Business Context and Reporting Period
Company: Health Care REIT, Inc. (Welltower Inc.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2006
Business Overview: A self-administered equity REIT investing in health care and senior housing properties, including independent living, assisted living, skilled nursing, and specialty care facilities. As of March 31, 2006, the portfolio consisted of 457 facilities across 37 states with total investments of approximately $2.92 billion.
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2006 | Q1 2005 |
|---|---|---|
| Total Revenues | $77,413 | $65,198 |
| Net Income | $24,978 | $23,239 |
| Net Income Available to Common Stockholders | $19,645 | $17,803 |
| Diluted EPS (Common) | $0.34 | $0.33 |
| Funds From Operations (FFO) | $41,354 | $38,309 |
| Funds Available for Distribution (FAD) | $49,264 | $35,454 |
| EBITDA | $75,685 | $64,322 |
| Cash and Cash Equivalents | $25,758 | $17,429 |
| Total Debt Outstanding | $1,528,324 | $1,456,822 (Est.) |
| Debt to Book Capitalization | 52% | 48% |
| Interest Coverage Ratio | 3.10x | 3.23x |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 19% to $77.4 million, driven primarily by a 24% increase in rental income ($72.8 million) due to new property acquisitions. Interest income decreased 14% due to a lower balance of outstanding loans.
- Expense Increases: Total expenses rose 28% to $54.3 million. Interest expense increased 29% ($24.0 million) due to higher average borrowings, and depreciation increased 24% ($23.1 million) due to new investments. General and administrative expenses rose 54%, largely due to the adoption of SFAS 123(R) for stock-based compensation.
- Investing Activity: The company invested $90.0 million in real property and $5.3 million in loans receivable. Proceeds from property sales were $14.5 million, resulting in a net gain on sales of $1.6 million.
- Dividends: Common stock dividends increased to $0.62 per share from $0.60 per share in the prior year.
Guidance, Outlook, and Risks
- Investment Outlook: Management expects to complete gross new investments of $450 million to $550 million in 2006, including approximately $300 million in acquisitions and $150 million to $250 million in funded new development. Anticipated sales and loan repayments are estimated at $100 million to $150 million.
- Liquidity: The company maintains $339 million in available borrowing capacity under unsecured lines of credit and $25.8 million in cash. A public offering of 3 million shares completed in April 2006 generated approximately $102.5 million in net proceeds.
- Accounting Changes: Adoption of SFAS 123(R) on January 1, 2006, increased compensation costs. Management expects this to increase costs by approximately $1.3 million for the full year 2006.
- Risk Factors: Key risks include operator financial stability (payment coverage), interest rate fluctuations (hedged via swaps), and the ability to reinvest proceeds from sales. The company holds $167.5 million in unfunded construction commitments.
Investor Verification Checklist
- Portfolio Concentration: Verify the financial health of top operators (Emeritus, Brookdale, Merrill Gardens) which represent significant portions of the investment mix.
- Payment Coverage: Review the 1.94x overall payment coverage ratio and specific facility-level coverages to assess rent collection risk.
- Debt Maturity Profile: Confirm the schedule of debt maturities, particularly the $500 million revolving credit facility expiring in 2008 and senior unsecured notes.
- Construction Commitments: Assess the $167.5 million in unfunded construction commitments and the associated capital requirements.
- Dividend Sustainability: Compare the $0.62 quarterly dividend against the Funds Available for Distribution (FAD) of $0.84 per share to evaluate payout coverage.