Welltower Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Welltower is a healthcare real estate REIT with seniors housing operating, triple-net and outpatient medical portfolios in the U.S., U.K. and Canada. The filing reflects an UPREIT reorganization completed during the period; substantially all operations are conducted through Welltower OP LLC.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $1.473 billion | $1.141 billion | $2.868 billion | $2.193 billion |
| Net income | $95.7 million | $45.8 million | $161.4 million | $117.9 million |
| Net income attributable to common stockholders | $89.8 million | $26.3 million | $151.7 million | $97.8 million |
| Diluted EPS attributable to common stockholders | $0.20 | $0.06 | $0.33 | $0.23 |
| FFO, diluted per share | $409.6 million; $0.90 | $248.8 million; $0.59 | $757.2 million; $1.67 | $536.0 million; $1.28 |
| Consolidated NOI | $618.5 million | $498.3 million | $1.160 billion | $933.1 million |
| Same-store NOI | $420.5 million | $380.4 million | $805.6 million | $766.4 million |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $719.3 million | $638.9 million |
Q2 revenue rose 29% year over year; common-stockholder net income and diluted FFO per share also increased. Same-store NOI increased 11% for the quarter and 5% for the half year. Seniors Housing Operating same-store NOI rose 19.9% in Q2, Triple-net rose 6.9%, and Outpatient Medical rose 2.4%. Q2 property operating expenses were $854.1 million, depreciation and amortization $310.3 million, and interest expense $127.8 million. The filing does not provide a conventional operating margin measure.
For the six months, investing activities used $2.085 billion, principally reflecting acquisitions, construction and other property investment; financing activities provided $1.474 billion. Cash, cash equivalents and restricted cash ended at $442.3 million. Cash distributions to stockholders were $549.8 million, compared with $719.3 million of operating cash flow. The declared quarterly dividend was $0.61 per share, unchanged from the prior-year quarter.
Balance sheet, debt and liquidity
- Total assets were $36.574 billion at June 30, 2022, versus $34.910 billion at year-end 2021. Balance-sheet carrying amounts included $354 million under the unsecured credit facility and commercial paper, $12.489 billion of senior unsecured notes and $2.192 billion of secured debt.
- Debt principal scheduled in the filing totaled $14.815 billion: $12.614 billion of senior unsecured notes and $2.201 billion of secured debt. The debt agreements were in material covenant compliance.
- Management reported approximately $4.1 billion of near-term available liquidity, including $363.3 million of cash and $3.646 billion of available revolving-credit capacity. The $4.0 billion revolver had $354 million drawn at quarter-end; no commercial paper was outstanding.
- Net debt to book capitalization was 43%; interest coverage was 4.21x and fixed-charge coverage was 3.78x for Q2. These are company-defined supplemental measures, not GAAP metrics.
- Welltower issued $550 million of 3.85% senior notes due 2032 and amended its $5.2 billion unsecured credit facility. It issued about $1.358 billion of common stock net proceeds through ATM sales during the half year. The ATM program had $3 billion of remaining capacity at June 30, in addition to outstanding forward-sale agreements.
Material changes and unusual items
- Occupancy in Seniors Housing Operating properties increased to 77.1% at June 30, 2022, from 73.0% at June 30, 2021. Nearly all communities were open for admissions, visitors, tours and communal activities.
- Acquisitions and development drove portfolio growth: the company reported 49 property acquisitions in the half year, with $1.829 billion of recorded real estate assets acquired. Cash invested in real property, net of cash acquired, was $1.958 billion, versus $900.1 million a year earlier.
- Q2 included $58.6 million of other income from derecognizing a right-of-use asset and lease liability when the NHI master lease covering 17 properties ended. The termination was part of an agreement resolving litigation. The company also released $6.9 million of cash flow generated by those properties to the landlord. This item materially boosted reported results and is excluded from the company’s Adjusted EBITDA calculation.
- Foreign currency translation reduced other comprehensive income by $306.7 million in Q2 and $373.7 million for the half year; gains on designated hedges partly offset the impact. These OCI movements are distinct from net income.
- Q2 2021 included a $55.6 million net loss on extinguishment of debt and $23.7 million of asset impairments; neither was recorded in Q2 2022. Six-month 2021 also included $103.7 million of net disposition gains, compared with $19.4 million in 2022.
Outlook, commentary and risks
Management gave no specific earnings or full-year financial guidance in the supplied filing text. It said liquidity was sufficient for expected uses of cash and described plans to fund investments through operating cash, borrowings and equity or debt issuance. Management expects additional health and safety costs in Seniors Housing Operating to remain elevated during the pandemic and potentially beyond.
- COVID-19, labor and operating costs, occupancy recovery, and operators’ ability to pay rent remain material uncertainties. The filing notes that long-term/post-acute care operators generally faced greater occupancy declines, potentially affecting contractual rent payments.
- At June 30, construction in progress was $900.6 million, with approximately $1.747 billion of further funding commitments; additional commitments for in-substance real estate investments were $279.5 million. These investment requirements could affect liquidity and financing needs.
- Variable-rate debt exposure was $2.786 billion after swaps; a 1 percentage-point rate increase would raise annual interest expense by an estimated $27.9 million, assuming balances unchanged. A 10% currency movement was estimated to change net income from U.K. and Canadian investments by less than $8 million, based on Q2 results and existing hedges.
- Other risks include access to capital and refinancing costs, tenant and operator financial health, healthcare regulation and reimbursement, foreign exchange rates, acquisition and development execution, and concentration among operators. Management cited Atria at 12% and ProMedica at 10% of Q2 consolidated NOI; Atria’s figure includes the $58.6 million lease-termination income.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It said there were no material changes to the risk factors in the 2021 Form 10-K and no pending legal matters expected to have a material adverse effect, while noting that legal outcomes and indemnitor capacity cannot be assured.
Most important facts for investors to verify
- How much of the Q2 earnings and NOI improvement is recurring after excluding the $58.6 million NHI lease-termination gain and considering acquisition growth.
- Whether occupancy gains translate into sustainable same-store growth, and how labor, health and safety costs and government grant support affect margins.
- Operator rent coverage and credit trends, particularly among major relationships and long-term/post-acute tenants.
- Funding and expected returns for the $1.747 billion construction commitment and other investment commitments, alongside planned debt and equity financing.
- Interest-rate sensitivity, debt maturities and refinancing costs, and the potential dilution from ATM and forward-sale share issuance.
- Performance of company-defined FFO, NOI and coverage measures alongside GAAP results; these supplemental measures may not be comparable to similarly named measures at other companies.