Business context and reporting period
Health Care REIT, Inc. (the registrant in this 2011 filing) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2011. It was a healthcare real estate investment trust with 868 properties across 45 states and investments spanning senior housing triple-net, senior housing operating, and medical facilities. The period included major acquisitions and the launch of consolidated senior-housing operating partnerships, so year-over-year comparisons reflect a substantially larger portfolio and changed revenue mix.
Key financial metrics
Amounts below are in millions except per-share data.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $381.1 | $153.7 | $634.0 | $296.8 |
| Net income attributable to common stockholders | $69.8 | $45.6 | $93.2 | $71.5 |
| Diluted EPS | $0.39 | $0.37 | $0.56 | $0.58 |
| FFO, diluted per share (non-GAAP) | $149.6; $0.84 | $92.2; $0.74 | $220.4; $1.32 | $155.3; $1.25 |
| Operating cash flow | Not reported quarterly | Not reported quarterly | $241.6 | $191.5 |
- Six-month net operating income (NOI, non-GAAP) was $493.9 million, up 64%; Q2 NOI was $292.8 million, up 86%. Growth reflects acquisitions and the new operating segment, not solely same-property performance.
- Q2 property operating expenses were $100.2 million and depreciation and amortization $110.4 million. Interest expense was $84.0 million for Q2 and $142.3 million for six months; the filing does not provide a directly comparable consolidated operating-margin measure.
- At June 30, total assets were $13.48 billion, total equity $6.73 billion, cash $328.8 million and restricted cash $42.5 million. Total debt was reported by management at $6.32 billion; balance-sheet borrowings included $4.43 billion of senior unsecured notes and $1.89 billion of secured debt.
- Debt to book capitalization was 49%; Q2 interest coverage was 3.34x and fixed-charge coverage 2.60x. The company said it complied with debt covenants.
- Common dividends were $0.715 per share for Q2 and $1.405 for the first half, versus $0.68 and $1.36 in the comparable 2010 periods.
Material changes versus the prior comparable period
- On April 1, the company acquired substantially all real estate assets of Genesis HealthCare: 147 properties for approximately $2.48 billion, including assumed capital-lease obligations. The 15-year triple-net master lease began at $198 million annual base rent, with contractual escalators.
- New Silverado and Benchmark partnerships added senior-housing operating communities under RIDEA structures. The company held 95.4% of Silverado and 95% of Benchmark; resident fees and services were $123.1 million in Q2 and $194.4 million for the half-year.
- Real estate acquisitions totaled $4.05 billion gross in the first half, versus $356.1 million a year earlier. Cash investment in real property was $3.37 billion. The company raised $1.42 billion net from common stock, $696.4 million net from preferred stock and $1.38 billion net from senior unsecured notes.
- Common shares outstanding increased substantially: weighted-average diluted shares for Q2 rose to 177.5 million from 124.3 million. Despite higher total earnings, first-half diluted EPS declined to $0.56 from $0.58.
- Q2 net income included $30.2 million of property-sale gains; first-half gains were $56.4 million. These gains and portfolio changes affect comparisons of reported earnings.
Outlook, commentary, risks and unusual items
- Management said liquidity was sufficient, subject to capital availability and cost, to fund operations, debt service, dividends and construction. It anticipated approximately $300 million of property sales and loan repayments during 2011 and expected to reinvest proceeds. It provided no clear numerical earnings or FFO guidance in the supplied filing text.
- On July 27, 2011, after quarter-end, the company replaced its $1.15 billion revolving facility with a $2.0 billion facility, extended to July 2015. The new facility carried a 1.35% spread over LIBOR and a 0.25% annual facility fee at then-current ratings.
- Key risks include operator/tenant ability to pay rent and repay loans, healthcare reimbursement and regulatory changes, access to and cost of capital, interest-rate exposure, acquisition and integration execution, and timely reinvestment of sale proceeds. Genesis represented 20% of investment at June 30; management also reported overall customer payment coverage of 2.05x.
- The senior-housing operating segment reported a $12.2 million loss attributable to common stockholders in Q2 and a $48.0 million loss for the half-year, including significant transaction costs, depreciation and interest. This segment had no comparable activity in the 2010 first half.
- Other notable items: $49.8 million of first-half transaction costs, primarily related to acquisitions and partnerships; a $0.2 million property impairment; and a $0.4 million loan-loss provision. Loans with $9.3 million outstanding were on non-accrual status at June 30.
- Construction commitments included $219.3 million of additional funding to complete projects and $80.2 million of contingent purchase obligations. Five letters of credit totaled approximately $5.5 million. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Genesis lease economics, guarantor support, rent escalators and tenant credit; assess concentration given the 20% investment share.
- Whether acquisition-driven NOI and FFO growth translates into sustained per-share growth after share issuance, debt costs and preferred dividends.
- Operating performance, margins and transaction costs of the Silverado and Benchmark RIDEA partnerships, including the path from segment losses to profitability.
- Debt maturities, secured-debt exposure, covenant headroom and the terms and availability of the expanded credit facility.
- Execution of the stated 2011 asset-sale and loan-repayment outlook, reinvestment returns, construction funding needs and collectability of non-accrual loans.