Business Context and Reporting Period
Company: Health Care REIT, Inc. (Welltower Inc.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2009
Business Overview: An equity real estate investment trust (REIT) investing in senior housing and health care real estate. As of June 30, 2009, the portfolio consisted of 620 properties in 39 states, including independent living/CCRCs, assisted living, skilled nursing, specialty care facilities, and medical office buildings.
Key Financial Metrics
| Metric (Six Months Ended June 30, 2009) | Amount (in thousands) |
|---|---|
| Total Revenues | $283,252 |
| Net Income | $131,403 |
| Net Income Attributable to Common Stockholders | $120,359 |
| Funds from Operations (FFO) | $174,529 |
| Net Operating Income (NOI) | $268,048 |
| Cash and Cash Equivalents | $79,505 |
| Total Debt Outstanding | $2,697,432 |
| Debt to Total Book Capitalization | 44% |
| Interest Coverage Ratio | 3.81x |
Material Changes vs. Prior Period
- Net Income Decline: Net income attributable to common stockholders decreased 35% to $120.4 million from $184.7 million in the prior year period. This decline is primarily due to a significant reduction in gains from the sale of properties (discontinued operations), which dropped from $118.2 million in 2008 to $27.7 million in 2009.
- Operating Performance: Despite the drop in net income, core operating metrics improved. Net Operating Income (NOI) increased 5% to $268.0 million, and Funds from Operations (FFO) increased 20% to $174.5 million, driven by rental income growth from new acquisitions and development completions.
- Revenue Growth: Total revenues increased 12% to $283.3 million. Rental income rose 13% to $260.4 million, and interest income increased 10% to $20.1 million.
- Expense Management: Interest expense decreased 20% to $53.9 million, largely due to lower utilization of the unsecured line of credit and lower interest rates. However, General and Administrative expenses increased 24% due to non-recurring costs associated with executive departures.
Guidance, Outlook, and Risks
- Investment Strategy: Management expects to complete gross new investments of approximately $600 million in 2009, primarily funded by new development. Net new investments are projected to be between $300 million and $400 million.
- Liquidity: The company maintains strong liquidity with $79.5 million in cash, $18.8 million in restricted cash, and $808 million of available borrowing capacity under its $1.15 billion unsecured line of credit.
- Dividends: The quarterly cash dividend of $0.68 per share was maintained, representing the 153rd consecutive quarterly payment.
- Risks:
- Economic Conditions: The severe recession and credit market dislocation may impact the ability of operators/tenants to meet obligations and limit access to capital.
- Concentration: The top five customers represent approximately 24% of total investment portfolio and 30% of revenue.
- Interest Rate Risk: A 1% increase in interest rates would increase annual interest expense on variable rate debt by approximately $3.4 million.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the extent to which the decline in Net Income is driven by the lack of property sale gains compared to the prior year, rather than a deterioration in core rental operations.
- FFO vs. Net Income: Confirm that Funds from Operations (FFO) growth of 20% aligns with the company's core value creation strategy, as this metric excludes non-cash depreciation and one-time gains/losses.
- Debt Covenants: Review compliance with the Adjusted Fixed Charge Coverage Ratio covenant (currently 2.89x, well above the 1.75x requirement) to ensure no risk of default.
- Construction Commitments: Assess the $458.8 million in unfunded construction commitments and the company's ability to fund these projects given current market conditions.
- Customer Concentration: Monitor the financial health of the top five operators (e.g., Signature Healthcare, Brookdale, Emeritus) which collectively account for a significant portion of revenue.