Business context and reporting period
Health Care REIT, Inc. (the registrant named in this filing) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2010. It operated a diversified senior housing and health care real estate portfolio of 641 properties across 39 states, with investments in senior housing and care, medical facilities, and life science buildings.
Financial and operating highlights
- Third-quarter revenue: $176.1 million, up 26% from $140.1 million a year earlier. Rental income was $152.1 million; resident fees and services of $12.8 million began with the newly consolidated Merrill Gardens partnership.
- Third-quarter earnings: Net income attributable to common stockholders was $1.1 million, or $0.01 per diluted share, versus $19.1 million, or $0.17, in Q3 2009. Continuing operations attributable to common stockholders were a loss of $0.08 per diluted share. Results included $18.8 million of transaction costs and a $28.9 million loan-loss provision.
- Nine-month results: Revenue was $487.4 million versus $413.8 million; net income attributable to common stockholders was $72.6 million versus $139.5 million. Diluted EPS was $0.58 versus $1.25. Funds from operations, a non-GAAP measure, were $196.4 million versus $235.5 million, or $1.58 versus $2.11 per diluted share.
- Property operating performance: Third-quarter net operating income (NOI), a non-GAAP measure, was $164.3 million, up 23%; nine-month NOI was $464.8 million, up 16%. The filing reports overall operator payment coverage of 2.11 times.
- Cash flow: Nine-month operating cash flow was $291.0 million, nearly unchanged from $290.4 million. Investing used $1.003 billion, principally for real property and joint-venture investments; financing provided $857.3 million. Cash and cash equivalents ended the period at $181.1 million.
- Debt and liquidity: Total debt carrying value was approximately $3.471 billion, comprising $2.586 billion of senior unsecured notes and $885.5 million of secured debt; no line-of-credit borrowings were outstanding at quarter-end. The company reported $61.2 million of restricted cash and $1.15 billion of available capacity on its credit line, scheduled to expire August 5, 2011. Debt to book capitalization was 45%; interest coverage was 2.25 times and fixed-charge coverage was 1.86 times. The company said it was in compliance with debt covenants.
- Dividends: Common dividends declared and paid were $0.69 per share for Q3 and $2.05 per share for the first nine months, compared with $0.68 and $2.04, respectively, in 2009.
Material changes versus the prior comparable period
- Quarterly revenue and NOI rose with acquisitions, development conversions, and the Merrill Gardens transaction, while common-stockholder earnings and FFO declined. Higher interest expense, transaction costs, and the loan-loss provision were significant pressures.
- For the first nine months, real property investment cash outflows increased to $803.4 million from $417.4 million; the company also invested $174.7 million in a joint venture. Gross acquisitions were $1.042 billion, partly funded by $353.2 million of assumed debt.
- Debt financing and equity issuance expanded: the company issued $1.394 billion of senior unsecured notes, including convertible debt, and raised $486.6 million net from common stock issuance. Debt carrying value rose from $2.414 billion at year-end 2009 to $3.471 billion.
- The Merrill Gardens partnership, formed in September, owns and operates 38 communities. Health Care REIT holds an 80% interest and consolidates the partnership; its results are included from September 1, 2010.
Outlook, commentary, risks, and unusual items
- Management expected 2010 gross investments of $2.3–$2.7 billion, including $2.0–$2.3 billion of acquisitions and joint ventures and $300–$400 million of funded development. It anticipated approximately $200 million of property sales and loan repayments. These are forward-looking expectations, not guarantees.
- Management said liquidity was sufficient, depending on the availability and cost of external capital, to fund operations, debt service, dividends, and construction commitments. It identified continued investment, capital-market access, and refinancing as important to its plans.
- The company recorded a $28.9 million provision for loan losses, including write-offs of $32.8 million, primarily tied to early-stage senior housing and continuing-care retirement community development projects no longer being pursued. At quarter-end, $10.9 million of loans were on non-accrual status; the allowance balance was $1.2 million.
- Other notable items included $20.6 million of gains on property sales for the first nine months, a $0.9 million Q3 impairment on two held-for-sale medical facilities, and a $34.2 million nine-month loss on extinguishment of debt. Purchase-price allocations for Merrill Gardens were preliminary.
- Risks include tenants’ and operators’ ability to pay rent and service loans; changes to Medicare and Medicaid reimbursement and health care regulation; interest rates and access to capital; property dispositions and reinvestment; and execution of acquisition, development, and joint-venture plans. The company had $314.1 million of additional construction funding commitments and reported $5.3 million of letters of credit.
Important facts for investors to verify
- How much of revenue and NOI growth reflects recurring portfolio performance versus acquisitions, new operating exposure through Merrill Gardens, and joint-venture activity.
- The recoverability and credit quality of loans, including the non-accrual balance, prior project write-offs, and the adequacy of the remaining allowance.
- Whether operating cash flow and future financing can support the investment program, debt obligations, dividends, and $314.1 million of remaining construction funding.
- The effect of increased debt and equity issuance on leverage, per-share results, coverage ratios, and refinancing needs, including the credit line’s 2011 expiration and scheduled debt maturities.
- Whether management’s 2010 investment and disposition expectations were achieved, and how health care reimbursement or regulatory changes affected tenants and operators.