Business Context and Reporting Period
Company: Health Care REIT, Inc. (d/b/a Welltower Inc.)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2001
Business Overview: The Company invests in health care-related real estate, including 147 assisted living facilities, 48 nursing facilities, and seven specialty care facilities as of September 30, 2001. The Company completed a $200 million asset divestiture program in March 2001 to strengthen its balance sheet and liquidity.
Key Financial Metrics
| Metric | 9 Months Ended Sep 30, 2001 | 9 Months Ended Sep 30, 2000 |
|---|---|---|
| Total Revenue | $100,052,000 | $102,106,000 |
| Net Income | $47,291,000 | $53,244,000 |
| Net Income Available to Common Shareholders | $37,163,000 | $43,130,000 |
| Diluted EPS | $1.22 | $1.51 |
| Operating Cash Flow | $61,086,000 | $58,520,000 |
| Total Assets | $1,195,287,000 | $1,156,904,000 |
| Total Liabilities | $432,301,000 | $458,297,000 |
| Shareholders' Equity | $762,986,000 | $698,607,000 |
| Cash and Cash Equivalents | $43,564,000 | $2,844,000 |
| Debt to Equity Ratio | 0.55 to 1.0 | N/A |
Material Changes vs. Prior Period
- Revenue: Total revenue decreased 2.01% year-over-year. Rental income increased 9.46% due to completed construction projects and property purchases, while interest income declined 23.67% due to loan repayments and conversions to owned properties.
- Profitability: Net income available to common shareholders decreased 13.8% to $37.16 million. Diluted EPS fell from $1.51 to $1.22.
- Expenses: Total expenses increased 5.48%. Depreciation rose 26.97% due to new property investments. Interest expense decreased 9.05% due to lower average borrowings on lines of credit.
- Liquidity: Cash and cash equivalents increased significantly from $2.8 million to $43.6 million, driven by a $74.2 million common stock issuance in June 2001 and a $175 million senior note issuance in August 2001, which were used to pay down credit lines.
- Debt Structure: The Company paid off its $119.9 million line of credit balance. Senior unsecured notes increased from $255 million to $412.25 million following the August issuance.
Guidance, Outlook, and Risks
Management Commentary: Management anticipates making additional investments in health care facilities funded by internal cash, asset sales, and capital markets. The Company believes its liquidity is sufficient to fund operations, meet debt service, and finance future investments. Shelf registrations allow for up to $77 million in additional securities issuance.
Outlook: The Company expects to replace temporary borrowings with permanent financing through private/public offerings of debt and equity. Operating results for the nine months ended September 30, 2001, are not necessarily indicative of full-year results.
Risks and Contingencies:
- Market Risk: Exposure to interest rate fluctuations. A 1% increase in rates would decrease the fair value of Senior Unsecured Notes by approximately $17 million.
- Operational Risk: Risk of operator bankruptcy or insolvency affecting rent/interest payments. Bankruptcy laws may restrict the Company's ability to collect unpaid amounts or replace operators quickly.
- Regulatory Risk: Changes in Medicare/Medicaid payment levels and government regulations.
- Contingent Liabilities: The Company remains contingently liable for certain obligations totaling $11.425 million.
Investor Verification Checklist
- Verify the sustainability of the 9.46% increase in rental income against the 23.67% decline in interest income as the portfolio shifts from loans to owned properties.
- Confirm the utilization of the $175 million senior note proceeds and the $74.2 million equity raise to ensure debt reduction targets were met.
- Review the $11.425 million contingent liability details to assess potential impact on future cash flows.
- Monitor the $150 million unsecured revolving line of credit (expiring March 2003) and the $25 million line (expiring June 2002) for refinancing needs.
- Assess the impact of the $213,000 loss on extinguishment of debt on future capital restructuring costs.