WELL

Business Context and Reporting Period

Company: Health Care REIT, Inc. (Welltower Inc.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2007
Business Overview: An equity real estate investment trust (REIT) investing in senior housing and health care real estate. The portfolio is divided into two segments: Investment Properties (single-tenant, triple-net leased facilities) and Operating Properties (medical office buildings and specialty care facilities, primarily acquired via the Windrose Medical Properties Trust merger in December 2006).

Key Financial Metrics (Nine Months Ended Sept 30, 2007)

Per Share Data (Diluted):
- Net Income Available to Common Stockholders: $0.94
- Funds From Operations: $2.30
- Dividends Declared and Paid: $1.6191

Material Changes vs. Prior Comparable Period

• Revenue Growth: Total revenues increased 54% to $354.5 million from $230.3 million in the prior year period. Rental income rose 56% to $332.9 million, driven by new acquisitions and the inclusion of the Windrose operating properties.
• Expense Increases: Total expenses increased 73% to $266.6 million. Interest expense rose 45% to $99.6 million due to higher average borrowings, partially offset by lower rates. Property operating expenses increased to $26.3 million (from $0) due to the Windrose merger.
• Net Income: Net income available to common stockholders increased 15% to $73.5 million. However, diluted earnings per share decreased 10% to $0.94 due to a significant increase in the weighted average number of shares outstanding (78.2 million vs. 61.1 million).
• Investing Activity: Net cash used in investing activities increased 108% to $603.5 million, reflecting $587.7 million in real property investments and $121.3 million in loan financings.

Guidance, Outlook, and Management Commentary

• Investment Outlook: Management expects to complete gross new investments of $1.1 billion to $1.2 billion for the full year 2007, including approximately $850 million to $950 million in acquisitions and $250 million in funded development. Net new investments are projected at $950 million to $1.1 billion.
• Dividend Policy: The quarterly dividend was increased to $0.66 per share, representing the 146th consecutive dividend payment.
• Capital Structure: The company maintains a debt-to-book capitalization ratio of 53% and a debt-to-market capitalization ratio of 40%. Interest coverage ratio is 2.82x and fixed charge coverage ratio is 2.30x.
• Liquidity: As of September 30, 2007, the company had $31.4 million in cash and $1.005 billion in available borrowing capacity under its unsecured line of credit.
• Key Transactions:
  • 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 for net proceeds of $265.3 million.
  • Acquired 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 sale proceeds at comparable yields.

Important Facts for Investor Verification

• Share Count Dilution: Verify the impact of the 29% increase in weighted average shares outstanding on future per-share earnings growth.
• Debt Maturities: Review the $1.15 billion unsecured revolving credit facility maturing in August 2011 and the schedule of senior unsecured notes.
• Construction Commitments: Confirm the status of the $593.4 million in unfunded construction commitments.
• Discontinued Operations: Note the reclassification of certain properties to discontinued operations and the $2.8 million net gain on sales of properties during the period.
• Derivative Instruments: Review the fair value of interest rate swaps ($2.7 million asset) and the impact of hedging activities on future interest expense.