Welltower Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also presents unaudited fourth-quarter results; this is an annual report, not a standalone quarterly filing.
Business context
Welltower is a healthcare and seniors housing REIT with properties in the United States, Canada and the United Kingdom. Its three reporting segments are triple-net, seniors housing operating and outpatient medical. At year-end, the consolidated portfolio comprised 1,313 properties; seniors housing operating generated 59% of annual revenue, triple-net 28%, and outpatient medical 13%.
Financial performance and liquidity
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $4.281 billion | $3.860 billion | +11% |
| Net income attributable to common stockholders | $1.012 billion; $2.81 diluted EPS | $818.3 million; $2.34 diluted EPS | +24% income; +20% diluted EPS |
| Net operating income (NOI) | $2.404 billion | $2.238 billion | +7% |
| Same-store NOI | $1.446 billion | $1.426 billion | +1% |
| Cash from operating activities | $1.629 billion | $1.373 billion | +19% |
| Cash distributions per common share | $3.44 | $3.30 | +4% |
Reported net income included $364.0 million of gains on real estate dispositions, versus $280.4 million in 2015. Revenue growth was accompanied by higher property operating expenses ($1.877 billion, up 16%) and interest expense ($521.3 million, up 6%). NOI was approximately 56% of revenue, compared with approximately 58% in 2015.
Segment NOI increased 3% in triple-net, 16% in seniors housing operating and 6% in outpatient medical. Same-store NOI rose 2% in triple-net and outpatient medical and 1% in seniors housing operating. Occupancy weakened year over year: triple-net was 86.5% versus 87.2%, seniors housing operating 88.7% versus 91.2%, and outpatient medical 94.7% versus 95.1%. Triple-net rent/interest coverage declined to 1.43x from 1.49x.
Year-end cash and cash equivalents were $419.4 million and restricted cash was $187.8 million. Management reported $2.313 billion of available borrowing capacity under its primary unsecured credit facility. Total liabilities were $13.185 billion; debt and capital lease balances shown on the balance sheet totaled approximately $12.358 billion. Net debt to book capitalization was 43% (45% in 2015); adjusted interest coverage was 4.19x and fixed-charge coverage 3.32x. The company reported compliance with all debt covenants.
Material changes and unusual items
- Welltower acquired 51 properties and reported pro-rata gross new investments of approximately $3.007 billion; it disposed of 158 properties for approximately $2.369 billion in pro-rata proceeds. Dispositions included two Genesis-leased property portfolios.
- In March, the company issued $700 million of 4.25% senior unsecured notes due 2026. In May, it replaced its credit facility with a $3.0 billion revolving facility and U.S. and Canadian term facilities. It raised $527.5 million through its dividend reinvestment and equity shelf programs.
- Two Genesis first-mortgage loans with combined principal of $317 million were restructured into four five-year loans at 10% interest with annual rate increases. Welltower recorded a $6.9 million loan-loss provision; management said it expected to collect all principal. Total impaired loans were $377.5 million at year-end.
- Welltower recorded $37.2 million of asset impairments and $10.2 million of loan-loss provisions in 2016. The company also reported a $364.0 million real estate disposition gain.
- The company disclosed correction of an immaterial mathematical error in prior-year comprehensive-income attribution; other financial statement line items were not affected. Ernst & Young issued unqualified opinions on the financial statements and internal controls. Certain acquired businesses, representing 4% of year-end assets and less than 1% of revenue and NOI, were excluded from the internal-control assessment.
Outlook, commentary and risks
Management said capital markets remained supportive and expected investment opportunities to continue, but provided no specific earnings or operating guidance in the supplied filing text. Management’s stated objectives are to protect capital, grow property NOI and support consistent cash dividends. The board approved a quarterly common dividend of $0.87 beginning in February 2017, subject to board approval.
Key risks include reliance on operator performance and government reimbursement, potential changes to healthcare regulation and payment policy, property operating and labor costs, lease renewals, access to and cost of capital, interest-rate and foreign-currency exposure, and REIT qualification. Relationship concentration is material: Genesis represented 16% of consolidated NOI and 8% of total revenue; Sunrise-related operations represented 13% of consolidated NOI, with the company separately reporting approximately $998.8 million of revenue from Sunrise. The filing also highlights Brexit-related uncertainty and possible U.S. healthcare-law changes.
Important facts for investors to verify
- Reconcile reported FFO: the MD&A summary gives $1.593 billion, while the FFO reconciliation gives $1.583 billion; the filing’s diluted FFO per-share figure is $4.39, versus $4.42 basic. Confirm the correct headline figure and basis.
- Review Genesis’s and Sunrise’s financial condition, rent and loan performance, and the concentration of revenue and NOI; assess the Genesis loan restructuring and impaired-loan disclosures.
- Assess the sustainability of reported earnings excluding disposition gains, impairments and other unusual items, and compare same-store trends with acquisition-driven growth.
- Check liquidity against commitments: approximately $494.0 million of additional construction funding was committed, and contractual obligations totaled $18.992 billion, including debt, interest and lease obligations.
- Confirm the effect of occupancy declines, debt maturities, variable-rate borrowings, foreign exchange and dividend requirements on future cash available for investment and distributions.