Health Care REIT, Inc. (now Welltower Inc.) — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Financial statements are unaudited. The registrant was named Health Care REIT, Inc. in this filing.
Business context
The company is a healthcare and seniors-housing REIT operating triple-net, seniors housing operating, and outpatient medical businesses. It reported a diversified portfolio of 1,411 properties across 46 U.S. states, the United Kingdom, and Canada; its segment NOI table covered 1,350 properties.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share figures. Period comparisons are with the corresponding 2014 period.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $957.2 | $826.4 | $1,851.3 | $1,628.3 |
| Net income attributable to common stockholders | $312.6 | $71.8 | $503.4 | $121.9 |
| Diluted earnings per share | $0.89 | $0.24 | $1.46 | $0.41 |
| Funds from operations (FFO) | $340.6 | $284.2 | $684.8 | $573.0 |
| Diluted FFO per share | $0.97 | $0.95 | $1.99 | $1.95 |
| Net operating income (NOI) | $558.8 | $482.7 | $1,076.5 | $943.1 |
| Same-store cash NOI | $427.3 | $420.1 | $842.3 | $827.3 |
| Cash provided by operating activities | — | — | $619.3 | $595.5 |
- Q2 revenue increased 16%; NOI increased 16% for the first half. First-half same-store cash NOI rose 2%.
- Net income growth substantially reflected disposition gains: $190.1 million in Q2 and $247.0 million year to date. First-half results also included a $58.4 million gain on a Genesis-related derivative.
- At June 30, total assets were $27.4 billion and total liabilities $12.2 billion. Balance-sheet borrowings were $350 million under the unsecured credit facility, $8.06 billion of senior unsecured notes, and $3.07 billion of secured debt.
- Cash and cash equivalents were $217.9 million, with $72.7 million of restricted cash. The company reported $2.09 billion of available borrowing capacity under its primary unsecured facility.
- First-half investing cash outflow was $2.22 billion, primarily reflecting acquisitions and loan investments. Financing cash inflow was $1.34 billion; cash distributions to stockholders were $594.6 million.
- Quarterly common dividends were $0.825 per share; first-half dividends were $1.65 per share. Management reported quarterly interest coverage of 5.32x and fixed-charge coverage of 4.19x.
Material changes and transactions
- The company invested $2.17 billion in acquisitions during the first half, including 85 properties across its reported segments. Cash disbursed for acquisitions was $2.15 billion.
- Disposition proceeds were $523.2 million in the cash flow statement; management’s transaction summary reports $749.1 million of pro rata proceeds, including seller financing. Dispositions generated the $247.0 million first-half gain.
- In February, the company issued 19.55 million common shares for approximately $1.48 billion gross proceeds. In May, it issued $750 million of 4.0% senior notes due 2025.
- NOI increased in all three segments, led by acquisition-related growth. Same-store cash NOI rose 3% in triple-net and outpatient medical, but declined 1% in seniors housing operating, partly due to unfavorable currency movements.
- Common shares outstanding increased materially following equity issuance; average diluted shares for the first half rose to 344.6 million from 294.6 million.
Outlook, risks, and unusual items
- The filing provides no specific numerical earnings or FFO guidance. Management said liquidity was sufficient for expected uses, subject to access to capital and market conditions, and anticipated reinvesting disposition proceeds in new investments.
- Management identified reliance on tenant and operator rent, fee, and loan payments; healthcare reimbursement and regulatory changes; financing availability and cost; interest and foreign-exchange movements; and the ability to acquire, sell, and reinvest properties as key risks.
- Genesis Healthcare represented 17% of reported six-month NOI; Sunrise represented 14%. The five largest operator relationships together accounted for 47% of NOI.
- Outstanding construction commitments were approximately $402.9 million; purchase obligations totaled $442.8 million, including $39.9 million of contingent obligations. The company reported $21 million of real estate loans on non-accrual status and no loan-loss provision for the first half.
- Other notable expenses included $61.0 million of first-half transaction costs and $34.3 million of losses on debt extinguishment. A $2.2 million asset impairment was also recorded.
- Management stated it was in compliance with debt covenants, disclosure controls were effective, and there had been no material changes to the risk factors in the 2014 Form 10-K. Routine legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- How much reported earnings growth reflects recurring property operations versus property-sale gains and the Genesis-related derivative gain.
- Whether same-store seniors housing performance, operator finances, and foreign-exchange trends improve or weaken, particularly given operator concentration.
- The return and funding costs of the substantial acquisition and development program, and the company’s capacity to meet construction and other commitments.
- The sustainability of dividends relative to recurring cash generation, including the effects of share-count growth and future capital-market access.
- Debt maturities, covenant headroom, and sensitivity to higher interest rates; the filing estimates a 1% rate increase would add about $14.5 million to annual interest expense on then-outstanding variable-rate debt.