WELLTOWER INC. quarterly report, Q2 FY2023

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Welltower Inc. — Q2 2023 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2023. Welltower is a healthcare real estate REIT operating in the U.S., U.K. and Canada, with seniors housing operating, triple-net and outpatient medical segments. Figures below are U.S. dollars; “Q2” means three months ended June 30, and “H1” means six months ended June 30.

Financial performance and position

  • Revenue: Q2 revenue was $1.665 billion, up 13% year over year; H1 revenue was $3.226 billion, up 12%. Q2 resident fees and services rose 15%, rental income rose 6%, and other income rose 31%.
  • Profit and per-share results: Q2 net income was $106.3 million versus $95.7 million; net income attributable to common stockholders was $103.0 million, or $0.20 per diluted share, versus $89.8 million, or $0.20. H1 net income declined 16% to $135.0 million; diluted earnings per share declined to $0.26 from $0.33.
  • Operating measures: Company-defined NOI was $706.8 million in Q2, up 14%, and $1.310 billion in H1, up 13%. Same-store NOI increased 10% in both periods. FFO was $466.2 million in Q2, up 14%, and $852.2 million in H1, up 13%; diluted FFO per share was $0.93 and $1.71, respectively. These are non-GAAP measures and are not substitutes for GAAP results or cash flow.
  • Segment indicators: Q2 consolidated NOI was $279.3 million for Seniors Housing Operating, $291.5 million for Triple-net and $127.5 million for Outpatient Medical. Seniors housing average occupancy was 79.6%, versus 77.1% in Q2 2022.
  • Cash flow: H1 operating cash flow was $792.3 million, compared with $719.3 million. Investing used $1.326 billion and financing provided $2.102 billion; cash, cash equivalents and restricted cash increased by $1.577 billion to $2.299 billion. Cash dividends paid were $603.6 million; declared dividends were $0.61 per share per quarter.
  • Debt and liquidity: At June 30, carrying value of senior unsecured notes and secured debt totaled $15.991 billion; principal was $16.192 billion. Cash and cash equivalents were $2.204 billion, and the $4.0 billion revolving credit facility had no balance outstanding. Management reported approximately $6.3 billion of near-term available liquidity. Net debt to book capitalization was 38%; interest coverage was 3.81x and fixed-charge coverage 3.51x.
  • Capital and investment: H1 stock issuance generated $1.334 billion of net proceeds. The company issued $1.035 billion of 2.75% exchangeable notes due 2028. H1 cash acquisitions were $424.1 million; development spending was $474.1 million. Construction-in-progress commitments to complete projects were approximately $1.853 billion.

Material changes versus the prior comparable period

  • Growth in resident fees, rents and NOI was supported by acquisitions, development conversions and improving seniors housing occupancy and rates. Q2 Seniors Housing Operating segment NOI was slightly lower year over year, while its Q2 same-store NOI rose 18.5%.
  • H1 GAAP net income fell despite revenue and NOI growth, primarily reflecting a $47.4 million loss from unconsolidated entities versus $9.9 million a year earlier, lower real estate disposition gains, and new impairment charges. The H1 comparison also includes unusual items in both years.
  • Interest expense increased 19% in H1 to $296.7 million. Interest coverage fell to 3.63x from 4.12x, and fixed-charge coverage fell to 3.32x from 3.68x.
  • H1 acquisitions and development spending were below 2022 levels, while cash and restricted cash rose substantially, supported by debt and equity issuance. The ATM program issued 17.4 million shares during H1 at a reported average price of $76.90.

Outlook, commentary, risks and unusual items

  • Outlook: The filing provides no specific earnings or FFO guidance. Management said liquidity was sufficient for expected uses of cash, subject to the availability and cost of external capital, and expects to fund investments through operating cash, dispositions, debt and equity. H1 results are not necessarily indicative of full-year results.
  • Revera transactions: In Q2, Welltower agreed to dissolve joint ventures with Revera involving acquisitions of remaining interests in 110 properties and dispositions of interests in 31. The U.K. portion closed in Q2. U.S.-related transactions closed in July, including an approximately $286 million investment in 10 properties and approximately $216 million of dispositions. The Canadian portion was expected to close before year-end 2023. These transactions involve execution, valuation and timing considerations.
  • Other unusual items: A May 2023 Genesis-related joint-venture transaction generated $104.2 million of net cash proceeds and a $65.5 million gain. Q2 other income in the Triple-net segment included this gain. H1 also included a $27.7 million impairment of an unconsolidated Sunrise management-company investment and $13.7 million of real estate impairments. Prior-year Q2 included $58.6 million of lease-termination-related income, affecting year-over-year comparisons.
  • Asset sales and credit: At quarter-end, 20 properties were held for sale, with approximately $456.9 million of expected gross proceeds and $171.7 million of associated secured debt. Total loan-loss allowance was $186.3 million, including $173.4 million against non-real-estate loans. Management stated that the allowance was adequate; collectability and borrower financial health remain relevant risks.
  • Commitments and risks: In addition to construction commitments, Welltower had $105.4 million of additional funding commitments for in-substance real estate investments and $78.9 million of contingent capital-improvement obligations. Risks include operator and tenant ability to pay, healthcare reimbursement and regulation, interest rates, capital-market access, foreign exchange, joint-venture execution, refinancing, property costs and possible COVID-19 effects. Government grants recognized were lower than in 2022 and remain subject to recapture if conditions are not met.
  • Management reported compliance in all material respects with debt covenants and effective disclosure controls. The filing reported no material change to previously disclosed risk factors and no legal proceedings management believed would have a material adverse effect.

Important facts for investors to verify

  • Reconcile GAAP net income and earnings per share with FFO, NOI and same-store NOI; assess the impact of the unusual gains, impairments, equity-method losses and prior-year comparison items.
  • Review the completion, consideration and financial effects of the Revera transactions, including the Canadian portfolio transaction expected after quarter-end.
  • Assess debt maturities, floating-rate exposure, higher interest costs and whether reported liquidity remains adequate for construction commitments, dividends and planned investments.
  • Track share issuance and potential dilution from the ATM program and exchangeable notes. The filing reports $1.659 billion of ATM capacity remaining at June 30, but $832.4 million as of July 28; verify the subsequent issuance activity and remaining capacity.
  • Monitor seniors housing occupancy, labor and operating costs, rent collection, loan-credit quality, held-for-sale execution and concentrations among operators and tenants.