Business context and reporting period
Welltower’s contemporaneous issuer name was Health Care REIT, Inc. This unaudited Form 10-Q covers the quarter ended March 31, 2015, compared with the quarter ended March 31, 2014 unless otherwise noted. The REIT owned or operated 1,384 properties across 46 U.S. states, the United Kingdom and Canada. Its reporting segments were triple-net, seniors housing operating and outpatient medical.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Total revenue | $894.2 million | $801.8 million; up 11.5% |
| Net income attributable to common stockholders | $190.8 million; diluted EPS $0.56 | $50.0 million; diluted EPS $0.17 |
| Funds from operations (FFO; non-GAAP) | $344.3 million; diluted FFO per share $1.02 | $288.8 million; $0.99 per share |
| Net operating income (NOI; non-GAAP) | $517.7 million | $460.4 million; up 12% |
| Same-store cash NOI (non-GAAP) | $419.1 million | $411.9 million; up 2% |
| Cash provided by operating activities | $226.2 million | $258.7 million; down 13% |
| Common dividend declared and paid | $0.825 per share | $0.795 per share |
Revenue comprised $379.6 million of rental income, $492.5 million of resident fees and services, and $17.0 million of interest income. NOI margin was approximately 57.9% of revenue, versus 57.4% in Q1 2014 (calculated). Triple-net NOI rose 15%, seniors housing operating NOI rose 5%, and outpatient medical NOI rose 18%; same-store seniors housing cash NOI declined 1%, with management citing foreign-exchange movements.
At March 31, 2015, total assets were $26.63 billion and cash and cash equivalents were $202.3 million, down from $473.7 million at year-end; restricted cash was $85.2 million. Debt carrying amounts included $7.52 billion of senior unsecured notes, $3.01 billion of secured debt, and $410 million drawn on the primary unsecured credit facility. The company reported $2.02 billion of available borrowing capacity. Debt-to-book capitalization was 42%; interest coverage was 4.21x and fixed-charge coverage was 3.34x. Management said the company complied with all debt covenants.
Changes, outlook and risks
- Common-stock issuance generated $1.49 billion net proceeds, including a February offering of 19.55 million shares at $75.50 per share. The company reported $1.64 billion of pro rata acquisitions and $175.6 million of property disposition proceeds during the quarter.
- Cash used in investing activities was $1.81 billion, principally reflecting acquisitions and loan investments; financing activities provided $1.31 billion. Cash distributions to stockholders exceeded operating cash flow during the quarter.
- Net income was materially affected by a $56.8 million gain on real estate dispositions and a $58.4 million net derivative gain, as well as $48.6 million in transaction costs and a $15.4 million net loss on extinguishment of debt. The derivative gain included recognition of the value of an option related to Genesis Healthcare’s merger transaction. These items make GAAP earnings less representative of recurring property operations.
- The board raised the annualized common dividend to $3.30 per share, from $3.18 in 2014. Management characterized capital markets as supportive and expected investment opportunities to remain available, while noting that future investment and financing depend on market conditions. The filing text does not provide a clear numerical earnings or operating forecast.
- Risks include operators’ ability to pay rent and maintain profitable operations; health-care reimbursement, regulation and quality initiatives; interest-rate and foreign-currency movements; access to capital and refinancing; construction and acquisition commitments; and concentration among major operator relationships. Genesis represented 17% of NOI and Sunrise 14% (excluding the company’s share of unconsolidated entities).
- Construction commitments included approximately $355.2 million of additional funding to complete projects. The filing also disclosed $415.1 million in purchase obligations, including contingent obligations, and $948.5 million in operating lease obligations. Management said routine legal proceedings were not expected to materially affect financial position or results; no material changes to the prior annual report’s risk factors were reported.
Important facts for investors to verify
- How much of reported earnings growth reflects recurring operations versus disposition and derivative gains, and whether transaction costs remain elevated.
- Whether same-store performance, particularly seniors housing, improves after currency effects and how newly acquired properties perform.
- Operator financial condition and concentration exposure, including Genesis and the Sunrise/Revera relationship.
- Funding needs for acquisitions, construction commitments and dividends relative to operating cash flow, available credit and future capital-market access.
- Debt maturities, refinancing costs, covenant headroom, and sensitivity to interest-rate and foreign-exchange changes.
- Effects of Medicare, Medicaid and other regulatory or reimbursement changes on tenants and operators.