Business Context and Reporting Period
Company: Health Care REIT, Inc. (Welltower Inc.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2008
Business Overview: An equity real estate investment trust (REIT) investing in senior housing and health care real estate, including independent living, assisted living, skilled nursing facilities, and medical office buildings. As of March 31, 2008, the portfolio consisted of 646 properties in 38 states.
Key Financial Metrics
| Metric | Q1 2008 | Q1 2007 |
|---|---|---|
| Total Revenues | $135.9 million | $110.2 million |
| Net Income | $36.6 million | $29.7 million |
| Net Income Available to Common Stockholders | $30.5 million | $23.4 million |
| Earnings Per Share (Diluted) | $0.35 | $0.32 |
| Funds From Operations (FFO) | $69.9 million | $56.2 million |
| Net Operating Income (NOI) | $124.6 million | $105.7 million |
| Cash and Cash Equivalents | $32.3 million | $31.3 million |
| Total Debt | $2.76 billion | $2.70 billion (approx.) |
| Debt to Book Capitalization | 52% | 54% |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 23% year-over-year, driven by a 21% increase in rental income and a 77% increase in interest income due to a larger loan portfolio.
- Profitability: Net income available to common stockholders rose 30% to $30.5 million. This was aided by a $1.3 million gain on the extinguishment of debt.
- Investing Activity: The company invested $168.4 million in real property (acquisitions and construction) and $7.8 million in real estate loans. This compares to $161.7 million and $80.4 million respectively in Q1 2007.
- Financing Activity: Net proceeds from the issuance of common stock were $138.3 million, primarily from a public offering of 3 million shares. Borrowings under the unsecured line of credit increased by $125.5 million.
- Dividends: The quarterly dividend per common share increased to $0.66 from $0.2991 in the prior year period.
Guidance, Outlook, and Risks
- 2008 Investment Outlook: Management expects to complete gross new investments of $1.1 billion to $1.4 billion in 2008, including $700 million to $900 million in acquisitions and $400 million to $500 million in funded development. Net new investments are projected at $700 million to $1.1 billion.
- Liquidity: The company maintains $32.3 million in cash and $717.5 million in available borrowing capacity under its $1.15 billion unsecured line of credit.
- Dividend Policy: The Board increased the quarterly dividend to $0.68 per share (a 2-cent increase), marking the 148th consecutive quarterly payment.
- Risks: Key risks include the financial condition of operators/tenants, changes in Medicare/Medicaid reimbursement rates, interest rate fluctuations, and the ability to access capital markets. The company holds $18.8 million in fair value liability related to interest rate swap agreements.
Investor Verification Checklist
- Debt Covenants: Verify compliance with financial ratios (Interest Coverage: 2.87x; Fixed Charge Coverage: 2.38x) required by debt agreements.
- Customer Concentration: Review the top five customers, which represent 27% of total investments and 31% of revenue (Emeritus, Signature Healthcare, Brookdale, Life Care Centers, Senior Living Communities).
- Loan Portfolio Quality: Confirm the status of the $7.4 million allowance for loan losses and the $6.8 million in loans on non-accrual status.
- Construction Commitments: Assess the $757.6 million in committed financing required to complete ongoing construction projects.
- Derivative Exposure: Monitor the fair value of the $250 million notional interest rate swaps designated as cash flow hedges.