sold 37 properties for stated proceeds of $1.049 billion.
Material changes, outlook and risks
- Revenue and NOI growth primarily reflected acquisitions and new properties entering service. Same-store cash NOI growth was more modest at 2% overall; senior housing operating same-store cash NOI declined 3%.
- Welltower recorded a $280.4 million gain on real estate dispositions and a $58.4 million derivative gain associated with the Genesis transaction. It also recorded a $35.6 million other-than-temporary impairment on its Genesis-related stock investment, $34.7 million of net debt-extinguishment losses and $110.9 million of transaction costs. These items affect interpretation of reported earnings growth.
- The company disposed of its life science investments during 2015. It had $258.97 million of construction investments outstanding and was committed to provide approximately $525.59 million more to complete investment-property construction.
- Management described capital markets as supportive and expected investment opportunities to remain available, while noting that dispositions exceeding new investments could reduce revenue and operating cash flow. The filing provides no numerical earnings or FFO guidance.
- Notable relationship exposure: Genesis accounted for 17% of reported NOI, and its lease covered 187 facilities. Sunrise accounted for 13% of reported NOI; Welltower also reported approximately $948 million of 2015 revenue from Sunrise. Operator performance, occupancy, reimbursement changes, labor and insurance costs, and licensing or regulatory action could impair operators’ ability to pay rent or manage properties.
- Other material risks include interest-rate and foreign-currency exposure, access to capital, refinancing and covenant risks, joint-venture dependence, construction delays and costs, and continued REIT qualification. A 1% rise in rates was estimated to increase annual interest expense by $22.4 million on year-end variable-rate debt.
- Ernst & Young issued unqualified audit opinions on the financial statements and internal control over financial reporting. The audit scope excluded certain 2015 acquisitions representing 4% of year-end assets and less than 1% of revenue and NOI.
Most important facts for investors to verify
- How much of earnings growth came from recurring property operations versus the disposition and derivative gains, and how should the Genesis investment impairment be assessed?
- Whether the decline in triple-net coverage and seniors housing operating same-store NOI signals property-level pressure, especially among major operators.
- Genesis’s and Sunrise’s current financial condition, lease or management performance, and the precise exposure represented by their reported concentration figures.
- Whether construction commitments, scheduled debt maturities and dividend payments remain adequately funded by operating cash flow and available capital.
- Whether the proposed $3.44 annualized common dividend is sustainable, given that it is subject to future board approval and REIT distribution requirements.