WELL

Business Context and Reporting Period

Company: Health Care REIT, Inc. (Welltower Inc.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2007
Business Overview: A self-administered equity REIT investing in senior housing and health care real estate. The portfolio includes skilled nursing facilities, assisted living, independent living/CCRCs, medical office buildings, and specialty care facilities. The company operates through two segments: Investment Properties (primarily triple-net leases) and Operating Properties (medical office buildings).

Key Financial Metrics (Six Months Ended June 30, 2007)

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 51% to $231.1 million from $153.2 million in the prior year period. Rental income rose 52% to $216.7 million, driven by new property acquisitions and the inclusion of the Windrose Medical Properties Trust merger results.
• Net Income: Net income available to common stockholders increased 16% to $49.0 million from $42.3 million. However, diluted earnings per share (EPS) decreased 9% to $0.64 from $0.70 due to a significant increase in the weighted average number of shares outstanding.
• Expense Increases: Interest expense rose 43% to $65.1 million due to higher average borrowings. General and administrative expenses increased 83% to $19.7 million, largely due to $1.75 million in one-time acquisition finder's fees related to the Rendina/Paramount transaction.
• Investing Activity: Net cash used in investing activities surged 241% to $445.1 million, reflecting $411.9 million in real property investments and $89.9 million in loan advances.

Guidance, Outlook, and Management Commentary

• Investment Outlook: Management expects to complete gross new investments of $1.0 billion to $1.2 billion in 2007, including $750 million to $950 million in acquisitions and $250 million in funded development. Net new investments are projected at $800 million to $1.1 billion.
• Dividends: The quarterly dividend was increased to $0.66 per share, representing the 145th consecutive dividend payment.
• Capital Markets Activity:
  • Issued $400 million of 4.75% convertible senior unsecured notes in July 2007.
  • Completed a public offering of 6.3 million common shares in April 2007, raising approximately $265.6 million net.
  • Expanded unsecured revolving credit facility to $1.15 billion in August 2007, extending maturity to 2011 and reducing borrowing costs from 80 to 60 basis points over LIBOR.
• Acquisitions: Completed the acquisition of 17 medical office buildings and Paramount Real Estate Services from Rendina Companies for approximately $294.5 million in May 2007.
• Risks: Primary risks include the financial condition of operators/tenants, changes in Medicare/Medicaid reimbursement rates, interest rate fluctuations, and the ability to reinvest proceeds from asset sales at comparable yields.

Key Facts for Investor Verification

• Share Count Dilution: Verify the impact of the April 2007 equity offering and dividend reinvestment plan on the weighted average shares outstanding, which contributed to the decline in EPS despite higher net income.
• One-Time Expenses: Confirm the treatment of the $1.75 million acquisition finder's fee expensed in Q2 2007 and its impact on GAAP net income versus FFO.
• Debt Maturity Profile: Review the $364.4 million outstanding on unsecured lines of credit and the recent refinancing to the $1.15 billion facility to assess liquidity and interest rate exposure.
• Discontinued Operations: Note the reclassification of certain assisted living and skilled nursing facilities to discontinued operations and the associated gains on sales ($2.0 million for the six months).
• Construction Commitments: Verify the $431.1 million in unfunded construction commitments as of June 30, 2007, which represent future cash outflows.