Business context and reporting period
The supplied filing is Health Care REIT, Inc.’s Form 10-K for the fiscal year ended December 31, 2012; the registrant named in the filing is not Welltower Inc. The company was a healthcare and seniors-housing REIT with investments across triple-net seniors housing, operated seniors housing, and medical facilities.
At year-end, the company reported $17.4 billion of consolidated real estate investments across 973 properties. Its portfolio included 573 triple-net seniors-housing properties, 154 seniors-housing operating properties, and 246 medical-facilities properties. Certain joint-venture properties are excluded from these consolidated counts.
Financial results and liquidity
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue | $1.822 billion | $1.330 billion | +37% |
| Net income | $294.8 million | $212.7 million | +39% |
| Net income attributable to common stockholders | $221.9 million | $157.1 million | +41% |
| Diluted earnings per common share | $0.98 | $0.90 | +9% |
| Funds from operations (FFO) | $697.6 million; $3.09 per diluted share | $524.9 million; $3.01 per diluted share | +33% total; +3% per share |
| Net operating income from continuing operations (NOI) | $1.252 billion | $952.3 million | +31% |
| Same-store cash NOI | $334.1 million | $332.0 million | +1% |
| Net cash from operating activities | $818.1 million | $588.2 million | +39% |
Revenue was reported as approximately 61% rental income, 37% resident fees and services, and 2% interest and other income, including discontinued operations. Growth primarily reflected acquisitions and properties entering service; same-store cash NOI growth was much more modest.
At December 31, 2012, cash and cash equivalents were $1.034 billion, restricted cash was $107.7 million, and the $2.0 billion unsecured credit facility was undrawn. The company reported total debt of $8.45 billion under its measure, debt-to-book capitalization of 45%, debt-to-market capitalization of 33%, adjusted interest coverage of 3.31x, and adjusted fixed-charge coverage of 2.58x. It reported compliance with debt covenants. Separately, balance-sheet liabilities included $6.114 billion of senior unsecured notes, $2.336 billion of secured debt, and $81.6 million of capital lease obligations.
Common dividends were $2.96 per share for 2012. The board approved a $0.765 quarterly rate, equivalent to $3.06 annually, beginning with the February 2013 dividend; future payments remained subject to board approval.
Material changes versus the prior year
- Revenue, common-stockholder income, FFO, operating cash flow, and NOI increased substantially, largely alongside rapid portfolio expansion. Same-store cash NOI increased just 1%.
- The company completed approximately $4.9 billion of gross investments and $635 million of dispositions during 2012, reporting $101 million of net disposition gains. It raised more than $6.0 billion through equity, preferred stock, debt, and a Canadian-dollar term loan.
- Common shares outstanding increased significantly, including 64.4 million shares issued in public offerings. This capital issuance helped fund growth and is relevant when assessing per-share performance.
- The seniors-housing operating segment expanded: its 2012 revenue rose to $703.7 million from $456.1 million, mainly from acquisitions. Segment net loss attributable to common stockholders narrowed to $13.9 million from $73.5 million.
- The company’s debt-to-book capitalization ratio improved to 45% from 50%, while adjusted interest coverage recovered to 3.31x from 3.02x.
Outlook, commentary, risks, and unusual items
- Management said capital markets remained supportive and expected investment opportunities to continue, but provided no specific numerical earnings guidance in the supplied filing text. It cited access to capital and reinvestment opportunities as important to its strategy.
- On January 9, 2013, after year-end, the company completed its Sunrise Senior Living acquisition. The estimated total purchase price was approximately $3.28 billion, including cash consideration and assumed debt; the filing said acquisition accounting was incomplete and did not provide pro forma financial information. A related $2.75 billion unsecured credit facility replaced the prior facility in January 2013.
- 2012 included a $27.0 million provision for loan losses, relating to a loan at an entrance-fee community; $29.3 million of asset impairments; $100.5 million of net gains on property sales; $61.6 million of transaction costs; and a $6.2 million preferred-stock redemption charge.
- Healthcare reimbursement, particularly Medicare and Medicaid policy, operator financial health, occupancy, labor and insurance costs, and regulatory compliance could affect tenants’ ability to pay rent or service debt. Genesis accounted for approximately 13% of total revenue; it leased 177 facilities under a master lease.
- Other material risks include acquisition and integration execution, reliance on operating partners, joint-venture and tenant concentration, access to capital and interest-rate exposure, development commitments, foreign-currency exposure, and maintaining REIT qualification. The company had $213.3 million of remaining construction funding commitments at year-end.
- Shareholder lawsuits challenged the Sunrise merger; the parties entered a memorandum of understanding to provisionally settle the suits, subject to conditions, and proceedings were stayed while settlement steps continued. The filing said ordinary-course legal proceedings were not expected to materially affect consolidated financial position or results.
- Ernst & Young issued an unqualified opinion on the financial statements and internal controls. Management also concluded disclosure controls and internal control over financial reporting were effective at year-end.
Important facts for investors to verify
- Confirm the registrant and security being reviewed: this is Health Care REIT, Inc.’s 2012 filing, although the request metadata identifies Welltower Inc.
- Review the Sunrise acquisition’s final purchase-price allocation, financing, integration results, and subsequent operating performance; the 10-K’s acquisition accounting and pro forma information were incomplete.
- Assess operator credit and rent coverage, especially Genesis exposure, and verify how payer reimbursement changes affected skilled-nursing and hospital operators.
- Reconcile debt measures and maturities across the balance sheet, principal schedules, credit agreements, and the January 2013 replacement facility; also evaluate remaining purchase and construction commitments.
- Separate acquisition-driven growth, disposition gains, impairments, and loan-loss charges from recurring operating and per-share trends; track dilution from equity issuance and dividend coverage.
- Check the final status and terms of the Sunrise-related litigation settlement and confirm the board’s subsequent dividend declarations.