Welltower Inc. — Q1 2017 Form 10-Q
Business and period. Welltower is a healthcare-focused REIT with seniors housing and post-acute, outpatient medical, and triple-net investments in the U.S., U.K. and Canada. This unaudited report covers the three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. Amounts below are in U.S. dollars.
Financial results and key metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue | $1,062.3 million | $1,047.1 million |
| Net income attributable to common stockholders | $312.6 million; $0.86 diluted EPS | $149.0 million; $0.42 diluted EPS |
| Funds from operations attributable to common stockholders (non-GAAP) | $306.2 million; $0.84 diluted per share | $391.3 million; $1.10 diluted per share |
| Net operating income from continuing operations (NOICO; company measure) | $552.1 million | $597.4 million |
| Same-store NOI (company measure) | $468.6 million | $469.8 million |
| Cash from operating activities | $385.5 million | $380.6 million |
| Cash and cash equivalents at quarter-end | $380.4 million | $355.9 million |
Revenue increased 1.5%, while property operating expenses rose to $510.2 million from $449.6 million. Interest expense declined to $118.6 million from $133.0 million. The filing does not provide a single consolidated operating-margin measure.
Segment performance: Triple-net NOICO fell 19% to $249.7 million, primarily as property dispositions exceeded acquisitions. Seniors housing operating NOICO rose 7% to $209.4 million, but same-store NOI declined 2% to $192.6 million. Outpatient medical NOICO was essentially unchanged at $92.7 million; same-store NOI was $86.5 million, also essentially flat.
Debt and liquidity: At March 31, total balance-sheet debt comprised $522.0 million drawn on the unsecured credit facility, $8,188.9 million of senior unsecured notes, $2,669.8 million of secured debt and $73.5 million of capital leases. Management reported net debt of $11,073.8 million and net debt to book capitalization of 42%, down from 43% at year-end 2016. Cash was $380.4 million, restricted cash was $42.8 million and available capacity under the primary unsecured credit facility was $2,445.5 million. Interest coverage was 5.67x and fixed-charge coverage was 4.53x. The company reported compliance with all debt covenants.
Material changes, outlook and risks
- Net income more than doubled, mainly reflecting a $244.1 million net gain on real estate dispositions; this was not recurring operating growth. FFO declined 22% and diluted FFO per share fell from $1.10 to $0.84.
- The company sold 44 properties for reported proceeds of $1,055.5 million and recorded a $244.1 million gain. It acquired six properties for a stated investment amount of $104.5 million. Dispositions reduced triple-net rental income and NOICO.
- Welltower extinguished $806.2 million of secured debt at a weighted average rate of 5.6%, recording a $31.4 million loss on debt extinguishment. It also redeemed all 11.5 million Series J preferred shares for $287.5 million and recorded a $9.8 million redemption charge.
- The quarterly common dividend increased to $0.87 per share from $0.86; cash distributions to stockholders totaled $329.8 million. The filing states operating cash flow exceeded stockholder distributions for the quarter.
- Management said liquidity was sufficient for expected uses, subject to capital availability and cost. It expects to reinvest disposition proceeds and may use the credit facility or issue securities to fund investments and repay borrowings. No specific earnings guidance or quantified forecast is provided in the supplied filing text.
- Key exposures include tenants’ and operators’ ability to pay rent and operate profitably, healthcare reimbursement and regulation, refinancing and interest-rate costs, foreign exchange, and the ability to reinvest sale proceeds. Genesis Healthcare represented 9% of reported NOICO; Sunrise Senior Living represented 14%. Construction commitments were approximately $466.0 million in addition to $390.2 million of construction in progress.
- Management identified ordinary-course legal proceedings but did not believe their resolution would materially adversely affect the company; outcomes remain uncertain. The company also disclosed $1,092.2 million of operating lease obligations and $483.1 million of purchase obligations. It reported no material change in risk factors from its 2016 Form 10-K.
- Accounting updates include adoption of the revised definition of a business, resulting in Q1 real estate acquisitions being treated as asset acquisitions. Management was evaluating the impact of other forthcoming accounting standards, including the leases standard, which it expected could materially affect the balance sheet.
Important facts for investors to verify
- Whether the large disposition gain and lower FFO obscure the trend in recurring earnings, same-store NOI and future rent after asset sales.
- The operating and credit condition of major tenants and operators, particularly Genesis, Sunrise/Revera and Brookdale, and any subsequent developments affecting rent collection.
- Debt maturities, refinancing needs, variable-rate exposure, and whether the reported available credit capacity and covenant headroom remain adequate.
- Plans and returns for reinvesting disposition proceeds, completing committed construction, and funding the common dividend.
- The filing presents slightly different aggregate NOICO totals in different sections; investors should consult the underlying statements and reconciliations for the exact intended figure.