Business Context and Reporting Period
Company: Health Care REIT, Inc. (Welltower Inc.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2008
Business Overview: An equity real estate investment trust (REIT) investing in senior housing and health care real estate. As of September 30, 2008, the portfolio consisted of 641 properties across 39 states, including independent living, assisted living, skilled nursing, specialty care facilities, and medical office buildings.
Key Financial Metrics
| Metric (Nine Months Ended Sep 30, 2008) | Amount (in thousands) |
|---|---|
| Total Revenues | $410,522 |
| Net Income | $259,517 |
| Net Income Available to Common Stockholders | $241,857 |
| Funds from Operations (FFO) | $231,677 |
| Net Operating Income (NOI) | $389,229 |
| EBITDA | $488,315 |
| Cash and Cash Equivalents | $18,273 |
| Restricted Cash | $83,189 |
| Total Debt (Senior Notes, Secured Debt, Lines of Credit) | $2,686,455 |
| Stockholders' Equity | $3,201,556 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 22% to $410.5 million from $335.9 million in the prior year period, driven by rental income growth (19%) and interest income growth (65%).
- Profitability Surge: Net income available to common stockholders increased 229% to $241.9 million from $73.5 million. This significant increase is primarily attributable to a $130.8 million gain on the sale of real properties (discontinued operations), compared to a $2.8 million gain in the prior year.
- Discontinued Operations: The company sold 19 properties to Emeritus Corporation for $222.7 million, recognizing a gain of $113.5 million. Properties held for sale and sold were reclassified to discontinued operations.
- Capital Structure: The company completed three public offerings of common stock totaling 15.65 million shares, raising net proceeds of approximately $681.4 million. Preferred stock conversions reduced preferred dividends paid.
- Debt Management: The company extinguished $42.3 million of senior unsecured notes and $47.1 million of secured debt, recognizing gains on extinguishment of $2.1 million.
Guidance, Outlook, and Risks
- Investment Outlook: Management expects to complete gross new investments of approximately $1.2 billion in 2008, with net new investments of approximately $950 million after sales and loan repayments.
- Liquidity: The company maintains $763 million of available borrowing capacity under its $1.15 billion unsecured line of credit. Management believes liquidity is sufficient to fund operations, debt service, dividends, and future investments.
- Dividends: The quarterly dividend was increased to $0.68 per share, representing the 150th consecutive quarterly dividend payment.
- Key Risks:
- Interest Rate Risk: Exposure to variable rate debt (line of credit) and fair value changes in fixed-rate debt. A 1% increase in rates would increase annual interest expense on variable debt by $3.9 million.
- Concentration Risk: Top five customers represent 27% of total investments and 31% of revenues (prior year). The largest customer, Emeritus Corporation, accounts for 5% of investments and 8% of revenues.
- Operator/Tenant Risk: Dependence on operators' ability to pay rent and repay loans. Payment coverage ratios remain strong at 1.99x.
- Market Risk: Potential inability to reinvest sale proceeds at similar rates or access capital markets if credit conditions deteriorate.
Investor Verification Checklist
- Gain on Sales: Verify the sustainability of earnings given that a significant portion of net income ($130.8 million) stems from one-time gains on property sales classified as discontinued operations.
- Debt Covenants: Confirm continued compliance with debt covenants, specifically the adjusted fixed charge coverage ratio requirement of 1.75x (currently 3.26x).
- Reinvestment Strategy: Assess the company's ability to deploy the $681 million raised from equity offerings and sale proceeds into new assets yielding returns above the cost of capital.
- Interest Rate Exposure: Monitor the impact of rising interest rates on the $387 million outstanding balance on the variable-rate line of credit.
- Customer Concentration: Review the financial health of top tenants, particularly Emeritus Corporation, which recently acquired a significant portion of the company's sold portfolio.