10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM              TO             

Commission file number: 1-10989

Ventas, Inc.

(Exact name of registrant as specified in its charter)

Delaware	61-1055020
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

10350 Ormsby Park Place, Suite 300

Louisville, Kentucky

(Address of principal executive offices)

40223

(Zip Code)

(502) 357-9000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x                    Accelerated filer  ¨                    Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class of Common Stock:	Outstanding at July 24, 2006:
Common Stock, $0.25 par value	104,014,124 shares

VENTAS, INC.

FORM 10-Q

INDEX

		Page
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005	3
	Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2006 and 2005	4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	37
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	38
Item 4.	Submission of Matters to a Vote of Security Holders	38
Item 6.	Exhibits	39

2

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VENTAS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

	June 30, 2006			December 31, 2005
	(Unaudited)			(Audited)
Assets
Real estate investments:
Land	$	300,384		$	295,363
Building and improvements		2,801,550			2,732,533
		3,101,934			3,027,896
Accumulated depreciation		(598,644	)		(541,346	)
Net real estate property		2,503,290			2,486,550
Loans receivable, net		35,800			39,924
Net real estate investments		2,539,090			2,526,474
Cash and cash equivalents		1,932			1,641
Escrow deposits and restricted cash		51,227			59,667
Deferred financing costs, net		17,667			17,581
Notes receivable - related parties		2,501			2,841
Other		48,555			30,914
Total assets	$	2,660,972		$	2,639,118
Liabilities and stockholders’ equity
Liabilities:
Senior notes payable and other debt	$	1,882,909		$	1,802,564
Deferred revenue		9,374			10,540
Accrued dividend		—			37,343
Accrued interest		14,461			14,418
Accounts payable and accrued and other liabilities		73,838			76,540
Deferred income taxes		30,394			30,394
Total liabilities		2,010,976			1,971,799
Commitments and contingencies
Stockholders’ equity:
Preferred stock, 10,000 shares authorized, unissued		—			—
Common stock, $0.25 par value; 180,000 shares authorized; 103,975 and 103,523 shares issued at June 30, 2006 and December 31, 2005, respectively		26,004			25,927
Capital in excess of par value		696,667			692,650
Unearned compensation on restricted stock		—			(713	)
Accumulated other comprehensive income (loss)		1,449			(143	)
Retained earnings (deficit)		(74,124	)		(50,402	)
Total stockholders’ equity		649,996			667,319
Total liabilities and stockholders’ equity	$	2,660,972		$	2,639,118

See notes to condensed consolidated financial statements.

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VENTAS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share amounts)

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2006		2005			2006		2005
Revenues:
Rental income	$	99,095	$	72,340		$	195,600	$	134,876
Interest income from loans receivable		839		1,492			1,807		2,144
Interest and other income		372		1,120			713		1,732
Total revenues		100,306		74,952			198,120		138,752
Expenses:
Interest		33,723		22,730			66,680		39,706
Depreciation		29,111		18,239			57,581		31,459
Property-level operating expenses		654		641			1,276		1,193
General, administrative and professional fees (including non-cash stock-based compensation expense of $727 and $506 for the three months ended 2006 and 2005, respectively, and $1,485 and $926 for the six months ended 2006 and 2005, respectively)		6,287		6,059			12,918		11,499
Loss on extinguishment of debt		1,273		—			1,273		—
Total expenses		71,048		47,669			139,728		83,857
Income before net loss on real estate disposals and discontinued operations		29,258		27,283			58,392		54,895
Net loss on real estate disposals		—		(175	)		—		(175	)
Income before discontinued operations		29,258		27,108			58,392		54,720
Discontinued operations		—		(40	)		—		(79	)
Net income	$	29,258	$	27,068		$	58,392	$	54,641
Earnings per common share:
Basic:
Income before discontinued operations	$	0.28	$	0.31		$	0.56	$	0.63
Net income	$	0.28	$	0.31		$	0.56	$	0.63
Diluted:
Income before discontinued operations	$	0.28	$	0.30		$	0.56	$	0.63
Net income	$	0.28	$	0.30		$	0.56	$	0.63
Shares used in computing earnings per common share:
Basic		103,884		88,574			103,818		86,626
Diluted		104,374		89,350			104,337		87,386
Dividends declared per common share	$	0.395	$	0.360		$	0.790	$	0.720

See notes to condensed consolidated financial statements.

4

VENTAS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	For the Six Months Ended June 30,
	2006			2005
Cash flows from operating activities:
Net income	$	58,392		$	54,641
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation (including amounts in discontinued operations)		57,581			31,551
Amortization of deferred financing costs		1,542			1,835
Stock-based compensation		1,485			926
Straight-lining of rental income		(9,864	)		(2,834	)
Loss on extinguishment of debt		1,273			—
Amortization of deferred revenue		(1,198	)		(1,320	)
Other		(140	)		(1,448	)
Changes in operating assets and liabilities:
(Increase) decrease in escrow deposits and restricted cash		(977	)		6,211
Increase in other assets		(2,426	)		(9,263	)
Increase in accrued interest		43			4,457
(Decrease) increase in accounts payable and accrued and other liabilities		(468	)		15,426
Net cash provided by operating activities		105,243			100,182
Cash flows from investing activities:
Net investment in real estate property		(64,211	)		(481,780	)
Investment in loans receivable		—			(47,333	)
Proceeds from loans receivable		4,156			1,759
Escrow funds returned from an Internal Revenue Code Section 1031 exchange		9,902			—
Other		(5,246	)		2,510
Net cash used in investing activities		(55,399	)		(524,844	)
Cash flows from financing activities:
Net change in borrowings under unsecured revolving credit facility		167,000			—
Net change in borrowings under secured revolving credit facility		(89,200	)		117,400
Proceeds from debt		2,074			400,000
Repayment of debt		(10,377	)		(6,844	)
Payment of deferred financing costs		(2,901	)		(6,599	)
Issuance of common stock		428			4,694
Proceeds from stock option exercises		2,880			2,036
Cash distributions to stockholders		(119,457	)		(88,588	)
Net cash (used in) provided by financing activities		(49,553	)		422,099
Net increase (decrease) in cash and cash equivalents		291			(2,563	)
Cash and cash equivalents at beginning of period		1,641			3,365
Cash and cash equivalents at end of period	$	1,932		$	802
Supplemental schedule of non-cash activities:
Assets and liabilities assumed from acquisitions:
Real estate investments	$	9,827		$	866,244
Escrow deposits and restricted cash		485			32,452
Other assets acquired		—			1,506
Debt		10,848			478,950
Other liabilities		(536	)		28,426
Issuance of common stock		—			392,826

See notes to condensed consolidated financial statements.

5

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – DESCRIPTION OF BUSINESS

Ventas, Inc. (together with its subsidiaries, unless otherwise indicated or except where the context otherwise requires, “we,” “us” or “our”) is a healthcare real estate investment trust (“REIT”) with a geographically diverse portfolio of healthcare-related and seniors housing facilities in the United States. As of June 30, 2006, this portfolio consisted of 200 skilled nursing facilities, 41 hospitals and 147 seniors housing and other healthcare-related facilities in 42 states. Except with respect to our medical office buildings, we lease these facilities to healthcare operating companies under “triple-net” or “absolute net” leases, which require the tenants to pay all property-related expenses. We also had real estate loan investments relating to seven healthcare-related and seniors housing facilities as of June 30, 2006.

We conduct substantially all of our business through our wholly owned subsidiaries, Ventas Realty, Limited Partnership (“Ventas Realty”) and PSLT OP, L.P. (“PSLT OP”), and ElderTrust Operating Limited Partnership (“ETOP”), in which we own substantially all of the partnership units.

NOTE 2 – BASIS OF PRESENTATION

The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim period have been included. Operating results for the three- and six-month periods ended June 30, 2006 are not necessarily an indication of the results that may be expected for the year ending December 31, 2006. The Condensed Consolidated Balance Sheet as of December 31, 2005 has been derived from our audited consolidated financial statements for the year ended December 31, 2005. The accompanying Condensed Consolidated Financial Statements and related notes should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2005. Certain prior period amounts have been reclassified to conform to current period presentation.

We operate through one reportable segment: investment in real estate. Our primary business consists of financing, owning and leasing healthcare-related and seniors housing facilities and leasing or subleasing those facilities to third parties. With the exception of our medical office buildings, we do not operate our facilities nor do we allocate capital to maintain our properties. Substantially all depreciation and interest expenses reflected in the condensed consolidated statements of income relate to our investment in real estate.

Recently Adopted Accounting Standards

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”), which is a revision to SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). SFAS No. 123(R) supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB Opinion No. 25”). Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123, except that SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative under SFAS No. 123(R). We adopted SFAS No. 123(R) on January 1, 2006. See “Note 6—Stock-Based Compensation.”

Gain on Sale of Facilities

We recognize sales of facilities only upon the closing of the transaction with the purchaser. Payments received from purchasers prior to closing are recorded as deposits and classified as other assets in the consolidated balance sheet. Gains on facilities sold are recognized using the full accrual method upon closing when the collectibility of the sales price is reasonably assured, we are not obligated to perform significant activities after the sale to earn the profit, we have received adequate initial investment from the buyer, and other profit recognition criteria have been satisfied. Gains may be deferred in whole or in part until the sales satisfy the requirements of gain recognition on sales of real estate under SFAS No. 66, “Accounting for Sales of Real Estate.”

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NOTE 3 – CONCENTRATION OF CREDIT RISK

As of June 30, 2006, approximately 44.7% and 32.8% of our properties, based on their original cost, were operated by Brookdale Senior Living Inc. (together with its subsidiaries, “Brookdale Senior Living”) and Kindred Healthcare, Inc. (together with its subsidiaries, “Kindred”), respectively, and approximately 60.5% and 26.9% of our properties, based on their original cost, were seniors housing facilities and skilled nursing facilities, respectively. Our remaining properties consist of hospitals, medical office buildings and other healthcare-related facilities. Our facilities are located in 42 states, with facilities in only two states accounting for more than 10% of total revenues during the six months ended June 30, 2006.

Approximately 51.4% and 70.9% of our total revenues for the six months ended June 30, 2006 and 2005, respectively, were derived from our master lease agreements with Kindred (the “Kindred Master Leases”). Each Kindred Master Lease is a triple-net lease pursuant to which Kindred is required to pay all insurance, taxes, utilities, maintenance and repairs related to the properties. There are several renewal bundles of properties under each Kindred Master Lease, with each bundle containing a varying number of properties. All properties within a bundle have primary terms ranging from ten to fifteen years from May 1, 1998 and, provided certain conditions are satisfied, are subject to three five-year renewal terms.

In June 2005, we completed the acquisition of Provident Senior Living Trust (“Provident”) (see “Note 4—Acquisitions”), which leased all of its properties to affiliates of Brookdale Senior Living. As a result of this acquisition, Brookdale Senior Living became a significant source of our total revenues. Approximately 30.9% of our total revenues for the six months ended June 30, 2006 was derived from our lease agreements with Brookdale Senior Living, including facilities we acquired in early 2004 from Brookdale Living Communities, Inc. (together with its subsidiaries, “Brookdale”), which is now a subsidiary of Brookdale Senior Living.

Because we lease a substantial portion of our properties to Kindred and Brookdale Senior Living and they are each a significant source of our total revenues, their financial condition and ability and willingness to satisfy their obligations under their respective leases and certain other agreements with us will significantly impact our revenues and our ability to service our indebtedness and to make distributions to our stockholders. We cannot assure you that Kindred or Brookdale Senior Living will have sufficient assets, income and access to financing to enable it to satisfy its obligations under its respective leases and other agreements with us, and any inability or unwillingness on its part to do so would have a material adverse effect on our business, financial condition, results of operation and liquidity, on our ability to service our indebtedness and on our ability to make distributions to our stockholders, as required to maintain our status as a REIT.

Kindred and Brookdale Senior Living are subject to the reporting requirements of the Securities and Exchange Commission (the “Commission”) and are required to file with the Commission annual reports containing audited financial information and quarterly reports containing unaudited interim financial information. The information related to Kindred and Brookdale Senior Living contained or referred to in this Quarterly Report on Form 10-Q is derived from filings made by Kindred or Brookdale Senior Living, as the case may be, with the Commission or other publicly available information, or has been provided to us by Kindred or Brookdale Senior Living. We have not verified this information either through an independent investigation or otherwise. We have no reason to believe that such information is inaccurate in any material respect, but we cannot assure you that all such information is accurate. Kindred’s and Brookdale Senior Living’s filings with the Commission can be found at the Commission’s website at www.sec.gov. We are providing this data for informational purposes only, and you are encouraged to obtain Kindred’s and Brookdale Senior Living’s publicly available filings from the Commission.

NOTE 4 – ACQUISITIONS

The primary reason for our acquisition activity is to invest in healthcare-related and seniors housing properties with an expected yield on investment, as well as to diversify our portfolio and revenue base and limit our dependence on any one single tenant for rental revenue.

