
Report of Independent Auditors		1
Consolidated Financial Statements
Consolidated Balance Sheets		2
Consolidated Statements of Income		3
Consolidated Statements of Cash Flows		4
Consolidated Statements of Member's Deficit		5
Notes to Consolidated Financial Statements		6

We have audited the accompanying consolidated balance sheets of HCR Properties, LLC. as of September 30, 2010 and December 31, 2009, and the related consolidated statements of income, cash flows and member's deficit for the nine months ended September 30, 2010 and years ended December 31, 2009 and 2008. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of HCR Properties, LLC as of September 30, 2010 and December 31, 2009, and the consolidated results of its operations and its cash flows for the nine months ended September 30, 2010 and years ended December 31, 2009 and 2008 in conformity with U.S. generally accepted accounting principles.

		September 30, 2010			December 31, 2009

		(In thousands)
Assets
Current assets:
	Restricted cash and cash equivalents	$	3,420		$	7,855
Net investment in direct financing lease			3,123,630			3,096,351
Property			60			60
Other assets			35,549			59,589

Total assets		$	3,162,659		$	3,163,855

Liabilities and Member's Deficit
Current liabilities:
	Accrued liabilities	$	8,110		$	8,280
	Income taxes payable		116,926			51,978
	Net payable to affiliated company		16,265			19,463

Total current liabilities			141,301			79,721
Long-term debt			4,595,942			4,595,942
Deferred income taxes			907,248			892,839
Member's deficit:
	Contributed capital		3,812,947			3,812,947
	Accumulated distributions		(5,097,856	)		(4,893,128	)
	Retained earnings		376,858			250,294
	Accumulated other comprehensive loss		(13,251	)		(17,020	)

			(921,302	)		(846,907	)
	Less subscription receivable		(1,560,530	)		(1,557,740	)

Total member's deficit			(2,481,832	)		(2,404,647	)

Total liabilities and member's deficit		$	3,162,659		$	3,163,855

		Nine months ended September 30, 2010			Year ended December 31, 2009			Year ended December 31, 2008

		(In thousands)
Revenues		$	—		$	—		$	—
Expenses:
	Operating		111			252			131
	Management fees		1,163			1,550			1,550

			1,274			1,802			1,681

Loss before other income (expenses) and income taxes			(1,274	)		(1,802	)		(1,681	)
Other income (expenses):
	Interest expense		(116,183	)		(152,316	)		(263,509	)
	Loss on debt extinguishment		—			—			(40	)
	Unrealized derivative loss		(10,921	)		(6,989	)		—
	Gain on sale of assets		—			1,232			—
	Interest income and other		331,865			438,876			398,193

Total other income, net			204,761			280,803			134,644

Income before income taxes			203,487			279,001			132,963
Income taxes			76,923			105,408			49,681

Net income		$	126,564		$	173,593		$	83,282

			Nine months ended September 30, 2010			Year ended December 31, 2009			Year ended December 31, 2008

			(In thousands)
Operating Activities
Net income			$	126,564		$	173,593		$	83,282
Adjustments to reconcile net income to net cash provided by operating activities:
	Deferred finance fee and derivative amortization			19,321			19,318			16,033
	Interest earned in excess of cash receipts			(30,069	)		(48,069	)		(50,202	)
	Loss on debt extinguishment			—			—			40
	Unrealized derivative loss			10,921			6,989			—
	Provision for deferred income taxes			11,976			52,319			47,741
	Gain on sale of assets			—			(1,232	)		—
	Changes in assets and liabilities:
		Assets		—			(13,176	)		9,632
		Liabilities		64,778			49,402			10,856

Total adjustments				76,927			65,551			34,100

Net cash provided by operating activities				203,491			239,144			117,382

Investing Activities
Investment in direct financing lease				—			(2,356	)		—
Investment in property				—			(60	)		—
Proceeds from sale of assets				—			4,704			—
Net change in restricted cash and cash equivalents				4,435			1,550			1,821
Proceeds from direct financing lease and subscription receivable				—			—			31,627

