Business Context and Reporting Period
Company: Health Care REIT, Inc. (Welltower Inc.)
Filing Type: Form 10-K
Period Ended: December 31, 2006
Health Care REIT, Inc. is a self-administered equity real estate investment trust (REIT) investing in senior housing and health care real estate, including skilled nursing facilities, assisted living, independent living/continuing care retirement communities (CCRCs), medical office buildings, and specialty care facilities. As of December 31, 2006, the portfolio consisted of 578 properties in 37 states with net real estate investments of approximately $4.13 billion.
The most significant event of the period was the completion of a merger with Windrose Medical Properties Trust on December 20, 2006, for an aggregate purchase price of approximately $1.02 billion. This transaction diversified the portfolio and added medical office buildings and specialty care facilities.
Key Financial Metrics
| Metric | 2006 | 2005 |
|---|---|---|
| Total Revenues | $322,824,000 | $273,538,000 |
| Net Income | $102,750,000 | $84,286,000 |
| Net Income Available to Common Stockholders | $81,287,000 | $62,692,000 |
| Funds From Operations (FFO) | $177,580,000 | $144,293,000 |
| Funds Available for Distribution (FAD) | $191,885,000 | $147,730,000 |
| Total Debt | $2,198,001,000 | $1,500,818,000 |
| Stockholders' Equity | $1,978,793,000 | $1,430,756,000 |
| Cash and Cash Equivalents | $36,216,000 | $36,237,000 |
| Debt to Book Capitalization | 53% | 51% |
| Interest Coverage Ratio (EBITDA/Interest) | 2.97x | 3.06x |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 18% to $322.8 million, driven primarily by a 22% increase in rental income due to new acquisitions and the Windrose merger. Interest income decreased 22% due to the recognition of additional interest income in 2005 related to loan payoffs.
- Profitability: Net income available to common stockholders increased 30% to $81.3 million. This growth was supported by the Windrose acquisition and organic growth, partially offset by $5.2 million in merger-related expenses and $1.3 million in accelerated stock-based compensation.
- Debt Levels: Total debt increased significantly to $2.20 billion from $1.50 billion, reflecting the assumption of debt in the Windrose merger ($301.6 million) and new issuances of $345 million in convertible notes.
- Portfolio Composition: The merger shifted the portfolio mix. Skilled nursing facilities remained the largest segment by investment (34%), followed by assisted living (25%) and medical office buildings (22%).
Guidance, Outlook, and Risks
Outlook and Guidance: Management expects to complete gross new investments of $1.0 billion to $1.2 billion in 2007, including $700 million to $800 million in acquisitions and $300 million to $400 million in funded new development. The company anticipates selling real property and repaying loans totaling $100 million to $200 million in 2007. The Board approved a new quarterly dividend rate of $0.66 per share commencing in May 2007.
Key Risks and Contingencies:
- Government Reimbursement: A significant portion of revenue from skilled nursing and specialty care facilities relies on Medicare and Medicaid. Changes in reimbursement rates or policies could materially impact operator ability to pay rent.
- Operator Concentration: The top five customers accounted for 41% of total investments and 43% of revenues in 2006. The financial health of these operators (e.g., Emeritus, Brookdale) is critical.
- Interest Rate Risk: The company has variable rate debt (unsecured lines of credit). A 1% increase in interest rates would increase annual interest expense by approximately $2.4 million.
- Regulatory Compliance: Operators are subject to extensive federal and state regulations regarding licensure, certification, and fraud/abuse laws. Non-compliance could lead to loss of reimbursement or closure.
Investor Verification Checklist
- Merger Integration: Verify the integration progress of Windrose Medical Properties Trust and the realization of anticipated synergies.
- Operator Financial Health: Monitor the financial stability of the top five tenants, particularly given the high concentration of revenue and investment.
- Reimbursement Policy Changes: Track legislative and administrative changes to Medicare and Medicaid reimbursement rates affecting skilled nursing and specialty care facilities.
- Debt Maturity Profile: Review the schedule of debt maturities, noting the $700 million revolving credit facility maturing in July 2009 and the $40 million line maturing in May 2007.
- Dividend Coverage: Confirm that Funds Available for Distribution (FAD) continues to cover the increased quarterly dividend rate of $0.66 per share.