Welltower Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Financial statements are unaudited. Welltower is a healthcare real estate investment trust operating in the U.S., U.K. and Canada across triple-net, seniors housing operating and outpatient medical properties.
Financial performance
Amounts below are in millions of dollars, except per-share data and ratios.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $1,125.9 | $1,058.6 | $2,222.9 | $2,120.9 |
| Net income | $167.3 | $203.4 | $620.8 | $541.1 |
| Net income attributable to common stockholders | $154.4 | $188.4 | $592.1 | $501.1 |
| Diluted GAAP EPS attributable to common stockholders | $0.41 | $0.51 | $1.59 | $1.37 |
| FFO, diluted per share (non-GAAP) | $1.02 | $1.04 | $1.96 | $1.88 |
| Consolidated NOI (non-GAAP) | $557.2 | $556.7 | $1,097.7 | $1,108.9 |
| Same-store NOI (non-GAAP) | $478.0 | $460.0 | $937.9 | $908.4 |
| Cash provided by operating activities | — | — | $838.4 | $844.1 |
- Q2 revenue increased 6% year over year, while net income and common-stockholder income each fell 18%. Six-month revenue rose 5%; common-stockholder income rose 18%, partly reflecting higher real estate disposition gains.
- Resident fees and services drove growth: Q2 increased 13% to $763.3 million; six-month revenue increased 11% to $1,499.3 million. Rental income declined 6% in Q2 and 6% over six months. Q2 property operating expenses rose 13% to $568.8 million.
- Q2 NOI was essentially flat; six-month NOI declined 1%. Same-store NOI increased 4% in Q2 and 3% over six months. Seniors housing operating NOI grew 9% in Q2; triple-net NOI declined 7% and outpatient medical NOI declined 3%.
- Six-month net income included a $348.9 million gain on real estate dispositions, versus $286.2 million a year earlier. Q2 disposition gain was $10.8 million, versus $42.2 million.
- Six-month interest expense was $244.2 million, versus $234.8 million. Impairment charges were $32.8 million, primarily on properties held for sale. The company also recorded a $14.6 million net gain on derivatives and financial instruments for the six-month period.
- Cash flow from operations was $838.4 million. Investing activities provided $130.3 million, including $947.2 million of property-sale proceeds; financing activities used $1,000.3 million. Cash distributions to stockholders were $670.9 million. Cash, cash equivalents and restricted cash totaled $272.4 million at period-end.
Debt, liquidity and capital
- At June 30, total reported debt included $540.0 million outstanding under the primary unsecured credit facility, $8,373.8 million of senior unsecured notes, $2,450.5 million of secured debt and $71.3 million of capital lease obligations.
- Management reported net debt of $11.22 billion, net debt to book capitalization of 42%, and net debt to undepreciated book capitalization of 36%. Q2 interest coverage was 4.34x and fixed-charge coverage was 3.58x.
- Cash and cash equivalents were $215.1 million, with $57.3 million in restricted cash. Available borrowing capacity under the existing facility was $2.44 billion at June 30. The company reported compliance with all debt covenants.
- Common dividends remained $0.87 per share quarterly ($3.48 annualized); six-month common dividends were $1.74 per share. This was the 189th consecutive quarterly common dividend payment.
Material developments, outlook and risks
- Subsequent acquisition: On July 26, 2018, Welltower completed its acquisition of Quality Care Properties (QCP), after ProMedica acquired HCR ManorCare’s operations. Welltower and ProMedica formed an 80/20 joint venture for the real estate of 218 properties, leased to ProMedica under a 15-year absolute triple-net master lease. Initial annual cash rent is $179 million, with a 1.375% first-year escalator and 2.75% annual escalators thereafter, and a full ProMedica corporate guarantee. Aggregate consideration for QCP shares and repayment of QCP debt was approximately $3.8 billion, excluding certain items. Welltower drew on a $1.0 billion term loan and its unsecured credit facility. Initial purchase accounting was incomplete, and pro forma financial information was not included.
- Refinancing: In July, the company replaced its former facility with a $3.7 billion unsecured credit facility: $3.0 billion revolving capacity and $500 million U.S.-dollar and $250 million Canadian-dollar term facilities. The filing describes improved pricing; the QCP acquisition and related borrowings materially changed the post-quarter financing picture.
- Management did not provide specific earnings guidance in this filing. It said liquidity was sufficient for expected uses of cash, subject to capital-market access and other conditions, and expected to reinvest disposition proceeds in new investments. Management cautioned that actual results may differ from expectations.
- Key exposures include operator/tenant ability to pay rent and maintain profitable operations, healthcare regulation and reimbursement, interest rates, foreign exchange, refinancing and capital availability, and the ability to reinvest sale proceeds. The top five operator relationships represented 41% of six-month NOI; Sunrise represented 15%, Brookdale 8%, Revera 7%, Genesis 6% and Benchmark 5%.
- At June 30, the company had $369.6 million of additional construction funding commitments, $1.12 billion of operating lease obligations and $378.9 million of purchase obligations. The filing reported ordinary-course legal proceedings and no material changes to previously disclosed risk factors.
- Adoption of the new lease accounting standard was expected to have a material balance-sheet effect when effective in 2019, including recognition of certain operating lease right-of-use assets and liabilities. Other accounting standards adopted during the period did not have a material financial-statement impact.
Important facts for investors to verify
- Review QCP’s post-close financing, purchase accounting, pro forma financial statements and the impact of acquisition debt on leverage and liquidity; these were not fully reflected in the June 30 statements.
- Track operator performance and rent coverage, particularly Genesis following its master-lease restructuring and the significant Sunrise and Brookdale concentrations.
- Assess the quality and repeatability of reported earnings: six-month net income benefited from disposition gains, while Q2 included $10.8 million of lease termination fees and a net financial-instrument gain.
- Monitor same-store NOI, especially the contrast between seniors housing operating growth and declines in triple-net and outpatient medical NOI.
- Verify cash availability and debt maturities alongside construction and other contractual commitments; the filing’s June 30 liquidity position predates the QCP acquisition and subsequent facility draws.