Health Care REIT, Inc. (now Welltower Inc.) — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. The filing was made under the name Health Care REIT, Inc.; the company described a diversified seniors housing and health care real estate portfolio of 898 properties across 45 states.
Financial performance and liquidity
- Q3 revenue: $384.8 million, versus $168.9 million in Q3 2010. Rental income was $250.0 million and resident fees and services were $125.1 million. Growth primarily reflected acquisitions and the expansion of the seniors housing operating business.
- Q3 earnings: Net income was $52.4 million versus $0.1 million a year earlier; income attributable to common stockholders was $36.6 million, compared with a $4.6 million loss. Diluted EPS was $0.21 versus a loss of $0.04.
- Nine-month results: Revenue was $1.019 billion versus $465.7 million; net income was $170.4 million versus $82.9 million; and common-stockholder income was $129.8 million versus $66.9 million. Diluted EPS was $0.76 versus $0.54.
- Supplemental operating measures: Nine-month FFO was $370.8 million ($2.18 diluted per share), versus $194.0 million ($1.56) in 2010. Nine-month NOI was $783.2 million, up 69%; Q3 NOI was $289.3 million versus $164.3 million. FFO and NOI are non-GAAP measures, not substitutes for GAAP earnings or cash flow. The filing does not provide a single comparable consolidated operating-margin measure.
- Cash flow: Nine-month operating cash flow was $417.6 million, up from $288.6 million. Investing used $3.673 billion, mainly for property investments; financing provided $3.260 billion. Cash and cash equivalents ended the period at $136.7 million.
- Debt and liquidity: Debt totaled approximately $6.710 billion, including $390.0 million drawn on the unsecured line, $4.432 billion of senior unsecured notes, and $1.888 billion of secured debt. Total liabilities were $7.135 billion. The $2.0 billion revolving facility expires in July 2015; available borrowing capacity was $1.610 billion. Cash was $136.7 million and restricted cash $56.7 million. Debt-to-book capitalization was 50%; Q3 interest and fixed-charge coverage were 2.94x and 2.29x, respectively. The company reported compliance with all debt covenants.
- Dividends and capital: Common dividends were $0.715 per share for Q3 and $2.12 per share for the first nine months. The company announced a quarterly common dividend increase to $0.74 for 2012, beginning with the February payment. It raised about $3.535 billion of equity and unsecured debt capital in March 2011.
Material changes versus prior periods
- In April, the company acquired substantially all real estate assets of Genesis HealthCare—147 properties—for a purchase price of approximately $2.475 billion, funded primarily with new equity and debt. The 15-year master lease had first-year base rent of $198 million.
- During the first nine months, the company reported $4.641 billion of gross property acquisitions across 248 properties, compared with $1.042 billion across 59 properties in the prior-year period. It sold 41 properties for $221.6 million of proceeds and recognized $56.6 million of gains.
- Two seniors housing operating partnerships, with Silverado and Benchmark, were formed in 2011. The acquired and operated communities contributed materially to resident-fee revenue and property operating costs. The seniors housing operating segment reported nine-month NOI of $99.7 million but a $57.8 million loss attributable to common stockholders, including financing, depreciation and transaction expenses.
- Q3 interest expense rose to $87.8 million from $42.9 million; nine-month interest expense increased to $230.1 million from $106.3 million. The larger portfolio and financing raised depreciation and amortization as well. Common shares outstanding increased substantially following a 2011 public issuance of 28.75 million shares.
- Senior housing triple-net coverage softened: the company’s overall customer payment coverage was 1.96x, down from 2.12x a year earlier; seniors housing coverage was 1.42x versus 1.54x. Genesis represented 19% of investment at quarter-end.
Outlook, risks and unusual items
- Management described itself as selective on acquisitions amid volatile property and credit markets and said liquidity was expected to support operations, debt service, dividends and construction, subject to access to capital and investment conditions. It anticipated approximately $350 million of property sales and loan repayments during 2011, with proceeds expected to be reinvested.
- No specific earnings or FFO forecast is stated in the supplied filing text. Management cautioned that actual results may differ from expectations and that sales or loan repayments exceeding replacement investment could reduce revenue and operating cash flow.
- Key risks include tenants’ ability to pay rent and loans; health care regulation and Medicare/Medicaid reimbursement; operator or joint-venture distress; interest-rate and refinancing exposure; capital-market access and cost; property re-leasing and reinvestment; and acquisition execution. A 1% rate increase was estimated to add about $6.1 million of annual interest expense on variable-rate debt, assuming balances were unchanged.
- Commitments included approximately $256.7 million to complete construction and $69.6 million of contingent purchase obligations for capital improvements. Total purchase obligations were $326.3 million. Four letters of credit totaled $5.4 million.
- Unusual or period-specific items included $56.6 million of property-sale gains, $56.5 million of nine-month transaction costs, and a $0.2 million impairment charge. The prior-year comparison included a $28.9 million provision for loan losses and a $34.2 million debt-extinguishment loss, neither of which recurred at comparable levels in 2011. The filing reported $9.3 million of loans on non-accrual status, all associated with the loan-loss allowance.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether Genesis and other major operators can sustain rent payments, particularly given the 19% investment concentration and lower reported coverage ratios.
- How much of reported revenue and FFO growth reflects acquired assets and the newly consolidated operating partnerships, versus comparable-property performance.
- Whether the new investments generate returns sufficient to cover higher interest, depreciation, operating costs and preferred dividends; review leverage, maturities and covenant headroom.
- Whether the stated 2011 asset-sale and loan-repayment expectations were achieved and proceeds reinvested without weakening recurring revenue or liquidity.
- How outstanding construction commitments, contingent purchase obligations, rate exposure and capital-market dependence affect future cash available for common dividends.