Net cash provided by investing activities				4,435			3,838			33,448

Financing Activities
Net (advance) payable to affiliated company				(3,198	)		351			(7,381	)
Contributions from Manor Care, Inc.				—			17,997			—
Distributions to Manor Care, Inc.				(204,728	)		(256,392	)		(142,909	)
Payment of debt				—			(3,558	)		(500	)
Payment of financing and extinguishment costs				—			(1,380	)		(40	)

Net cash used in financing activities				(207,926	)		(242,982	)		(150,830	)

Net change in cash and cash equivalents				—			—			—
Cash and cash equivalents at beginning of period				—			—			—

Cash and cash equivalents at end of period			$	—		$	—		$	—

			Contributed Capital		Accumulated Distributions			Retained (Deficit) Earnings			Accumulated Other Comprehensive Loss			Subscription Receivable			Total Member's Deficit

			(In thousands)
Balance at January 1, 2008			$	3,794,950	$	(4,493,827	)	$	(6,581	)	$	(6,316	)	$	(1,548,240	)	$	(2,260,014	)
Distributions to Manor Care, Inc.						(142,909	)											(142,909	)
Subscription receivable activity															1,112			1,112
Comprehensive income (loss):
	Net income								83,282
	Other comprehensive loss, net of tax:
		Unrealized loss and reclassification adjustments for hedging derivatives (see Note 4)										(13,446	)
Total comprehensive income																		69,836

Balance at December 31, 2008				3,794,950		(4,636,736	)		76,701			(19,762	)		(1,547,128	)		(2,331,975	)
Contributions from Manor Care, Inc.				17,997														17,997
Distributions to Manor Care, Inc.						(256,392	)											(256,392	)
Subscription receivable activity															(10,612	)		(10,612	)
Comprehensive income:
	Net income								173,593
	Other comprehensive income, net of tax:
		Unrealized gain and reclassification adjustments for hedging derivatives (see Note 4)										2,742
Total comprehensive income																		176,335

Balance at December 31, 2009				3,812,947		(4,893,128	)		250,294			(17,020	)		(1,557,740	)		(2,404,647	)
Distributions to Manor Care, Inc.						(204,728	)											(204,728	)
Subscription receivable activity															(2,790	)		(2,790	)
Comprehensive income:
	Net income								126,564
	Other comprehensive income, net of tax:
		Unrealized loss and reclassification adjustments for hedging derivatives (see Note 4)										3,769
Total comprehensive income																		130,333

Balance at September 30, 2010			$	3,812,947	$	(5,097,856	)	$	376,858		$	(13,251	)	$	(1,560,530	)	$	(2,481,832	)

HCR Properties, LLC and subsidiaries (the Company) lease certain property and equipment of 331 skilled nursing and assisted living centers to a related party, HCR III Healthcare, LLC. The centers are located in 30 states, with 63 percent located in Florida, Illinois, Michigan, Ohio and Pennsylvania.

The consolidated financial statements include the accounts of HCR Properties, LLC and its wholly-owned subsidiaries. HCR Properties, LLC is a wholly-owned subsidiary of Manor Care, Inc.

Effective July 1, 2009, the Company adopted a new accounting standard that was issued to establish the Financial Accounting Standards Board (FASB) Accounting Standard Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles. Adopting this standard had no impact on the Company's financial position or results of operations.

HCR III Healthcare, LLC is an indirect, wholly-owned subsidiary of HCR Healthcare, LLC and Manor Care, Inc. Certain of the consolidated subsidiaries of HCR Properties, LLC hold the title to the property and equipment of the skilled nursing and assisted living facilities. HCR III Healthcare, LLC (also referred to as Master Tenant) leases the property from certain subsidiaries of HCR Properties, LLC and conducts the operations of the business. The lease is accounted for as a direct financing lease. HCR Properties, LLC distributes the residual lease payments to Manor Care, Inc., which represents the portion of the lease payments received from HCR III Healthcare, LLC which are not used by subsidiaries of HCR Properties, LLC to make payments with respect to their loan agreements. The distributions were $204.7 million for the nine months ended September 30, 2010, $256.4 million for the year ended December 31, 2009, and $142.9 million for the year ended December 31, 2008. In addition, Manor Care, Inc. contributes funds to HCR Properties, LLC as needed, which totaled $18.0 million for the year ended December 31, 2009.

