Business Context and Reporting Period
Company: Health Care REIT, Inc. (Welltower Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2012
Business Overview: An S&P 500 equity real estate investment trust (REIT) investing in seniors housing and health care real estate. As of September 30, 2012, the portfolio consisted of 1,030 properties across 46 states, the United Kingdom, and Canada. The company operates through three segments: Seniors Housing Triple-Net, Seniors Housing Operating, and Medical Facilities.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2012 | Nine Months Ended Sep 30, 2012 |
|---|---|---|
| Total Revenues | $474.1 million | $1,353.6 million |
| Net Income (GAAP) | $53.5 million | $187.8 million |
| Net Income Attributable to Common Stockholders | $37.3 million | $131.3 million |
| Earnings Per Share (Diluted) | $0.16 | $0.61 |
| Funds From Operations (FFO) | $170.7 million | $492.5 million |
| Net Operating Income (NOI) | $329.7 million | $944.0 million |
| Cash and Cash Equivalents | $1,382.3 million | $1,382.3 million (Balance Sheet) |
| Total Debt (Principal) | ~$7.24 billion (Senior Unsecured Notes: $4.95B; Secured Debt: $2.30B) | |
| Debt to Book Capitalization | 41% |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 28% year-over-year for the nine months ended September 30, 2012, driven primarily by acquisitions and the conversion of newly constructed properties.
- Loan Loss Provision: A significant non-recurring charge of $27.0 million was recorded for the provision for loan losses in the third quarter of 2012, compared to only $0.1 million in the same period in 2011. This was due to a change in intent regarding collateral and updated appraisals.
- Discontinued Operations: The company sold 42 properties during the nine months ended September 30, 2012, recognizing net gains of $46.0 million. Properties held for sale were reclassified to discontinued operations.
- Capitalization: The company significantly increased its cash position from $163.5 million at year-end 2011 to $1.38 billion at September 30, 2012, funded by equity issuances and debt refinancing.
Guidance, Outlook, and Risks
- Strategic Acquisitions: The company entered into a definitive agreement in August 2012 to acquire Sunrise Senior Living, Inc. in an all-cash merger. The estimated purchase price increased to approximately $3.17 billion following the acquisition of additional joint venture properties. Closing is expected in early 2013.
- Dividends: The quarterly cash dividend on common stock was increased to $0.74 per share in 2012 from $0.715 in the prior year.
- Health Reform Risks: The filing details significant risks associated with the Patient Protection and Affordable Care Act (PPACA), including potential reductions in Medicare reimbursement rates for hospitals and skilled nursing facilities, which could impact tenant ability to pay rent.
- Legal Proceedings: Following the Sunrise merger announcement, lawsuits were filed in Virginia and Delaware challenging the merger on behalf of Sunrise stockholders. The company intends to defend vigorously, but outcomes are uncertain.
- Market Risk: The company is exposed to interest rate and foreign currency risks, utilizing derivatives (swaps and forward contracts) to hedge exposures related to Canadian and UK investments.
Investor Verification Checklist
- Loan Loss Provision: Verify the specific properties and collateral values associated with the $27.0 million loan loss provision to assess future credit risk.
- Sunrise Merger Status: Monitor the progress of the Sunrise Senior Living merger, including regulatory approvals and the resolution of pending litigation.
- Reimbursement Policy Changes: Track CMS rulemakings regarding Medicare reimbursement rates for skilled nursing and hospital tenants to evaluate potential rent collection risks.
- Debt Maturities: Review the schedule of debt maturities, particularly the $2.0 billion unsecured line of credit expiring in 2015 and the Canadian term loan.
- FFO vs. Net Income: Analyze the reconciliation between Net Income and Funds From Operations (FFO) to understand the impact of depreciation and non-cash items on reported earnings.