2006 Acquisitions

During the three months ended June 30, 2006, we acquired three seniors housing facilities for an aggregate purchase price of $26.0 million, with assumed debt of $10.8 million, in two separate transactions. The purchase price was allocated between land and buildings of $2.2 million and $23.8 million, respectively, based upon their estimated fair values. Such estimates are subject to refinement as additional valuation information is received. The buildings are being depreciated over their estimated useful lives, which were determined to be 35 years. The facilities are leased under triple-net leases, each having initial terms ranging from nine to fourteen years and initially providing aggregate, annual cash base rent of $2.1 million, subject to escalation as provided in the leases.

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During the first quarter of 2006, we acquired five seniors housing facilities for an aggregate purchase price of $48.3 million, with no assumed debt, in three separate transactions. The purchase price was allocated between land and buildings of $2.8 million and $45.5 million, respectively, based upon their estimated fair values. Such estimates are subject to refinement as additional valuation information is received. The buildings are being depreciated over their estimated useful lives, which were determined to be 35 years. The facilities are leased under triple-net leases, each having initial terms ranging from nine to fourteen years and initially providing aggregate, annual cash base rent of $4.0 million, subject to escalation as provided in the leases.

Provident

In June 2005, we completed the acquisition of Provident in a transaction valued at approximately $1.2 billion. Provident was formed as a Maryland real estate investment trust in March 2004 and owned seniors living properties located in the United States. Pursuant to the Provident acquisition, we acquired 68 independent and assisted living facilities in 19 states comprised of approximately 6,819 residential living units, all of which are currently leased to affiliates of Brookdale Senior Living pursuant to triple-net leases with renewal options. As of June 30, 2006, the aggregate annualized contractual cash rent from the Provident properties was approximately $88.5 million.

We funded the cash portion of the purchase price for the Provident acquisition, which was approximately $231.0 million, and repaid all outstanding borrowings under Provident’s credit facility at closing from a combination of net proceeds from the sale of $350.0 million aggregate principal amount of senior notes and borrowings under our revolving credit facility. Additionally, we issued approximately 15.0 million shares of our common stock and share equivalents to Provident equity holders as part of the purchase price for the Provident acquisition. We also assumed approximately $459.4 million of property-level mortgage debt. On its May 1, 2006 maturity, we paid off one of these assumed mortgages. At the time of maturity, the outstanding principal of this debt was $5.1 million and the interest rate was LIBOR plus 2.5%, or 7.4%.

Other 2005 Acquisitions

During 2005, we acquired 23 seniors housing facilities, an adjacent parcel of land and one hospital for an aggregate purchase price of $278.2 million, including assumed debt of $74.4 million at the time of the acquisitions. The seniors housing facilities and the hospital are leased under triple-net leases, each having initial terms ranging from ten to fifteen years and initially providing aggregate, annual cash base rent of approximately $23.9 million, subject to escalation as provided in the leases.

Also during 2005, we acquired three medical office buildings for an aggregate purchase price of $13.0 million, including assumed debt of $7.3 million at the time of the acquisitions. These buildings are leased to various tenants under leases having various remaining terms and initially providing aggregate, annual cash base rent of approximately $1.7 million, subject to escalation as provided in the leases. We have engaged third parties to manage the operations at these medical office buildings.

8

Pro Forma

The following table illustrates the effect on net income and earnings per share as if we had consummated our 2006 and 2005 acquisitions and our July 2005 public offering of common stock as of the beginning of each of the three-and six-month periods ended June 30, 2006 and 2005:

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2006		2005		2006		2005
Revenues	$	100,621	$	99,201	$	199,949	$	196,391
Expenses		71,443		73,028		141,937		142,391
Income before discontinued operations		29,178		25,999		58,012		53,825
Net income		29,178		25,959		58,012		53,746
Earnings per common share:
Basic:
Income before discontinued operations	$	0.28	$	0.25	$	0.56	$	0.52
Net income	$	0.28	$	0.25	$	0.56	$	0.52
Diluted:
Income before discontinued operations	$	0.28	$	0.25	$	0.56	$	0.52
Net income	$	0.28	$	0.25	$	0.56	$	0.52
Shares used in computing earnings per common share:
Basic		103,884		103,029		103,818		102,966
Diluted		104,374		103,805		104,337		103,726

NOTE 5 – SENIOR NOTES PAYABLE AND OTHER DEBT

Unsecured Credit Facility

In April 2006, we entered into a $500 million senior unsecured revolving credit facility (the “Unsecured Credit Facility”). The Unsecured Credit Facility replaced our previous $300 million secured revolving credit facility. The Unsecured Credit Facility matures in 2009, with a one-year extension option subject to the satisfaction of certain conditions, and contains a $100 million “accordion feature” that permits us to increase our total borrowing capacity to $600 million.

Generally, borrowings outstanding under the Unsecured Credit Facility bear interest at a fluctuating LIBOR-based rate per annum plus an applicable percentage based on our consolidated leverage, initially 0.75%. Our previous secured credit facility also bore interest at a fluctuating LIBOR-based rate per annum plus an applicable percentage. The applicable percentage for the previous secured credit facility was 1.45% from January 1, 2006 until its replacement in April.

We recognized a loss on extinguishment of debt in the amount of $1.3 million representing the write-off of unamortized deferred financing costs related to our previous secured credit facility during the second quarter of 2006.

NOTE 6 – STOCK-BASED COMPENSATION

Compensation Plans

We have seven plans under which options to purchase common stock and/or shares of restricted stock have been, or may be, granted to officers, employees and non-employee directors, one plan under which executive officers may receive common stock in lieu of compensation and two plans under which certain directors may receive common stock in lieu of director fees (the following are collectively referred to as the “Plans”): (1) the 1987 Incentive Compensation Program (Employee Plan); (2) the 2000 Incentive Compensation Plan (Employee Plan); (3) the 1987 Stock Option Plan for Non-Employee Directors; (4) the 2004 Stock Plan for Directors; (5) the TheraTx, Incorporated 1996 Stock Option/Stock Issuance Plan; (6) the Executive Deferred Stock Compensation Plan; (7) the Common Stock Purchase Plan for Directors (the “Directors Stock Purchase Plan”); (8) the Nonemployee Director Deferred Stock Compensation Plan; (9) the 2006 Incentive Plan; and (10) the 2006 Stock Plan for Directors.

New option and restricted stock grants and stock issuances may only be made under the 2000 Incentive Compensation Plan (Employee Plan), the Executive Deferred Stock Compensation Plan, the 2004 Stock Plan for Directors, the Directors Stock Purchase Plan, the Nonemployee Director Deferred Stock Compensation Plan, the 2006 Incentive Plan and the 2006

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Stock Plan for Directors. No additional grants are permitted under the 1987 Incentive Compensation Program (Employee Plan), the 1987 Stock Option Plan for Non-Employee Directors or the TheraTx, Incorporated 1996 Stock Option/Stock Issuance Plan.

Under the Plans (other than the Executive Deferred Stock Compensation Plan, the Directors Stock Purchase Plan and the Nonemployee Director Deferred Stock Compensation Plan), options are exercisable at the market price on the date of grant, expire ten years from the date of grant, and vest over varying periods ranging from one to four years. As of June 30, 2006, options for 1,374,642 shares had been granted to eligible participants and remained outstanding under the Plans.

We have also granted options and restricted stock to certain officers, employees and non-employee directors outside of the Plans. These options and shares of restricted stock vest over varying periods, and the options are exercisable at the market price on the date of grant and expire ten years from the date of grant. As of June 30, 2006, options for 38,000 shares had been granted outside of the Plans to certain employees and non-employee directors and remained outstanding.

Prior to January 1, 2006, we accounted for the Plans under the recognition and measurement provisions of APB Opinion No. 25, as permitted by SFAS No. 123. Consequently, no stock-based compensation cost relating to stock options was recognized in our consolidated statement of income for any period prior to 2006, as all options granted under the Plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2006, we adopted the fair value provisions for share-based awards pursuant to SFAS No. 123(R), using the modified-prospective transition method. Under that transition method, compensation cost recognized in 2006 includes: (i) compensation cost for all share-based awards granted prior to, but not yet vested as of January 1, 2006, based on the attribution method and grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (ii) compensation cost for all share-based awards granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R), all recognized on a straight-line basis as the requisite service periods are rendered. Results for prior periods have not been restated.

The adoption of SFAS No. 123(R) on January 1, 2006 caused our net income for the three and six months ended June 30, 2006 to be approximately $222,000 and $463,000, respectively, lower than if we had continued to account for stock-based compensation under APB Opinion No. 25. The adoption had no impact on basic and diluted earnings per share as reported for the three months ended June 30, 2006 or diluted earnings per share for the six months ended June 30, 2006, but did cause basic earnings per share to be $0.01 lower for the six months ended June 30, 2006.

The following table illustrates the effect on net income and earnings per share for the three and six months ended June 30, 2005, as if we had applied the fair value recognition provisions of SFAS No. 123(R) to all stock-based compensation granted under equity award plans for awards granted prior to June 30, 2005 (in thousands, except per share amounts):

	For the Three Months Ended June 30, 2005			For the Six Months Ended June 30, 2005
Net income, as reported	$	27,068		$	54,641
Add: Stock-based employee compensation expense included in reported net income		506			926
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards		(627	)		(1,204	)
Pro forma net income	$	26,947		$	54,363
Earnings per share:
Basic – as reported	$	0.31		$	0.63
Basic – pro forma	$	0.30		$	0.63
Diluted – as reported	$	0.30		$	0.63
Diluted – pro forma	$	0.30		$	0.62

We granted 77,494 shares of restricted stock and restricted stock units during the six months ended June 30, 2006. The market value of shares of restricted stock and restricted stock units on the date of the award is recognized as stock-based compensation expense over the vesting period, with charges to operations of $1,022,000 and $926,000 for the six months ended June 30, 2006 and 2005, respectively. As required upon the adoption of SFAS No. 123(R), the contra equity balance in unearned compensation on restricted stock of approximately $713,000 as of January 1, 2006 was reclassified (i.e. netted against capital in excess of par value) in our Condensed Consolidated Balance Sheet as of June 30, 2006.

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Stock Options

In determining the estimated fair value of our stock options as of the date of grant, we used the Black-Scholes option pricing model with the following assumptions:

	2006		2005
Risk-free interest rate	4.57	%	4.50	%
Dividend yield	4.95	%	6.61	%
Volatility factors of the expected market price for our common stock	15.00	%	20.29	%
Weighted average expected life of options	6.5 years		10 years

The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because our employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in our opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options.

The following tables summarize stock option activity during the six months ended June 30, 2006 and the year ended December 31, 2005:

2006 Activity	Shares		Range of Exercise Prices				Weighted Average Exercise Price
Outstanding at beginning of period	1,341,420		$	3.31 -	$	27.09	$	18.26
Options granted	320,033			30.83 -		32.78		30.97
Options exercised	(226,958	)		11.42 -		25.44		12.61
Options canceled	(21,853	)		16.54 -		30.83		23.25
Outstanding at end of period	1,412,642		$	3.31 -	$	32.78	$	21.97
Exercisable at end of period	1,092,350		$	3.31 -	$	32.02	$	19.95

2005 Activity	Shares		Range of Exercise Prices				Weighted Average Exercise Price
Outstanding at beginning of year	1,617,769		$	3.31 -	$	25.17	$	14.18
Options granted	338,128			24.93 -		27.09		25.27
Options exercised	(606,444	)		6.75 -		25.17		11.24
Options canceled	(8,033	)		13.74 -		25.44		22.46
Outstanding at end of year	1,341,420		$	3.31 -	$	27.09	$	18.26
Exercisable at end of year	992,778		$	3.31 -	$	27.09	$	16.11

NOTE 7 – LITIGATION

Legal Proceedings Presently Defended and Indemnified by Third Parties

The following litigation arose from our operations prior to the time of our spin off of Kindred in May 1998 or relates to assets or liabilities transferred to Kindred in connection with the spin off. Pursuant to the agreements we entered into with Kindred at the time of the spin off, Kindred assumed the defense, on our behalf of the matter described below, among others, and has indemnified us for any fees, costs, expenses and liabilities related to this matter (the “Indemnification”). Under Kindred’s plan of reorganization, Kindred assumed and agreed to abide by the Indemnification and to defend us in this and other matters as required under the spin agreements. However, there can be no assurance that Kindred will continue to defend us in such matters or that Kindred will have sufficient assets, income and access to financing to enable it to satisfy such obligations or its other obligations incurred in connection with the spin off. In addition, the following description is based primarily on information included in Kindred’s public filings and information provided to us by Kindred. There can be no assurance that Kindred has included in its public filings and provided us complete and accurate information in all instances.

