Welltower Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; filed November 2, 2016. Unless stated otherwise, financial amounts below are in U.S. dollars.
Business context
Welltower is a healthcare-focused REIT with 1,464 properties in the United States, Canada and the United Kingdom, spanning triple-net, seniors housing operating and outpatient medical investments. Management evaluates property performance principally using NOI, a non-GAAP measure.
Financial performance
- Revenue: Q3 revenue was $1.079 billion, up 10% year over year; nine-month revenue was $3.203 billion, up 13%. Resident fees and services rose 16% in Q3 and 17% for nine months, largely reflecting acquisitions. Rental income increased 3% and 6%, respectively.
- Profit and EPS: Q3 net income attributable to common stockholders was $334.9 million, or $0.93 diluted per share, versus $182.0 million, or $0.52, a year earlier. The increase chiefly reflects a $162.4 million gain on real estate dispositions. Nine-month common earnings were $679.4 million, down about 1%, and diluted EPS was $1.89 versus $1.97.
- FFO and NOI: Q3 FFO attributable to common stockholders was $401.9 million, or $1.11 diluted per share, versus $392.3 million and $1.11. Nine-month FFO was $1.210 billion, up 12%, and $3.37 per diluted share, up 9%. Q3 NOI was $605.5 million, up 6%; same-store NOI was $441.7 million, essentially flat. Nine-month NOI rose 11% to $1.821 billion and same-store NOI rose 2% to $1.336 billion. Q3 NOI as a share of revenue was approximately 56%, compared with 58% in Q3 2015.
- Segment trends: Q3 same-store NOI increased 2% in triple-net and outpatient medical, but declined 3% in seniors housing operating. Nine-month same-store growth was 2%, 2% and 1%, respectively.
- Cash flow and distributions: Nine-month operating cash flow was $1.272 billion, up 23%, exceeding cash distributions to stockholders of $970.4 million. Investing used $1.291 billion and financing provided $96.2 million. Cash and cash equivalents ended at $428.6 million, versus $360.9 million at year-end 2015.
- Debt and liquidity: September 30 carrying balances included $1.350 billion drawn on the unsecured credit facility, $8.689 billion of senior unsecured notes and $3.318 billion of secured debt. Cash, restricted cash and available capacity under the primary credit facility were $428.6 million, $83.1 million and $1.605 billion, respectively. Net debt to book capitalization was 45%; interest and fixed-charge coverage were 5.24x and 4.17x for Q3. The company reported compliance with debt covenants.
- Other balance-sheet items: Total assets were $29.856 billion and total equity was $15.264 billion at quarter-end. Nine-month common dividends declared and paid were $2.58 per share; the annualized common dividend had been increased to $3.44 per share.
Material changes, outlook and risks
- Welltower invested $1.538 billion in acquisitions and joint-venture investments during the first nine months, compared with $374 million in property dispositions as reported in the disposition activity table. It also reported $538 million of cash proceeds from real-property sales; the filing presents differing disposition measures and bases, so these amounts are not directly interchangeable.
- On November 1, 2016, after quarter-end, the company completed a sale of properties leased to Genesis Healthcare for approximately $1.1 billion. The properties were not classified as held for sale at September 30 because of transaction execution risk. Genesis represented 16% of nine-month NOI before the sale.
- Construction in progress was $529.5 million, with approximately $516.0 million of additional funding committed to complete construction. Total contractual obligations were reported at $20.127 billion, including debt, interest, leases and purchase obligations.
- Management said liquidity was sufficient for expected uses of cash and characterized capital markets as supportive of its investment strategy. It expected investment opportunities to remain available and anticipated reinvesting disposition proceeds, but provided no specific earnings or operating guidance in the supplied filing text.
- Key risks include operator and tenant ability to pay rent, concentration in major relationships, Medicare and Medicaid reimbursement or regulatory changes, financing cost and availability, interest-rate and foreign-currency movements, and uncertainty following Brexit. A 1% increase in interest rates was estimated to add $28.2 million to annual interest expense on variable-rate debt, assuming balances were unchanged.
- Unusual items included $24.0 million of nine-month asset impairment charges and a $58.4 million derivative gain in the prior-year period. Management reported no loan-loss provision, no loans on non-accrual status, and no legal proceedings expected to have a material adverse effect.
Important facts for investors to verify
- Confirm the completed Genesis property sale’s final proceeds, impact on future rent and NOI, and how the proceeds were deployed.
- Assess whether seniors housing operating same-store performance, particularly the Q3 decline, stabilizes and whether acquisition growth translates into durable per-share FFO.
- Review operator concentration and tenant credit quality, including Genesis exposure after the disposition and the remaining exposure to Sunrise/Revera and Brookdale.
- Verify debt maturities, facility availability, covenant headroom and sensitivity to higher interest rates and foreign-exchange movements.
- Track completion costs and timing for the construction pipeline and assess the sustainability of dividends against recurring cash generation.