Business context and reporting period
Health Care REIT, Inc. (the registrant named in this filing; company metadata identifies Welltower Inc.) filed this unaudited Form 10-Q for the quarter ended June 30, 2014. It operated a diversified seniors housing and health care real estate portfolio across the U.S., U.K. and Canada. At quarter-end, it reported 1,157 properties and $21.9 billion of real estate investments, excluding its share of unconsolidated entities.
Financial and operating results
Amounts below are in U.S. dollars. Quarterly and six-month comparisons are to the corresponding 2013 periods.
| Metric | Q2 2014 | Six months 2014 |
|---|---|---|
| Total revenue | $826.4 million, up 22% | $1.628 billion, up 24% |
| Net income attributable to common stockholders | $71.8 million, versus a loss of $8.5 million | $121.9 million, up 162% |
| Diluted GAAP earnings per share | $0.24, versus a loss of $0.03 | $0.41, versus $0.17 |
| Funds from operations (FFO), a non-GAAP measure | $284.2 million; $0.95 per diluted share | $573.0 million; $1.95 per diluted share |
| Net operating income (NOI), a non-GAAP measure | $482.7 million, up 20% | $943.1 million, up 21% |
| Same-store cash NOI, a non-GAAP measure | $323.7 million, up 4% | $643.1 million, up 4% |
| Cash from operating activities | Quarterly figure not provided in the presented filing text | $595.5 million, versus $406.7 million |
| Cash and cash equivalents | $207.4 million at June 30 | Up from $158.8 million at December 31, 2013 |
Quarterly revenue growth included resident fees and services of $467.6 million, up 26%, and rental income of $347.8 million, up 16%. Property operating expenses rose to $343.8 million, while interest expense was $121.1 million and depreciation and amortization was $214.4 million. Segment NOI growth was strongest in seniors housing operating (up 30% for the quarter); seniors housing triple-net NOI rose 20% and medical facilities NOI rose 8%. Same-store cash NOI was comparatively slower-growing, up 10% in seniors housing operating, 3% in triple-net and 1% in medical facilities.
Balance sheet, debt and liquidity
- Total assets were $23.57 billion and total liabilities were $11.02 billion at June 30, 2014. Balance-sheet borrowings included $7.41 billion of senior unsecured notes, $2.85 billion of secured debt and no balance outstanding on the unsecured line of credit. Capital lease obligations were $83.9 million.
- Debt principal maturities totaled $10.26 billion, including $7.45 billion of senior unsecured notes and $2.81 billion of secured debt. The filing reports annual interest rates of 1.5%–6.5% for senior notes and 1.0%–8.0% for secured debt. Debt covenants were satisfied at quarter-end.
- The existing revolving credit facility had $2.25 billion of committed capacity; no amount was outstanding at quarter-end. On July 25, 2014, the company closed a replacement facility with a $2.5 billion revolver and $750 million of term loans, extending the facility to October 31, 2018. It included an option to increase commitments by up to $1.0 billion.
- Six-month investing cash outflow was $798.4 million, versus $2.70 billion in 2013, reflecting lower acquisition spending. Financing cash inflow was $252.5 million, including $1.10 billion of net common-stock issuance proceeds and $495.3 million of cash distributions to stockholders.
- Debt to book capitalization was 45% and interest coverage was 3.51x at June 30. The quarterly common dividend was $0.795 per share, up from $0.765 a year earlier; the annualized rate was $3.18.
Changes, outlook, risks and unusual items
- Growth in revenue and NOI primarily reflected acquisitions, property developments placed into service and portfolio transitions. The company reported $898.0 million of acquisitions and joint-venture investments in the first half, and $140.8 million of property-sale proceeds.
- Net income comparisons were affected by property-sale items and discontinued operations: Q2 2014 included a $6.4 million gain on sales of discontinued properties and a separate $6.7 million gain on real estate dispositions. Q2 2013 included a $30.0 million loss on sales of discontinued properties.
- CEO and Chairman George L. Chapman retired effective April 13, 2014. Q2 general and administrative expense included $19.7 million of related charges, comprising accelerated deferred compensation and consulting, retirement and other costs.
- Management said capital markets remained supportive, expected attractive investment opportunities to continue, and believed liquidity sufficient for planned uses, subject to availability and cost of external capital. The filing provides no numerical earnings or FFO guidance.
- Key risks include tenant/operator ability to pay rent and manage operations; changes to Medicare and Medicaid reimbursement and regulation; concentration in major relationships (Sunrise represented 18% and Genesis 12% of investments); access to capital and refinancing costs; and interest-rate and foreign-currency movements. A 1% rate increase was estimated to raise annual interest expense on then-outstanding variable-rate debt by $9.6 million. The filing also disclosed construction commitments, lease obligations, purchase obligations and healthcare-policy exposure.
- The company adopted revised discontinued-operations accounting prospectively in 2014; management said it had no material financial-statement impact. It was evaluating a new revenue-recognition standard effective for it in 2017. Management reported effective disclosure controls; no material risk-factor changes or legal proceedings believed likely to materially affect results were reported.
Important facts for investors to verify
- Separate acquisition-driven growth from underlying same-store performance, particularly the 4% six-month same-store cash NOI increase.
- Review the drivers and repeatability of GAAP earnings, including property-sale gains, the prior-year sale loss, CEO transition costs and higher G&A.
- Assess operator and payer exposure, including Sunrise concentration and possible reimbursement or regulatory changes affecting tenants.
- Check debt maturities, covenant headroom, variable-rate exposure and the terms and subsequent use of the July 2014 credit facility.
- Evaluate the effect of equity issuance and share-count growth on per-share results and dividend coverage; verify that cash generated from operations continues to support distributions and investment plans.