Business Context and Reporting Period
Company: Health Care REIT, Inc. (Welltower Inc.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2007
Business Overview: A self-administered equity REIT investing in senior housing and health care real estate. The portfolio includes skilled nursing facilities, assisted living, independent living/CCRCs, medical office buildings, and specialty care facilities. The company operates two primary segments: Investment Properties (triple-net leases) and Operating Properties (medical office buildings).
Key Financial Metrics
| Metric (in thousands) | Q1 2007 | Q1 2006 |
|---|---|---|
| Total Revenues | $112,645 | $76,008 |
| Net Income | $29,673 | $24,978 |
| Net Income Available to Common Stockholders | $23,356 | $19,645 |
| Funds From Operations (FFO) | $56,207 | $41,354 |
| Funds Available for Distribution (FAD) | $53,825 | $49,975 |
| EBITDA | $96,810 | $73,189 |
| Cash and Cash Equivalents | $31,293 | $25,758 |
| Total Debt Outstanding | $2,352,321 | $2,012,321 (Est. based on components) |
| Debt to Book Capitalization | 54% | 52% |
| Interest Coverage Ratio | 2.82x | 2.99x |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 48% to $112.6 million, driven primarily by a 48% increase in rental income ($105.9 million vs. $71.4 million) due to new property acquisitions and the Windrose Medical Properties Trust merger completed in December 2006.
- Expense Increases: Total expenses rose 61% to $84.0 million. Interest expense increased 36% to $31.9 million due to higher average borrowings. Property operating expenses were $7.2 million in 2007 compared to $0 in 2006, reflecting the inclusion of operating properties from the Windrose merger.
- Investing Activity: Net cash used in investing activities increased significantly to $215.9 million (from $57.2 million) due to $161.7 million in real property investments and $80.4 million in loan financings.
- Financing Activity: Net cash provided by financing activities turned positive at $149.6 million, primarily due to a $156 million net increase in unsecured lines of credit to fund acquisitions.
Guidance, Outlook, and Risks
- 2007 Investment Outlook: Management expects to complete gross new investments of $1.0 billion to $1.2 billion in 2007, including $700-$800 million in acquisitions and $300-$400 million in funded development. Net new investments are projected at $800 million to $1.1 billion.
- Dividends: The Board increased the quarterly dividend to $0.66 per share (a 2-cent increase from 2006). The dividend declared for Q1 2007 was $0.2991 per share.
- Recent Transactions:
- Completed a public offering of 6.325 million shares in April 2007 with net proceeds of approximately $265.3 million.
- Announced an agreement to acquire a portfolio of 17 medical office buildings from Rendina Companies (expected to close Q2 2007).
- Extended a $40 million unsecured line of credit to May 2008 with reduced pricing.
- Risks and Contingencies:
- Concentration Risk: Top five customers represent approximately 31% of investments; top five states represent 50% of investments.
- Interest Rate Risk: The company has $381 million in variable rate debt. A 1% increase in rates would increase annual interest expense by $3.81 million.
- Unfunded Commitments: $339.9 million in unfunded construction commitments as of March 31, 2007.
Investor Verification Checklist
- Debt Covenants: Verify continued compliance with debt covenants, specifically the interest coverage ratio (2.82x) and fixed charge coverage ratio (2.28x), to ensure investment-grade ratings are maintained.
- Acquisition Integration: Monitor the closing and integration of the Rendina/Paramount acquisition and the Windrose merger assets to ensure projected revenue synergies are realized.
- Capital Markets Access: Confirm the successful deployment of the $265 million equity raised in April 2007 and the ability to refinance the $381 million in variable rate debt at favorable terms.
- Tenant Credit Quality: Review payment coverage ratios (currently 1.94x) for the top operators (Emeritus, Brookdale, Home Quality) to assess rent collection risk.
- Dividend Sustainability: Compare the increased dividend payout ($0.66/share) against the Funds Available for Distribution (FAD) of $0.73/share to ensure coverage remains adequate.