Health Care REIT, Inc. (now Welltower Inc.) — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparative period is Q1 2013. The filing was signed May 8, 2014. At the time, the company reported as Health Care REIT, Inc.
Business context
The company was a healthcare and seniors-housing real estate investment trust, operating across seniors housing triple-net, seniors housing operating, and medical facilities. It reported 1,212 properties across 46 U.S. states, the United Kingdom, and Canada; the investment mix table lists 1,145 properties and excludes the company’s share of unconsolidated entities.
Financial performance
- Revenue: $801.8 million, up 27% from $629.7 million. Rental income increased 15% to $336.5 million, while resident fees and services rose 39% to $456.3 million.
- Profit: Net income was $65.2 million versus $71.8 million; net income attributable to common stockholders was $50.0 million, down 9%. Diluted EPS was $0.17 versus $0.21. Q1 2013 included an $82.5 million gain on property sales; Q1 2014 had no property-sale gain.
- Property operations: NOI from continuing operations increased 22% to $460.4 million; same-store cash NOI grew 4% to $322.7 million. FFO, a non-GAAP measure, increased 69% to $288.8 million, or $0.99 per diluted share versus $0.65.
- Cash flow: Operating cash flow was $258.7 million, up 29%. Investing cash outflow was $351.4 million and financing cash inflow was $119.6 million. Cash distributions to stockholders were $247.2 million, including $230.8 million of common dividends.
- Margins and expenses: Property operating expenses were $341.4 million and depreciation and amortization was $233.3 million. General and administrative expense was $32.9 million; management reported G&A at 4.10% of consolidated revenue, compared with 4.46% a year earlier.
- Debt and liquidity: Balance-sheet carrying amounts included $562.0 million drawn on the unsecured credit line, $7.38 billion of senior unsecured notes, and $2.92 billion of secured debt. Cash and cash equivalents were $185.9 million, restricted cash $67.8 million, and available capacity under the $2.25 billion revolver was $1.688 billion. The company reported a 48% debt-to-book-capitalization ratio, 3.24x interest coverage, and 2.56x fixed-charge coverage; it was in compliance with debt covenants.
- Dividends: Quarterly common dividend increased to $0.795 per share from $0.765; the annualized rate became $3.18 per share.
Material changes versus Q1 2013
- Revenue and NOI rose substantially, reflecting acquisitions, new properties coming into service, and portfolio transitions. Same-store cash NOI increased more modestly, by 4%.
- Common-stockholder earnings declined despite improved continuing operations, principally because the prior-year period included the property-sale gain. Q1 2013 also included $66.0 million of transaction costs, largely related to the Sunrise merger, versus $1.0 million in Q1 2014.
- Operating cash flow improved and exceeded cash distributions in Q1 2014. In Q1 2013, distributions exceeded operating cash flow.
- Investing outflows were far lower than the prior year, when acquisitions and contributions to unconsolidated entities were significantly larger. The company invested $542.2 million in gross acquisitions and joint ventures in Q1 2014.
- Debt drawn under the revolver increased from $130.0 million at year-end 2013 to $562.0 million at March 31, 2014. The company’s reported market-risk analysis estimated that a 1% rate increase would add about $15.1 million to annual interest expense on variable-rate debt, assuming balances stayed unchanged.
Outlook, risks, and unusual items
- Outlook: No specific earnings or revenue guidance is stated in the provided filing text. Management said capital markets remained supportive, expected investment opportunities to continue, and believed liquidity was sufficient for planned uses, subject to availability and cost of external capital.
- Investment and funding plans: Management expected to fund investments with operating cash, revolver borrowings, and equity or debt issuance, with permanent financing used to repay temporary revolver draws. The company completed a $214.8 million investment for a 46.79% interest in a joint venture owning 10 seniors-housing properties.
- Commitments: The company had $144.5 million of construction in progress and was committed to an additional approximately $224.1 million to complete construction. It also reported $66.6 million of contingent purchase obligations and $16.84 billion of total contractual obligations, including debt, interest, and leases.
- Operating and regulatory risks: Rent and operating-property performance depend on tenants, operators, and joint-venture partners. Management highlighted potential pressure from Medicare and Medicaid reimbursement changes, government scrutiny of skilled-nursing billing, and healthcare payment reforms. Other cited risks include interest-rate and foreign-currency movements, capital-market access, tenant credit, and property investment or disposition execution.
- Concentration: Sunrise represented 19% and Genesis HealthCare 12% of reported investments; the five largest relationships together accounted for 44%. These figures exclude the company’s share of unconsolidated entities.
- Accounting and contingencies: The company adopted ASU 2014-08 prospectively and reclassified properties sold before or held for sale at January 1, 2014 as discontinued operations for comparison. Management reported no material impact from adoption. Routine legal proceedings were not believed likely to have a material adverse effect; no material changes to reported risk factors were disclosed.
Important facts for investors to verify
- How much of revenue and NOI growth reflects acquisitions and portfolio changes versus underlying same-store performance.
- The sustainability of the $3.18 annualized common dividend relative to operating cash flow, capital spending, and debt service.
- Tenant and operator credit quality, especially exposure to Sunrise and Genesis, and any changes in reimbursement or regulatory conditions.
- Debt maturities, variable-rate exposure, covenant headroom, and the cost and availability of future capital.
- Progress, remaining funding needs, and expected returns for construction projects and joint-venture investments; also confirm the distinction between consolidated property counts and unconsolidated holdings.