Business Context and Reporting Period
Company: Health Care REIT, Inc. (Welltower Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Business Overview: An equity real estate investment trust (REIT) investing in senior housing and health care real estate, including skilled nursing, assisted living, independent living, medical office buildings, and specialty care facilities. The company operates through two segments: Investment Properties (leased to operators) and Operating Properties (managed by the company, primarily medical office buildings).
Key Financial Metrics (Year Ended Dec 31, 2007)
| Metric | 2007 Value | 2006 Value |
|---|---|---|
| Total Revenues | $486.0 million | $313.4 million |
| Net Income Available to Common Stockholders | $116.3 million | $81.3 million |
| Funds From Operations (FFO) | $251.1 million | $177.6 million |
| Funds Available for Distribution (FAD) | $252.8 million | $191.9 million |
| EBITDA | $433.5 million | $300.5 million |
| Total Assets | $5.21 billion | $4.28 billion |
| Total Debt | $2.70 billion | $2.20 billion |
| Stockholders' Equity | $2.40 billion | $1.98 billion |
| Cash and Cash Equivalents | $30.3 million | $36.2 million |
| Dividends Paid (Common) | $2.28 per share | $2.88 per share |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 55% to $486.0 million, driven primarily by a 55% increase in rental income due to new acquisitions and the full-year impact of the Windrose Medical Properties Trust merger (completed Dec 2006).
- Net Income: Net income available to common stockholders rose 43% to $116.3 million. This increase was bolstered by a $14.4 million gain on the sale of real property and a $1.1 million gain on the extinguishment of debt.
- Acquisitions: The company completed $1.19 billion in gross investments in 2007, including the acquisition of 17 medical office buildings and Paramount Real Estate Services from Rendina Companies in May 2007.
- Debt Structure: In August 2007, the company closed a new $1.15 billion unsecured revolving credit facility, replacing a $700 million facility. In July 2007, it issued $400 million of 4.75% convertible senior unsecured notes.
- Dividends: The quarterly dividend was increased to $0.66 per share in 2007 (up from $0.64 in 2006). The Board approved a further increase to $0.68 per share commencing in May 2008.
Guidance, Outlook, and Risks
- 2008 Investment Outlook: Management expects to complete gross new investments of $900 million to $1.2 billion in 2008, comprising $500–$700 million in acquisitions and $400–$500 million in funded new development.
- Dispositions: Anticipates sales of real property and loan repayments totaling $100 million to $200 million in 2008.
- Liquidity: As of Dec 31, 2007, the company had $843 million of available borrowing capacity under its unsecured line of credit.
- Key Risks:
- Government Reimbursement: Significant reliance on Medicare and Medicaid reimbursement for skilled nursing and specialty care facilities; potential for rate cuts or regulatory changes.
- Operator/Tenant Risk: Dependence on the financial health of operators/tenants to make rent payments; risk of bankruptcy or insolvency.
- Interest Rate Risk: Exposure to variable rate debt (unsecured line of credit); a 1% increase in rates would increase annual interest expense by approximately $3.2 million.
- REIT Qualification: Risk of failing to meet REIT distribution requirements (90% of taxable income), which would result in corporate taxation.
Important Facts for Investor Verification
- Portfolio Concentration: Top five customers (Emeritus, Signature Healthcare, Brookdale, Life Care Centers, Senior Living Communities) accounted for 32% of total investments and 43% of revenues in 2007.
- Construction Commitments: The company had $313.7 million in outstanding construction financings and was committed to providing an additional $800.7 million to complete construction projects as of year-end.
- Debt Covenants: The company is in compliance with all debt covenants, but its credit ratings (Baa2/BBB-/BBB) determine borrowing costs on its revolving credit facility.
- Non-GAAP Measures: Investors should review the reconciliation of FFO and FAD to Net Income, as these are the primary metrics used by management and analysts to evaluate REIT performance.
- Discontinued Operations: Gains on sales of properties ($14.4 million) were significant in 2007; verify the sustainability of core operating income excluding these one-time gains.