Health Care REIT, Inc. (now Welltower Inc.) — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing is issued under the name Health Care REIT, Inc.; the provided company metadata uses Welltower Inc. The fourth quarter ended December 31, 2011.
Business context
The company was a healthcare and seniors-housing REIT with 937 properties across 46 states. Its portfolio spanned triple-net seniors housing and skilled nursing, operated seniors housing, hospitals, medical office buildings, and life-science properties. Reported investment balances totaled $14.3 billion; committed investments, including specified unfunded construction commitments and unconsolidated investments, were $14.6 billion.
Financial results and liquidity
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $1.421 billion | $657.3 million |
| Net income attributable to common stockholders | $157.1 million | $106.9 million |
| Diluted EPS | $0.90 | $0.83 |
| Funds from operations (FFO), diluted per share | $524.9 million; $3.01 | $280.0 million; $2.18 |
| Net operating income (NOI) | $1.087 billion | $640.3 million |
| Cash from operating activities | $588.2 million | $364.7 million |
Fourth quarter: Reported revenue was $407.4 million; net income attributable to common stockholders was $27.3 million, or $0.15 per diluted share. The filing notes that quarterly results may not sum to annual totals because of rounding and discontinued-operations reclassifications.
Balance sheet and funding: At year-end, total assets were $14.925 billion, total liabilities $7.612 billion, total equity $7.279 billion, and debt $7.157 billion. Cash and cash equivalents were $163.5 million, restricted cash $69.6 million, and available borrowing capacity under the primary credit facility $1.395 billion. The company reported $610 million outstanding on its $2.0 billion revolving facility, which matured in July 2015. Debt-to-book capitalization was 50%; adjusted interest and fixed-charge coverage were 3.02x and 2.37x, respectively. The company reported compliance with debt covenants.
Common dividends were $2.835 per share for 2011. The board approved a $0.74 quarterly rate, equivalent to $2.96 annually, beginning with the February 2012 dividend; future payments remain subject to board approval.
Material changes versus 2010
- Revenue more than doubled, while common-stockholder net income rose 47%, FFO rose 87%, and operating cash flow rose 61%. Portfolio expansion was a major driver.
- Gross investments were $5.986 billion, including $5.698 billion of real-property acquisitions. The April 2011 Genesis transaction acquired substantially all of Genesis HealthCare Corporation’s real estate assets for approximately $2.483 billion; the related master lease began at $198 million base rent for its first year.
- The company raised capital through common-stock offerings ($2.138 billion net proceeds), a $696.4 million preferred-stock offering, and $1.4 billion of senior notes. Year-end debt-to-book capitalization increased from 49% to 50%, while adjusted fixed-charge coverage fell from 2.76x to 2.37x.
- RIDEA seniors-housing operating activity expanded: this segment represented 31% of total revenues in 2011 versus 7% in 2010. Its reported segment loss attributable to common stockholders widened to $73.5 million from $24.4 million, reflecting acquisitions, operating costs, depreciation and transaction costs, as well as different periods of ownership.
- Reported occupancy varied by property type: triple-net seniors housing was 88.2% versus 88.9%; skilled nursing/post-acute was 88.0% versus 84.9%; operated seniors housing was 90.1% versus 91.9%; hospitals were 59.0% versus 62.9%; and medical office buildings were 93.4% versus 93.1%.
Outlook, risks and unusual items
- Management described healthcare real estate investment activity and sector capital availability as strong, and expected to continue pursuing acquisitions in 2012. It also cited economic and capital-market volatility and did not provide a specific earnings forecast in the supplied filing text.
- Government reimbursement is a key indirect risk to tenant rent-paying capacity. The filing describes an 11.1% reduction in skilled-nursing RUG payments for fiscal 2012, possible further Medicare and Medicaid changes, and sequestration-related Medicare reductions starting in 2013.
- Other principal risks include operator financial distress or bankruptcy, customer concentration, occupancy and labor costs, licensing and regulatory constraints on replacing operators, liability insurance costs, development and construction execution, interest rates, refinancing and capital-market access, and maintaining REIT qualification.
- Unusual 2011 items included $70.2 million of transaction costs, $12.2 million of impairment charges, $61.2 million of gains on property sales, $2.0 million of loan-loss provisions, and a $1.0 million gain on debt extinguishment. Management said transaction costs primarily related to acquisitions, including Genesis and RIDEA partnerships.
- At year-end, $282.9 million of additional construction funding was committed, and $57.5 million of contingent purchase obligations remained. Five medical facilities and one triple-net seniors-housing facility were classified as held for sale. On February 15, 2012, the company announced a Canadian seniors-housing partnership acquisition valued at $925 million, with a stated company investment of approximately $503 million.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls; it reported no material fourth-quarter change in internal control over financial reporting. Ordinary-course legal proceedings were not expected by the company to have a material adverse effect.
Important facts for investors to verify
- Reconcile the substantial revenue and FFO growth to acquisition timing, acquired debt, equity issuance and the expanded operated-seniors-housing segment; review per-share results alongside dilution.
- Assess Genesis lease coverage and counterparty exposure, including Genesis’s 18% share of investment balances and the filing’s reported 12% share of total revenue.
- Review debt maturities, interest-rate sensitivity, coverage trends, covenant headroom and refinancing needs, including $610 million drawn on the revolver and the 2012–2016 debt maturities.
- Evaluate whether the increased dividend is supported by recurring cash generation after debt service, capital spending, construction commitments and required REIT distributions.
- Check the effects of skilled-nursing reimbursement reductions and other healthcare-policy changes on operators’ rent coverage, and monitor occupancy—particularly the hospital portfolio’s 59% rate.
- Review held-for-sale assets, impairments, transaction costs and the announced Chartwell transaction, including final funding, debt assumption and operating terms.