Business context and reporting period
Welltower’s Form 10-Q covers the three months ended March 31, 2022. The company is a healthcare real estate REIT operating in the United States, Canada and the United Kingdom, with Seniors Housing Operating, Triple-net and Outpatient Medical segments. The filing is for Old Welltower, now Welltower OP Inc. On April 1, 2022, a corporate reorganization made New Welltower the publicly traded parent; the company said it expects to conduct business through Welltower OP LLC, subject to shareholder approval of the conversion.
Key financial metrics
Unless noted otherwise, amounts are in U.S. dollars. Financial statement amounts are unaudited.
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $1.396 billion | $1.052 billion | +33% |
| Net income | $65.8 million | $72.2 million | -9% |
| Net income attributable to common stockholders | $61.9 million; $0.14 diluted EPS | $71.5 million; $0.17 diluted EPS | -13% in income |
| FFO, a non-GAAP measure | $347.6 million; $0.77 per diluted share | $287.2 million; $0.69 per diluted share | +21% in FFO; +12% per share |
| Consolidated NOI, a non-GAAP measure | $542.0 million | $434.7 million | +25% |
| Same-store NOI, a non-GAAP measure | $391.2 million | $389.0 million | +1% |
| Cash from operating activities | $324.5 million | $303.7 million | +7% |
| Cash, cash equivalents and restricted cash at quarter-end | $367.0 million | $2.559 billion | Down from prior-year quarter-end |
| Debt on balance sheet | $14.54 billion | — | Credit facility/commercial paper $300.0 million; senior notes $12.14 billion; secured debt $2.10 billion |
Revenue growth reflected acquisitions and portfolio changes, including the 2021 Holiday Retirement acquisition. Net income was lower despite higher revenue, while FFO and NOI rose; these supplemental measures are not GAAP and may not be comparable across companies. Net income was about 4.7% of revenue, versus 6.9% a year earlier. Consolidated NOI was about 38.8% of revenue, versus 41.3%; the filing does not present these as reported margin measures.
At March 31, cash and cash equivalents were $301.1 million, restricted cash was $66.0 million, and available capacity under the revolving facility was $3.7 billion. Management reported approximately $4.1 billion of near-term available liquidity. Operating cash flow exceeded common dividends paid of approximately $273.0 million. Investing activities used $808.5 million, primarily reflecting $601.4 million of acquisition spending, capital improvements, development and joint venture contributions. Financing activities provided $505.1 million.
The company declared and paid $0.61 per common share, unchanged from Q1 2021. Net debt to book capitalization was 43% (42% at December 31, 2021); interest coverage was 4.03x and fixed-charge coverage was 3.57x. The company reported compliance in all material respects with debt covenants.
Material changes versus the prior comparable period
- Resident fees and services increased 37% to $994.3 million; rental income rose 18% to $356.4 million and interest income increased to $39.0 million from $19.6 million.
- Property operating expenses increased 38% to $853.7 million, faster than total revenue growth. Depreciation and amortization rose 24% to $304.1 million.
- Same-store NOI varied by segment: Seniors Housing Operating declined 5.3% to $143.6 million; Triple-net increased 5.2% to $144.5 million; Outpatient Medical increased 3.1% to $103.2 million.
- Senior Housing Operating segment revenue and expense growth reflected acquisitions, while its reported occupancy data are inconsistently labeled in the filing. The filing cites 73.0% and 77.5% but does not clearly associate each figure with the correct year.
- COVID-related Seniors Housing Operating expenses fell to $11.0 million from $28.0 million. Government grant income recognized as a reduction to property operating expenses fell to $5.8 million from $49.2 million.
- Acquisitions consumed $601.4 million in cash, versus $203.1 million a year earlier; proceeds from property sales were $73.6 million, versus $274.2 million. The company issued $550 million of senior unsecured notes at 3.85%, due June 2032, and received $549.3 million net from common stock issuance under its ATM program.
Outlook, commentary, risks and unusual items
- No specific numerical full-year earnings or operating guidance is provided. Management said liquidity was sufficient for anticipated uses, subject to the availability and cost of external capital, and expected to reinvest disposition proceeds in new investments.
- Management said seniors housing occupancy had been improving and nearly all communities were open to admissions, visitors, tours and communal activities. It cautioned that pandemic-related health and safety costs may remain elevated during and potentially beyond the pandemic.
- COVID-19, labor and operating costs, occupancy, government policy and reimbursement, and the financial health of operators and tenants remain risks. The filing notes that long-term/post-acute operators have generally faced greater occupancy declines, potentially affecting rent payments.
- At quarter-end, 15 properties were classified as held for sale, with expected gross proceeds of approximately $273.2 million. The company had $717.7 million of construction in progress and commitments of about $1.57 billion to complete construction; it also expected to fund a further $184.9 million for investments classified as in-substance real estate.
- On April 1, 2022, the company’s leasehold interest in 17 properties under a master lease with National Health Investors was terminated as part of a litigation resolution and property transitions or sales. A Welltower subsidiary agreed to release $6.9 million of cash to the landlord; the related right-of-use asset and lease liability at March 31 were $77.1 million and $135.7 million.
- Interest-rate sensitivity: management estimated a 1 percentage-point increase in rates would add approximately $22.6 million to annual interest expense on then-outstanding variable-rate debt, assuming balances did not change. Currency sensitivity analysis estimated a 10% exchange-rate movement would change income from Canadian and U.K. investments by less than $7 million, based on Q1 results and existing hedges.
- Management said ordinary-course legal matters were not expected to have a material adverse effect, while noting that litigation outcomes and indemnitors’ ability to meet obligations cannot be assured. No material changes to the 2021 Form 10-K risk factors were reported.
Important facts for investors to verify
- Confirm the occupancy figures and their period labels; the filing’s wording is internally inconsistent.
- Assess whether same-store operating trends, particularly the 5.3% decline in Seniors Housing Operating NOI, are improving and how much consolidated growth reflects acquisitions.
- Monitor operator and tenant liquidity, rent collection, occupancy, labor costs and any continued effects of COVID-19 or reduced government support.
- Review acquisition and development commitments, the timing and proceeds of planned dispositions, and resulting funding needs and leverage.
- Track debt maturities, floating-rate exposure, refinancing costs, covenant compliance and the impact of the April 2022 UPREIT reorganization and related guarantees.
- Evaluate the sustainability of dividends against operating cash flow, investment spending and access to equity and debt financing; treat FFO, NOI and coverage ratios as supplemental, non-GAAP measures.