Business Context and Reporting Period
Company: Health Care REIT, Inc. (Welltower Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2003
Business Overview: A self-administered equity REIT investing primarily in long-term care facilities (skilled nursing and assisted living), which comprised 92% of the portfolio. As of year-end, the portfolio included 328 facilities in 33 states managed by 47 operators.
Key Financial Metrics
| Metric (in thousands) | 2003 | 2002 |
|---|---|---|
| Total Revenues | $201,031 | $154,928 |
| Net Income | $82,740 | $67,659 |
| Net Income Available to Common Stockholders | $70,732 | $55,191 |
| Diluted EPS (Common) | $1.60 | $1.48 |
| Net Real Estate Investments | $1,992,446 | $1,524,457 |
| Total Debt | $1,013,184 | $676,331 |
| Total Stockholders' Equity | $1,149,679 | $897,232 |
| Cash and Cash Equivalents | $124,496 | $9,550 |
| Debt to Total Capitalization Ratio | 0.47 to 1.0 | N/A |
Dividends: Quarterly dividend rate increased to $0.60 per share commencing May 2004. Total cash distributions per common share for 2003 were $2.34.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 30% to $201.0 million, driven primarily by a 41% increase in rental income ($176.5 million) due to property acquisitions. This was partially offset by a 22% decrease in interest income.
- Expense Increases: Total expenses rose 37% to $125.3 million. Interest expense increased 37% due to higher average borrowings, and depreciation increased 40% due to additional property investments.
- Portfolio Expansion: Net real estate investments grew by approximately $468 million. The company invested $378.3 million in real property and provided $78.2 million in permanent mortgage/loan financings during 2003.
- Capital Structure: Total debt increased significantly to $1.01 billion from $676 million, funded by public offerings of senior unsecured notes ($354 million gross proceeds) and preferred stock ($126.5 million gross proceeds).
- Impairment Charges: Recorded an impairment charge of $2.8 million for a property where projected cash flows did not exceed net book value.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Liquidity: Management believes liquidity is sufficient to fund operations, debt service, and dividends. The company anticipates future investments funded by lines of credit, public/private offerings, and asset sales. Moody's upgraded the senior unsecured notes rating from Ba1 to Baa3 in July 2003.
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.
- Discontinued Operations: Income from properties sold subsequent to Jan 1, 2002, was reclassified to discontinued operations, generating $7.0 million net income in 2003.
Material Risks and Contingencies:
- Operator Bankruptcies:
- Doctors Community Health Care Corp: Filed Chapter 11 in Nov 2002. The company holds a $18.8 million mortgage loan which was on non-accrual status for 2003. An auction for assets concluded in Dec 2003, with reorganization pending court approval.
- Alterra Healthcare Corp: Filed Chapter 11 in Jan 2003. The company holds a master lease for 45 facilities ($103.3 million book value). The lease was assumed by a new owner (Fortress-Emeritus JV) in Nov 2003, and Alterra remained current on payments.
- Government Reimbursement: Significant reliance on Medicare/Medicaid for skilled nursing and specialty care facilities. Changes in reimbursement rates or eligibility could materially impact operator ability to pay rent.
- Interest Rate Risk: A 1% increase in interest rates would decrease the fair value of senior unsecured notes by approximately $31.5 million. Variable rate debt exposure was minimal as no borrowings were outstanding on lines of credit at year-end.
Investor Verification Checklist
- Non-Accrual Loan Status: Verify the resolution of the $18.8 million loan to Doctors Community Health Care Corp and the status of interest recognition.
- Operator Concentration: Review the top 5 operators, which comprised 45% of total investments and 41% of revenues, to assess concentration risk.
- Debt Covenants: Confirm compliance with amended indentures limiting secured debt to 40% of undepreciated assets and total debt to 60% of undepreciated assets.
- Dividend Sustainability: Assess the ability to maintain the increased $0.60 quarterly dividend given the 37% rise in interest expense and reliance on government reimbursement for operators.
- Construction Commitments: Monitor the $15.5 million in unfunded construction commitments and associated risks.