Certain wholly-owned subsidiaries of HCR Healthcare, LLC perform services for the Company, which will be referred to as affiliated company. An affiliated company provides strategic advisory and management services to the Company in accordance with a corporate services agreement. The management fee is based on an agreed upon fee for each legal entity, as defined in the agreement. Total management fees were $1.2 million for the nine months ended September 30, 2010, and $1.6 million for each of the years ended December 31, 2009 and 2008. Cash is received and disbursed on behalf of the Company by an affiliated company. The net payable to an affiliated company was $16.3 million at September 30, 2010 and $19.5 million at December 31, 2009. The payable is due on the earlier of 30 days after the affiliated company demands payment, the Company is no longer a direct or indirect wholly-owned subsidiary of Manor Care, Inc., or an event of default, as defined in the agreement. The payable is guaranteed by Manor Care, Inc. Payments or other credits are applied against any outstanding balance on a first-in, first-out basis. Generally, the payable accrues interest if it remains outstanding for more than three months. There was no interest expense recorded during the nine months ended September 30, 2010 or the years ended December 31, 2009 and 2008.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

The Company's restricted cash and cash equivalents represent amounts escrowed under the Company's loan agreements for insurance and taxes

The accounting standard for derivatives and hedging activities establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction. For derivatives not designated as hedges, changes in fair value are recognized in earnings. The Company records all derivative activity in cash flows from operations.

On January 1, 2009, the Company adopted a new accounting standard that amends and expands the disclosure requirements for derivative instruments and hedging activities. The new standard requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments. See Note 4 for the expanded disclosures.

In 2008, the Company adopted a new accounting standard for its financial instruments measured at fair value on a recurring basis. See Note 5 for the disclosures. On January 1, 2009, the Company adopted a new accounting standard for its non-financial assets and liabilities that are not recognized at fair value on a recurring basis. The new standard defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The adoption of the standard for its non-financial assets did not affect the Company's consolidated financial statements.

In the first quarter of 2010, the Company adopted a new accounting standard that amends and expands the disclosures about fair value measurements. The additional disclosures include the amount of transfers between Levels 1 and 2 of the fair value hierarchy, the reasons for transfers in and out of Level 3 and activity for recurring Level 3 measures. The amendments clarify certain existing disclosure requirements related to the level at which fair value disclosures should be disaggregated and the requirement to provide disclosures about the valuation techniques and inputs used in determining the fair value of assets or liabilities classified as Levels 2 or 3. The Company previously provided disclosures about the valuation techniques and inputs. See Note 5 for these disclosures.

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of restricted cash and cash equivalents, and derivatives, which the Company maintains with various financial institutions. The Company's loan agreements limit the types of investments that the Company can make. The majority of the Company's cash equivalents are invested in money market funds. As part of its cash and risk management process, the Company performs periodic evaluations of the relative credit standing of the financial institutions. The Company has not sustained credit losses from instruments held at financial institutions. The Company utilizes interest rate caps to add stability to interest expense. Such contracts involve the risk of non-performance by the counterparties with respect to the interest rate caps, which could result in a material loss if interest rates were to increase.

In accordance with accounting standards for income taxes, the Company's financial statements recognize the current and deferred income tax consequences that result from the Company's activities as if the Company were a separate taxpayer, rather than a member of the ultimate parent company's consolidated income tax return group. The Company's related party lease activity is eliminated in consolidation and not reflected in the parent company's consolidated tax return. As a result, the Company's current income taxes receivable or payable will remain on the Company's balance sheets.

