Business context and reporting period
Health Care REIT, Inc. (the registrant identified in this 10-Q; company metadata identifies Welltower Inc.) reported unaudited results for the three months ended March 31, 2012, compared with the same 2011 period. The REIT invests in seniors housing and health care real estate and provides property management and development services. Its portfolio comprised 956 properties in 46 states at quarter-end.
Unless otherwise indicated, financial amounts below are in millions of U.S. dollars. Management cautioned that interim results are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 | Change or context |
|---|---|---|---|
| Total revenue | $435.4 | $245.8 | Up 77% |
| Net income | $57.5 | $31.8 | Up 81% |
| Net income attributable to common stockholders | $39.3 | $23.4 | Up 68% |
| Diluted EPS attributable to common stockholders | $0.19 | $0.15 | Up 27% |
| Funds from operations (FFO), diluted per share | $163.9; $0.81 | $71.1; $0.46 | FFO up 131%; per share up 76% |
| NOI from continuing operations | $306.1 | $182.2 | Up 68% |
| Same-store cash NOI | $163.0 | $158.1 | Up 3% |
| Cash from operating activities | $174.0 | $113.8 | Up 53% |
Growth primarily reflected acquisitions and newly completed properties, rather than comparable-property growth alone. Rental income rose 67% to $267.4 million and resident fees and services more than doubled to $158.2 million. Interest expense increased to $92.7 million from $56.9 million, while depreciation and amortization rose to $126.0 million from $70.7 million. Transaction costs declined to $5.6 million from $36.1 million. Q1 2012 included a $0.6 million unrealized derivative loss; the prior-year quarter included $26.2 million of gains on property sales, contributing to the year-over-year change in reported earnings.
Cash used in investing activities was $537.8 million, including $570.2 million invested in real property, partly offset by property-sale proceeds. Financing activities provided $669.5 million, principally reflecting equity issuance and debt activity. Cash and cash equivalents ended the quarter at $469.2 million, compared with $163.5 million at year-end 2011; restricted cash was an additional $83.5 million. Common and preferred dividends paid totaled $162.1 million. The quarterly common dividend was increased to $0.74 per share from $0.715, and $0.74 per share was declared and paid during the quarter.
At March 31, total debt, excluding capital leases, was $6.795 billion: $4.436 billion of senior unsecured notes, $2.354 billion of secured debt, and $5 million drawn on a revolving demand note. Total equity was $8.554 billion. Debt to book capitalization was 45%, debt to market capitalization 34%, interest coverage 3.03x, and fixed-charge coverage 2.33x. The company reported compliance with all debt covenants. It had a $2.0 billion unsecured revolving facility, with $2.0 billion of available capacity, scheduled to expire July 2015.
Material changes versus the prior comparable period
- Reported revenue, NOI, FFO, and operating cash flow increased substantially, largely reflecting portfolio expansion and acquisition contributions. Same-store cash NOI grew more modestly, by 3%.
- The company invested in 22 properties during the quarter, with reported acquired assets of $680.3 million before assumed debt and other items. Acquisitions included three seniors housing triple-net properties, six seniors housing operating properties, 12 medical office buildings, and one hospital.
- Common shares outstanding increased materially following a February public offering of 20.7 million shares, generating approximately $1.063 billion net. The company also issued 11.5 million Series J preferred shares, generating approximately $277.9 million net. Higher average common shares and preferred dividends affect per-share comparisons.
- Compared with Q1 2011, financing cash flow was much lower; the prior-year quarter included $1.381 billion of net proceeds from senior-note issuance. Q1 2012 instead included significant common-equity proceeds and repayment of $605 million of line-of-credit borrowings.
Outlook, commentary, risks, and unusual items
Management said it expected to pursue further investments and believed liquidity was sufficient for operations, debt service, distributions, and construction commitments, subject to external capital availability and cost. It anticipated approximately $300 million of property sales and loan repayments during 2012 and expected to reinvest proceeds. The filing does not provide a clear quantified earnings or FFO forecast.
After quarter-end, the company issued $600 million of 4.125% senior notes due 2019, redeemed $275 million of Series D and Series F preferred stock, and completed or arranged the conversion/redemption of approximately $125.6 million of convertible notes. It also extinguished approximately $185 million of secured debt. On May 1, 2012, it completed a Canadian seniors housing transaction with Chartwell involving 42 communities and an investment of approximately $509.5 million, funded with cash and assumed secured debt.
Key exposures include operators’ ability to pay rent and meet obligations; changes to Medicare and Medicaid reimbursement, health care regulation, and fraud-and-abuse enforcement; capital-market access and refinancing costs; interest and foreign-exchange movements; acquisition execution; and property or tenant concentration. Genesis represented 17% of investment, and the five largest customer relationships together represented approximately 40%. The company disclosed $12.956 million of loans on non-accrual status with no allowance for loan losses. It also had $150.8 million of construction in progress for leased properties and committed approximately $240.8 million more to complete construction. The filing discusses uncertain tax positions associated with the Genesis acquisition and an indemnification asset; the asset’s collectability is reviewed periodically.
Important facts for investors to verify
- How much of reported growth is attributable to acquisitions and new properties versus underlying same-store performance, occupancy, and rent or fee increases.
- Operator and tenant credit quality, especially the concentration in Genesis and the status and recoverability of the non-accrual loans.
- Funding needs and returns for construction commitments, the Chartwell investment, and planned acquisitions, including the effect of equity issuance and dilution.
- Debt maturities, refinancing costs, covenant headroom, and the effect of interest-rate or currency changes; confirm subsequent-quarter debt and preferred-stock transactions.
- Potential impacts of Medicare and Medicaid reimbursement changes, health care regulation, and other risks discussed in the filing; assess whether post-quarter developments change management’s outlook.