WELLTOWER INC. quarterly report, Q1 FY2013

Business context and reporting period

Health Care REIT, Inc. (now Welltower Inc.) filed this unaudited Form 10-Q for the quarter ended March 31, 2013. The REIT invests in seniors housing and health care real estate. Its portfolio comprised 1,133 properties across 46 U.S. states, the United Kingdom and Canada, including properties held through unconsolidated ventures.

Financial results and position

Unless otherwise noted, amounts are in U.S. dollars.

• Investing activities used $1.969 billion, chiefly for property acquisitions and investments in unconsolidated entities. Financing activities provided $1.004 billion. Cash declined by $763.9 million during the quarter.
• Balance-sheet debt included $710 million drawn on unsecured lines, $6.611 billion of senior unsecured notes, $2.452 billion of secured debt and $80.6 million of capital lease obligations. Management reported $1.55 billion of available capacity under its primary credit facility.
• Reported interest coverage was 3.42x and fixed-charge coverage was 2.72x. Debt/book capitalization was 49%; the company stated it complied with all debt covenants.
• Common dividends were $0.765 per share for the quarter, versus $0.740 a year earlier. The annualized dividend was raised to $3.06 per share.

Material changes versus the prior comparable period

• Revenue rose 52%, and NOI rose 32%, substantially reflecting acquired properties, particularly the Sunrise portfolio. Same-store cash NOI increased 3%, a more modest growth rate than total NOI.
• Sunrise contributed $112.1 million of revenue and $36.9 million of NOI after its January 9, 2013 acquisition. The estimated purchase price was approximately $2.763 billion, including approximately $2.042 billion cash consideration; the allocation remained preliminary.
• Q1 net income included an $82.5 million gain on property sales, compared with $0.8 million in Q1 2012. As a result, positive net income coexisted with a $0.11-per-share loss from continuing operations.
• Transaction costs increased to $66.0 million from $5.6 million, primarily in connection with Sunrise. Interest expense increased to $110.3 million from $88.8 million, and depreciation and amortization increased to $187.1 million from $120.9 million.
• FFO increased 4% in total but declined to $0.65 per diluted share from $0.81, reflecting the expanded share base and acquisition-related factors. Weighted-average common shares increased from 199.7 million to 260.0 million.
• The company completed $2.6 billion of gross investments and $337.5 million of dispositions and loan payoffs. Dispositions included $294.6 million of property-sale proceeds and generated the reported $82.5 million gain.

Outlook, commentary, risks and unusual items

• Management said capital markets remained supportive and believed liquidity was sufficient for planned uses, subject to availability and cost of external capital. It expected attractive investment opportunities to continue, but provided no clear numerical full-year earnings or FFO guidance in the supplied filing text.
• The new unsecured facility comprised a $2.25 billion revolver and a $500 million term loan; the revolver matures in 2017 and the term loan in 2016, with extension options. Management noted that rating downgrades could raise financing costs or reduce capital availability. S&P upgraded the company to BBB with a stable outlook.
• Key business risks include tenants’ and operating partners’ ability to pay rent, reimbursement and regulatory changes affecting health care operators, acquisition execution, refinancing and capital-market access, interest-rate and foreign-exchange movements, and reliance on joint-venture partners. Medicare sequestration reductions of up to 2% began April 1, 2013; additional proposed reimbursement changes were described but were not final.
• At March 31, 2013, the company had $217.2 million of additional construction funding commitments, $74.0 million of contingent purchase obligations, $698.0 million of operating lease obligations and $83.5 million of capital lease obligations. Eight letters of credit totaled $6.2 million. Some sales proceeds were held in a Section 1031 exchange escrow.
• One real estate loan balance of $4.2 million was on non-accrual status with no allowance recorded; no loan-loss provision was recorded in the quarter. The company also reported a $22.7 million foreign-currency translation loss in other comprehensive income and a $2.3 million realized derivative loss in earnings.
• Management said pending legal proceedings were ordinary-course matters and were not expected to have a material adverse effect. It reported effective disclosure controls and no material change in internal control over financial reporting.

Most important facts for investors to verify

• Assess whether Sunrise’s acquired-property NOI can be sustained and whether acquisition costs and integration effects are nonrecurring; the purchase-price allocation was preliminary.
• Reconcile GAAP earnings, which benefited from property-sale gains, with continuing-operations results and per-share FFO, which declined year over year.
• Review leverage, maturities, variable-rate exposure and remaining revolver availability; a 1% rate increase was estimated to add about $10.0 million of annual interest expense at quarter-end balances.
• Monitor same-store NOI, tenant and operator credit quality, and the potential effects of reimbursement cuts and other health care regulation.
• Confirm the use and reinvestment of disposition proceeds, construction commitments, and the performance and debt obligations of unconsolidated ventures.