On April 1, 2009, the Company adopted the new accounting standard that establishes the accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. The Company has evaluated subsequent events through November 30, 2010, the date the financial statements were available to be issued.

In December 2007, the Company entered into a master lease agreement to lease its property and equipment for skilled nursing and assisted living facilities to HCR III Healthcare, LLC. The original term of the agreement is 12 years with one 10-year renewal. Because HCR III Healthcare, LLC has an economic compulsion to renew the lease, all lease payments are included in the minimum lease payment calculations. At the inception of the lease, the present value of the minimum lease payments exceeded the fair value of the property and equipment. The excess value is classified as a subscription receivable and included in member's deficit. Unearned income is recognized as interest income using the interest method over the term of the lease. There is no allowance for uncollectible minimum lease

2. Net Investment in Direct Financing Lease and Subscription Receivable (Continued)

payments receivable. In 2009, the Company sold one skilled nursing facility in Ohio for $4.7 million, resulting in a net gain of $1.2 million due to the related adjustment of the direct financing lease and subscription receivable.

At September 30, 2010, future minimum lease payments receivable for the direct financing lease and future subscription payments receivable are as follows:

Commercial Mortgage-Backed Securities (CMBS) and Mezzanine Loans. In December 2007, subsidiaries of the Company entered into loan agreements with aggregate proceeds of $4.6 billion, consisting of CMBS totaling $3.0 billion and Mezzanine loans totaling $1.6 billion. The CMBS and Mezzanine debt are non-recourse and expire on January 9, 2012, subject to a one-year extension at the borrower's option if certain criteria are met. CMBS debt is secured by mortgages on the assets of certain of the subsidiaries of the Company, with a net book value of $2.8 billion at September 30, 2010. Interest on the CMBS and Mezzanine loans is payable monthly at LIBOR plus a spread, as defined in the loan agreements. Principal and any unpaid interest are payable at maturity. At September 30, 2010 and December 31, 2009, the weighted-average interest rate on the CMBS and Mezzanine loans was 2.8 percent and 2.7 percent, respectively. See Note 4 for discussion on interest rate caps entered into with respect to the CMBS and Mezzanine debt. During 2009, the Company paid a total of $3.6 million on its CMBS and Mezzanine loans due to the sale of a facility and excess land. During 2008, the Company paid $0.5 million due to the sale of excess land at a facility with an immaterial prepayment premium.

The CMBS and Mezzanine debt are not obligations of HCR Healthcare, LLC or HCR III Healthcare, LLC. HCR Properties, LLC and its subsidiaries' assets and credit are not available to satisfy the debts and other obligations of any of their affiliates or any other person. HCR III Healthcare, LLC and its subsidiaries' assets and credit are not available to satisfy the debts and other obligations of any of their affiliates or any other person.

Fair Value. At September 30, 2010 and December 31, 2009, the carrying value of the Company's debt was $4.6 billion and the fair value was $4.3 billion and $3.9 billion, respectively. At September 30, 2010 and December 31, 2009, the fair value of the Company's variable-rate debt was calculated using cash flows based upon the variable interest rate in effect at period end discounted at a current replacement spread over LIBOR based on current market conditions.

Other Information. Interest paid, primarily related to debt, amounted to $97.1 million for the nine months ended September 30, 2010, $135.8 million for the year ended December 31, 2009, and $229.1 million for the year ended December 31, 2008.

The Company has assumed that it will extend the CMBS and Mezzanine debt for one year, which is permitted under the loan agreements if certain criteria are met, until 2013. Therefore, the only debt maturity for the five years subsequent to September 30, 2010 is $4.6 billion in 2013.

Risk Management Objective of Using Derivatives. The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company's derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company's known or expected cash receipts and its known or expected cash payments principally related to the Company's borrowings. As of September 30, 2010 and December 31, 2009, no derivatives were designated as fair value hedges or hedges of net investments in foreign operations. Additionally, the Company does not use derivatives for trading or speculative purposes.

Cash Flow Hedges of Interest Rate Risk. The Company's objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company uses interest rate caps as part of its interest rate risk management strategy. Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium.

