Business Context and Reporting Period
Company: Health Care REIT, Inc. (Welltower Inc.)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2004
Business Overview: A self-administered equity REIT investing primarily in long-term care facilities (skilled nursing and assisted living), which comprised approximately 92% of the portfolio as of March 31, 2004. The portfolio included 340 facilities in 33 states managed by 48 operators.
Key Financial Metrics
| Metric (in thousands) | Q1 2004 | Q1 2003 |
|---|---|---|
| Total Revenues | $60,961 | $44,137 |
| Net Income | $20,925 | $19,297 |
| Net Income Available to Common Stockholders | $18,655 | $16,451 |
| Diluted EPS (Common) | $0.36 | $0.41 |
| Net Cash from Operating Activities | $22,950 | $19,303 |
| Net Cash Used in Investing Activities | ($89,560) | ($39,075) |
| Cash and Cash Equivalents (End of Period) | $47,063 | $33,878 |
| Total Debt Outstanding | $1,012,616 | N/A |
| Stockholders' Equity | $1,160,363 | N/A |
Note: Total debt includes $865,000 in senior unsecured notes and $147,616 in secured debt. Unsecured lines of credit were $0 at period end.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 38% to $60.96 million, driven by a 41% increase in rental income ($54.5M vs $38.6M) due to property acquisitions and a 16% increase in interest income.
- Expense Increases: Total expenses rose 55% to $40.0 million. Interest expense increased 63% primarily due to higher average borrowings, though partially offset by lower average interest rates. Depreciation increased 57% due to additional property investments.
- EPS Decline: Diluted earnings per share decreased from $0.41 to $0.36. This decline is attributed to a higher weighted average number of common shares outstanding (51.4M vs 40.5M) resulting from preferred stock conversions and stock plan issuances, despite higher net income.
- Discontinued Operations: Q1 2003 included $925,000 of income from discontinued operations (properties sold), whereas Q1 2004 had no dispositions and zero income from discontinued operations.
- Cash Flow: Net cash used in investing activities more than doubled to $89.6 million, reflecting significant capital deployment ($85.4M in real property and $8.6M in loans).
Outlook, Risks, and Contingencies
- Liquidity and Capital: Management believes liquidity is sufficient to fund operations and future investments. The company has an effective shelf registration to issue up to $581.8 million in securities and a dividend reinvestment plan allowing for the issuance of up to 6.3 million common shares.
- Bankruptcy Contingency (Doctors Community Health Care Corp): The company provided mortgage financing to Doctors Community Health Care Corporation (DCHCC), which filed for Chapter 11 bankruptcy. The outstanding principal was approximately $18.8 million. On April 2, 2004, the bankruptcy court approved a reorganization plan. The company refinanced the loan with a new $18.8 million loan (7% initial rate, increasing to 9.5%) and made an additional $3.4 million loan to a related entity. No interest was paid on the original loan from Jan 1, 2003, to April 5, 2004.
- Guarantees: The company is contingently liable for $3.2 million under a guaranty for industrial revenue bonds for one assisted living facility, maturing in 2009.
- Market Risk: The company is exposed to interest rate risk. A 1% increase in interest rates would decrease the fair value of senior unsecured notes by approximately $30.4 million. As of March 31, 2004, there were no borrowings under variable-rate unsecured lines of credit.
- Forward-Looking Statements: Future results depend on economic conditions, capital market access, and regulatory changes in the health care industry.
Investor Verification Checklist
- Preferred Stock Conversions: Verify the impact of Series C and Series E preferred stock conversions on the weighted average share count and EPS dilution.
- Doctors Community Health Care Resolution: Confirm the terms and security of the new $18.8 million loan issued post-bankruptcy reorganization and the status of the additional $3.4 million loan.
- Capital Deployment: Review the $85.4 million invested in real property during the quarter to assess portfolio growth and occupancy rates of new assets.
- Dividend Sustainability: Analyze the ratio of net income available to common stockholders ($18.7M) against cash dividends paid ($29.6M) to understand the reliance on external capital or cash reserves to fund distributions.
- Unfunded Commitments: Note the $12.3 million in unfunded construction commitments as of March 31, 2004.