Welltower Inc. — Q2 2016 Form 10-Q
Business context and reporting period. Welltower is a healthcare-focused REIT with 1,486 properties across the U.S., Canada and the U.K., spanning seniors housing and post-acute, outpatient medical, and related real estate investments. This unaudited filing covers the three and six months ended June 30, 2016; comparisons are to the corresponding 2015 periods.
Financial performance and liquidity
- Revenue: Q2 revenue was $1.077 billion, up 12% year over year; first-half revenue was $2.124 billion, up 15%. Q2 resident fees and services were $615.2 million, rental income $422.6 million, and interest income $24.0 million.
- Profit and per-share results: Q2 net income attributable to common stockholders was $195.5 million, or $0.54 diluted per share, versus $312.6 million, or $0.89, in Q2 2015. First-half amounts were $344.4 million, or $0.96 diluted per share, versus $503.4 million, or $1.46. Continuing-operations income was $209.2 million in Q2, up from $140.3 million.
- REIT operating measures: Q2 funds from operations (FFO, a non-GAAP measure) was $417.0 million, or $1.16 diluted per share, up 22% and 20%, respectively. First-half FFO was $808.2 million, up 18%. Net operating income (NOI) rose 11% to $617.8 million in Q2 and 13% to $1.215 billion in the first half; same-store NOI increased 3% in both periods.
- Segment NOI, Q2: Triple-net was $310.3 million (+6%); seniors housing operating was $207.3 million (+16%); outpatient medical was $99.8 million (+14%). Reported same-store NOI growth was 3%, 3% and 2%, respectively.
- Cash flow: First-half operating cash flow was $848.7 million, compared with $619.3 million in 2015. Investing used $361.4 million versus $2.222 billion, while financing used $373.2 million versus providing $1.345 billion. Cash increased to $466.6 million from $360.9 million at year-end.
- Debt and liquidity: At June 30, total liabilities were $13.702 billion; borrowings under the unsecured facility, senior notes and secured debt totaled $12.899 billion, excluding $74.8 million of capital lease obligations. Cash was $466.6 million, with $2.206 billion of available borrowing capacity under the primary unsecured facility. The company reported compliance with all debt covenants. Debt-to-book capitalization was 46%; Q2 interest and fixed-charge coverage were 4.21x and 3.34x.
- Dividends: Common dividends declared and paid were $0.86 per share in Q2 and $1.72 per share in the first half. The annual common dividend was increased to $3.44 per share beginning in February 2016.
Material changes versus 2015
- Revenue and NOI grew, driven in part by acquisitions and development, including growth in seniors housing operating revenue and resident fees. First-half cash investment in real property was $624.9 million, substantially below the prior-year pace; acquisitions and loan activity were also lower.
- Common-stockholder net income fell despite higher operating revenue and continuing-operations income. The comparison is affected by the prior-year $247.0 million first-half gain on real estate dispositions (including $190.1 million in Q2) versus $1.5 million in 2016. The prior-year first half also included a $58.4 million derivative gain and higher transaction and debt-extinguishment costs.
- First-half interest expense rose to $265.3 million from $239.9 million, and depreciation and amortization rose to $455.3 million from $397.6 million. First-half impairment charges were $14.3 million versus $2.2 million.
- First-half operating cash flow exceeded cash distributions to stockholders. Common-stock dividends paid totaled $613.2 million; total cash distributions to stockholders, including preferred dividends, were $645.9 million.
Outlook, risks and unusual items
- Management said it believed capital markets remained supportive and expected investment opportunities to continue, subject to market conditions. It described liquidity as sufficient for planned uses, including investments, debt service and distributions. The filing provides no specific numerical earnings guidance.
- At June 30, the company had $475.2 million of construction in progress and was committed to an additional $627.8 million to complete construction. Purchase obligations included $1.15 billion of acquisitions expected to close before year-end; timing and completion remain uncertain.
- Operator and tenant performance is a key exposure: Genesis Healthcare represented 16% of first-half NOI and Sunrise Senior Living 13% (Revera owns a controlling interest in Sunrise). Government reimbursement changes, regulatory requirements, operator costs and the ability of tenants to pay rent may affect results.
- Other risks include refinancing and interest-rate exposure, foreign-exchange movements, lease renewals and vacancies, and Brexit-related uncertainty. A 1% increase in rates on outstanding variable-rate debt would increase annual interest expense by approximately $22.1 million, assuming balances remained unchanged.
- U.K. minimum-wage changes and proposed or evolving Medicare, Medicaid and other healthcare rules could affect operators’ costs or reimbursement. Management said it could not predict whether Brexit or these policy changes would materially affect tenants or the company.
- The filing reports a $114.7 million reclassification of noncontrolling interests from permanent to temporary equity related to a 2015 transaction; management characterized the misclassification as immaterial. No material changes to reported risk factors were identified, and routine legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether expected acquisitions totaling $1.15 billion close as planned, and how they are financed.
- Whether NOI and same-store NOI growth persist, and how much growth reflects acquisitions versus existing-property performance.
- Genesis, Sunrise/Revera and other operator exposure, including tenants’ financial condition and sensitivity to reimbursement or regulatory changes.
- Debt maturities, interest-rate exposure, available revolver capacity, covenant headroom and the company’s ability to refinance or access capital.
- Whether the common dividend remains supported by operating cash flow after investment requirements, debt service and other distributions.
- How foreign currency movements and Brexit affect U.K. and Canadian assets, operators and reported results.