During December 2007, the Company entered into 24 interest rate caps, which expire in January 2012, to hedge the variable cash flows associated with the CMBS and Mezzanine variable-rate debt of $4.6 billion for an up-front premium of $36.9 million. These transactions were executed in conjunction with interest rate floor transactions executed by HCR Healthcare, LLC. During the first quarter of 2009, the Company modified certain interest rate caps to reduce the strike rate on $2.5 billion of the total outstanding notional amount for an up-front premium of $14.2 million. As a result of these modifications, the Company discontinued prospectively the hedge accounting on 16 of its interest rate caps for $3.57 billion of the notional amount, as this portion no longer met the strict hedge accounting requirements. As of September 30, 2010, the Company had eight interest rate caps designated as cash flow hedges of interest rate risk for a notional amount of $1.03 billion.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in other comprehensive income (OCI) and is subsequently reclassified from accumulated other comprehensive income (AOCI) into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. The payment of $3.6 million of CMBS and Mezzanine variable rate debt in 2009 created a minor ineffective portion and the change in fair value that is recorded directly to earnings is disclosed in the table below.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company's variable-rate debt. The Company continues to report the net gain or loss at the time of the modification related to the discontinued cash flow hedges in AOCI. The net gain or loss is expected to be reclassified into earnings during the original contractual terms of the derivative agreements as the hedged interest payments are expected to occur as forecasted. During the twelve months ending September 30, 2011, the Company estimates that an additional $16.2 million will be reclassified as an increase to interest expense.

Non-Designated Hedges. Derivatives not designated as hedges are not speculative and are used to manage the Company's exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements. The Company uses interest rate caps as part of its interest rate risk management strategy. Interest rate caps involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract. Changes in the fair value are recorded directly in earnings. As of September 30, 2010, the Company had 16 interest rate caps for a notional amount of $3.57 billion that were not designated as hedges in qualifying hedging relationships.

Balance Sheet Classification. The fair value of the Company's derivative financial instruments and their classification on the consolidated balance sheets was as follows:

Income Statement Effect. The effect of the Company's derivative financial instruments on the consolidated statements of income was as follows:

Amount of gain/credit or (loss/expense)	Location	Nine months ended September 30, 2010			Year ended December 31, 2009			Year ended December 31, 2008

		(In thousands)
Recognized in OCI (effective portion)	OCI	$	(1,165	)	$	1,052		$	(22,593	)
Reclassified from AOCI into income (effective portion)	Interest		(7,367	)		(3,434	)		(467	)
	expense
Recognized in income (ineffective portion and amount excluded from effectiveness testing)	Unrealized		(5	)		(53	)		—
	derivative
	loss

Other Comprehensive Income (Loss). The derivative activity included in other comprehensive income (loss) was as follows:

	Nine months ended September 30, 2010			Year ended December 31, 2009			Year ended December 31, 2008

	(In thousands)
Beginning balance	$	(17,020	)	$	(19,762	)	$	(6,316	)
Unrealized (loss) gain on hedging derivatives, net of income tax benefit (expense) of $457, $(413), and $8,863, respectively		(708	)		639			(13,730	)
Reclassification adjustment for losses recognized in earnings, net of income tax benefit of $2,890, $1,357, and $183, respectively		4,477			2,103			284

Net derivative activity		3,769			2,742			(13,446	)

Ending balance	$	(13,251	)	$	(17,020	)	$	(19,762	)

The Company measures certain financial assets and liabilities at fair value on a recurring basis. Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. The following three-tier hierarchy prioritizes the inputs used in measuring fair value:

The fair value of the Company's financial assets was determined using the following inputs:

There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2010 or the years ended December 31, 2009 and 2008. There were no assets or liabilities classified in Level 3 during the nine months ended September 30, 2010 or the years ended December 31, 2009 and 2008.