A stockholder derivative suit entitled Thomas G. White on behalf of Ventas, Inc. v. W. Bruce Lunsford, et al., Case No. 98 C103669, was filed in June 1998 in the Circuit Court of Jefferson County, Kentucky. The complaint alleges, among other things, that certain former officers and directors damaged our company by engaging in breaches of fiduciary duty, insider trading, fraud and securities fraud and damaging our reputation. The suit seeks unspecified damages, interest, punitive

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damages, reasonable attorneys’ fees, other costs, and any extraordinary equitable and/or injunctive relief permitted by law or equity to assure the plaintiff has an effective remedy. We believe the allegations in the complaint are without merit. In September 2003, Kindred filed a motion to dismiss this action as to all defendants, including us, based on plaintiff’s failure to make demand for remedy upon the appropriate Board of Directors. On July 26, 2005, the Court granted Kindred’s motion and dismissed this action in its entirety. The plaintiff has appealed to the Kentucky Court of Appeals, and the parties have completed their briefing. Kindred has indicated that it intends to continue to defend this action vigorously on our behalf. We are unable at this time to estimate the possible loss or range of loss for this action and, therefore, no provision for liability, if any, resulting from this litigation has been made in our Condensed Consolidated Financial Statements as of June 30, 2006.

Kindred and certain subsidiaries of Brookdale Senior Living are also parties to certain legal actions and regulatory investigations arising in the normal course of their business. There can be no assurance that the resolution of any litigation or investigations, either individually or in the aggregate, would not have a material adverse effect on Kindred’s or such subsidiaries’ liquidity, financial position or results of operations, which in turn could have a material adverse effect on us.

Kindred Litigation

On May 12, 2006, we sent notice to Kindred and its lenders demanding to receive all of Kindred’s appraisal reports regarding our facilities under a provision of the Kindred Master Leases that requires Kindred to provide Ventas with all “Facility specific…reports [and/or] studies” in Kindred’s possession or control. In a June 14, 2006 letter to Kindred, our counsel stated that it has advised us that an Event of Default by Kindred has occurred under the Kindred Master Leases on account of Kindred’s failure to deliver these reports within the time outlined in the Kindred Master Leases. On June 19, 2006, Kindred filed a lawsuit against us in the Supreme Court of the State of New York, County of New York, entitled Kindred Healthcare, Inc. and Kindred Healthcare Operating, Inc. v. Ventas Realty, Limited Partnership, Index No. 602137-06, seeking immediate declaratory and injunctive relief to prevent us from terminating the Kindred Master Leases based on Kindred’s refusal to deliver all appraisal reports in Kindred’s control or possession relating to the 225 facilities we lease to Kindred. The suit alleges, among other things, that the terms of the Kindred Master Leases do not entitle us to receive the appraisal reports and, therefore, Kindred’s failure to disclose those reports does not enable us to exercise our rights and remedies under the Kindred Master Leases, including termination as to one or more facilities thereunder. The parties entered into a stipulation on June 19, 2006 agreeing that Kindred would not pursue its motions for emergency injunctive relief and we would not take any further action to terminate any Kindred Master Leases in whole or in part or declare an Event of Default under any of the Kindred Master Leases for failure to deliver the appraisal reports, in each case generally while the stipulation was in effect. On July 20, 2006, the Court issued an order denying Kindred’s motions for a preliminary injunction or other injunctive relief. The Court order directed Kindred to supply to us all documents that Kindred produced to its appraisers, directed Kindred to produce other information, including its inter-company pharmacy and therapy contracts, and directed Kindred’s appraisers to create an inventory of all documents used in the appraisal reports and deliver the documents and inventories to us. The Court did not order Kindred to turn over any of the appraiser reports noting that we would receive them as part of the Reset Right process. No provision for liability resulting from this litigation has been made in our Condensed Consolidated Financial Statements as of June 30, 2006.

Other Litigation

We are a plaintiff in an action seeking a declaratory judgment and damages entitled Ventas Realty, Limited Partnership et al. v. Black Diamond CLO 1998-1 Ltd., et al., Case No. 99C107076, filed November 22, 1999 in the Circuit Court of Jefferson County, Kentucky. Two of the three defendants in that action, Black Diamond International Funding, Ltd. and BDC Finance, LLC (collectively, “Black Diamond”), have asserted counterclaims against us under theories of breach of contract, tortious interference with contract and abuse of process. We dispute the material allegations contained in Black Diamond’s counterclaims and we intend to continue to pursue our claims and defend the counterclaims vigorously. There were no material developments in this action during the six-month period ended June 30, 2006. We are unable at this time to estimate the possible loss or range of loss for the counterclaims in this action, and therefore, no provision for liability, if any, resulting from this litigation has been made in our Condensed Consolidated Financial Statements as of June 30, 2006.

We are party to various other lawsuits arising in the normal course of our business. It is the opinion of management that, except as set forth in this Note 7, the disposition of these lawsuits will not, individually or in the aggregate, have a material adverse effect on us. If management’s assessment of our liability with respect to these actions is incorrect, such lawsuits could have a material adverse effect on us.

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NOTE 8 – COMMITMENTS AND CONTINGENCIES

Assumption of Certain Operating Liabilities and Litigation

In connection with our spin off of Kindred, Kindred agreed, among other things, to assume all liabilities and to indemnify, defend and hold us harmless from and against certain losses, claims and litigation arising out of the ownership or operation of the healthcare operations or any of the assets transferred to Kindred in the spin off, including without limitation all claims arising out of the third-party leases and third-party guarantees assigned to and assumed by Kindred at the time of the spin off. Under Kindred’s plan of reorganization, Kindred assumed and agreed to fulfill these obligations.

Similarly, in connection with Provident’s acquisition in 2004 of entities related to certain subsidiaries of Brookdale Senior Living, those subsidiaries of Brookdale Senior Living agreed to indemnify and hold Provident (and, as a result of the Provident acquisition, us) harmless from and against, among other things, certain liabilities arising out of the ownership or operation of such entities prior to the acquisition by Provident.

There can be no assurance that Kindred or such Brookdale Senior Living subsidiaries will have sufficient assets, income and access to financing to enable them to satisfy, or that they will be willing to satisfy, their respective obligations under these arrangements. If Kindred or such Brookdale Senior Living subsidiaries do not satisfy or otherwise honor their respective obligations to indemnify, defend and hold us harmless under their respective contractual arrangements with us, then we may be liable for the payment and performance of such obligations and may have to assume the defense of such claims or litigation, which could have a material adverse effect on our business, financial condition, results of operations and liquidity, our ability to service our indebtedness and our ability to make distributions to our stockholders as required to maintain our status as a REIT.

Brookdale Leases

Subject to certain limitations and restrictions, if during the first six years of the initial term of our Brookdale leases assumed in connection with the Provident acquisition we, either voluntarily or at Brookdale’s request, obtain new mortgage debt or refinance existing mortgage debt on property covered by a Brookdale lease, then we may be required to pay Brookdale the net proceeds from any such mortgage debt financing or refinancing. Also, subject to certain limitations and conditions, Brookdale may request that we obtain new mortgage debt or refinance existing mortgage debt on the property covered by the Brookdale leases, and we have agreed to use commercially reasonable efforts to pursue any such financing or refinancing from the holder of the then existing mortgage debt on the applicable Brookdale property. In connection with any such financing or refinancing, the rent for the applicable Brookdale property will be increased using a recomputed lease basis increased by an amount equal to the net financed proceeds paid to Brookdale plus any fees, penalties, premiums or other costs related to such financing or refinancing. In addition, if the monthly debt service on any financed or refinanced proceeds paid to Brookdale exceeds the rent increase attributable to those financed or refinanced proceeds, then Brookdale is required to pay the excess. In addition, under certain circumstances, Brookdale will also be required to pay additional amounts relating to increases in debt service and other costs relating to any such financing or refinancing.

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NOTE 9 – EARNINGS PER SHARE

The following table shows the amounts used in computing basic and diluted earnings per share:

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2006		2005			2006		2005
	(in thousands, except per share amounts)
Numerator for basic and diluted earnings per share:
Income before discontinued operations	$	29,258	$	27,108		$	58,392	$	54,720
Discontinued operations		—		(40	)		—		(79	)
Net income	$	29,258	$	27,068		$	58,392	$	54,641
Denominator:
Denominator for basic earnings per share —weighted average shares		103,884		88,574			103,818		86,626
Effect of dilutive securities:
Stock options		482		766			510		749
Time vesting restricted stock awards		8		10			9		11
Dilutive potential common stock		490		776			519		760
Denominator for diluted earnings per share —adjusted weighted average shares		104,374		89,350			104,337		87,386
Basic earnings per share:
Income before discontinued operations	$	0.28	$	0.31		$	0.56	$	0.63
Discontinued operations		—		—			—		—
Net income	$	0.28	$	0.31		$	0.56	$	0.63
Diluted earnings per share:
Income before discontinued operations	$	0.28	$	0.30		$	0.56	$	0.63
Discontinued operations		—		—			—		—
Net income	$	0.28	$	0.30		$	0.56	$	0.63

NOTE 10 – COMPREHENSIVE INCOME

Comprehensive income is comprised of the following:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2006			2005			2006			2005
Net income	$	29,258		$	27,068		$	58,392		$	54,641
Other comprehensive income:
Unrealized gain (loss) on interest rate swap		626			(3,421	)		1,413			1,077
Reclassification adjustment for realized (gain) loss on interest rate swap included in net income during the period		(72	)		1,405			(31	)		2,694
Other		210			—			210			—
		764			(2,016	)		1,592			3,771
Net comprehensive income	$	30,022		$	25,052		$	59,984		$	58,412

NOTE 11 – CONDENSED CONSOLIDATING INFORMATION

We and certain of our direct and indirect wholly owned subsidiaries (the “Wholly Owned Subsidiary Guarantors”) have fully and unconditionally guaranteed, on a joint and several basis, the obligation to pay principal and interest with respect to each series of senior notes issued by Ventas Realty and Ventas Capital Corporation (“Ventas Capital” and together with Ventas Realty, the “Issuers”). ETOP, of which we own substantially all of the partnership units, and certain of its wholly owned subsidiaries (the “ETOP Subsidiary Guarantors” and collectively, with the Wholly Owned Subsidiary Guarantors, the “Guarantors”), have also provided a guarantee, on a joint and several basis, of the senior notes. We have other subsidiaries (“Non-Guarantor Subsidiaries”) that have not provided a guarantee of the senior notes and therefore are not directly obligated with respect to the senior notes. Contractual and legal restrictions, including those contained in the instruments governing

14

certain Non-Guarantor Subsidiaries’ outstanding indebtedness may, under certain circumstances restrict our ability to obtain cash from our Non-Guarantor Subsidiaries for the purpose of meeting our debt service obligations, including our guarantee of payment of principal and interest on the senior notes. In addition, we and the Guarantors have guaranteed the Unsecured Credit Facility and certain of our real estate assets are subject to mortgages. The following summarizes our condensed consolidating information as of June 30, 2006 and December 31, 2005 and for the three and six months ended June 30, 2006 and 2005:

CONDENSED CONSOLIDATING BALANCE SHEET

As of June 30, 2006

(in thousands)	Ventas, Inc.		ETOP and ETOP Subsidiary Guarantors		Wholly Owned Subsidiary Guarantors		Issuers (1)			Non - Guarantor Subsidiaries		Consolidated Elimination			Consolidated
Assets
Net real estate investments	$	11,780	$	55,131	$	847,893	$	1,041,904		$	582,382	$	—		$	2,539,090
Cash and cash equivalents		1		—		—		1,365			566		—			1,932
Escrow deposits and restricted cash		225		—		27,326		5,972			17,704		—			51,227
Deferred financing costs, net		—		—		—		17,635			32		—			17,667
Notes receivable-related parties		1,751		—		—		750			—		—			2,501
Equity in affiliates		442,751		80,821		120,668		731,621			15		(1,375,876	)		—
Investment in affiliates		—		9,039		—		—			—		(9,039	)		—
Other		—		585		19,430		18,583			9,957		—			48,555
Total assets	$	456,508	$	145,576	$	1,015,317	$	1,817,830		$	610,656	$	(1,384,915	)	$	2,660,972
Liabilities and stockholders’ equity
Liabilities:
Senior notes payable and other debt	$	—	$	418	$	298,546	$	1,258,038		$	325,907	$	—		$	1,882,909
Intercompany		—		2,350		125,000		(132,500	)		5,150		—			—
Deferred revenue		31		—		—		9,336			7		—			9,374
Accrued interest		—		299		1,400		10,964			1,798		—			14,461
Accounts payable and accrued and other liabilities		2,904		102		22,959		31,667			15,813		393			73,838
Deferred income taxes		30,394		—		—		—			—		—			30,394
Total liabilities		33,329		3,169		447,905		1,177,505			348,675		393			2,010,976
Total stockholders’ equity		423,179		142,407		567,412		640,325			261,981		(1,385,308	)		649,996
Total liabilities and stockholders’ equity	$	456,508	$	145,576	$	1,015,317	$	1,817,830		$	610,656	$	(1,384,915	)	$	2,660,972

(1) Ventas Capital is a wholly owned direct subsidiary of Ventas Realty that was formed to facilitate the offerings of the senior notes and has no assets or operations.

