Health Care REIT, Inc. (now Welltower) — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010. The filing is under the name Health Care REIT, Inc. Financial amounts below are in U.S. dollars; unless stated otherwise, figures are in millions.
Business context
The company was an equity REIT investing in senior housing and health care real estate, with property management and development services. At quarter-end it reported 625 properties across 39 states and $6,900.5 million of investments, including its share of unconsolidated joint ventures. Its portfolio included senior housing and care, hospitals, medical office buildings, and a new life-science investment.
Key financial results
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenues | $163.1 | $139.0 | $315.9 | $277.9 |
| Net income | $51.1 | $64.8 | $82.8 | $131.4 |
| Net income attributable to common stockholders | $45.6 | $59.2 | $71.5 | $120.4 |
| Diluted EPS | $0.37 | $0.53 | $0.58 | $1.09 |
| Funds from operations (FFO; non-GAAP) | $92.2 | $89.2 | $155.3 | $174.5 |
| Net operating income (NOI; non-GAAP) | $157.4 | $133.2 | $300.5 | $268.0 |
| Cash from operating activities | Not separately stated | Not separately stated | $191.5 | $184.3 |
Q2 revenue increased 17% year over year, primarily reflecting rent from acquisitions and newly completed properties. Common-stockholder net income fell 23% for Q2 and 41% for the first half; diluted EPS declined 30% and 47%, respectively. First-half results included a $25.1 million loss on extinguishment of debt, compared with a $1.7 million gain in the 2009 period, and lower gains on property sales. Q2 interest expense was $37.5 million versus $26.1 million; depreciation and amortization was $47.5 million versus $38.1 million. FFO rose 3% in Q2 but declined 11% for the first half, while NOI increased 18% and 12%, respectively. FFO and NOI are company-defined non-GAAP measures.
Balance sheet, debt and liquidity
- At June 30, total assets were $7,079.3 million, total liabilities $3,342.2 million, and total equity $3,737.1 million.
- Debt totaled $3,154.8 million: $206.0 million drawn on the unsecured credit line, $2,135.4 million of senior unsecured notes, and $813.3 million of secured debt. Debt to book capitalization was 46%; debt to market capitalization was 36%.
- Cash and cash equivalents were $55.4 million; restricted cash was $59.7 million. The $1.15 billion credit facility had $944 million of available capacity and was scheduled to expire August 5, 2011, with a one-year extension option subject to conditions.
- Interest coverage and fixed-charge coverage for Q2 were 3.48x and 2.78x. The company said it was in compliance with debt covenants at quarter-end.
- First-half investing cash outflow was $601.1 million, including $389.9 million invested in real property and $174.6 million contributed to a joint venture. Financing provided $429.6 million; cash increased $19.9 million to $55.4 million.
- Common dividends were $0.68 per share in Q2 and $1.36 per share for the first half, unchanged from the comparable 2009 periods. The board subsequently increased the quarterly dividend to $0.69 beginning August 2010.
Material changes and transactions
- The company invested $174.6 million for a 49% interest in a seven-building, fully leased life-science campus in Cambridge, Massachusetts. Its share of the joint venture’s non-recourse debt was approximately $156.7 million.
- First-half gross investments were reported at $877.6 million, with $47.5 million of investment payoffs. The company acquired 29 properties, including 19 medical office buildings and 10 senior housing facilities, and sold nine properties.
- The company issued $494.4 million of 3.00% convertible notes due 2029 and $450 million of 6.125% notes due 2020; it repurchased $441.3 million of 4.75% convertible notes due 2026 and 2027.
- After quarter-end, the company announced an $817 million partnership with Merrill Gardens. It planned to acquire an 80% interest in a 38-building senior housing portfolio; closing was anticipated in September 2010. The portfolio’s projected 2011 NOI after management fees was approximately $60–$63 million.
Outlook, commentary and risks
Management expected 2010 gross new investments of $1.8–$2.2 billion, comprising $1.5–$1.8 billion of acquisitions and joint ventures and $300–$400 million of funded development. It anticipated approximately $300 million of property sales and loan repayments. Management said liquidity remained important but that it was pursuing investments meeting its strategic and underwriting criteria, and believed liquidity was sufficient for operations, debt service, distributions and ongoing construction, subject to capital availability and cost.
Management described the economic outlook as uncertain: bank lending remained cautious, while government-sponsored financing and equity capital were available in some health care property sectors. Key risks include tenants’ ability to pay contractual rent and interest, health care reimbursement and regulation, access to and cost of capital, refinancing, interest-rate changes, development and acquisition execution, property vacancies, and the ability to reinvest proceeds from sales or loan repayments. The filing also reported $310.0 million of additional construction financing commitments, $10.8 million of contingent purchase obligations, and $183.4 million of operating lease obligations. A 1% increase in rates was estimated to raise annual interest expense on variable-rate debt by $3.4 million, assuming balances stayed constant.
Other notable items: the company recorded no impairment charge in the first half of 2010, but had $78.4 million of loans on non-accrual status and a $5.0 million allowance for loan losses. It incurred $25.1 million in debt-extinguishment losses and $8.5 million in transaction costs during the first half. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile the decline in GAAP earnings and FFO with rising revenue and NOI, particularly the effects of debt-extinguishment losses, property-sale gains, and higher interest expense.
- Review tenant and borrower credit quality, including the $78.4 million non-accrual loan balance, customer concentration, and reported 2.03x overall payment coverage.
- Assess the funding, returns, and leverage implications of the Cambridge joint venture, ongoing construction commitments, and announced Merrill Gardens transaction.
- Confirm the company’s capacity to fund its investment plans, dividends, debt maturities, and commitments through operating cash flow and available capital markets.
- Check the timing and terms of debt maturities and convertible-note put features, and monitor covenant compliance, interest-rate exposure, and refinancing access.