Health Care REIT, Inc. — Q2 2013 Form 10-Q
Period: Quarter and six months ended June 30, 2013. The filing names Health Care REIT, Inc. as registrant; it does not identify the company as Welltower Inc. The summary below reflects the registrant shown in the filing.
Business context
Health Care REIT was a healthcare and seniors-housing REIT operating across the United States, the United Kingdom and Canada. At June 30, 2013, it reported 1,183 portfolio properties in 46 states and two countries, including wholly owned and unconsolidated investments. Its principal segments were seniors housing triple-net, seniors housing operating and medical facilities.
Key financial metrics
Amounts below are in millions of dollars, except per-share data and ratios.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $682.1 | $438.7 | $1,315.5 | $855.7 |
| Net income | $7.2 | $76.9 | $79.0 | $134.3 |
| Net income (loss) attributable to common stockholders | $(8.5) | $54.7 | $46.6 | $94.0 |
| Diluted GAAP EPS attributable to common stockholders | $(0.03) | $0.25 | $0.17 | $0.45 |
| Funds from operations (FFO), diluted per share | $230.7; $0.83 | $157.9; $0.73 | $401.5; $1.49 | $321.8; $1.55 |
| NOI from continuing operations | $403.5 | $302.9 | $783.6 | $591.0 |
| Same-store cash NOI | $266.1 | $258.8 | $526.9 | $513.8 |
| Net cash from operating activities | — | $406.7 | $351.0 |
- Q2 revenue rose 55%; NOI rose 33%; same-store cash NOI increased 3%. Management attributed much of the growth to acquisitions, particularly Sunrise, rather than same-store gains.
- Q2 common-stockholder loss reflected a $30.0 million net loss on property sales recorded in discontinued operations. Continuing-operations income was $36.8 million.
- Six-month interest expense was $220.6 million, versus $179.8 million. Depreciation and amortization was $386.8 million, versus $248.1 million; transaction costs were $94.1 million, including $65.3 million related to Sunrise.
- Cash and cash equivalents were $512.5 million at June 30, down from $1,033.8 million at year-end 2012. Restricted cash was $212.8 million. The $2.25 billion revolver had no balance outstanding, leaving $2.25 billion of stated borrowing capacity.
- At June 30, balance-sheet borrowings included $6.605 billion of senior unsecured notes and $2.876 billion of secured debt. Principal amounts disclosed for senior unsecured notes and secured debt totaled $9.471 billion. Debt-to-book-capitalization was 44%; Q2 interest coverage was 2.88x and fixed-charge coverage was 2.27x.
- Cash used in investing activities was $2.703 billion, primarily reflecting property investment and contributions to unconsolidated entities; financing provided $1.774 billion. Cash distributions to stockholders of $433.0 million exceeded operating cash flow. The common dividend was $0.765 per share quarterly, or $1.53 for the six-month period.
Material changes and notable transactions
- The January 9, 2013 Sunrise acquisition substantially expanded seniors-housing operating activity. The company reported 71 wholly owned Sunrise properties and interests in 54 unconsolidated properties at June 30; it acquired remaining interests in 49 of those properties on July 1, after quarter-end.
- Sunrise contributed $241.3 million of revenue and $79.3 million of NOI from acquisition through June 30. Reported seniors-housing operating revenue more than doubled year over year, while segment NOI rose 125% in Q2; acquisition scale and consolidation materially affect comparability.
- Six-month gross investments were reported at approximately $4.1 billion. The company raised $1.7 billion net from a May common-stock offering of 23 million shares, increasing the share base and supporting investment funding.
- Total assets increased to $22.2 billion from $19.5 billion at December 31, 2012; net real estate investments rose to $20.0 billion from $17.4 billion. Unconsolidated-entity investments increased to $768.7 million from $438.9 million.
- Foreign-currency translation contributed a $43.5 million loss to six-month other comprehensive income; total other comprehensive loss was $42.6 million.
Outlook, risks and contingencies
- The filing provides no quantified earnings or FFO guidance. Management said it expected investment opportunities to remain available and considered liquidity sufficient for planned uses, subject to capital-market access and market conditions. Results for the six-month period were expressly not presented as indicative of full-year results.
- Management highlighted reliance on tenant and operator rent payments and the operating performance of RIDEA properties. Risks include operator or joint-venture distress, acquisition execution and integration, refinancing and capital availability, interest and foreign-exchange movements, lease renewals and vacancies, and changes to Medicare and Medicaid reimbursement or regulation.
- Medicare sequestration reductions of up to 2% began in April 2013. CMS’s final 2014 skilled-nursing payment rule provided a 1.3% net increase; the filing also describes other proposed or pending reimbursement changes that could affect operators and tenants.
- Commitments included approximately $241.0 million of additional construction funding and $62.4 million of contingent purchase obligations. Outstanding construction in progress was $137.5 million. Contractual obligations totaled $14.824 billion, including debt principal, interest, leases and purchase obligations.
- The company reported compliance with debt covenants at June 30, 2013. It also disclosed notices to convert $219 million of 3.00% convertible notes received by July 31, expected to be settled by August 26, 2013.
- Management said ordinary-course legal proceedings were not expected to have a material adverse effect. Disclosure controls were deemed effective, and no material changes to internal control over financial reporting were reported.
Important facts for investors to verify
- Confirm the intended issuer: this filing is for Health Care REIT, Inc., notwithstanding the request metadata naming Welltower Inc.
- Review Sunrise purchase accounting, the July 1 acquisition of additional property interests, ongoing transaction costs and the operating results of the expanded RIDEA portfolio.
- Assess the quality and sustainability of operating cash flow and dividends, given that six-month cash distributions exceeded cash generated from operations.
- Reconcile debt maturities, interest exposure, secured-property collateral and the effect of the $219 million note conversion on cash, leverage and dilution.
- Separate acquisition-driven growth and discontinued-operation sale gains or losses from same-store operating trends; note that FFO and NOI are non-GAAP measures.
- Monitor reimbursement policy, tenant/operator financial health, Sunrise concentration, construction funding commitments and foreign-currency exposure.