Business context and reporting period
Welltower Inc. is a healthcare real estate investment trust (REIT) with seniors housing, post-acute care and outpatient medical properties in the United States, Canada and the United Kingdom. This Form 10-K reports the fiscal year ended December 31, 2017; it includes fourth-quarter results but is an annual filing.
At year-end, the consolidated portfolio comprised 1,286 properties. Seniors housing operating generated 65% of reported revenue, triple-net 22% and outpatient medical 13%. Seniors housing operating was also the largest share of NOI, at 39.5%.
Financial and operating performance
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $4.317 billion | $4.281 billion | +1% |
| Net income | $540.6 million | $1.082 billion | -50% |
| Net income attributable to common stockholders | $463.6 million; $1.26 diluted EPS | $1.012 billion; $2.81 diluted EPS | -54% in income |
| Funds from operations attributable to common stockholders (FFO, non-GAAP) | $1.166 billion; $3.16 diluted per share | $1.583 billion; $4.39 diluted per share | -26% in FFO |
| Consolidated NOI (non-GAAP) | $2.233 billion | $2.404 billion | -7% |
| Same-store NOI (non-GAAP) | $1.519 billion | $1.500 billion | +1% |
| Cash provided by operating activities | $1.434 billion | $1.639 billion | -13% |
Triple-net NOI fell 20% to $967.1 million, while seniors housing operating NOI rose 8% to $880.0 million and outpatient medical NOI rose 1% to $384.1 million. Year-end occupancy was 85.8% for triple-net properties, 86.5% for seniors housing operating and 93.7% for outpatient medical; each was below 2016. Triple-net rent coverage declined to 1.34x from 1.43x.
At December 31, 2017, total assets were $27.944 billion, total liabilities $12.644 billion and total equity $14.925 billion. Reported debt balances included $719 million outstanding under the unsecured credit facility, $8.332 billion of senior unsecured notes and $2.609 billion of secured debt. Cash and cash equivalents were $243.8 million, with $65.5 million of restricted cash; available borrowing capacity under the primary unsecured credit facility was $2.259 billion. Net debt to book capitalization was 42.9%, unchanged from 2016; net debt to undepreciated book capitalization improved to 36.3% from 37.4%.
Common dividends were $3.48 per share for 2017, or $0.87 quarterly. The Board approved the same annualized rate for 2018, subject to its review and approval. Operating cash flow exceeded cash distributions to stockholders in 2017, though the filing does not establish that the dividend is covered by any particular non-GAAP earnings measure.
Material changes versus the prior comparable period
- Revenue edged up, but common-stockholder income, diluted EPS and FFO fell sharply. The filing attributes much of the earnings deterioration to increased impairment and loan-loss charges, unusual expenses, and lower disposition gains.
- Welltower recorded $124.5 million of asset impairments, compared with $37.2 million in 2016, and a $63.0 million loan-loss provision, compared with $10.2 million. The loan provision related to Genesis HealthCare loans; the year-end allowance was $68.4 million.
- Property dispositions exceeded acquisitions: the company sold 65 properties for reported proceeds of $1.320 billion and acquired or invested in 26 properties for a stated pro-rata investment amount of $742.0 million. This contributed to lower triple-net revenue and NOI.
- Debt reduction included extinguishing $1.080 billion of secured debt at a blended average interest rate of 5.2%. Secured debt fell to $2.609 billion from $3.478 billion. The company also redeemed all 11.5 million shares of its 6.5% Series J preferred stock.
- Operating cash flow declined by $204.9 million, while investing activities provided $154.6 million, primarily reflecting property-sale proceeds. Financing activities used $1.914 billion, including $1.326 billion of cash distributions to stockholders.
Outlook, commentary, risks and unusual items
The filing provides no quantified company-wide earnings or operating guidance. Management stated that liquidity was sufficient for expected uses of cash, subject to the availability and cost of external capital, and expected to reinvest disposition proceeds. It also emphasized that actual performance may differ materially from expectations.
After year-end, Welltower and Genesis agreed to reduce Genesis’s annual cash rent obligation by $35 million effective January 1, 2018, extend the master lease by five years and reset rent in 2023 subject to property-level performance. Welltower also agreed to fund a priority-repayment $24 million loan tranche and amend the rate on approximately $267 million of Genesis real estate loans to 12% beginning February 15, 2018, comprising 7% cash interest and 5% paid-in-kind. Genesis was to seek commitments to repay at least $105 million of obligations; failure to do so by April 1, 2018 would increase the cash-pay interest component by approximately $2 million annually. These changes are significant to rent, credit exposure and future cash receipts.
Other unusual 2017 items included $88.3 million of non-capitalizable costs associated with a seniors housing joint-venture transaction and related property/relationship restructuring; a $40.7 million expense for the planned donation of the corporate headquarters; and an $18.3 million other-than-temporary impairment of the Genesis equity investment. Fourth-quarter common-stockholder results were a loss of $111.5 million, or $0.31 per diluted share; the company attributed the decline primarily to $99.8 million of asset impairments and the $63.0 million Genesis loan-loss provision.
Key risks include operator and tenant financial distress, especially Genesis and Brookdale; reliance on Sunrise to manage a substantial seniors housing portfolio; occupancy, labor, competition and oversupply pressures; Medicare and Medicaid reimbursement and regulatory changes; joint-venture risks; property impairment and development execution; interest-rate, foreign-currency and capital-market exposure; and maintaining REIT qualification. Management reported compliance with debt covenants at year-end. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective.
Important facts for investors to verify
- Review the Genesis restructuring’s effect on rent, loan collectability, cash interest and potential recovery of the loan allowance; assess whether the agreed repayment commitments were obtained.
- Reconcile the 2017 earnings decline to the $124.5 million impairment charge, $63.0 million loan-loss provision, $177.8 million of other expenses and $344.3 million of real estate disposition gains.
- Assess whether same-store NOI growth can persist as occupancy declined across all three property types and triple-net coverage weakened.
- Evaluate dividend capacity against recurring operating cash flow, capital spending, debt service and the company’s substantial contractual obligations.
- Monitor operator concentration and performance, particularly Sunrise’s 14% share of consolidated NOI and Genesis’s 9% share, as well as the planned 2018 dispositions and lease expirations.
- Consider leverage, variable-rate exposure—$2.295 billion outstanding, with a 1% rate increase estimated to raise annual interest expense by $22.9 million—and refinancing requirements.