Business Context and Reporting Period
Company: Health Care REIT, Inc. (Welltower Inc.)
Filing Type: Form 10-K
Period Ended: December 31, 2005
Business Overview: A self-administered equity REIT investing in health care and senior housing facilities. As of year-end 2005, the portfolio consisted of 442 facilities in 36 states, including 195 assisted living, 203 skilled nursing, 31 independent living/CCRC, and 13 specialty care facilities. The company leases properties to 54 different operators.
Key Financial Metrics
| Metric | 2005 Value | 2004 Value |
|---|---|---|
| Total Revenues | $281,847,000 | $239,055,000 |
| Net Income | $84,286,000 | $85,371,000 |
| Net Income Available to Common Stockholders | $62,692,000 | $72,634,000 |
| Funds From Operations (FFO) | $144,293,000 | $146,742,000 |
| Funds Available for Distribution (FAD) | $145,020,000 | $132,950,000 |
| Total Assets | $2,972,164,000 | $2,552,171,000 |
| Total Debt | $1,500,818,000 | $1,192,958,000 |
| Cash and Cash Equivalents | $36,237,000 | $19,763,000 |
| Debt to Book Capitalization | 51% | 47% |
| Interest Coverage Ratio (EBITDA/Interest) | 3.10x | 3.24x |
Material Changes vs. Prior Period
- Net Income Decline: Net income available to common stockholders decreased 14% to $62.7 million, primarily due to a $21.5 million loss on the extinguishment of debt, increased interest expense, and higher preferred stock dividends.
- Revenue Growth: Total revenues increased 18% to $281.8 million, driven by rental income growth from new property acquisitions.
- Debt Restructuring: The company issued $550 million in new senior unsecured notes (5.875% and 6.2% rates) to refinance higher-cost debt, resulting in the $21.5 million extinguishment loss.
- Portfolio Expansion: Gross investments totaled $642.5 million, while investment payoffs were $147.0 million. The portfolio shifted slightly toward skilled nursing facilities (44% of investments).
- Dividend Increase: The quarterly common dividend was increased to $0.62 per share, representing the 139th consecutive dividend payment.
Guidance, Outlook, and Risks
- 2006 Investment Outlook: Management expects gross new investments of $450 million to $550 million in 2006, including $300 million in acquisitions and $150 million to $250 million in funded new development.
- Dividend Policy: The Board approved a new quarterly dividend rate of $0.64 per share commencing with the May 2006 dividend.
- Key Risks:
- Government Reimbursement: Significant exposure to Medicare and Medicaid reimbursement rates. Changes in federal or state policies could materially impact operator ability to pay rent.
- Operator Concentration: The top five operators represent 41% of total investments and 43% of revenues. Emeritus Corporation is the largest operator (13% of investments).
- Interest Rate Risk: A 1% increase in interest rates would increase annual interest expense on variable rate debt by approximately $1.95 million.
- Liability Insurance: Rising costs and restricted availability of long-term care liability insurance in states like Texas and Florida pose operational risks to operators.
Investor Verification Checklist
- Debt Extinguishment Impact: Verify the long-term impact of the $21.5 million one-time loss on 2005 earnings and confirm the reduction in weighted average interest rates on the new debt issuances.
- Operator Solvency: Review the financial health of the top five operators (Emeritus, Merrill Gardens, Southern Assisted Living, Life Care Centers, Commonwealth Communities), which collectively account for over 40% of the portfolio.
- Reimbursement Trends: Monitor CMS and state Medicaid rate changes for 2006, particularly the impact of the new RUG system on skilled nursing facilities.
- Dividend Coverage: Confirm that Funds Available for Distribution (FAD) of $2.66 per share continues to cover the increased dividend rate of $0.64 per quarter ($2.56 annualized).
- Construction Commitments: Verify the status of the $36.5 million in unfunded construction commitments and the $44.9 million in contingent purchase obligations.