The valuation of interest rate caps was determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflected the contractual terms of the derivatives, including the period to maturity, and used observable market-based inputs, including interest rate curves and implied volatilities. The Company incorporated credit valuation adjustments to appropriately reflect the respective counterparty's nonperformance risk in the fair value measurements. Although the Company determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by its counterparties. However, as of September 30, 2010 and December 31, 2009, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivative valuations in their entirety were classified in Level 2 of the fair value hierarchy.

		Nine months ended September 30, 2010		Year ended December 31, 2009		Year ended December 31, 2008

		(In thousands)
Current:
	Federal	$	58,157	$	46,794	$	2,250
	State and local		6,790		6,295		(310	)

			64,947		53,089		1,940

Deferred:
	Federal		9,992		46,679		42,594
	State and local		1,984		5,640		5,147

			11,976		52,319		47,741

Provision for income taxes		$	76,923	$	105,408	$	49,681

The reconciliation of the amount computed by applying the statutory federal income tax rate to income before income taxes to the provision for income taxes was as follows:

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax

purposes. Significant components of the Company's federal and state deferred tax assets and liabilities were as follows:

		September 30, 2010		December 31, 2009

		(In thousands)
Deferred tax assets:
	Depreciable/amortizable assets for tax	$	311,453	$	314,777
	Hedge transactions		8,554		10,987
	Other		195		166

			320,202		325,930

Deferred tax liabilities:
	Net investment in direct financing lease		1,225,400		1,214,699
	Other		2,050		4,070

			1,227,450		1,218,769

Net deferred tax liabilities		$	907,248	$	892,839

	Minimum lease payments receivable		Subscription payments receivable

	(In thousands)
2011	$	272,583	$	138,809
2012		280,761		142,973
2013		289,183		147,262
2014		297,859		151,680
2015		306,795		156,231
Later years		5,516,117		2,809,003

Total	$	6,963,298	$	3,545,958

	September 30, 2010		December 31, 2009

	(In thousands)
Future minimum lease payments receivable	$	6,963,298	$	7,163,236
Unguaranteed residual value		1,568,324		1,568,324

Gross investment in lease		8,531,622		8,731,560
Less unearned income		5,407,992		5,635,209

Net investment in direct financing lease	$	3,123,630	$	3,096,351

			Fair Value

Asset Derivatives		Balance Sheet Location	September 30, 2010		December 31, 2009
			(In thousands)
Designated hedges
	Interest Rate Caps	Other assets	$	9	$	1,179
Non-designated hedges
	Interest Rate Caps	Other assets		98		11,014

			$	107	$	12,193



Level 1:		Observable inputs such as quoted prices in active markets;
Level 2:		Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3:		Unobservable inputs for which there is little or no market data, which requires the Company to develop assumptions.

		Nine months ended September 30, 2010		Year ended December 31, 2009		Year ended December 31, 2008

		(In thousands)
Income taxes computed at statutory rate		$	71,220	$	97,650	$	46,537
Differences resulting from:
	State and local income taxes, net of federal effect		5,703		7,758		3,144

Provision for income taxes		$	76,923	$	105,408	$	49,681


		CONSOLIDATED FINANCIAL STATEMENTS
		HCR Properties, LLC For the nine months ended September 30, 2010 and for the years ended December 31, 2009 and 2008 With Report of Independent Auditors

	September 30, 2010		December 31, 2009

	(In thousands)
Future subscription payments receivable	$	3,545,958	$	3,647,773
Less unearned income		1,985,428		2,090,033

Subscription receivable	$	1,560,530	$	1,557,740

	September 30, 2010		December 31, 2009

	(In thousands)
Commercial mortgage-backed securities (CMBS)	$	2,997,353	$	2,997,353
Mezzanine loans		1,598,589		1,598,589

Long-term debt	$	4,595,942	$	4,595,942

	Fair Value at September 30, 2010

	Level 1		Level 2		Level 3
	(In thousands)
Assets:
Restricted cash and cash equivalents	$	3,420	$	—	$	—
Derivative asset for interest rate caps		—		107		—

Total assets	$	3,420	$	107	$	—