Welltower Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; filed February 15, 2024. Welltower is a REIT investing in seniors housing, post-acute care and outpatient medical properties in the U.S., Canada and the U.K. Its business is conducted principally through Welltower OP LLC, which Welltower owned approximately 99.765% of at year-end.
Financial performance and position
| Metric | FY 2023 | FY 2022 | Change |
|---|---|---|---|
| Total revenue | $6.638 billion | $5.861 billion | +13% |
| Net income | $358.1 million | $160.6 million | +123% |
| Net income attributable to common stockholders | $340.1 million | $141.2 million | +141% |
| Diluted EPS attributable to common stockholders | $0.66 | $0.30 | +120% |
| FFO attributable to common stockholders* | $1.763 billion; $3.40 per diluted share | $1.478 billion; $3.18 per diluted share | +19%; +7% per share |
| Consolidated NOI* | $2.690 billion | $2.302 billion | +17% |
| Cash provided by operating activities | $1.602 billion | $1.329 billion | +21% |
| Cash, cash equivalents and restricted cash | $2.076 billion | $722.3 million | +187% |
Segment NOI: Seniors Housing Operating (SHO) was $1.118 billion, up 17%; Triple-net was $1.001 billion, up 13%; and Outpatient Medical was $519.2 million, up 10%. Same-store NOI at Welltower’s share increased 20.5% for SHO, 2.3% for Triple-net and 2.3% for Outpatient Medical for the year. Fourth-quarter SHO occupancy was 82.2%, versus 78.3% a year earlier; Outpatient Medical occupancy was 94.8%, versus 95.2%.
Debt and liquidity: Debt principal was approximately $15.922 billion at year-end, including $13.700 billion of senior unsecured notes and $2.222 billion of secured debt; carrying value of debt was $15.736 billion. Net debt was $13.739 billion. Net debt to book capitalization improved to 34.3% from 39.5%; adjusted interest coverage was 3.95x. Welltower reported $4.0 billion of undrawn revolving credit capacity and approximately $6.1 billion of total near-term available liquidity. No revolving-credit or commercial-paper borrowings were outstanding at year-end. The company was in material compliance with debt covenants.
Cash uses and capital: Investing activities used $5.708 billion, including $3.558 billion of cash for acquisitions and $1.015 billion for construction in progress. Financing activities provided $5.449 billion, including $6.010 billion of net common-stock issuance proceeds; cash distributions to stockholders were $1.261 billion. The annual common dividend remained $2.44 per share; the fourth-quarter declared dividend was $0.61 per share.
*FFO and NOI are non-GAAP measures; the filing cautions that they are not substitutes for GAAP earnings or operating cash flow and may not be comparable with similarly named measures at other companies.
Material changes versus prior year
- Revenue and NOI grew, led by higher SHO resident fees and services, acquisitions and improving occupancy and rates. SHO revenue increased 12%; SHO same-store NOI rose 20.5% for the year.
- Net income increased substantially, but the comparison includes gains and other nonrecurring items. FY 2023 included a $67.9 million net gain on real estate dispositions and a $65.5 million gain associated with loss of control and derecognition of leasehold interests. FY 2022 included $58.6 million of other income from a lease termination.
- Welltower issued 53.3 million shares through ATM programs and 20.1 million shares in a November offering. Weighted-average diluted shares rose to 518.7 million from 465.2 million, tempering per-share FFO growth.
- Reported cash increased substantially, supported by equity and debt financing, while investing outflows also increased. The company completed $4.227 billion of property acquisitions and joint-venture investments by recorded book amount.
- Interest expense rose to $607.8 million from $529.5 million. A new $1.035 billion, 2.75% exchangeable senior note issue was completed in May 2023. The company also issued and assumed secured debt and extinguished secured debt during the year.
Outlook, risks and unusual items
- The filing provides no quantified earnings, FFO, occupancy or investment guidance. Management described its priorities as protecting capital, enhancing stockholder value, paying consistent dividends and pursuing portfolio growth; it stated that liquidity was sufficient for expected uses, subject to external capital availability and cost.
- In February 2024, Welltower agreed to acquire 25 SHO properties for $969 million, expected to be funded with cash and assumption of $523 million of secured debt, subject to closing conditions and lender consents.
- Welltower entered agreements to dissolve Revera joint ventures. The U.K. and predominantly U.S. portions closed during 2023; the Canadian portion, involving plans to acquire interests in 71 properties and sell interests in 14, was expected to close in the first half of 2024.
- Construction commitments were approximately $966.8 million, in addition to $195.8 million of expected funding for in-substance real estate investments. The filing also reports $1.304 billion of construction investments in progress. Total contractual obligations were $24.868 billion, including principal, interest, leases and purchase obligations.
- Key exposures include operator and tenant financial health, labor shortages and wage inflation, occupancy and resident-rate trends, reimbursement and regulatory changes, financing costs and interest rates, refinancing and capital access, and property development costs. Sunrise accounted for approximately 12% of total revenue; Integra accounted for approximately 3%.
- Welltower recorded $36.1 million of property impairment charges and $35.3 million of impairment losses on unconsolidated investments. Its auditor identified impairment valuation as a critical audit matter, given the judgment involved in forecasts, occupancy assumptions and capitalization rates.
- Genesis-related loans remain a credit concern: the unsecured notes had a $290.3 million contractual balance before potential debt reduction but a $24.2 million carrying value after allowance and unrecognized interest. Their maturity was extended to March 29, 2024. The filing also reports $191.1 million of net Genesis loan exposure in its business discussion.
- Other risks include dependence on partner operators, healthcare compliance and litigation, cybersecurity and privacy, climate-related events, foreign currency, and maintaining REIT qualification. The company reported no legal proceedings it believed would currently have a material adverse effect. The financial-statement and internal-control audits received unqualified opinions.
Investor verification priorities
- Reconcile GAAP net income growth to the disposition and leasehold-related gains, impairments, and other unusual items; assess normalized earnings and FFO.
- Review the effect of 2023 equity issuance and the resulting share-count increase on per-share returns and future capital needs.
- Track SHO occupancy, resident rates, labor costs and same-store NOI, and assess whether operating improvements persist without pandemic-era grants. Grant income recognized declined to $21.2 million from $38.6 million.
- Assess operator and borrower credit exposure, particularly Sunrise, Integra and Genesis; monitor Genesis loan maturities, recoveries and any restructuring.
- Confirm completion, funding and expected returns for the Revera transactions, the Affinity acquisition, and construction and in-substance investment commitments.
- Evaluate debt maturities, refinancing terms, interest-rate sensitivity and covenant headroom; verify that liquidity and dividend capacity remain adequate after planned investments and distributions.