Health Care REIT, Inc. (now identified in the request as Welltower Inc.) — 2013 Form 10-K
Business context and reporting period. The filing is Health Care REIT, Inc.’s audited annual report for the fiscal year ended December 31, 2013, not a standalone fourth-quarter report. The registrant name in the filing is Health Care REIT, Inc. Its portfolio spans seniors housing triple-net and operating properties and medical facilities in the United States, Canada and the United Kingdom. At year-end, reported net real estate investments were $21.68 billion across 1,142 consolidated properties; the notes describe 1,199 properties including unconsolidated investments.
Key financial metrics
| Metric | FY 2013 | Comparison |
|---|---|---|
| Total revenue | $2.881 billion | Up 60% from $1.805 billion |
| Net income attributable to common stockholders | $78.7 million; diluted EPS $0.28 | Down 65% from $221.9 million and $0.98 per diluted share |
| Funds from operations (FFO), a non-GAAP measure | $924.9 million; $3.32 per diluted share | Up 33% in total and 7% per share |
| Net operating income (NOI), a non-GAAP measure | $1.674 billion | Up 35% |
| Same-store cash NOI, a non-GAAP measure | $547.3 million | Up 1% |
| Cash from operating activities | $988.5 million | Up 21%; exceeded stockholder cash distributions |
| Cash and liquidity | $158.8 million cash; $72.8 million restricted cash | Management reported $2.1 billion of available borrowing capacity under the primary unsecured line |
| Debt and coverage | $7.422 billion senior unsecured notes principal; $3.011 billion secured debt principal; $130 million drawn on the unsecured revolver | Debt/book capitalization 48%; adjusted interest coverage 3.23x; fixed-charge coverage 2.56x |
| Common dividend | $3.06 per share for 2013 | Board approved $0.795 quarterly, or $3.18 annualized, starting February 2014 |
Revenue comprised $1.228 billion of rental income, $1.616 billion of resident fees and services, and $32.7 million of interest income. The seniors housing operating segment generated 56% of total revenue, triple-net 28%, and medical facilities 16%. The filing does not present a single consolidated GAAP operating-margin measure; NOI and FFO are non-GAAP supplemental measures.
Material changes versus the prior comparable period
- Revenue and NOI rose substantially, primarily reflecting acquisitions and portfolio growth. FFO per share also increased, while same-store cash NOI growth remained modest at 1%.
- Common-stockholder net income and diluted EPS fell sharply despite higher revenue. The year included $133.4 million of transaction costs, including $77.2 million associated with the Sunrise portfolio, and depreciation and amortization increased to $865.8 million from $506.2 million. Discontinued-operations income declined to $51.7 million from $114.1 million.
- Reported total assets rose to $23.08 billion from $19.55 billion, and total liabilities to $11.29 billion from $8.99 billion. Year-end cash fell from $1.034 billion to $158.8 million as the company funded investments and other uses of cash.
- The seniors housing operating share of investment increased to 39% from 28%, while triple-net declined to 41% from 47% and medical facilities to 20% from 25%. The report attributes this mix shift chiefly to major acquisitions.
Outlook, management commentary, risks and unusual items
- Transactions and growth: The company completed the Sunrise acquisition in January 2013, with an approximately $4.155 billion purchase price, and formed a 75%-owned partnership with Revera for 47 Canadian seniors housing properties. Gross new investments totaled $5.7 billion; the company raised over $3.7 billion through common stock and unsecured debt issuances. Management said capital markets remained supportive and expected attractive investment opportunities to continue, but gave no quantified earnings or FFO guidance.
- Funding and commitments: The company entered a $2.75 billion unsecured credit facility in January 2013, comprising a $2.25 billion revolver and a $500 million term loan. It reported $16.49 billion of contractual obligations, including principal, interest, leases and purchase obligations. It also had approximately $243.1 million of additional construction funding commitments.
- Concentration and operating exposure: Sunrise represented 19% of investment and approximately 23% of total revenue; Genesis represented 12% of investment and approximately 10% of revenue. Performance depends on operators’ ability to maintain occupancy, control costs and meet rent or debt obligations. Sunrise-managed properties are particularly important to operating results.
- Industry and financial risks: Management highlighted Medicare and Medicaid reimbursement changes, regulation and compliance, operator financial distress, acquisition and development execution, competition, access to capital, debt covenants, interest rates and foreign-currency exposure. A 1% increase in rates was estimated to raise annual interest expense on variable-rate debt by approximately $10.9 million, assuming balances were unchanged.
- Unusual items and controls: Foreign-currency translation reduced other comprehensive income by $23.2 million; net derivative losses were $4.5 million. The Sunrise merger litigation was settled and dismissed with prejudice in early 2014. The financial-statement audit opinion was unqualified and management reported effective controls; however, the Revera Partnership was excluded from the 2013 internal-control assessment, representing 5% of assets and 4% of revenue.
Important facts for investors to verify
- Confirm the issuer and period: the supplied filing names Health Care REIT, Inc. and covers FY 2013; it is not a current Welltower filing or a standalone Q4 filing.
- Review the full acquisition accounting, integration costs and pro forma results for Sunrise and Revera, including the preliminary Revera purchase-price allocation.
- Assess whether growth in FFO and NOI translates into sustainable per-share cash generation, given 1% same-store cash NOI growth, acquisition funding needs and dilution from equity issuance.
- Check tenant and operator concentration, especially Sunrise and Genesis, and monitor rent coverage, occupancy and reimbursement exposure.
- Reconcile debt maturities, secured borrowing, credit-facility availability and construction commitments against liquidity needs and dividend payments.
- Evaluate the quality and cash character of earnings, including transaction costs, depreciation, discontinued operations, derivative effects and the non-GAAP adjustments used in FFO and NOI.