Welltower Inc. — Q1 2019 Form 10-Q
Business context and period: Welltower is a healthcare-focused REIT with seniors housing operating, triple-net, and outpatient medical properties in the U.S., Canada, and the U.K. This unaudited report covers the three months ended March 31, 2019; comparisons are with Q1 2018 unless noted.
Financial results and key metrics
- Revenue: $1.272 billion, up 16% from $1.097 billion. Resident fees and services were $868.3 million; rental income was $381.1 million.
- Profit: Net income was $292.3 million, down 36%; net income attributable to common stockholders was $280.5 million. Diluted EPS was $0.71 versus $1.17. The decline primarily reflects lower real estate disposition gains: $167.4 million versus $338.2 million.
- REIT operating measures: FFO was $358.4 million, up 1%, while diluted FFO per share was $0.91 versus $0.95. Consolidated NOI increased 11% to $601.4 million; same-store NOI increased 2% to $447.0 million.
- Cash flow: Operating cash flow was $343.9 million versus $368.6 million. Investing activities provided $197.3 million, reflecting property sale proceeds of $602.7 million. Financing activities used $452.2 million. Cash, cash equivalents, and restricted cash ended at $407.4 million. Operating cash flow exceeded common-stockholder distributions of $342.8 million.
- Debt and liquidity: Balance-sheet borrowings included $419.3 million of commercial paper, $9.632 billion of senior unsecured notes, and $2.660 billion of secured debt. Cash and cash equivalents were $249.1 million, with $158.3 million restricted cash. Available borrowing capacity under the unsecured revolver was $2.580 billion. The company reported compliance with debt covenants.
- Dividends and capital: Common dividends were $0.87 per share, unchanged from Q1 2018. The company converted all outstanding Series I preferred stock into common shares and raised $533.5 million net through common-stock issuances, including its dividend reinvestment plan and equity shelf program.
Material changes and unusual items
- Revenue growth reflected acquisitions and portfolio changes; Q1 2019 acquisitions covered 17 properties with a stated investment amount of $258.8 million. Dispositions included 34 properties and reported proceeds of $612.2 million in management’s discussion.
- A $18.7 million loan-loss provision was recorded to fully reserve certain triple-net loans deemed uncollectible. The allowance for loan losses was $87.1 million; three loans with $21.2 million outstanding were on non-accrual status.
- Welltower adopted lease accounting standard ASC 842 on January 1, 2019. Adoption added right-of-use assets and lease liabilities; management said it did not materially affect the income or cash flow statements.
- In February, the company issued $500 million of 3.625% notes due 2024 and $550 million of 4.125% notes due 2029, and repaid $1.05 billion of notes due 2019 and 2020. Debt-extinguishment loss was $15.7 million.
- Q1 operating metrics were supported by disposition gains, while FFO and same-store NOI provide additional operating context. These are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
Outlook, commentary, and risks
Management stated that liquidity was sufficient for expected uses of cash and anticipated funding new investments through operating cash, temporary borrowings, dispositions, and public debt or equity issuance. The filing provides no specific numerical earnings or operating guidance. The board maintained the annual common dividend at $3.48 per share.
- Management identified reliance on tenants’ and operators’ ability to pay rent and generate operating cash, as well as the effects of healthcare regulation and reimbursement, capital-market access and cost, interest rates, and foreign exchange.
- Construction commitments were approximately $526.3 million; purchase obligations totaled $1.797 billion, including a definitive agreement to acquire outpatient medical facilities in 2019. Total contractual obligations were $21.885 billion.
- Concentration exposure included Sunrise at 15% of consolidated NOI, ProMedica at 9%, and Revera at 6%. The filing notes Revera owns a controlling interest in Sunrise.
- Market sensitivity: a 1% increase in interest rates was estimated to raise annual interest expense by $22.0 million on variable-rate debt outstanding. A 10% currency-rate movement was estimated to change net income from Canadian and U.K. investments by less than $12 million, including existing hedges.
- Management said ordinary-course legal proceedings were not expected to have a material adverse effect; it cautioned that outcomes and indemnitors’ ability to meet obligations cannot be assured. No material changes to the prior annual report’s risk factors were reported.
Important facts for investors to verify
- How much of revenue and NOI growth came from acquisitions, transitions, and same-store operations, and whether same-store NOI growth can be sustained.
- The collectability and recovery prospects for impaired and non-accrual loans, including the adequacy of the $87.1 million allowance.
- Execution, funding, and expected returns for the 2019 outpatient medical acquisition and the company’s construction and purchase commitments.
- Debt maturities, refinancing costs, variable-rate exposure, covenant headroom, and access to capital markets.
- The effect of property dispositions and their gains on reported earnings, and the continued capacity to cover dividends with operating cash flow.