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CONDENSED CONSOLIDATING BALANCE SHEET

As of December 31, 2005

(in thousands)	Ventas, Inc.		ETOP and ETOP Subsidiary Guarantors		Wholly Owned Subsidiary Guarantors		Issuers (1)			Non- Guarantor Subsidiaries		Consolidated Elimination			Consolidated
Assets
Net real estate investments	$	12,117	$	56,201	$	867,404	$	1,016,212		$	574,540	$	—		$	2,526,474
Cash and cash equivalents		1		1		—		1,027			612		—			1,641
Escrow deposits and restricted cash		220		26		26,693		17,636			15,092		—			59,667
Deferred financing costs, net		—		—		—		17,581			—		—			17,581
Notes receivable-related parties		1,716		—		—		1,125			—		—			2,841
Equity in affiliates		514,844		80,390		94,823		724,038			15		(1,414,110	)		—
Investment in affiliates		—		9,039		—		—			—		(9,039	)		—
Other		—		508		13,113		10,024			7,269		—			30,914
Total assets	$	528,898	$	146,165	$	1,002,033	$	1,787,643		$	597,528	$	(1,423,149	)	$	2,639,118
Liabilities and stockholders’ equity
Liabilities:
Senior notes payable and other debt	$	—	$	424	$	305,816	$	1,180,239		$	316,085	$	—		$	1,802,564
Intercompany		—		2,696		125,000		(132,500	)		4,804		—			—
Deferred revenue		44		—		—		10,496			—		—			10,540
Accrued dividend		37,272		71		—		—			—		—			37,343
Accrued interest		—		3		1,442		11,190			1,783		—			14,418
Accounts payable and accrued and other liabilities		2,346		103		22,846		37,743			13,109		393			76,540
Deferred income taxes		30,394		—		—		—			—		—			30,394
Total liabilities		70,056		3,297		455,104		1,107,168			335,781		393			1,971,799
Total stockholders’ equity		458,842		142,868		546,929		680,475			261,747		(1,423,542	)		667,319
Total liabilities and stockholders’ equity	$	528,898	$	146,165	$	1,002,033	$	1,787,643		$	597,528	$	(1,423,149	)	$	2,639,118

(1) Ventas Capital is a wholly owned direct subsidiary of Ventas Realty that was formed to facilitate the offerings of the senior notes and has no assets or operations.

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CONDENSED CONSOLIDATING STATEMENT OF INCOME

For the three months ended June 30, 2006

(in thousands)	Ventas, Inc.		ETOP and ETOP Subsidiary Guarantors			Wholly Owned Subsidiary Guarantors			Issuers (1)			Non- Guarantor Subsidiaries		Consolidated Elimination			Consolidated
Revenues:
Rental income	$	607	$	1,431		$	19,022		$	63,982		$	14,053	$	—		$	99,095
Interest income from loans receivable		—		—			—			839			—		—			839
Equity earnings (loss) in affiliates		29,022		(30	)		(2,321	)		—			—		(26,671	)		—
Interest and other income		19		—			9			218			126		—			372
Total revenues		29,648		1,401			16,710			65,039			14,179		(26,671	)		100,306
Expenses:
Interest		—		(140	)		4,865			23,324			5,674		—			33,723
Depreciation		169		534			9,585			13,120			5,703		—			29,111
Property-level operating expenses		—		—			—			105			549		—			654
General, administrative and professional fees		221		103			1,199			3,901			863		—			6,287
Loss on extinguishment of debt		—		—			—			1,273			—		—			1,273
Intercompany interest		—		122			—			(299	)		177		—			—
Total expenses		390		619			15,649			41,424			12,966		—			71,048
Net income	$	29,258	$	782		$	1,061		$	23,615		$	1,213	$	(26,671	)	$	29,258

(1) Ventas Capital is a wholly owned direct subsidiary of Ventas Realty that was formed to facilitate the offerings of the senior notes and has no assets or operations.

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CONDENSED CONSOLIDATING STATEMENT OF INCOME

For the three months ended June 30, 2005

(in thousands)	Ventas, Inc.		ETOP and ETOP Subsidiary Guarantors			Wholly Owned Subsidiary Guarantors		Issuers (1)			Non- Guarantor Subsidiaries		Consolidated Elimination			Consolidated
Revenues:
Rental income	$	586	$	1,418		$	5,005	$	59,115		$	6,216	$	—		$	72,340
Interest income from loans receivable		—		—			—		1,492			—		—			1,492
Equity earnings (loss) in affiliates		26,900		(141	)		917		—			—		(27,676	)		—
Interest and other income		18		22			—		1,067			13		—			1,120
Total revenues		27,504		1,299			5,922		61,674			6,229		(27,676	)		74,952
Expenses:
Interest		—		9			1,255		18,915			2,551		—			22,730
Depreciation		173		534			3,204		11,911			2,417		—			18,239
Property-level operating expenses		—		—			—		106			535		—			641
General, administrative and professional fees		263		168			438		4,665			525		—			6,059
Intercompany interest		—		(3	)		—		(150	)		153		—			—
Total expenses		436		708			4,897		35,447			6,181		—			47,669
Income before net loss on real estate disposals and discontinued operations		27,068		591			1,025		26,227			48		(27,676	)		27,283
Net loss on real estate disposals		—		—			—		(175	)		—		—			(175	)
Income before discontinued operations		27,068		591			1,025		26,052			48		(27,676	)		27,108
Discontinued operations		—		(40	)		—		—			—		—			(40	)
Net income	$	27,068	$	551		$	1,025	$	26,052		$	48	$	(27,676	)	$	27,068

(1) Ventas Capital is a wholly owned direct subsidiary of Ventas Realty that was formed to facilitate the offerings of the senior notes and has no assets or operations.

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CONDENSED CONSOLIDATING STATEMENT OF INCOME

For the six months ended June 30, 2006

(in thousands)	Ventas, Inc.		ETOP and ETOP Subsidiary Guarantors			Wholly Owned Subsidiary Guarantors		Issuers (1)			Non- Guarantor Subsidiaries		Consolidated Elimination			Consolidated
Revenues:
Rental income	$	1,201	$	2,853		$	37,973	$	125,701		$	27,872	$	—		$	195,600
Interest income from loans receivable		—		—			—		1,807			—		—			1,807
Equity earnings (loss) in affiliates		57,933		(52	)		8,952		—			—		(66,833	)		—
Interest and other income		39		—			13		475			186		—			713
Total revenues		59,173		2,801			46,938		127,983			28,058		(66,833	)		198,120
Expenses:
Interest		—		17			9,679		45,761			11,223		—			66,680
Depreciation		337		1,069			19,180		25,667			11,328		—			57,581
Property-level operating expenses		—		—			—		220			1,056		—			1,276
General, administrative and professional fees		444		218			2,490		7,972			1,794		—			12,918
Loss on extinguishment of debt		—		—			—		1,273			—		—			1,273
Intercompany interest		—		(46	)		—		(299	)		345		—			—
Total expenses		781		1,258			31,349		80,594			25,746		—			139,728
Net income	$	58,392	$	1,543		$	15,589	$	47,389		$	2,312	$	(66,833	)	$	58,392

(1) Ventas Capital is a wholly owned direct subsidiary of Ventas Realty that was formed to facilitate the offerings of the senior notes and has no assets or operations.

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CONDENSED CONSOLIDATING STATEMENT OF INCOME

For the six months ended June 30, 2005

(in thousands)	Ventas, Inc.		ETOP and ETOP Subsidiary Guarantors			Wholly Owned Subsidiary Guarantors		Issuers (1)			Non- Guarantor Subsidiaries		Consolidated Elimination			Consolidated
Revenues:
Rental income	$	1,160	$	2,837		$	5,005	$	115,844		$	10,030	$	—		$	134,876
Interest income from loans receivable		—		—			—		2,144			—		—			2,144
Equity earnings (loss) in affiliates		54,218		(259	)		1,742		—			—		(55,701	)		—
Interest and other income		36		42			—		1,630			24		—			1,732
Total revenues		55,414		2,620			6,747		119,618			10,054		(55,701	)		138,752
Expenses:
Interest		—		18			1,255		34,215			4,218		—			39,706
Depreciation		345		1,069			3,204		23,361			3,480		—			31,459
Property-level operating expenses		—		—			—		215			978		—			1,193
General, administrative and professional fees		428		342			438		9,442			849		—			11,499
Intercompany interest		—		(1	)		—		(298	)		299		—			—
Total expenses		773		1,428			4,897		66,935			9,824		—			83,857
Income before net loss on real estate disposals and discontinued operations		54,641		1,192			1,850		52,683			230		(55,701	)		54,895
Net loss on real estate disposals		—		—			—		(175	)		—		—			(175	)
Income before discontinued operations		54,641		1,192			1,850		52,508			230		(55,701	)		54,720
Discontinued operations		—		(79	)		—		—			—		—			(79	)
Net income	$	54,641	$	1,113		$	1,850	$	52,508		$	230	$	(55,701	)	$	54,641

(1) Ventas Capital is a wholly owned direct subsidiary of Ventas Realty that was formed to facilitate the offerings of the senior notes and has no assets or operations.

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the six months ended June 30, 2006

(in thousands)	Ventas, Inc.			ETOP and ETOP Subsidiary Guarantors			Wholly Owned Subsidiary Guarantors			Issuers (1)			Non- Guarantor Subsidiaries			Consolidated Elimination		Consolidated
Net cash provided by operating activities	$	1,336		$	2,492		$	18,796		$	70,193		$	12,426		$	—	$	105,243
Net cash used in investing activities		(35	)		—			—			(55,077	)		(287	)		—		(55,399	)
Cash flows from financing activities:
Net change in borrowings under unsecured revolving credit facility		—			—			—			167,000			—			—		167,000
Net change in borrowings under secured revolving credit facility		—			—			—			(89,200	)		—			—		(89,200	)
Proceeds from debt		—			—			—			—			2,074			—		2,074
Repayment of debt		—			(6	)		(7,270	)		—			(3,101	)		—		(10,377	)
Payment of deferred financing costs		—			—			—			(2,901	)		—			—		(2,901	)
Issuance of common stock		428			—			—			—			—			—		428
Proceeds from stock option exercises		2,880			—			—			—			—			—		2,880
Cash distributions from (to) affiliates		114,606			(2,245	)		(11,526	)		(89,677	)		(11,158	)		—		—
Cash distributions to stockholders		(119,215	)		(242	)		—			—			—			—		(119,457	)
Net cash used in financing activities		(1,301	)		(2,493	)		(18,796	)		(14,778	)		(12,185	)		—		(49,553	)
Net increase (decrease) in cash and cash equivalents		—			(1	)		—			338			(46	)		—		291
Cash and cash equivalents at beginning of period		1			1			—			1,027			612			—		1,641
Cash and cash equivalents at end of period	$	1		$	—		$	—		$	1,365		$	566		$	—	$	1,932

(1) Ventas Capital is a wholly owned direct subsidiary of Ventas Realty that was formed to facilitate the offerings of the senior notes and has no assets or operations.

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the six months ended June 30, 2005

(in thousands)	Ventas, Inc.			ETOP and ETOP Subsidiary Guarantors			Wholly Owned Subsidiary Guarantors			Issuers (1)			Non- Guarantor Subsidiaries			Consolidated Elimination		Consolidated
Net cash provided by (used in) operating activities	$	683		$	2,472		$	(648	)	$	96,269		$	1,406		$	—	$	100,182
Net cash used in investing activities		(12,823	)		—			—			(512,021	)		—			—		(524,844	)
Cash flows from financing activities:
Net change in borrowings under secured revolving credit facility		—			—			—			117,400			—			—		117,400
Proceeds from debt		—			—			—			400,000			—			—		400,000
Repayment of debt		—			(6	)		—			(6,070	)		(768	)		—		(6,844	)
Payment of deferred financing costs		—			—			—			(6,599	)		—			—		(6,599	)
Issuance of intercompany note		—			—			125,000			(125,000	)		—			—		—
Issuance of common stock		4,694			—			—			—			—			—		4,694
Proceeds from stock option exercises		2,036			—			—			—			—			—		2,036
Cash distributions from (to) affiliates		93,951			(2,503	)		(124,355	)		34,105			(1,198	)		—		—
Cash distributions to stockholders		(88,588	)		—			—			—			—			—		(88,588	)
Net cash provided by (used in) financing activities		12,093			(2,509	)		645			413,836			(1,966	)		—		422,099
Net decrease in cash and cash equivalents		(47	)		(37	)		(3	)		(1,916	)		(560	)		—		(2,563	)
Cash and cash equivalents at beginning of period		48			37			3			1,979			1,298			—		3,365
Cash and cash equivalents at end of period	$	1		$	—		$	—		$	63		$	738		$	—	$	802

(1) Ventas Capital is a wholly owned direct subsidiary of Ventas Realty that was formed to facilitate the offerings of the senior notes and has no assets or operations.

