Business Context and Reporting Period
Company: Health Care REIT, Inc. (Welltower Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Business Overview: A self-administered equity real estate investment trust (REIT) investing primarily in long-term care facilities, including skilled nursing, assisted living, and specialty care facilities. As of December 31, 2002, the portfolio consisted of 244 facilities in 33 states managed by 44 operators. Long-term care facilities comprised approximately 92% of the investment portfolio.
Key Financial Metrics
| Metric (in thousands) | 2002 | 2001 |
|---|---|---|
| Total Revenues | $163,118 | $129,369 |
| Net Income | $67,659 | $60,549 |
| Net Income Available to Common Stockholders | $55,191 | $47,044 |
| Diluted EPS (Common) | $1.48 | $1.52 |
| Total Assets | $1,594,110 | $1,269,843 |
| Total Debt | $676,331 | $491,216 |
| Stockholders' Equity | $897,232 | $757,870 |
| Net Cash Provided by Operating Activities | $105,367 | $88,682 |
| Debt to Total Capitalization Ratio | 0.43 to 1.0 | N/A |
Dividends: Cash distributions per common share were $2.34 for 2002, consistent with 2001.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 26% to $163.1 million, driven primarily by a 43% increase in rental income ($133.8 million) due to property acquisitions. This was partially offset by a 15% decrease in interest income ($26.5 million) due to mortgage loan repayments.
- Expense Increases: Total expenses rose 37% to $95.7 million. Interest expense increased 35% to $41.1 million due to higher average borrowings and reduced capitalized interest. Depreciation increased 37% to $39.3 million reflecting additional property investments.
- Impairment Charges: The company recorded a $2.3 million impairment charge in 2002 for one assisted living facility, one specialty care facility, and one parcel of land where projected cash flows did not exceed net book values.
- Portfolio Expansion: Net real estate investments grew from $1.21 billion in 2001 to $1.52 billion in 2002. The company invested $390 million in real property and $85 million in permanent mortgage/loan financings during the year.
- Capital Structure: Total debt increased significantly from $491 million to $676 million. The company issued $150 million in senior notes in September 2002 and raised approximately $142 million in net proceeds from common stock issuances.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Capital Resources: Management anticipates making additional investments in health care facilities funded by temporary borrowings, internally generated cash, and asset sales. Permanent financing is expected via public/private offerings of debt and equity. The company maintains an effective shelf registration for up to $385.6 million in securities.
Material Risks and Contingencies:
- Operator Bankruptcies:
- Doctors Community Health Care Corp: Filed for Chapter 11 bankruptcy on November 20, 2002. The company holds a $18.8 million mortgage loan secured by Pacifica Hospital. Management expects full repayment as an oversecured creditor but will not recognize interest if payment is delayed.
- Alterra Healthcare Corp: Filed for Chapter 11 bankruptcy on January 23, 2003. The company holds a master lease for 45 assisted living facilities (book value $106 million). Management expects Alterra to remain current on rent and assume the lease.
- Government Reimbursement: Skilled nursing and specialty care operators rely heavily on Medicare and Medicaid. The expiration of temporary payment add-ons in 2003 is expected to result in an overall decrease in federal payments compared to 2002, potentially impacting operator liquidity.
- Interest Rate Risk: A 1% increase in interest rates would increase annual interest expense on variable rate debt by approximately $1.1 million and decrease the fair value of senior unsecured notes by approximately $15 million.
Unusual Items: The company recorded a $403,000 extraordinary loss on the extinguishment of debt in April 2002 upon repurchasing $35 million of senior notes.
Investor Verification Checklist
- Operator Solvency: Verify the status of rent payments from Alterra Healthcare Corp following their January 2003 bankruptcy filing and the repayment timeline for the Doctors Community Health Care loan.
- Reimbursement Trends: Monitor the impact of the expiration of temporary Medicare add-on payments on the cash flow of skilled nursing operators in 2003.
- Debt Maturity Profile: Review the $250 million of senior notes maturing after 2007 and the $175 million unsecured line of credit expiring in August 2005 to assess refinancing risks.
- Asset Quality: Assess the $2.3 million impairment charge and the $15.3 million in loans currently on non-accrual status.
- Dividend Coverage: Confirm that operating cash flows ($105.4 million) remain sufficient to cover the $97.1 million in cash distributions paid to stockholders.