Business Context and Reporting Period
Company: Health Care REIT, Inc. (d/b/a Welltower Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2003
Business Overview: The company invests in health care-related real estate, including assisted living facilities, skilled nursing facilities, and specialty care facilities. As of June 30, 2003, the portfolio included 166 assisted living facilities, 96 skilled nursing facilities, and eight specialty care facilities.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2003 | Six Months Ended June 30, 2002 |
|---|---|---|
| Total Revenues | $94,148 | $75,467 |
| Net Income | $38,359 | $32,720 |
| Net Income Available to Common Stockholders | $33,195 | $26,002 |
| Diluted EPS (Common) | $0.81 | $0.74 |
| Net Cash Provided by Operating Activities | $54,237 | $47,620 |
| Total Assets | $1,746,100 | $1,594,110 |
| Total Liabilities | $850,790 | $696,878 |
| Total Stockholders' Equity | $895,310 | $897,232 |
| Debt to Total Book Capitalization Ratio | 0.48 to 1.0 | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 25% year-over-year, driven primarily by a 37% increase in rental income due to property acquisitions. This offset a 27% decline in interest income resulting from loan repayments.
- Expense Increases: Total expenses rose 26%. Interest expense increased 28% due to higher average borrowings, and depreciation increased 34% due to new property investments.
- Profitability: Net income available to common stockholders increased 28% ($33.2M vs. $26.0M). Diluted EPS grew from $0.74 to $0.81.
- Capital Structure: The company issued $100 million in senior unsecured notes in March 2003. Preferred stock dividends decreased 23% due to the conversion of Series C preferred shares into common stock.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management anticipates making additional investments in health care facilities, funded by temporary borrowings, internal cash, and asset sales. Permanent financing is expected via public/private debt and equity offerings. The company maintains an effective shelf registration for up to $137.6 million in securities.
Risks and Contingencies
- Bankruptcy Filings:
- Doctors Community Health Care Corp: Filed Chapter 11 in Nov 2002. The company holds an $18.8 million secured loan. Management expects full repayment by Dec 31, 2003, but interest accrual has been paused pending payment.
- Alterra Healthcare Corp: Filed Chapter 11 in Jan 2003. The company holds a master lease for 45 facilities ($104.8M book value). Alterra remains current on payments and intends to assume the lease.
- Contingent Liabilities: Approximately $7.8 million in contingent liabilities related to industrial revenue bond guarantees and letters of credit.
- Unfunded Commitments: Approximately $27.5 million in unfunded construction commitments.
Unusual Items
- Impairment: A $550,000 impairment charge was recorded in Q2 2002 (reclassified to continuing operations in 2003) for a parcel of land.
- Discontinued Operations: Gains/losses on property sales are now classified as discontinued operations per FASB 144.
Investor Verification Checklist
- Debt Service Coverage: Verify the ability to service $833.5 million in total debt, particularly given the reliance on variable rate lines of credit ($156.9M outstanding).
- Tenant Solvency: Monitor the bankruptcy proceedings of Doctors Community Health Care and Alterra Healthcare to ensure continued rental income and loan repayment.
- Capital Markets Access: Confirm the successful execution of the July 2003 preferred stock and common stock offerings mentioned in the notes to fund future growth and refinance debt.
- Interest Rate Sensitivity: Assess the impact of rising rates on variable debt, which could increase annual interest expense by $1.57 million for every 1% rate hike.