WELL

Business Context and Reporting Period

Company: Health Care REIT, Inc. (d/b/a Welltower Inc.)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2003
Business Overview: The company invests in health care-related real estate, including 162 assisted living facilities, 78 skilled nursing facilities, and eight specialty care facilities. It also provides mortgage financing and subdebt investments.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 28% to $46.3 million, driven primarily by a 42% increase in rental income ($40.8 million) due to property acquisitions. This was partially offset by a 27% decline in interest income ($4.9 million) due to loan repayments.
• Expense Increases: Total expenses rose 30% to $27.0 million. Interest expense increased 25% due to higher average borrowings, and depreciation increased 41% due to additional property investments.
• Profitability: Net income available to common stockholders increased 31% year-over-year, with diluted EPS rising from $0.37 to $0.41.
• Discontinued Operations: The company reclassified income from properties sold subsequent to January 1, 2002, to discontinued operations. This resulted in a net loss of $6,000 for Q1 2003 compared to income of $665,000 in Q1 2002.
• Liquidity: Cash and cash equivalents increased significantly from $9.6 million at year-end 2002 to $33.9 million at March 31, 2003, aided by the issuance of $100 million in senior notes.

Guidance, Outlook, Risks, and Unusual Items

Capital Markets and Financing

In March 2003, the company sold $100 million of 8.0% unsecured senior notes maturing in September 2012. The company maintains an effective shelf registration for up to $285.6 million in securities. Management anticipates using proceeds from asset sales, internal cash, and capital markets to fund future investments and repay revolving credit facilities.

Contingencies and Risks

• Bankruptcy Filings:
  • Doctors Community Health Care Corporation: Filed for Chapter 11 bankruptcy in November 2002. The company holds a secured loan of approximately $18.8 million. While the borrower missed an interest payment in Q1 2003, management expects full repayment by December 31, 2003, based on the property's oversecured status.
  • Alterra Healthcare Corporation: Filed for Chapter 11 in January 2003. The company holds a master lease for 45 facilities with a book value of $105.6 million. Alterra has remained current on payments and intends to assume the lease at current levels.
• Guarantees: The company is contingently liable for approximately $3.2 million in industrial revenue bonds and $4.7 million in letters of credit/guarantees related to specific projects.
• Unfunded Commitments: Approximately $36.5 million in unfunded construction commitments as of March 31, 2003.

Forward-Looking Statements

Management notes that future results depend on economic conditions, capital market access, and regulatory changes in the health care industry. There is no specific numerical guidance provided for the full year 2003.

Investor Verification Checklist

• Debt Service Coverage: Verify the company's ability to service $740.8 million in debt while maintaining dividend payments ($0.585 per share).
• Bankruptcy Exposure: Monitor the resolution of the Doctors Community Health Care Corporation bankruptcy and the status of the $18.8 million secured loan.
• Alterra Lease Assumption: Confirm the confirmation of Alterra Healthcare's reorganization plan and the assumption of the master lease by September 30, 2003.
• Capitalization Strategy: Assess the company's ability to replace short-term revolving credit borrowings with long-term fixed-rate debt or equity as planned.
• Construction Commitments: Review the funding requirements for the $36.5 million in unfunded construction commitments.