Business context and reporting period
Welltower Inc. is a healthcare real estate investment trust with seniors housing operating, triple-net and outpatient medical properties in the U.S., U.K. and Canada. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods. Amounts below are U.S. dollars.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $1.240bn | $1.037bn | $3.433bn | $3.484bn |
| Net income | $190.3m | $395.0m | $308.3m | $883.6m |
| Net income attributable to common stockholders | $179.7m | $325.6m | $277.5m | $815.1m |
| Diluted EPS attributable to common stockholders | $0.42 | $0.77 | $0.65 | $1.94 |
| FFO, a non-GAAP measure | $345.7m | $185.0m | $881.7m | $876.7m |
| Consolidated NOI, a non-GAAP measure | $510.4m | $402.2m | $1.443bn | $1.507bn |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $992.0m | $1.110bn |
Q3 consolidated NOI margin was approximately 41.2% of revenue, compared with 38.8% a year earlier; nine-month NOI margin was approximately 42.0%, versus 43.3%. These percentages are calculated from the filing’s reported revenue and NOI.
At September 30, 2021, total assets were $33.480bn and total liabilities were $15.308bn. Balance-sheet borrowings comprised $291.0m under the credit facility/commercial paper program, $11.116bn in senior unsecured notes and $2.262bn in secured debt. Cash and cash equivalents were $304.0m, with another $58.7m restricted. The company reported approximately $3.709bn of available revolving-credit capacity and approximately $4.0bn of total near-term available liquidity. Debt covenants were reported in material compliance.
Material changes versus prior comparable periods
- Q3 revenue increased 20%, largely reflecting acquisitions and higher resident fees and services; nine-month revenue declined 1%. Nine-month resident fees and rental income were both lower year over year.
- Q3 net income fell 52%, while nine-month net income fell 65%. Real estate disposition gains were $119.95m in Q3 2021 versus $484.30m in Q3 2020, and $223.70m for nine months versus $902.99m. These gains materially affect the net-income comparison.
- Q3 FFO rose 87% to $345.7m; nine-month FFO was nearly flat, up 1% to $881.7m. Nine-month consolidated NOI decreased 4%, while same-store NOI decreased 8% to $1.160bn.
- Segment same-store results were mixed for nine months: Seniors Housing Operating decreased 18.5%, Triple-net decreased 1.1%, and Outpatient Medical increased 3.6%. Q3 spot seniors housing occupancy reached 76.7%, up about 440 basis points from its pandemic low, but remained below pre-pandemic levels.
- Operating cash flow declined 11% for nine months. Investing cash flow swung to a $2.988bn outflow from a $2.330bn inflow, reflecting $2.735bn of acquisition spending and $953.0m of loan investments, partly offset by $941.7m of property-sale proceeds. Cash, cash equivalents and restricted cash declined to $362.6m from $2.021bn at year-end 2020.
Outlook, management commentary, risks and unusual items
- No specific financial guidance or earnings forecast is provided. Management said liquidity was sufficient for anticipated uses, subject to capital availability and market conditions, and expected to reinvest disposition proceeds in new investments. Management cautioned that pandemic effects and operating results remain uncertain.
- COVID-19 remains a key risk to occupancy, labor and health-and-safety costs, operator performance, rent collection and property values. Management noted improving occupancy, but said expenses may remain elevated. Triple-net rent collections were approximately 94% for the first nine months; virtually all outpatient medical rent due was collected.
- Welltower received approximately $41.0m in Provider Relief Funds during the first nine months, recorded as a reduction to COVID-related property operating costs. Net COVID-related property cost was a benefit of $24.9m for nine months, versus a net expense of $65.6m in the prior-year period.
- In July, the company acquired 85 Holiday Retirement seniors housing properties for approximately $1.577bn. It also provided approximately $750m of senior financing to affiliates of Safanad in connection with HC-One; the loan is secured by HC-One shares and assets and includes equity warrants. The warrant’s reported fair value was $40.7m.
- Welltower is exiting substantially all of its Genesis Healthcare operating relationship. The company reported a planned $86m lease-termination fee, to be used to repay debt owed to Welltower, and a potential additional $170m debt reduction in exchange for an equity interest, subject to restructuring milestones. Net Genesis loan carrying value was $149.6m at quarter-end.
- The company issued $1.366bn net proceeds from common-stock sales during the nine months and had forward sales expected to generate approximately $993.9m when settled. These transactions may increase share count. The quarterly dividend was $0.61 per share; nine-month dividends were $1.83 per share, below $2.09 in 2020.
- Commitments included approximately $1.072bn to complete construction in progress, in addition to purchase obligations and further funding commitments. Market risks include variable-rate debt, foreign exchange exposure, refinancing and capital-market access. A 1% increase in rates was estimated to increase annual interest expense by $17.5m on then-outstanding variable-rate debt.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing reported no material change to previously disclosed risk factors and no legal proceeding that management believed would have a material adverse effect.
Important facts for investors to verify
- Whether seniors housing occupancy continues to recover and translates into improved same-store NOI, particularly given continuing staffing, wage and other operating-cost pressures.
- The quality and sustainability of reported earnings and cash flow, separating recurring operations from property-sale gains, impairment charges, credit-loss provisions and relief-fund benefits.
- Triple-net rent collection, operator credit quality and the completion, costs and final loan recoveries associated with the Genesis transition.
- HC-One loan performance, collateral value, credit-loss allowance and the assumptions underpinning the $40.7m warrant valuation.
- Liquidity after acquisitions, construction commitments, debt maturities, forward-equity settlements and any further common-stock issuance; also confirm the company’s ability to maintain covenant and coverage levels.
- Underlying reconciliations for FFO, NOI, same-store NOI and coverage ratios, which are non-GAAP measures and may not be comparable with similarly named measures at other REITs.