WELL

Business Context and Reporting Period

Company: Health Care REIT, Inc. (Welltower Inc.)
Filing Type: Form 10-K
Reporting Period: Fiscal year ended December 31, 1999

Health Care REIT, Inc. is a self-administered real estate investment trust (REIT) investing primarily in long-term care facilities, including nursing homes and assisted living facilities. As of December 31, 1999, the portfolio consisted of 238 facilities in 34 states managed by 38 operators. Long-term care facilities comprised approximately 90% of the investment portfolio, with assisted living facilities representing 70% of total real estate investments.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 32% to $129.3 million, driven primarily by a $30.7 million increase in operating rent income from new real estate investments.
• Expense Increases: Total expenses rose 50% to $53.7 million. Interest expense increased 49% to $26.9 million due to new senior notes and credit facility borrowings. Depreciation expense increased 76% to $17.9 million due to additional property investments.
• Net Income: Net income available to common shareholders increased 8% to $62.8 million, though diluted EPS decreased slightly from $2.24 to $2.21 due to share count increases.
• Capital Structure: Total debt increased by $120 million. The company issued $50 million in Senior Unsecured Notes and advanced $60 million under a new Secured Credit Facility. Preferred stock dividends increased to $12.8 million following the issuance of Series C preferred stock.

Guidance, Outlook, and Risks

Outlook and Strategy: Management anticipates a restrictive capital environment continuing until the long-term care industry prospects improve. To strengthen the balance sheet and generate liquidity, the company announced a $200 million asset divestiture program in October 1999. Future investments are expected to be funded by asset sales, internal cash, and proceeds from debt or equity offerings.

Liquidity: As of December 31, 1999, the company had $17.5 million available under unsecured lines of credit and $53.4 million in unfunded construction commitments. The company maintains effective shelf registrations for up to $380.3 million in securities.

Risks and Contingencies:

• Regulatory Risk: Revenues are indirectly affected by Medicare and Medicaid reimbursement changes. Recent shifts to prospective payment systems have negatively impacted some operators, leading to bankruptcies in the sector.
• Interest Rate Risk: The company has variable interest rate debt exceeding variable rate assets, creating exposure to rising rates. A 1% increase in rates would decrease the fair value of senior unsecured notes by approximately $11 million.
• Operator Risk: The company faces risks if operators fail to meet rent/interest payments or file for bankruptcy, which could delay liquidation proceeds or require the company to fund property expenses.

Investor Verification Checklist

• Dividend Coverage: Verify that cash available for distribution ($76.9M) continues to cover the required 95% REIT distribution and preferred dividends ($12.8M).
• Asset Divestiture Progress: Monitor the execution of the $200 million asset divestiture program announced in late 1999 to assess liquidity generation.
• Operator Concentration: Review the financial health of the top three operators, which collectively represent approximately 29% of real estate investments.
• Debt Maturities: Assess the refinancing risk for the $290 million in Senior Unsecured Notes and the $177.5 million in line of credit borrowings maturing between 2000 and 2008.
• Regulatory Impact: Track legislative changes to Medicare/Medicaid reimbursement rates that could affect the ability of lessees to pay rent.