Business Context and Reporting Period
Company: Health Care REIT, Inc. (Welltower Inc.)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2003
Business Overview: A real estate investment trust (REIT) specializing in health care facilities, including 217 assisted living facilities, 96 skilled nursing facilities, and eight specialty care facilities as of September 30, 2003.
Key Financial Metrics
| Metric (Nine Months Ended Sep 30, 2003) | Value (in thousands) |
|---|---|
| Total Revenues | $139,833 |
| Net Income | $63,660 |
| Net Income Available to Common Stockholders | $53,796 |
| Diluted EPS (Common) | $1.28 |
| Net Cash Provided by Operating Activities | $74,672 |
| Total Assets | $2,031,611 |
| Total Liabilities | $910,487 |
| Total Stockholders' Equity | $1,121,124 |
| Debt to Total Book Capitalization | 0.45 to 1.0 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 25% year-over-year (YTD) to $139.8 million, driven primarily by a 38% increase in rental income ($121.8 million) due to property acquisitions. This offset a 24% decline in interest income.
- Expense Increases: Total expenses rose 30% YTD to $83.3 million. Interest expense increased 31% due to higher average borrowings, and depreciation increased 38% due to new property investments.
- Profitability: Net income available to common stockholders increased 25% YTD to $53.8 million. Diluted EPS rose from $1.18 to $1.28.
- Discontinued Operations: The company sold 17 properties (14 assisted living, 2 skilled nursing, 1 land parcel) for a net gain of $4.3 million. These sales are classified as discontinued operations.
- Capital Structure: Significant equity and debt activity occurred, including the issuance of $100 million in senior notes, $96.9 million in Series D preferred stock, and over $150 million in common stock proceeds.
Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management anticipates continued investment in health care facilities funded by temporary borrowings, internal cash, and asset sales. Permanent financing is expected via public/private offerings. The company maintains sufficient liquidity to fund operations, debt service, and dividends.
Unusual Items
- Preferred Stock Redemption Charge: A non-cash, non-recurring charge of $2.79 million was recorded in Q3 2003 related to the redemption of Series B preferred stock (EITF Topic D-42), reducing net income available to common stockholders.
- Impairment and Debt Extinguishment: A $550,000 impairment charge on land and a $403,000 loss on extinguishment of debt were recorded in the current period (reclassified from extraordinary items in 2002).
Risks and Contingencies
- Bankruptcy Exposure:
- Doctors Community Health Care Corp: Filed Chapter 11. The company holds a secured loan of approximately $18.8 million. No interest payments were made YTD 2003; interest recognition is suspended until payment is received.
- Alterra Healthcare Corp: Filed Chapter 11. The company holds a master lease for 45 facilities ($104 million book value). A joint venture acquired the assets; the lease is expected to be assumed by the reorganized entity. Alterra has remained current on payments.
- Guarantees: Contingent liabilities include a $3.2 million guaranty for industrial revenue bonds and a $3.5 million letter of credit/guaranty for a residential retirement community project.
- Interest Rate Risk: A 1% increase in interest rates would increase annual interest expense on variable rate debt by approximately $1.43 million.
Investor Verification Checklist
- Bankruptcy Resolution: Verify the status of the Doctors Community Health Care loan ($18.8M) and the assumption of the Alterra master lease ($104M book value) following their respective Chapter 11 proceedings.
- Debt Covenants: Confirm compliance with the newly amended indentures limiting secured debt to 40% of undepreciated assets and total debt to 60%.
- Capital Deployment: Review the utilization of the $24.9 million in unfunded construction commitments and the $143 million outstanding on unsecured lines of credit.
- Dividend Sustainability: Assess the ability to maintain the $0.585 quarterly dividend given the increase in interest expense and the impact of the preferred stock redemption charge on distributable earnings.