Welltower Inc. (then Health Care REIT, Inc.) — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited results are reported under U.S. GAAP. The company was a healthcare and seniors-housing REIT operating in the United States, United Kingdom, and Canada.
Financial results
Amounts below are in millions of dollars except per-share data. Prior-period comparisons are to the corresponding 2013 period.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $847.5 | $783.7 | $2,475.8 | $2,092.0 |
| Net income attributable to common stockholders | $136.3 | $20.7 | $258.1 | $67.2 |
| Diluted GAAP EPS | $0.44 | $0.07 | $0.86 | $0.24 |
| FFO (non-GAAP) | $316.5 | $258.3 | $889.6 | $659.8 |
| Diluted FFO per share (non-GAAP) | $1.01 | $0.90 | $2.96 | $2.40 |
| NOI from continuing operations (non-GAAP) | $492.4 | $441.8 | $1,435.4 | $1,219.3 |
| Cash provided by operating activities | Not stated quarterly | Not stated quarterly | $854.2 | $625.9 |
Revenue increased 8% in Q3 and 18% for the nine-month period. Q3 NOI was approximately 58% of revenue, compared with 56% a year earlier; nine-month NOI was approximately 58% of revenue in both periods. Same-store cash NOI rose 4% year over year in Q3 and 4% for the nine months. These are management-defined non-GAAP measures and may not be comparable with similarly named measures at other companies.
For the nine months, investing activities used $1,106.9 million, principally for acquisitions and investments, while financing activities provided $1,092.5 million. Cash and cash equivalents were $998.7 million at September 30, 2014, versus $158.8 million at December 31, 2013; restricted cash was an additional $118.2 million.
Balance sheet, debt, and liquidity
- Total assets were $24.54 billion and total liabilities were $10.96 billion at September 30, 2014. The balance sheet reported $7.31 billion of senior unsecured notes, $2.89 billion of secured debt, and $83.6 million of capital lease obligations.
- The company had no borrowings outstanding at quarter-end under its primary unsecured credit facility, which provided a $2.5 billion revolver. Management reported $2.5 billion of available borrowing capacity, in addition to cash and restricted cash.
- In July, the company put in place a new facility with a $2.5 billion revolving line, $500 million U.S. term loan, and $250 million Canadian term loan; it may be upsized by up to $1 billion and matures in October 2018, with a one-year extension option.
- Debt to book capitalization was 43%; interest coverage was 3.86x and fixed-charge coverage was 3.07x for Q3. The company said it complied with all debt covenants at quarter-end.
- Operating cash flow exceeded cash distributions to stockholders during the first nine months. Common dividends declared and paid were $0.795 per share in Q3; the annual rate was raised to $3.18 per share beginning in February 2014.
Material changes and unusual items
- Q3 common net income and EPS increased substantially from 2013, but included $29.6 million of net gains on real estate dispositions. Nine-month results also included $36.3 million of such gains. Interpret GAAP earnings alongside FFO and operating trends.
- Growth reflected portfolio expansion: the company reported $1.55 billion of acquisitions and joint-venture investments during the first nine months, against $442.7 million of real-property sale proceeds. It also raised approximately $2.14 billion in gross proceeds from two common-stock offerings during the period, plus dividend reinvestment proceeds.
- General and administrative expense for the nine months rose to $115.3 million from $79.8 million. The increase included $19.7 million of costs related to the former CEO’s April retirement, including accelerated deferred compensation and consulting and retirement-related costs.
- Q3 other comprehensive income included a $42.7 million foreign-currency translation loss. Total comprehensive income attributable to common stockholders was $118.5 million, versus $63.4 million in Q3 2013.
- The company adopted new discontinued-operations guidance prospectively in 2014. This changes classification for certain property sales and affects comparability; prior-period amounts were reclassified where applicable.
Outlook, risks, and contingencies
- No quantified earnings or investment guidance is provided in the supplied filing text. Management said capital markets remained supportive, expected attractive investment opportunities to continue, and believed liquidity was sufficient for planned uses of cash, subject to the availability and cost of external capital.
- Management identified dependence on tenants’ and operators’ ability to pay rent and maintain profitable operations as a key exposure. The portfolio’s largest disclosed relationships were Sunrise at 19% and Genesis at 12% of investments; concentration figures exclude the company’s share of unconsolidated joint ventures.
- Healthcare reimbursement and regulatory changes—including Medicare and Medicaid payment policies and scrutiny of skilled-nursing billing—could adversely affect operators and indirectly affect the company. Other stated risks include refinancing and capital-market access, interest and foreign-exchange movements, occupancy and lease renewals, joint-venture performance, and operator insolvency.
- At quarter-end, the company had $179.4 million of construction in progress and was committed to an additional approximately $217.3 million to complete construction. Purchase obligations totaled $1.34 billion, including $1.08 billion for acquisitions expected to close before year-end. It also had an unfunded $360 million secured-bridge-facility commitment and $857.0 million of operating lease obligations.
- The filing reported ordinary-course legal proceedings and management did not expect their resolution to materially affect consolidated financial position or results. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether reported earnings growth persists after separating disposition gains, acquisition contributions, and other unusual items from recurring performance.
- How same-store occupancy, cash NOI, and operator financial health evolve, particularly for major relationships such as Sunrise and Genesis.
- Whether acquisition and construction commitments close as expected, and whether investment returns justify the capital and equity issued to fund growth.
- Debt maturities, refinancing costs, covenant headroom, and continued access to the revolver and capital markets.
- The cash-flow coverage and sustainability of common and preferred dividends, including the effects of portfolio operating costs and future capital requirements.