Welltower Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Welltower is a REIT investing in seniors housing, post-acute care and outpatient medical properties in the U.S., U.K. and Canada.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $1.052 billion | $1.259 billion | Down 16% |
| Net income | $72.2 million | $329.4 million | Down 78% |
| Net income attributable to common stockholders | $71.5 million; $0.17 diluted EPS | $310.3 million; $0.75 diluted EPS | Down 77% per share |
| FFO, a non-GAAP measure | $287.2 million; $0.69 per diluted share | $356.1 million; $0.86 per diluted share | Down 19% in total |
| Consolidated NOI, a non-GAAP measure | $434.7 million | $576.8 million | Down 25% |
| Operating cash flow | $303.7 million | $411.9 million | Down 26% |
Reported net income included a $59.1 million net gain on real estate dispositions, versus $262.8 million a year earlier. The filing attributes lower operating cash flow principally to reduced seniors housing occupancy, reserves against straight-line rent receivables and property dispositions. Cash flow from operations exceeded cash distributions to stockholders in both periods.
NOI margin was approximately 41.3% of revenue, compared with 45.8% in Q1 2020. Segment same-store NOI at Welltower’s share fell 28.7% in Seniors Housing Operating and 4.4% in Triple-net, while Outpatient Medical rose 3.2%.
At March 31, cash and cash equivalents were $2.132 billion and restricted cash was $427.0 million. The company reported $3.0 billion of available revolving-credit capacity and approximately $5.1 billion of total near-term available liquidity. Balance-sheet carrying amounts were $12.184 billion of senior unsecured notes and $2.329 billion of secured debt. Net debt to book capitalization was 42%; interest coverage was 3.56x and fixed-charge coverage was 3.16x. The company said it complied with debt covenants.
Material changes and transactions
- Revenue, NOI and earnings declined year over year, mainly amid pandemic-related occupancy weakness and property dispositions. In particular, Seniors Housing Operating revenue fell 15% and segment NOI fell 30%.
- Seniors housing spot occupancy was 73.6% at quarter-end, down from 75.9% at December 31, 2020 and 85.4% in February 2020. It improved to 73.8% by April 23, 2021, about 60 basis points above the March 12 pandemic low.
- Triple-net rent collections were approximately 96% of amounts due; Outpatient Medical collections were 99%. No significant Triple-net rent deferrals or concessions were made, and virtually all previously deferred outpatient medical rent had been repaid.
- Welltower issued $750 million of 2.80% senior notes due 2031 on March 25. On April 15, it used proceeds to redeem approximately $673.8 million of 2023 notes and expected an approximately $51 million extinguishment loss in April.
- During Q1, property acquisitions totaled approximately $209.4 million and dispositions generated approximately $216.4 million of proceeds. At quarter-end, 65 properties were classified as held for sale, with expected gross proceeds of approximately $716.8 million.
Outlook, risks and unusual items
Management did not provide numerical full-year guidance in the supplied filing text. It said liquidity was sufficient for expected uses of cash, subject to availability and cost of external capital, and expected Seniors Housing Operating expenses to remain elevated during the pandemic and potentially beyond as health and safety practices continue.
COVID-19 remained a material uncertainty. The filing warns that occupancy, operator and tenant finances, rent collection, operating costs, acquisitions and dispositions could be affected by the pandemic and its economic consequences. Q1 Seniors Housing Operating COVID-related costs, net of reimbursements, produced a reported benefit of approximately $21.2 million, compared with a $7.3 million expense in Q1 2020. Welltower received approximately $35.7 million of Provider Relief Funds in Q1, recorded as a reduction to those costs.
Welltower entered agreements to substantially exit its Genesis Healthcare operating relationship. The planned transition covers 51 properties: nine were contributed to a ProMedica joint venture in April, 35 were agreed for sale to a joint venture for $496 million, and seven subleased properties were to transition to a new operator. The company agreed to an $86 million lease termination fee upon successful transition; subject to restructuring milestones, it also agreed to reduce Genesis debt by $170 million in exchange for an equity interest. Genesis would retain $167 million of debt to Welltower, excluding additional PIK interest, due January 1, 2024. These arrangements and transitions involve execution and counterparty risks.
Other notable exposures include $224.1 million of total loan-loss allowances, including a $211.2 million allowance against deteriorated loans; $715.955 million of committed construction funding; and foreign exchange and interest-rate risks. A hypothetical 1% increase in rates was estimated to raise annual interest expense by about $23.1 million on variable-rate debt outstanding at quarter-end.
Key facts for investors to verify
- Whether seniors housing occupancy and NOI recover, and whether the April occupancy improvement persists.
- Whether operators and tenants continue making contractual payments as relief funding and pandemic support change; monitor Genesis transition milestones and resulting cash, debt and equity effects.
- How much of reported earnings and operating performance reflects property-sale gains, impairments, straight-line rent reserves and Provider Relief Funds.
- Execution of planned asset sales and construction commitments, and the effect of dispositions on recurring revenue and cash flow.
- Debt refinancing, interest-rate sensitivity, covenant compliance and the availability and cost of capital.