Business Context and Reporting Period
Company: Health Care REIT, Inc. (Welltower Inc.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2004
Business Overview: A self-administered equity REIT investing primarily in long-term care facilities (skilled nursing and assisted living), which comprised 93% of the portfolio as of June 30, 2004. The company owns 346 facilities across 33 states managed by 49 operators.
Key Financial Metrics
| Metric (Six Months Ended June 30, 2004) | Amount (in thousands) |
|---|---|
| Total Revenues | $119,419 |
| Net Income | $42,354 |
| Net Income Available to Common Stockholders | $37,862 |
| Earnings Per Share (Diluted) | $0.73 |
| Funds From Operations (FFO) | $71,549 |
| EBITDA | $116,234 |
| Cash and Cash Equivalents | $33,990 |
| Total Debt Outstanding | $1,012,936 |
| Debt to Book Capitalization | 47% |
| Interest Coverage Ratio (EBITDA/Interest) | 3.21x |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 36% to $119.4 million from $88.1 million in the prior year period, driven primarily by a 39% increase in rental income due to new property acquisitions.
- Net Income: Net income available to common stockholders rose 14% to $37.9 million. However, diluted EPS decreased from $0.81 to $0.73 due to a 26% increase in the weighted average number of common shares outstanding.
- Expense Increases: Total expenses increased 51% to $78.8 million. Interest expense rose 52% and depreciation increased 60%, reflecting higher debt levels and a larger property portfolio.
- Cash Flow: Net cash provided by operating activities increased 16% to $62.8 million. Net cash used in investing activities decreased 24% to $121.6 million, aided by $34.9 million in proceeds from property sales.
- Dividends: The quarterly dividend was increased to $0.60 per share, representing the 133rd consecutive dividend payment.
Guidance, Outlook, and Risks
- Investment Outlook: Management expects to complete approximately $400 million to $500 million of new investments net of sales and loan payoffs for the full year 2004.
- Liquidity: The company maintains $33.99 million in cash and $299 million in available borrowing capacity under unsecured lines of credit. Management believes liquidity is sufficient to fund operations, debt service, and dividends.
- Lease Structure Change: Beginning in June 2004, new standard leases include rental escalators contingent on the Consumer Price Index (CPI) or gross operating revenues. This may initially lower reported revenues and FFO compared to historical fixed escalator leases but aims to generate organic growth.
- Risks: Key risks include the ability of operators to generate sufficient cash for lease/loan payments, potential operator bankruptcies, changes in Medicare/Medicaid reimbursement rates, and interest rate fluctuations. The company has entered into interest rate swaps to hedge $100 million of fixed-rate debt.
- Contingencies: The company is contingently liable for $3.2 million under a guaranty for industrial revenue bonds and has $8.9 million in unfunded construction commitments.
Investor Verification Checklist
- Share Count Impact: Verify the impact of the 26% increase in outstanding shares on future EPS growth relative to revenue growth.
- Operator Concentration: Review the top five operator mix (currently 46% of investments) to assess concentration risk.
- Debt Maturity Profile: Examine the contractual obligations table for debt maturities, noting $50 million in senior notes due in 2004 and $275 million due in 2005-2006.
- Non-GAAP Reconciliations: Review the reconciliation of FFO and EBITDA to Net Income to understand the adjustments for depreciation and interest.
- Portfolio Coverage: Monitor the payment coverage ratios (currently 1.64x overall) for the assisted living and skilled nursing portfolios.