Business Context and Reporting Period
Company: Health Care REIT, Inc. (d/b/a Welltower Inc.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2006
Business Overview: A self-administered equity REIT investing in health care and senior housing properties, including independent living, assisted living, skilled nursing, and specialty care facilities. As of September 30, 2006, the portfolio consisted of 477 facilities in 37 states.
Key Financial Metrics
| Metric (Nine Months Ended Sept 30, 2006) | Amount (in thousands) |
|---|---|
| Total Revenues | $236,229 |
| Net Income | $79,791 |
| Net Income Available to Common Stockholders | $63,793 |
| Diluted EPS (Common) | $1.04 |
| Funds From Operations (FFO) | $133,120 |
| Funds Available for Distribution (FAD) | $142,876 |
| EBITDA | $225,588 |
| Total Assets | $3,200,829 |
| Total Liabilities | $1,653,860 |
| Total Stockholders' Equity | $1,546,969 |
| Cash and Cash Equivalents | $15,490 |
| Debt to Book Capitalization | 51% |
| Interest Coverage Ratio | 3.04x |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 19% to $236.2 million, driven primarily by a 22% increase in rental income ($220.0 million) due to new property acquisitions. Interest income decreased 14% to $13.2 million due to a lower balance of outstanding loans.
- Profitability: Net income available to common stockholders increased 77% to $63.8 million compared to $36.1 million in the prior year. This significant increase is largely attributable to the absence of an $18.4 million loss on extinguishment of debt recorded in the second quarter of 2005.
- Expenses: Total expenses increased 7% to $160.3 million. Interest expense rose 22% to $70.6 million due to higher average borrowings, and depreciation increased 24% to $70.3 million due to new investments. General and administrative expenses increased 27%, partly due to the adoption of SFAS 123(R) for stock-based compensation.
- Investing Activity: Net cash used in investing activities increased 46% to $289.8 million, reflecting $290.6 million in real property investments and $74.1 million in loan advances, partially offset by $35.3 million in proceeds from property sales.
Guidance, Outlook, and Risks
- Merger with Windrose: On September 13, 2006, the Company announced a definitive merger agreement with Windrose Medical Properties Trust. The transaction is expected to close around year-end 2006, creating a combined entity with over 550 properties and approximately $4 billion in gross real estate assets.
- Investment Outlook: Management expects to complete gross new investments of $525 million to $575 million for the full year 2006, resulting in net new investments of $375 million to $425 million.
- Dividends: The quarterly dividend was increased to $0.64 per share, representing the 142nd consecutive dividend payment.
- Liquidity: The Company maintains a $700 million unsecured revolving credit facility (extended to July 2009) with $464 million available capacity as of September 30, 2006.
- Risks: Key risks include the ability of operators to make rent payments, changes in Medicare/Medicaid reimbursement rates, interest rate fluctuations, and the successful integration of the Windrose merger. The Company holds $265.1 million in unfunded construction commitments.
Investor Verification Checklist
- Merger Completion: Verify the closing status and regulatory approvals for the Windrose Medical Properties Trust merger.
- Operator Concentration: Review the financial health of top operators (Emeritus, Brookdale, Home Quality Management) which represent a significant portion of the portfolio.
- Debt Covenants: Confirm continued compliance with debt covenants, specifically the interest coverage ratio (currently 3.04x) and fixed charge coverage ratio (currently 2.44x).
- Construction Commitments: Assess the funding requirements and progress of the $265.1 million in unfunded construction commitments.
- Interest Rate Exposure: Monitor the impact of rising interest rates on the $276 million outstanding variable-rate debt and the $100 million notional interest rate swaps.