NOTE 12 – ETOP CONDENSED CONSOLIDATING INFORMATION

ETOP, of which we own substantially all of the partnership interests, and the ETOP Subsidiary Guarantors have provided full and unconditional guarantees, on a joint and several basis with us and the Wholly Owned Subsidiary Guarantors, of the obligation to pay principal and interest with respect to each series of senior notes. See “Note 11—Condensed Consolidating Information.” Certain of ETOP’s other direct and indirect wholly owned subsidiaries (the “ETOP Non-Guarantor Subsidiaries”) have not provided a guarantee of the senior notes and therefore are not directly obligated with respect to the senior notes. Contractual and legal restrictions, including those contained in the instruments governing certain of the ETOP Non-Guarantor Subsidiaries’ outstanding indebtedness, may under certain circumstances restrict ETOP’s (and, therefore, our) ability to obtain cash from the ETOP Non-Guarantor Subsidiaries for the purpose of satisfying our and ETOP’s debt service obligations, including our respective guarantees of payment of principal and interest on the senior notes. In addition, ETOP and the ETOP Subsidiary Guarantors have guaranteed the Unsecured Credit Facility and certain of the ETOP Subsidiary Guarantors’ properties are subject to mortgages.

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CONDENSED CONSOLIDATING BALANCE SHEET

As of June 30, 2006

(in thousands)	ETOP and ETOP Subsidiary Guarantors			ETOP Non- Guarantor Subsidiaries		Consolidated Elimination			Consolidated
Assets
Net real estate investments	$	55,131		$	87,562	$	—		$	142,693
Cash and cash equivalents		—			458		—			458
Escrow deposits and restricted cash		—			5,982		—			5,982
Equity in affiliates		80,821			15		(80,836	)		—
Investment in affiliates		9,039			—		—			9,039
Other		585			1,374		—			1,959
Total assets	$	145,576		$	95,391	$	(80,836	)	$	160,131
Liabilities and partners’ equity
Liabilities:
Notes payable and other debt	$	418		$	66,090	$	—		$	66,508
Intercompany		(5,150	)		5,150		—			—
Note payable to affiliate		7,500			—		—			7,500
Accrued interest		299			419		—			718
Accounts payable and accrued and other liabilities		102			2,929		—			3,031
Total liabilities		3,169			74,588		—		$	77,757
Total partners’ equity		142,407			20,803		(80,836	)		82,374
Total liabilities and partners’ equity	$	145,576		$	95,391	$	(80,836	)	$	160,131

CONDENSED CONSOLIDATING BALANCE SHEET

As of December 31, 2005

(in thousands)	ETOP and ETOP Subsidiary Guarantors			ETOP Non-Guarantor Subsidiaries		Consolidated Elimination			Consolidated
Assets
Net real estate investments	$	56,201		$	88,992	$	—		$	145,193
Cash and cash equivalents		1			438		—			439
Escrow deposits and restricted cash		26			5,590		—			5,616
Equity in affiliates		80,390			15		(80,405	)		—
Investment in affiliates		9,039			—		—			9,039
Other		508			1,366		—			1,874
Total assets	$	146,165		$	96,401	$	(80,405	)	$	162,161
Liabilities and partners’ equity
Liabilities:
Notes payable and other debt	$	424		$	66,776	$	—		$	67,200
Intercompany		(4,804	)		4,804		—			—
Note payable to affiliate		7,500			—		—			7,500
Accrued dividend		71			—		—			71
Accrued interest		3			431		—			434
Accounts payable and accrued and other liabilities		103			3,017		—			3,120
Total liabilities		3,297			75,028		—		$	78,325
Total partners’ equity		142,868			21,373		(80,405	)		83,836
Total liabilities and partners’ equity	$	146,165		$	96,401	$	(80,405	)	$	162,161

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CONDENSED CONSOLIDATING STATEMENT OF INCOME

For the three months ended June 30, 2006

(in thousands)	ETOP and ETOP Subsidiary Guarantors			ETOP Non-Guarantor Subsidiaries			Consolidated Elimination		Consolidated
Revenues:
Rental income	$	1,431		$	2,688		$	—	$	4,119
Equity loss in affiliates		(30	)		—			30		—
Interest and other income		—			26			—		26
Total revenues		1,401			2,714			30		4,145
Expenses:
Interest		(140	)		1,265			—		1,125
Depreciation		534			798			—		1,332
Property-level operating expenses		—			357			—		357
General, administrative and professional fees		103			148			—		251
Intercompany interest		122			176			—		298
Total expenses		619			2,744			—		3,363
Net income (loss)	$	782		$	(30	)	$	30	$	782

CONDENSED CONSOLIDATING STATEMENT OF INCOME

For the three months ended June 30, 2005

(in thousands)	ETOP and ETOP Subsidiary Guarantors			ETOP Non-Guarantor Subsidiaries			Consolidated Elimination		Consolidated
Revenues:
Rental income	$	1,418		$	2,660		$	—	$	4,078
Equity loss in affiliates		(141	)		—			141		—
Interest and other income		22			10			—		32
Total revenues		1,299			2,670			141		4,110
Expenses:
Interest		9			1,290			—		1,299
Depreciation		534			793			—		1,327
Property-level operating expenses		—			366			—		366
General, administrative and professional fees		168			209			—		377
Intercompany interest		(3	)		153			—		150
Total expenses		708			2,811			—		3,519
Income (loss) before discontinued operations		591			(141	)		141		591
Discontinued operations		(40	)		—			—		(40	)
Net income (loss)	$	551		$	(141	)	$	141	$	551

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CONDENSED CONSOLIDATING STATEMENT OF INCOME

For the six months ended June 30, 2006

(in thousands)	ETOP and ETOP Subsidiary Guarantors			ETOP Non-Guarantor Subsidiaries			Consolidated Elimination		Consolidated
Revenues:
Rental income	$	2,853		$	5,377		$	—	$	8,230
Equity loss in affiliates		(52	)		—			52		—
Interest and other income		—			58			—		58
Total revenues		2,801			5,435			52		8,288
Expenses:
Interest		17			2,530			—		2,547
Depreciation		1,069			1,593			—		2,662
Property-level operating expenses		—			688			—		688
General, administrative and professional fees		218			332			—		550
Intercompany interest		(46	)		344			—		298
Total expenses		1,258			5,487			—		6,745
Net income (loss)	$	1,543		$	(52	)	$	52	$	1,543

CONDENSED CONSOLIDATING STATEMENT OF INCOME

For the six months ended June 30, 2005

(in thousands)	ETOP and ETOP Subsidiary Guarantors			ETOP Non-Guarantor Subsidiaries			Consolidated Elimination		Consolidated
Revenues:
Rental income	$	2,837		$	5,318		$	—	$	8,155
Equity loss in affiliates		(259	)		—			259		—
Interest and other income		42			20			—		62
Total revenues		2,620			5,338			259		8,217
Expenses:
Interest		18			2,579			—		2,597
Depreciation		1,069			1,584			—		2,653
Property-level operating expenses		—			697			—		697
General, administrative and professional fees		342			438			—		780
Intercompany interest		(1	)		299			—		298
Total expenses		1,428			5,597			—		7,025
Income (loss) before discontinued operations		1,192			(259	)		259		1,192
Discontinued operations		(79	)		—			—		(79	)
Net income (loss)	$	1,113		$	(259	)	$	259	$	1,113

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the six months ended June 30, 2006

(in thousands)	ETOP and ETOP Subsidiary Guarantors			ETOP Non-Guarantor Subsidiaries			Consolidated Elimination		Consolidated
Net cash provided by operating activities	$	2,492		$	1,479		$	—	$	3,971
Net cash used in investing activities		—			(163	)		—		(163	)
Cash flows from financing activities:
Repayment of debt		(6	)		(686	)		—		(692	)
Cash distributions to partners		(2,487	)		(610	)		—		(3,097	)
Net cash used in financing activities		(2,493	)		(1,296	)		—		(3,789	)
Net increase (decrease) in cash and cash equivalents		(1	)		20			—		19
Cash and cash equivalents at beginning of period		1			438			—		439
Cash and cash equivalents at end of period	$	—		$	458		$	—	$	458

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the six months ended June 30, 2005

(in thousands)	ETOP and ETOP Subsidiary Guarantors			ETOP Non-Guarantor Subsidiaries			Consolidated Elimination		Consolidated
Net cash provided by operating activities	$	2,472		$	334		$	—	$	2,806
Net cash used in investing activities		—			(4	)		—		(4	)
Cash flows from financing activities:
Repayment of debt		(6	)		(638	)		—		(644	)
Cash distributions to partners		(2,503	)		(406	)		—		(2,909	)
Net cash used in financing activities		(2,509	)		(1,044	)		—		(3,553	)
Net decrease in cash and cash equivalents		(37	)		(714	)		—		(751	)
Cash and cash equivalents at beginning of period		37			1,173			—		1,210
Cash and cash equivalents at end of period	$	—		$	459		$	—	$	459

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statements

Unless otherwise indicated or except where the context otherwise requires, the terms “we,” “us” and “our” and other similar terms in this Quarterly Report on Form 10-Q refer to Ventas, Inc. and its consolidated subsidiaries.

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements regarding our expected future financial position, results of operations, cash flows, funds from operations, dividends and dividend plans, financing plans, business strategy, budgets, projected costs, capital expenditures, competitive positions, growth opportunities, expected lease income, continued qualification as a real estate investment trust (“REIT”), plans and objectives of management for future operations and statements that include words such as “anticipate,” “if”, “believe,” “plan,” “estimate,” “expect,” “intend,” “may,” “could,” “should,” “will” and other similar expressions are forward-looking statements. These forward-looking statements are inherently uncertain, and security holders must recognize that actual results may differ from our expectations. We do not undertake a duty to update these forward-looking statements, which speak only as of the date on which they are made.

Our actual future results and trends may differ materially depending on a variety of factors discussed in our filings with the Securities and Exchange Commission (the “Commission”). Factors that may affect our plans or results include without limitation:

• the ability and willingness of our operators, tenants, borrowers and other third parties to meet and/or perform the obligations under their various contractual arrangements with us;

• the ability and willingness of Kindred Healthcare, Inc. (together with its subsidiaries, “Kindred”), Brookdale Living Communities, Inc. (together with its subsidiaries, “Brookdale”) and Alterra Healthcare Corporation (together with its subsidiaries, “Alterra”) to meet and/or perform their obligations to indemnify, defend and hold us harmless from and against various claims, litigation and liabilities under our respective contractual arrangements with Kindred, Brookdale and Alterra;

• the ability of our operators, tenants and borrowers to maintain the financial strength and liquidity necessary to satisfy their respective obligations and liabilities to third parties, including without limitation obligations under their existing credit facilities;

• our success in implementing our business strategy and our ability to identify, underwrite, finance, consummate and integrate diversifying acquisitions or investments, including those in different asset types and outside the United States;

• the nature and extent of future competition;

• the extent of future or pending healthcare reform and regulation, including cost containment measures and changes in reimbursement policies, procedures and rates;

• increases in our cost of borrowing;

• the ability of our operators to deliver high quality care and to attract patients;

• the results of litigation affecting us;

• changes in general economic conditions and/or economic conditions in the markets in which we may, from time to time, compete;

• our ability to pay down, refinance, restructure and/or extend our indebtedness as it becomes due;

• the movement of interest rates and the resulting impact on the value of and the accounting for our interest rate swap agreement;

• our ability and willingness to maintain our qualification as a REIT due to economic, market, legal, tax or other considerations;

• final determination of our taxable net income for the year ended December 31, 2005 and for the year ending December 31, 2006;

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• the ability and willingness of our tenants to renew their leases with us upon expiration of the leases and our ability to relet our properties on the same or better terms in the event such leases expire and are not renewed by the existing tenants;

• the impact on the liquidity, financial condition and results of operations of our operators, tenants and borrowers resulting from increased operating costs and uninsured liabilities for professional liability claims, and the ability of our operators, tenants and borrowers to accurately estimate the magnitude of these liabilities; and

• the value of our rental reset right with Kindred (the “Reset Right”), which is dependent on a variety of factors and is highly speculative.

Many of these factors are beyond our control and the control of our management.

Kindred and Brookdale Senior Living Information

Kindred and Brookdale Senior Living Inc. (together with its subsidiaries, which include Brookdale and Alterra, “Brookdale Senior Living”) are subject to the reporting requirements of the Commission and are required to file with the Commission annual reports containing audited financial information and quarterly reports containing unaudited interim financial information. The information related to Kindred and Brookdale Senior Living contained or referred to in this Quarterly Report on Form 10-Q is derived from filings made by Kindred or Brookdale Senior Living, as the case may be, with the Commission or other publicly available information, or has been provided to us by Kindred or Brookdale Senior Living. We have not verified the information related to Kindred or Brookdale Senior Living either through an independent investigation or otherwise. We have no reason to believe that such information is inaccurate in any material respect, but we cannot assure you that all such information is accurate. Kindred’s and Brookdale Senior Living’s filings with the Commission can be found at the Commission’s website at www.sec.gov. We are providing this data for informational purposes only, and you are encouraged to obtain Kindred’s and Brookdale Senior Living’s publicly available filings from the Commission.

