Welltower Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet figures are as of March 31, 2016. Welltower is a healthcare real estate investment trust with seniors housing and post-acute, outpatient medical, and triple-net properties in the U.S., Canada, and U.K. It reported 1,490 properties company-wide; its operating-segment table covered 1,434 properties.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $1.047 billion | $894.2 million | +17% |
| Net income | $165.5 million | $209.4 million | -21% |
| Net income attributable to common stockholders | $149.0 million | $190.8 million | -22% |
| Diluted EPS | $0.42 | $0.56 | -25% |
| Funds from operations (FFO) | $391.3 million; $1.10 per diluted share | $344.3 million; $1.02 per diluted share | +14%; +8% per share |
| Net operating income (NOI) | $597.4 million | $517.7 million | +15% |
| Same-store cash NOI | $468.4 million | $454.9 million | +3% |
| Cash from operating activities | $373.7 million | $226.2 million | +$147.5 million |
Revenue growth reflected higher rental income, resident fees and services, and interest income. Seniors housing operating revenue rose 22% and segment NOI rose 26%; triple-net NOI rose 10%, and outpatient medical NOI rose 14%. Same-store cash NOI growth was 3% overall: 3% in triple-net, 4% in seniors housing operating, and 2% in outpatient medical. The filing does not provide a comparable GAAP operating-margin measure; reported NOI was approximately 57% of revenue.
Interest expense was $133.0 million, up from $121.1 million. Total expenses were $879.5 million versus $729.3 million. Cash and cash equivalents were $355.9 million, with restricted cash of $62.2 million. Management reported $1.806 billion of available borrowing capacity under the primary unsecured credit facility. Total reported borrowings were approximately $13.0 billion: $645.0 million under the credit facility, $8.828 billion of senior unsecured notes, and $3.515 billion of secured debt. Debt-to-book capitalization was 46%; interest and fixed-charge coverage were 3.85x and 3.06x, respectively. The company said it complied with debt covenants.
Operating cash flow exceeded cash distributions to stockholders in Q1 2016 ($373.7 million versus $322.1 million). Investing activities used $242.0 million, while financing activities used $137.0 million. The company declared and paid $0.86 per common share, up from $0.825 a year earlier; its board set an annualized dividend of $3.44 per share beginning in February 2016.
Material changes and unusual items
- Common-stockholder income and diluted EPS declined despite higher revenue and FFO. Q1 2015 included a $58.4 million derivative gain and a $56.8 million gain on property dispositions; neither recurred in Q1 2016.
- Q1 2015 transaction costs were $48.6 million, compared with $8.2 million in Q1 2016. Conversely, Q1 2016 included $14.3 million of asset impairment charges, versus $2.2 million in the prior-year quarter.
- In March 2016, Welltower issued $700 million of 4.25% senior notes due 2026, generating approximately $688.6 million in net proceeds. It also extinguished $400 million of senior notes.
- Q1 2016 cash acquisitions were substantially lower than in Q1 2015: $171.5 million versus $1.501 billion. The company reported eight acquisitions/investments with a stated total investment amount of $204.2 million. No property dispositions were completed in the quarter.
- The company corrected a $114.7 million classification of noncontrolling interests from permanent to temporary equity, describing the matter as immaterial. It adopted two accounting updates without significant impact and was evaluating the effects of new revenue-recognition and lease standards.
Outlook, risks and contingencies
No numerical earnings or FFO guidance is stated in the provided filing text. Management said it believed capital markets remained supportive, expected attractive investment opportunities to continue, and considered liquidity sufficient for planned uses of cash, subject to the availability and cost of external capital. Management also stated that quarterly results are not necessarily indicative of full-year results.
- Key business risks include tenants’ and operators’ ability to pay rent and service loans, healthcare reimbursement and regulatory changes, occupancy and operating performance, refinancing and capital-market access, and foreign-currency movements. Genesis Healthcare accounted for 17% of reported NOI; Sunrise Senior Living accounted for 13%, and Revera controls Sunrise.
- A 1% increase in interest rates was estimated to increase annual interest expense by $20.6 million on variable-rate debt outstanding at quarter-end. A 1% currency-rate change was estimated to affect annualized net income from Canadian and U.K. investments by less than $1.5 million.
- Outstanding construction in progress was $297.0 million, with approximately $637.4 million of additional funding commitments to complete construction. The company also reported $90.4 million of letters of credit and $666.1 million of purchase obligations.
- Healthcare payment-policy developments, including Medicare and Medicaid reimbursement changes and increased regulatory scrutiny, could indirectly affect operators and Welltower. U.K. minimum-wage changes may also affect operators’ costs.
- Management reported no material changes to previously disclosed risk factors. Routine legal proceedings were not expected to have a material adverse effect. Disclosure controls were deemed effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile GAAP earnings and EPS declines with higher revenue, NOI, and FFO, including the effects of prior-year derivative and disposition gains and current-quarter impairments.
- Review the definition and calculation of non-GAAP FFO, NOI, same-store cash NOI, and leverage and coverage ratios; these measures are not GAAP measures.
- Assess debt maturities, variable-rate exposure, covenant headroom, and the company’s reliance on continued capital-market access.
- Evaluate operator and tenant concentration, especially Genesis and the Sunrise/Revera relationship, and monitor reimbursement and labor-cost developments.
- Confirm the scale and timing of construction funding commitments, lease obligations, and the dividend relative to cash generation and future financing needs.