Health Care REIT, Inc. (now Welltower Inc.) — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. The filing issuer was Health Care REIT, Inc. Its portfolio comprised 1,010 properties across 46 U.S. states and Canada, spanning seniors housing, skilled nursing, medical facilities and life science properties. Unless stated otherwise, financial amounts below are in millions of U.S. dollars.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $453.1 | $369.6 | $884.2 | $611.2 |
| Net income attributable to common stockholders | $54.7 | $69.8 | $94.0 | $93.2 |
| Diluted EPS attributable to common stockholders | $0.25 | $0.39 | $0.45 | $0.56 |
| Funds from operations (FFO), non-GAAP | $157.9 | $149.6 | $321.8 | $220.6 |
| Diluted FFO per share | $0.73 | $0.84 | $1.55 | $1.33 |
| Net operating income (NOI), non-GAAP | $316.8 | $269.8 | $618.7 | $447.8 |
- Revenue growth reflected acquisitions and property conversions. Q2 rental income rose 22% to $278.1 million and resident fees and services rose 35% to $165.7 million. Six-month revenue increased 45%.
- Common-stockholder income declined 22% in Q2 while revenue and NOI grew; diluted EPS also reflected a larger share base. The Q2 comparison included a $6.2 million preferred-stock redemption charge in 2012. Six-month common-stockholder income was approximately flat, while diluted EPS fell to $0.45 from $0.56.
- Six-month same-store cash NOI increased 3% to $315.5 million. Management reported triple-net customer payment coverage had softened: weighted-average CBMF was 1.76x versus 2.05x a year earlier, and CAMF was 1.42x versus 1.64x.
- Six-month operating cash flow was $351.0 million, versus $241.6 million. Investing used $1.228 billion; financing provided $918.2 million. Cash and equivalents ended at $204.9 million, with restricted cash of $79.6 million.
- At June 30, total debt was approximately $7.604 billion; debt to book capitalization was 48% and debt to market capitalization was 36%. Interest and fixed-charge coverage for Q2 were 3.21x and 2.52x. The company reported compliance with debt covenants.
- Liquidity included $1.612 billion of available capacity on a $2.0 billion unsecured revolving facility, in addition to cash and restricted cash. Senior unsecured notes and secured debt carried principal balances of approximately $4.939 billion and $2.285 billion, respectively.
- Common dividends were $0.74 per share for Q2, compared with $0.715 a year earlier. The company issued 20.7 million common shares in February, raising net proceeds of approximately $1.062 billion.
Material changes, transactions and outlook
- Gross investments were approximately $1.902 billion in the first half. The company acquired 24 seniors housing triple-net properties, 48 seniors housing operating properties, and medical facilities including 19 medical office buildings and one hospital. It also formed a 50/50 Canadian seniors housing joint venture with Chartwell; its cash investment in the 39 jointly owned properties was $223.1 million.
- The company sold 23 properties for $156.7 million of proceeds and $33.2 million of gains; 36 seniors housing facilities were classified as held for sale at quarter-end.
- Management said capital markets remained supportive, expected attractive investment opportunities to continue through the balance of 2012, and anticipated approximately $300 million of property sales and loan repayments during 2012, with proceeds generally intended for reinvestment. No specific earnings or FFO guidance was provided in the supplied filing text.
- After quarter-end, the company funded a $250 million Canadian-dollar unsecured term loan on July 30, 2012, maturing in July 2015 with a one-year extension option. Holders converted $167.6 million of 4.75% convertible notes due 2027; the remaining $0.5 million was repurchased or redeemed by July 17.
Risks, contingencies and unusual items
- Revenue and liquidity depend on tenants and operators making contractual payments. Risks include operator financial distress, declining reimbursement, regulation and health-care reform, acquisition and development execution, access to capital, interest rates, foreign currency movements and the ability to reinvest sale proceeds at comparable returns.
- Health-care reimbursement reductions and regulatory changes could weaken operators’ ability to pay rent. Management noted uncertainty about the effects of health reform, including Medicare and Medicaid policy changes and state decisions concerning Medicaid expansion.
- At June 30, the company had $170.8 million of construction in progress for leased properties and was committed to an additional approximately $201.3 million to complete construction. Contingent purchase obligations were $62.3 million; total contractual obligations were $12.089 billion.
- Loans with $13.0 million of outstanding balances were on non-accrual status, with no loan-loss allowance recorded. The company recorded no loan-loss provision in the first half.
- A 1% increase in interest rates was estimated to increase annual interest expense by $6.1 million on variable-rate debt outstanding at quarter-end. Foreign-exchange exposure related to the Chartwell investment was hedged with a forward contract.
- The company reported $6.5 million of unrecognized tax benefits; Genesis-related tax positions were indemnified, with a corresponding indemnification asset recorded. Purchase price allocations for certain acquisitions remained preliminary.
Key facts for investors to verify
- Review the reconciliation and definitions of non-GAAP FFO, NOI, same-store cash NOI and coverage ratios, and assess per-share trends against substantial equity issuance.
- Assess tenant/operator credit and payment coverage, especially the decline in weighted-average coverage and Genesis’s 17% share of investment at June 30.
- Confirm funding and completion costs for construction commitments, the status of held-for-sale properties, and whether anticipated sales and loan repayments are reinvested as planned.
- Review debt maturities, refinancing needs, variable-rate exposure, covenant headroom and the effect of the post-quarter Canadian term loan and convertible-note conversions.
- Evaluate the sustainability of the dividend relative to operating cash flow, financing needs and the company’s REIT distribution requirements.