Background Information

We are a healthcare REIT with a geographically diverse portfolio of healthcare-related and seniors housing facilities in the United States. As of June 30, 2006, this portfolio consisted of 200 skilled nursing facilities, 41 hospitals and 147 seniors housing and other healthcare-related facilities in 42 states. Except with respect to our medical office buildings, we lease these facilities to healthcare operating companies under “triple-net” or “absolute net” leases, which require the tenants to pay all property-related expenses. We also had real estate loan investments relating to seven healthcare-related and seniors housing facilities as of June 30, 2006.

We conduct substantially all of our business through our wholly owned subsidiaries, Ventas Realty, Limited Partnership (“Ventas Realty”) and PSLT OP, L.P. (“PSLT OP”), and ElderTrust Operating Limited Partnership (“ETOP”), in which we own substantially all of the partnership units. Our primary business consists of financing, owning and leasing healthcare-related and seniors housing facilities and leasing or subleasing those facilities to third parties.

Our business strategy is comprised of two primary objectives: (1) diversifying our portfolio of properties and (2) increasing our earnings. We intend to continue to diversify our real estate portfolio by operator, facility type, geography and reimbursement source through investments in, and/or acquisitions or development of, additional healthcare-related and/or seniors housing assets across a wide spectrum.

As of June 30, 2006, approximately 44.7% and 32.8% of our properties, based on their original cost, were operated by Brookdale Senior Living and Kindred, respectively. Approximately 30.9% and 51.4% of our total revenues for the six months ended June 30, 2006 were derived from our leases with Brookdale Senior Living and our master lease agreements with Kindred (the “Kindred Master Leases”), respectively.

Recent Developments Regarding Acquisitions

During the three months ended June 30, 2006, we acquired three seniors housing facilities for an aggregate purchase price of $26.0 million, with assumed debt of $10.8 million, in two separate transactions. The purchase price was allocated between land and buildings of $2.2 million and $23.8 million, respectively, based upon their estimated fair values. Such estimates are subject to refinement as additional valuation information is received. The buildings are being depreciated over

28

their estimated useful lives, which were determined to be 35 years. The facilities are leased under triple-net leases, each having initial terms ranging from nine to fourteen years and initially providing aggregate, annual cash base rent of $2.1 million, subject to escalation as provided in the leases.

During the first quarter of 2006, we acquired five seniors housing facilities for an aggregate purchase price of $48.3 million, with no assumed debt, in three separate transactions. The purchase price was allocated between land and buildings of $2.8 million and $45.5 million, respectively, based upon their estimated fair values. Such estimates are subject to refinement as additional valuation information is received. The buildings are being depreciated over their estimated useful lives, which were determined to be 35 years. The facilities are leased under triple-net leases, each having initial terms ranging from nine to fourteen years and initially providing aggregate, annual cash base rent of $4.0 million, subject to escalation as provided in the leases.

Recent Developments Regarding Government Regulation

Medicare Reimbursement; Long-Term Acute Care Hospitals

On May 12, 2006, the Centers for Medicare & Medicaid Services (“CMS”) published its final rule updating the long-term acute care hospitals prospective payment system (LTAC PPS) payment rates for the 2007 rate year (July 1, 2006 through June 30, 2007). Pursuant to the rule, long-term acute care hospitals will receive no market basket inflation increase in Medicare payments starting July 1, 2006. The rule also adds new restrictions on payments for short stay outlier cases, makes adjustments to the labor portion of the federal rate and increases the outlier fixed-loss threshold. CMS estimates that the combined effective decrease in rate year 2007 Medicare revenues for long-term acute care hospitals would be a nominal 3.7% on the total historical patient mix and volume, though it has stated: “we believe that the actual decrease in LTCHs’ payments for [reimbursement year] 2007 will be less than estimated 3.7 percent.”

On May 8, 2006, Kindred announced that, based upon its historical Medicare patient volumes, it expects that the rule will “reduce Medicare revenues to the Company’s hospitals associated with short stay outliers and high cost outliers by approximately $46 million on an annual basis.” Because we own only 39 of Kindred’s 80 long-term acute care hospitals, however, our portfolio will bear only a portion of the reduction in Kindred’s corporate EBITDARM as a result of the CMS rule. Furthermore, based on CMS’s statement and our analysis of the final rule, as well as Kindred’s historical behavior, we anticipate that Kindred will make certain operational changes to mitigate the impact of the reimbursement reductions, and, therefore, we do not expect Kindred to experience the full 3.7% nominal rate decrease at its facilities. We cannot assure you however, as to what impact the final CMS rule will have on Kindred’s liquidity or profitability.

On April 12, 2006, CMS placed on public display a proposed rule to revise the hospital inpatient prospective payment system and to implement the Deficit Reduction Act of 2005 (“DRA”). The rule also proposes changes to the methodology used to reimburse long-term acute care hospitals. Comments on this proposed rule were accepted through June 12, 2006. A final rule implementing the DRA has yet to be issued.

Medicare Reimbursement; Skilled Nursing Facilities

Under the April 12, 2006 proposed rule described above, reimbursement of uncollectible Medicare coinsurance amounts for all beneficiaries (other than beneficiaries of both Medicare and Medicaid) would be reduced from 100% to 70% for skilled nursing facility cost reporting periods beginning on or after October 1, 2005. CMS estimates that the change in treatment of bad debt will result in a decrease in payments to skilled nursing facilities of $490 million over the five-year period from fiscal year 2006 to 2010.

The proposed rule also includes various options for classifying and weighing patients transferred to a skilled nursing facility after a hospital stay less than the mean length of stay associated with that particular diagnosis-related group. This change in methodology could affect skilled nursing facility admissions, although we currently cannot predict what impact it will have on the liquidity or profitability of our skilled nursing facility operators.

In addition, under the proposed rule, the $1,740 annual cap on Medicare part B reimbursement for physical therapy and speech-language pathology services and the separate annual cap of $1,740 on occupational therapy would be lifted for those patients who can demonstrate medical necessity. Unless Congress takes prior action, the caps will go back into effect on January 1, 2007.

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On August 4, 2005, CMS published a final rule under the prospective payment system for skilled nursing facilities. Pursuant to the rule, CMS, among other things, adopted a refinement to the resource utilization groups (“RUGs”) used to determine payment for beneficiaries in skilled nursing facilities which increases the number of RUGs from 44 to 53. CMS also increased the case mix index adjustment for all RUGs categories and implemented a market basket increase of 3%. The market basket increase became effective on October 1, 2005, and the RUGs refinements became effective January 1, 2006. CMS projects the overall effect of these changes in 2006 to be a 0.1% increase in aggregate Medicare payments, but within this aggregate CMS expects some facilities to have modest decreases and some to have modest increases.

In the past, CMS has updated skilled nursing facility payment rates under Medicare part A through annual rulemaking. For fiscal year 2007, however, CMS has indicated that, instead of a rule, it intends to issue before August 1, 2006 a program announcement setting the rates for payments under Medicare part A.

Medicaid Reimbursement; Skilled Nursing Facilities

Finally, the April 12, 2006 proposed rule described above mitigates both state and federal Medicaid expenditures by establishing additional Medicaid eligibility restrictions. Collectively, these Medicaid eligibility restrictions are anticipated to reduce Medicaid payments to skilled nursing facility operators in the future. Further, President Bush’s Budget for fiscal year 2007 proposes limiting to 3% the taxes that states may impose on healthcare providers and which would qualify for federal financial participation under Medicaid. The ceiling is currently set at 6%. There is strong opposition from state governors, and it is uncertain whether the proposal will go into effect. If it does, it could have an adverse effect in certain states, although we cannot predict at this time how any such reduction would affect our skilled nursing facility operators.

At this time, we also cannot predict whether significant Medicaid rate freezes, cuts or other program changes will be adopted, and if so, by how may states or the impact of such actions on our skilled nursing facility operators. However, severe and widespread rate cuts or freezes could have a material adverse effect on those operators, and in turn could have an adverse effect on us.

Critical Accounting Policies and Estimates

Our Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), which requires us to make estimates and judgments about future events that affect the reported amounts in the financial statements and the related disclosures. We believe that the following critical accounting policies, among others, affect our more significant estimates and judgments used in the preparation of our financial statements.

Recently Issued Accounting Standards

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”), which is a revision to SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). SFAS No. 123(R) supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB Opinion No. 25”). Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123, except that SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative under SFAS No. 123(R).

As required, we adopted the provisions of this accounting standard on January 1, 2006. We applied the modified-prospective transition method of adoption in which compensation cost is recognized beginning on the date we adopt the accounting standard for all share-based payments granted after the adoption date and for all awards granted to employees prior to the adoption date that remain unvested on the adoption date. See “Note 6— Stock-Based Compensation” regarding the effect the adoption of SFAS No. 123(R) had on our condensed consolidated financial statements.

Long-Lived Assets

Investments in real estate properties are recorded at cost. We account for acquisitions using the purchase method. The cost of the properties acquired is allocated among tangible land, buildings and equipment and recognized intangibles based upon estimated fair values in accordance with the provisions of SFAS No. 141, “Business Combinations.” We estimate fair values of the components of assets acquired as of the acquisition date or engage a third party appraiser as necessary. Recognized intangibles, if any, include the value of acquired lease contracts and related customer relationships.

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Our method for determining fair value varies with the categorization of the asset acquired. We estimate the fair value of buildings on an as-if-vacant basis, and depreciate the building value over the estimated remaining life of the building. We determine the allocated value of other fixed assets based upon the replacement cost and depreciate such value over their estimated remaining useful lives. We determine the value of land either based on real estate tax assessed values in relation to the total value of the asset, internal analyses of recently acquired and existing comparable properties within our portfolio or third party appraisals. The fair value of in-place leases, if any, reflects (i) above and below market leases, if any, determined by discounting the difference between the estimated current market rent and the in-place rentals, the resulting intangible asset of which is amortized to rental revenue over the remaining life of the associated lease plus any fixed rate renewal periods, if applicable, (ii) the estimated value of the cost to obtain tenants, including tenant allowances, tenant improvements and leasing commissions, which is amortized over the remaining life of the associated lease, and (iii) an estimated value of the absorption period to reflect the value of the rents and recovery costs foregone during a reasonable lease-up period, as if the acquired space was vacant, which is amortized over the remaining life of the associated lease. We also estimate the value of tenant or other customer relationships acquired by considering the nature and extent of existing business relationships with the tenant, growth prospects for developing new business with such tenant, such tenant’s credit quality, expectations of lease renewals with such tenant, and the potential for significant, additional future leasing arrangements with such tenant. We amortize such value, if any, over the expected term of the associated arrangements or leases, which would include the remaining lives of the related leases and any expected renewal periods.

Impairment of Long-Lived Assets

We periodically evaluate our long-lived assets, primarily consisting of our investments in real estate, for impairment indicators. If indicators of impairment are present, we evaluate the carrying value of the related real estate investments in relation to the future undiscounted cash flows of the underlying operations and adjust the net book value of leased properties and other long-lived assets to fair value if the sum of the expected future cash flow or sales proceeds is less than book value. An impairment loss is recognized at the time we make any such adjustment. Future events could occur which would cause us to conclude that impairment indicators exist and an impairment loss is warranted.

Revenue Recognition

Certain of our leases, excluding the Kindred Master Leases, provide for periodic and determinable increases in base rent. Base rental revenues under these leases are recognized on a straight-line basis over the term of the applicable lease. Certain of our other leases, including the Kindred Master Leases, provide for an annual increase in rental payments only if certain revenue parameters or other contingencies are met. We recognize the increased rental revenue under these leases only if the revenue parameters or other contingencies are met rather than on a straight-line basis over the term of the applicable lease. We recognize income from rent, lease termination fees and other income once all of the following criteria are met in accordance with the Commission’s Staff Accounting Bulletin 104: (i) the agreement has been fully executed and delivered; (ii) services have been rendered; (iii) the amount is fixed or determinable; and (iv) the collectibility is reasonably assured.

Gain on Sale of Facilities

We recognize sales of facilities only upon the closing of the transaction with the purchaser. Payments received from purchasers prior to closing are recorded as deposits and classified as other assets in the consolidated balance sheet. Gains on facilities sold are recognized using the full accrual method upon closing when the collectibility of the sales price is reasonably assured, we are not obligated to perform significant activities after the sale to earn the profit, we have received adequate initial investment from the buyer, and other profit recognition criteria have been satisfied. Gains may be deferred in whole or in part until the sales satisfy the requirements of gain recognition on sales of real estate under SFAS No. 66, “Accounting for Sales of Real Estate.”

