WELL

Business Context and Reporting Period

Company: Health Care REIT, Inc. (Welltower Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2006
Business Overview: A self-administered equity REIT investing in health care and senior housing properties, including independent living, assisted living, skilled nursing, and specialty care facilities. The portfolio consists of 464 facilities across 37 states managed by 57 operators.

Key Financial Metrics (Six Months Ended June 30, 2006)

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 21% to $157.6 million, driven primarily by a 24% increase in rental income due to new property acquisitions.
• Profitability Surge: Net income available to common stockholders rose 161% to $42.3 million compared to $16.2 million in the prior year. This improvement is largely attributable to the absence of an $18.4 million loss on extinguishment of debt recorded in the second quarter of 2005.
• Expense Increases: Interest expense increased 25% and depreciation increased 25% due to a larger asset base and higher average borrowings, though offset by lower average borrowing costs.
• Portfolio Activity: The company completed $220.0 million in gross new investments and $52.9 million in investment payoffs, resulting in net investments of $167.1 million.

Guidance, Outlook, and Risks

Guidance and Outlook

• Investment Guidance: Management increased full-year 2006 investment guidance to a range of $525 million to $600 million (up from $450 million to $550 million).
• Net Investment Target: Anticipates net new investments of $375 million to $500 million for 2006, assuming sales and loan repayments of $100 million to $150 million.
• Dividends: Quarterly dividend increased to $0.64 per share, marking the 141st consecutive dividend payment.

Management Commentary

Management highlighted strong payment coverages in the portfolio (1.93x) and a successful public offering of common stock in April 2006 raising approximately $109.8 million. The company also closed on a new $700 million unsecured revolving credit facility to replace the expiring $500 million facility, extending maturity to July 2009 and reducing facility fees.

Risks and Contingencies

• Operator Risk: Revenue and cash flow depend on operators' ability to make contractual payments. Management monitors this via financial reviews and covenant compliance.
• Interest Rate Risk: The company holds $146 million in variable-rate debt. A 1% increase in rates would increase annual interest expense by approximately $1.46 million.
• Derivative Exposure: Two interest rate swap agreements (notional $100 million) resulted in a $71,000 loss for the six-month period, recorded as an addition to interest expense.
• Construction Commitments: Unfunded construction commitments totaled $260.1 million as of June 30, 2006.

Investor Verification Checklist

• Debt Refinancing: Verify the terms and covenants of the new $700 million credit facility closed in July 2006.
• Operator Concentration: Review the top five operators (Emeritus, Brookdale, Life Care Centers, Merrill Gardens, Tara Cares) which represent a significant portion of the portfolio.
• Loan Portfolio Quality: Confirm the status of $15.3 million in loans currently on non-accrual status and the adequacy of the $6.96 million allowance for loan losses.
• Stock-Based Compensation: Assess the impact of the adoption of SFAS 123(R) on future compensation costs, estimated to increase by $1.3 million for the full year 2006.
• Dividend Coverage: Monitor Funds Available for Distribution (FAD) relative to the $1.26 per share dividend paid in the first half of 2006.