Loans and Other Amounts Receivable from Third Parties

We evaluate the collectibility of loans and other amounts receivable from third parties based on a number of factors, including (i) corporate and facility level financial and operations reports, (ii) compliance with the financial covenants set forth in the borrowing or lease agreement, (iii) the financial stability of the applicable borrower or tenant and any guarantor and (iv) the payment history of the borrower or tenant. Our level of reserves, if any, for loans and other amounts receivable from third parties fluctuates depending upon all of the factors previously mentioned.

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Legal Contingencies

We are involved in litigation as described in “Note 7—Litigation” of the Notes to Condensed Consolidated Financial Statements. We evaluate such matters by (i) ascertaining the probability that such litigation could result in a loss for us and (ii) determining an estimate of any possible loss. In accordance with SFAS No. 5, “Accounting for Contingencies,” we accrue for any probable losses that are estimable and disclose any loss contingencies that are possible. If management’s assessment of our liability with respect to these actions is incorrect, such matters could have a material adverse effect on us.

Certain Information Regarding ElderTrust Operating Limited Partnership

Not later than the deadline prescribed by the Exchange Act, we will cause ETOP to file a Quarterly Report on Form 10-Q for the quarter ended June 30, 2006. Such Quarterly Report, upon filing, shall be deemed incorporated by reference in this Quarterly Report on Form 10-Q.

Results of Operations

Three Months Ended June 30, 2006 and 2005

The following illustrates our results of operations for the three months ended June 30, 2006 and 2005 and the absolute dollar and percentage changes in those results from period to period (dollars in thousands).

	For the Three Months Ended June 30,					Change
	2006		2005			$			%
Revenues:
Rental income	$	99,095	$	72,340		$	26,755		37.0	%
Interest income from loans receivable		839		1,492			(653	)	(43.8	)
Interest and other income		372		1,120			(748	)	(66.8	)
Total revenues		100,306		74,952			25,354		33.8
Expenses:
Interest		33,723		22,730			10,993		48.4
Depreciation		29,111		18,239			10,872		59.6
Property-level operating expenses		654		641			13		2.0
General, administrative and professional fees (including non-cash stock-based compensation expense of $727 and $506, respectively)(1)		6,287		6,059			228		3.8
Loss on extinguishment of debt		1,273		—			1,273		nm
Total expenses		71,048		47,669			23,379		49.0
Income before net loss on real estate disposals and discontinued operations		29,258		27,283			1,975		7.2
Net loss on real estate disposals		—		(175	)		175		nm
Income before discontinued operations		29,258		27,108			2,150		7.9
Discontinued operations		—		(40	)		40		nm
Net income	$	29,258	$	27,068		$	2,190		8.1	%

nm - Not meaningful

(1) Expense includes approximately $222 in 2006 ($0 in 2005) related to the expensing of stock options as required upon the adoption of SFAS No. 123(R) on January 1, 2006.

Revenues

The increase in our second quarter 2006 rental income over the same period in 2005 primarily reflects (i) $19.5 million of additional rent related to properties acquired in the Provident acquisition, (ii) $1.7 million of additional rent resulting from the 3.5% annual increase in the rent paid under Kindred Master Leases effective May 1, 2006, and (iii) additional rent relating to the properties acquired during the period from July 1, 2005 through June 30, 2006. See “Note 4—Acquisitions” of the Notes to Condensed Consolidated Financial Statements.

The decrease in interest income from loans receivable is due to the repayment of a mezzanine loan in March 2006, which had an interest rate of 17%, offset by loans made or acquired by us during the period from July 1, 2005 through December 31, 2005. No additional loans have been issued in 2006.

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The decrease in interest and other income relates primarily to the collection in 2005 of a note receivable previously written-off as it was deemed uncollectible.

Expenses

Total interest expense increased $11.0 million in the second quarter of 2006 over 2005, primarily due to $12.5 million of additional interest from higher loan balances as a result of 2005 acquisition activity, partially offset by a $1.5 million reduction in interest from lower effective interest rates. Interest expense includes $0.8 million and $0.9 million of amortized deferred financing costs for the three months ended June 30, 2006 and 2005, respectively. Our effective interest rate decreased to 7.3% for the three months ended June 30, 2006 from 7.7% for the same period in 2005.

Depreciation expense increased primarily due to additional depreciation relating to the properties acquired during the period from July 1, 2005 through June 30, 2006. See “Note 4—Acquisitions” of the Notes to Condensed Consolidated Financial Statements.

In April 2006, we replaced our previous $300 million secured revolving credit facility with a $500 million unsecured revolving credit facility. In conjunction with the replacement, we recognized a loss on extinguishment of debt of $1.3 million representing the write-off of unamortized deferred financing costs. See “Note 5—Senior Notes Payable and Other Debt” of the Notes to Condensed Consolidated Financial Statements.

Six Months Ended June 30, 2006 and 2005

The table below shows our results of operations for the six months ended June 30, 2006 and 2005 and the absolute dollar and percentage changes in those results from period to period (dollars in thousands).

	For the Six Months Ended June 30,					Change
	2006		2005			$			%
Revenues:
Rental income	$	195,600	$	134,876		$	60,724		45.0	%
Interest income from loans receivable		1,807		2,144			(337	)	(15.7	)
Interest and other income		713		1,732			(1,019	)	(58.8	)
Total revenues		198,120		138,752			59,368		42.8
Expenses:
Interest		66,680		39,706			26,974		67.9
Depreciation		57,581		31,459			26,122		83.0
Property-level operating expenses		1,276		1,193			83		7.0
General, administrative and professional fees (including non-cash stock-based compensation expense of $1,485 and $926, respectively)(1)		12,918		11,499			1,419		12.3
Loss on extinguishment of debt		1,273		—			1,273		nm
Total expenses		139,728		83,857			55,871		66.6
Income before net loss on real estate disposals and discontinued operations		58,392		54,895			3,497		6.4
Net loss on real estate disposals		—		(175	)		175		nm
Income before discontinued operations		58,392		54,720			3,672		6.7
Discontinued operations		—		(79	)		79		nm
Net income	$	58,392	$	54,641		$	3,751		6.9	%

nm - Not meaningful

(1) Expense includes approximately $463 in 2006 ($0 in 2005) related to the expensing of stock options as required upon the adoption of SFAS No. 123(R) on January 1, 2006.

Revenues

The increase in our rental income for the first six months of 2006 primarily reflects (i) $45.9 million of additional rent related to properties acquired in the Provident acquisition, (ii) $3.4 million increase resulting from the 3.5% annual increase in the rent paid under Kindred Master Leases effective May 1, 2006 and 2005, and (iii) $11.2 million in additional rent relating to properties acquired during the period from July 1, 2005 through June 30, 2006. See “Note 4—Acquisitions” of the Notes to Condensed Consolidated Financial Statements.

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The decrease in interest income from loans receivable is due to the repayment of a mezzanine loan in March 2006, which had an interest rate of 17%, offset by loans made or acquired by us during the year ended December 31, 2005. No additional loans have been issued in 2006.

The decrease in interest and other income relates primarily to the collection in 2005 of a note receivable previously written-off as it was deemed uncollectible.

Expenses

The increase in interest expense was primarily attributable to $31.4 million of additional interest from increased debt to fund acquisitions, partially offset by a $4.4 million reduction in interest from lower effective interest rates. Our effective interest rate decreased to 7.4% for the six months ended June 30, 2006 from 7.9% for the six months ended June 30, 2005.

Depreciation expense increased primarily due to additional depreciation relating to properties acquired during the period from July 1, 2005 through June 30, 2006. See “Note 4—Acquisitions” of the Notes to Condensed Consolidated Financial Statements.

The increase in general, administrative and professional fees is primarily attributable to costs associated with the growth in our asset base and our initiative to develop and market our strategic diversification program, engage in comprehensive asset management, comply with regulatory requirements and attract and retain appropriate personnel to achieve our business objectives and the expensing of stock options as a result of our adoption of SFAS No. 123(R).

In April 2006, we replaced our previous $300 million secured revolving credit facility with a $500 million unsecured revolving credit facility. In conjunction with the replacement, we recognized a loss on extinguishment of debt of $1.3 million representing the write-off of unamortized deferred financing costs. See “Note 5—Senior Notes Payable and Other Debt” of the Notes to Condensed Consolidated Financial Statements.

Funds from Operations

Our funds from operations (“FFO”) for the three and six months ended June 30, 2006 and 2005 are summarized in the following table:

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2006		2005		2006		2005
	(in thousands)
Net income	$	29,258	$	27,068	$	58,392	$	54,641
Adjustments:
Depreciation on real estate assets		28,969		18,144		57,298		31,273
Net loss on real estate disposals		—		175		—		175
Other items:
Discontinued operations
Real estate depreciation — discontinued		—		46		—		92
Funds from operations	$	58,227	$	45,433	$	115,690	$	86,181

Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead, have historically risen or fallen with market conditions, many industry investors have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. To overcome this problem, we consider FFO an appropriate measure of performance of an equity REIT, and we use the National Association of Real Estate Investment Trusts (“NAREIT”) definition of FFO. NAREIT defines FFO as net income (computed in accordance with GAAP), excluding gains (or losses) from sales of real estate property, plus real estate depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.

FFO presented herein is not necessarily comparable to FFO presented by other real estate companies due to the fact that not all real estate companies use the same definition. FFO should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of our financial performance or as an alternative to cash flow from

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operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is FFO necessarily indicative of sufficient cash flow to fund all of our needs. We believe that in order to facilitate a clear understanding of our consolidated historical operating results, FFO should be examined in conjunction with net income as presented in the Condensed Consolidated Financial Statements and data included elsewhere in this Quarterly Report on Form 10-Q.

Liquidity and Capital Resources

During the six months ended June 30, 2006, our principal sources of liquidity were cash flows from operations and borrowings under our unsecured and previous secured revolving credit facilities. We anticipate that cash flows from operations over the next twelve months will be adequate to fund our business operations, dividends to stockholders and debt amortization. Capital requirements for acquisitions may require funding from borrowings, assumption of debt from the seller and issuance of secured or unsecured long-term debt or other securities, including equity.

We intend to continue to fund future investments through cash flows from operations, borrowings under our unsecured revolving credit facility, assumption of indebtedness, disposition of assets and issuance of secured or unsecured long-term debt or other securities. As of June 30, 2006, we had cash and cash equivalents of $1.9 million, escrow deposits and restricted cash of $51.2 million and unused credit availability of $332.8 million under our unsecured revolving credit facility.

In April 2006, we filed an automatic shelf registration statement on Form S-3 with the Commission relating to the sale, from time to time, of an indeterminate amount of debt securities and related guarantees, common stock, preferred stock, depositary shares and warrants. The registration statement replaced our previous universal shelf registration statement, under which approximately $500 million of securities remained available for offering.

Also in April 2006, we entered into a new $500 million unsecured revolving credit facility which replaced our previous $300 million secured revolving credit facility. We believe our new shelf registration statement and new unsecured revolving credit facility will provide us with greater flexibility with raising capital.

Cash Flows from Operating Activities

Net cash provided by operating activities was $105.2 million and $100.2 million for the six months ended June 30, 2006 and 2005, respectively. The increase primarily resulted from FFO that was higher for the six months ended June 30, 2006 as a result of our real estate acquisitions, partially offset by changes in operating assets and liabilities at June 30, 2006.

Cash Flows from Investing Activities

Net cash used in investing activities was $55.4 million and $524.8 million for the six months ended June 30, 2006 and 2005, respectively. These activities consisted primarily of our investments in real estate and mortgage loans, offset by the return of funds held for an Internal Revenue Code Section 1031 exchange during the second quarter of 2006 related to the sale of one of our facilities in the fourth quarter of 2005.

Cash Flows from Financing Activities

Net cash used in financing activities totaled $49.6 million for the six months ended June 30, 2006. These activities primarily included $119.5 million of cash dividend payments to stockholders and aggregate principal payments on mortgage obligations of $10.4 million, offset by proceeds of (i) $77.8 million from net borrowings under our unsecured and previous secured revolving credit facility, (ii) $2.1 million from an addition to an existing mortgage and (iii) $3.3 million from the issuance of common stock upon the exercise of stock options and other issuances.

Net cash provided by financing activities for the six months ended June 30, 2005 totaled $422.1 million and consisted primarily of proceeds from new debt issuances of $400.0 million and net borrowings under our previous secured revolving credit facility of $117.4 million, partially offset by $88.6 million of cash dividend payments to stockholders.

Except with respect to our medical office buildings, capital expenditures to maintain and improve our leased properties generally will be incurred by our tenants. Accordingly, we do not believe that we will incur any major expenditures in connection with these leased properties. After the terms of the leases expire, or in the event that the tenants are unable or unwilling to meet their obligations under the leases, we anticipate that any expenditures relating to the maintenance of leased properties for which we may become responsible will be funded by cash flows from operations or through additional

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borrowings. To the extent that unanticipated expenditures or significant borrowings are required, our liquidity may be affected adversely. Our ability to borrow funds may be restricted in certain circumstances by the terms of our unsecured revolving credit facility and the indentures governing our outstanding senior notes.

Reset Right

We have a one-time right under each Kindred Master Lease (the “Reset Right”) to increase the aggregate annual rent on the 225 facilities we lease to Kindred to “Fair Market Rental” levels, using a predetermined process described in the Kindred Master Leases. The Reset Right applies to the Kindred Master Leases on a lease-by-lease basis, and if we elect to exercise the Reset Right for any Kindred Master Lease, we will pay to Kindred a pro rata portion of the $4.6 million fee applicable to all of the Kindred Master Leases at the time of exercise.

On May 9, 2006, we initiated the Reset Right process by delivering four notices (the “Reset Notices”) to Kindred with our proposal that aggregate base rents under the Kindred Master Leases increase by $111 million to $317 million per year, effective July 19, 2006. The current annual cash base rent under the Kindred Master Leases for the year commencing May 1, 2006 is $205.9 million. The Reset Notices also propose that the annual rent escalations under the Kindred Master Leases be reset to 3% per year, rather than the current 3.5% per year, effective May 1, 2007. Kindred has stated publicly that it has a significant disagreement with us regarding this matter.

Because we and Kindred did not reach agreement on Fair Market Rental for our facilities within the time period specified in the Kindred Master Leases, on July 6, 2006, each company selected its designated appraiser. Under the Kindred Master Leases, those two appraisers then had ten days to agree on the selection of a qualified third appraiser (the “Third Appraiser”) to make the Fair Market Rental determination. Because such an agreement was not reached within the stipulated time period, we and Kindred each petitioned the American Arbitration Association (“AAA”) on July 17, 2006 to select the Third Appraiser. The AAA has until August 6, 2006 to make its selection. In the meantime, we and Kindred and our respective appraisers continue to engage in discussions regarding a mutually agreed selection of the Third Appraiser, and if we are able to so agree the AAA process would become unnecessary.

The determination of Fair Market Rental under the Reset Right is highly speculative and is dependent on, and may be influenced by, a variety of factors, including without limitation market conditions, reimbursement rates and cash flow to rent coverages applicable to healthcare facilities. If Fair Market Rental is determined by the appraisal process in the Kindred Master Leases, it is subject to the inherent risks, uncertainties, subjectivity and judgment contained in any appraisal process. Furthermore, a Third Appraiser’s determination regarding Fair Market Rental or escalations for our 225 healthcare facilities that are covered by the Kindred Master Leases could materially differ from our estimates, analyses or proposals. In no event will the base rent under the Kindred Master Leases decrease as a result of the Reset Right, although we cannot assure you (and are expressing no views) as to the final determination of Fair Market Rental or the value of the Reset Right.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following discussion of our exposure to various market risks contains forward-looking statements that involve risks and uncertainties. These projected results have been prepared utilizing certain assumptions considered reasonable in light of information currently available to us. Nevertheless, because of the inherent unpredictability of interest rates as well as other factors, actual results could differ materially from those projected in such forward-looking information.

We receive revenue primarily by leasing our assets under long-term triple-net leases in which the rental rate is generally fixed with annual escalators, subject to certain limitations. We also earn revenue from our mortgage loans. Our obligations under our unsecured revolving credit facility are floating rate obligations whose interest rate and related monthly interest payments vary with the movement in LIBOR. The general fixed nature of our assets and the variable nature of our obligations create interest rate risk. If interest rates were to rise significantly, our lease and other revenue might not be sufficient to meet our debt obligations. In order to mitigate this risk, in September 2001, we entered into an interest rate swap agreement in the notional amount of $450.0 million to hedge floating rate debt for the period between July 1, 2003 and June 30, 2008 (the “Swap”). The Swap is treated as a cash flow hedge for accounting purposes and is with a highly rated counterparty on which we pay a fixed rate of 5.385% and receive LIBOR from the counterparty. In December 2003, due to our lower expected future variable rate debt balances as a result of the sale of ten facilities, we reduced the notional amount of the Swap for the period from December 11, 2003 through June 29, 2006 from $450.0 million to $330.0 million. In December 2005, due to our lower expected future variable rate debt balances as a result of the payoff of our commercial mortgage backed securities loan, we further reduced the notional amount of the Swap to $100.0 million for the remaining term of the Swap. There are no collateral requirements under the Swap. As of June 30, 2006, the notional amount of the Swap was $100.0 million, which is scheduled to expire on June 30, 2008.

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To highlight the sensitivity of the Swap and our fixed rate debt to changes in interest rates, the following summary shows the effects of a hypothetical instantaneous change of 100 basis points (BPS) in interest rates as of June 30, 2006 and December 31, 2005:

	As of June 30, 2006					As of December 31, 2005
	Swap			Fixed Rate Debt		Swap			Fixed Rate Debt
	(in thousands)
Notional amount	$	100,000			N/A	$	100,000			N/A
Book value		N/A		$	1,602,351		N/A		$	1,594,322
Fair value		152			1,696,722		(1,580	)		1,765,805
Fair value reflecting change in interest rates:
-100 BPS		(1,627	)		1,781,324		(3,847	)		1,860,688
+100 BPS		1,887			1,618,128		(634	)		1,677,903

N/A - Not applicable

We paid $0.3 million under the Swap during the six months ended June 30, 2006. Assuming that interest rates do not change, we estimate that we will pay approximately $0.4 million on the Swap during the year ending December 31, 2006.

We had approximately $280.6 million of variable rate debt outstanding as of June 30, 2006 and approximately $208.2 million of variable rate debt outstanding as of December 31, 2005. The increase in our outstanding variable rate debt from December 31, 2005 is primarily attributable to net borrowings under our unsecured revolving credit facility. The Swap currently effectively hedges $100.0 million of our outstanding variable rate debt. Any amounts of variable rate debt in excess of $100.0 million are subject to interest rate changes. However, pursuant to the terms of certain leases with one of our tenants, if interest rates increase on certain debt that we have totaling $104.3 million as of June 30, 2006, our tenant is required to pay us additional rent (on a dollar-for-dollar basis) in an amount equal to the increase in interest expense resulting from the increased interest rates. Therefore, the increase in interest expense related to this debt is equally offset by an increase in additional rent due to us from the tenant. As of June 30, 2006, there was minimal cash flow impact from the fluctuation of interest rates on variable rate debt since we effectively hedged nearly all of our variable rate debt. The fair value of our fixed and variable rate debt is based on current interest rates at which similar borrowings could be made by us.

We may engage in additional hedging strategies in the future, depending on management’s analysis of the interest rate environment and the costs and risks of such strategies. Our market risk sensitive instruments are not entered into for trading purposes.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures to ensure that material information relating to us is timely communicated to the officers who certify our financial reports and to other members of our management and Board of Directors.

Based upon their evaluation as of June 30, 2006, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are effective to ensure that information required to be disclosed by us in our Exchange Act filings is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.

Internal Control Over Financial Reporting

During the second quarter of 2006, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) or in other factors that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information contained in “Note 7–Litigation” of the Notes to Condensed Consolidated Financial Statements is incorporated by reference into this Item 1. Except as set forth therein, there has been no material change in the status of the legal proceedings reported in our Annual Report on Form 10-K for the year ended December 31, 2005.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Our 2006 Annual Meeting of Stockholders (the “Annual Meeting”) was held on May 19, 2006.

Proxies for the Annual Meeting were solicited pursuant to Regulation 14A under the Exchange Act. There were no solicitations in opposition to management’s nominees for the Board of Directors as listed in our proxy statement or to any other proposals contained in the proxy statement. All such nominees were elected and all such other proposals were approved by our stockholders.

At the Annual Meeting, stockholders voted on the election of seven directors for the ensuing year. The number of votes cast for and withheld from each nominee for director is set forth below:

Nominee	For	Withheld
Debra A. Cafaro	94,044,816	1,909,220
Douglas Crocker II	94,992,460	961,576
Ronald G. Geary	94,602,113	1,351,923
Jay M. Gellert	95,841,265	112,771
Christopher T. Hannon	95,842,794	111,242
Sheli Z. Rosenberg	94,428,888	1,525,148
Thomas C. Theobald	94,604,785	1,349,251

At the Annual Meeting, stockholders voted on a proposal to ratify the appointment of Ernst & Young LLP as our independent auditors for fiscal year 2006. The number of votes cast for and against this proposal and the number of abstentions and broker non-votes are set forth below:

For	Against	Abstentions and Broker Non-Votes
94,005,943	1,904,510	43,582

At the Annual Meeting, stockholders voted on a proposal to approve the adoption of the Ventas, Inc. 2006 Incentive Plan. The number of votes cast for and against this proposal and the number of abstentions and broker non-votes are set forth below:

For	Against	Abstentions and Broker Non-Votes
75,663,444	9,261,392	11,029,200

At the Annual Meeting, stockholders voted on a proposal to approve the adoption of the Ventas, Inc. 2006 Stock Plan for Directors. The number of votes cast for and against this proposal and the number of abstentions and broker non-votes are set forth below:

For	Against	Abstentions and Broker Non-Votes
74,944,804	9,945,273	11,063,959

38

ITEM 6. EXHIBITS

Exhibit Number	Description of Document	Location of Document
10.1	Credit and Guaranty Agreement dated as of April 26, 2006 among Ventas Realty, Limited Partnership, as borrower, Ventas, Inc. and the other guarantors named therein, Bank of America, N.A., as Administrative Agent, Issuing Bank and Swingline Lender and the lenders identified therein.	Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on May 2, 2006.
10.2	Master Lease Combination Amendment and Agreement dated as of May 10, 2006 by and among Kindred Healthcare, Inc. (f/k/a Vencor, Inc.), Kindred Healthcare Operating, Inc. (f/k/a Vencor Operating, Inc.) and Ventas Realty, Limited Partnership.	Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on May 16, 2006.
31.1	Certification of Debra A. Cafaro, Chairman, President and Chief Executive Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.	Filed herewith.
31.2	Certification of Richard A. Schweinhart, Executive Vice President and Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.	Filed herewith.
32.1	Certification of Debra A. Cafaro, Chairman, President and Chief Executive Officer, pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. 1350.	Filed herewith.
32.2	Certification of Richard A. Schweinhart, Executive Vice President and Chief Financial Officer, pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. 1350.	Filed herewith.

39

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: July 28, 2006

VENTAS, INC.
By:	/s/ DEBRA A. CAFARO
	Debra A. Cafaro
	Chairman, President and
	Chief Executive Officer
By:	/s/ RICHARD A. SCHWEINHART
	Richard A. Schweinhart
	Executive Vice President and
	Chief Financial Officer

40

Exhibits

Exhibit Number	Description of Document	Location of Document
10.1	Credit and Guaranty Agreement dated as of April 26, 2006 among Ventas Realty, Limited Partnership, as borrower, Ventas, Inc. and the other guarantors named therein, Bank of America, N.A., as Administrative Agent, Issuing Bank and Swingline Lender, and the lenders identified therein.	Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on May 2, 2006.
10.2	Master Lease Combination Amendment and Agreement dated as of May 10, 2006 by and among Kindred Healthcare, Inc. (f/k/a Vencor, Inc.), Kindred Healthcare Operating, Inc. (f/k/a Vencor Operating, Inc.) and Ventas Realty, Limited Partnership.	Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on May 16, 2006.
31.1	Certification of Debra A. Cafaro, Chairman, President and Chief Executive Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.	Filed herewith.
31.2	Certification of Richard A. Schweinhart, Executive Vice President and Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.	Filed herewith.
32.1	Certification of Debra A. Cafaro, Chairman, President and Chief Executive Officer, pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. 1350.	Filed herewith.
32.2	Certification of Richard A. Schweinhart, Executive Vice President and Chief Financial Officer, pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. 1350.	Filed herewith.

41

EX-31.1

Exhibit 31.1

I, Debra A. Cafaro, Chairman, President and Chief Executive Officer of Ventas, Inc., certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Ventas, Inc.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report, any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting, which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 28, 2006

/s/ Debra A. Cafaro

Debra A. Cafaro

Chairman, President and Chief Executive Officer

EX-31.2

Exhibit 31.2

I, Richard A. Schweinhart, Executive Vice President and Chief Financial Officer of Ventas, Inc., certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Ventas, Inc.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report, any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting, which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 28, 2006

/s/ Richard A. Schweinhart

Richard A. Schweinhart

Executive Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Ventas, Inc. (the “Company”) for the period ended June 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Debra A. Cafaro, Chairman, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: July 28, 2006

/s/ Debra A. Cafaro

Debra A. Cafaro

Chairman, President and Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to the Company and will be

retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Ventas, Inc. (the “Company”) for the period ended June 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard A. Schweinhart, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: July 28, 2006

/s/ Richard A. Schweinhart

Richard A. Schweinhart

Executive Vice President and Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to the Company and will be

retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.