Exhibit 99.1

EXHIBIT 99.1

Item 6. Selected Financial Data

The following selected financial data for the five years ended December 31, 2004 are derived from our audited consolidated financial statements (in thousands, except per share data):


	Year Ended December 31
	2000		2001		2002		2003		2004
Operating Data
Revenues (1)	$	115,936	$	115,169	$	149,158	$	195,577	$	250,256
Expenses:
Interest expense (1)		29,259		26,923		37,890		52,499		71,715
Provision for depreciation (1)		17,124		23,670		34,318		48,760		72,447
Other operating expenses (2)		9,570		10,853		13,038		17,274		21,178
Impairment of assets						2,298		2,792		314
Loss on extinguishment of debt (3)				213		403
Loss on investment		2,000

Total expenses		57,953		61,659		87,947		121,325		165,654

Income from continuing operations		57,983		53,510		61,211		74,252		84,602
Income from discontinued operations, net (1)		10,073		7,039		6,448		8,488		769

Net income		68,056		60,549		67,659		82,740		85,371
Preferred stock dividends		13,490		13,505		12,468		9,218		12,737
Preferred stock redemption charge								2,790

Net income available to common stockholders	$	54,566	$	47,044	$	55,191	$	70,732	$	72,634

Other Data
Average number of common shares outstanding:
Basic		28,418		30,534		36,702		43,572		51,544
Diluted		28,643		31,027		37,301		44,201		52,082
Per Share Data
Basic:
Income from continuing operations available to common stockholders	$	1.57	$	1.31	$	1.32	$	1.43	$	1.40
Discontinued operations, net		0.35		0.23		0.18		0.19		0.01

Net income available to common stockholders		1.92		1.54		1.50		1.62		1.41
Diluted:
Income from continuing operations available to common stockholders	$	1.56	$	1.29	$	1.31	$	1.41	$	1.38
Discontinued operations, net		0.35		0.23		0.17		0.19		0.01

Net income available to common stockholders		1.91		1.52		1.48		1.60		1.39
Cash distributions per common share	$	2.335	$	2.34	$	2.34	$	2.34	$	2.385


	December 31
	2000		2001		2002		2003		2004
Balance Sheet Data
Net real estate investments	$	1,121,419	$	1,213,564	$	1,524,457	$	1,992,446	$	2,441,972
Total assets		1,156,904		1,269,843		1,594,110		2,182,731		2,549,643
Total debt		439,752		491,216		676,331		1,013,184		1,186,225
Total liabilities		458,297		511,973		696,878		1,033,052		1,214,364
Total stockholders’ equity		698,607		757,870		897,232		1,149,679		1,335,279

(1)		In accordance with FASB Statement No. 144, we have reclassified the income and expenses attributable to the properties sold subsequent to January 1, 2002 through March 31, 2005 to discontinued operations for all periods presented. See Note 15 to our audited consolidated financial statements.
(2)		Other operating expenses include loan expense, provision for loan losses and general and administrative expenses.
(3)		Effective January 1, 2003, in accordance with FASB Statement No. 145, we reclassified the losses on extinguishments of debt in 2001 and 2002 to income from continuing operations rather than as extraordinary items as previously required under FASB Statement No. 4.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is based primarily on the consolidated financial statements of Health Care REIT, Inc. for the periods presented and should be read together with the notes thereto. Other important factors are identified in “Item 1 – Business” in the Annual Report on Form 10-K for the year ended December 31, 2004.

Executive Overview

Business

Health Care REIT, Inc. is a self-administered, equity real estate investment trust that invests in health care facilities, primarily skilled nursing and assisted living facilities. We also invest in specialty care facilities. Founded in 1970, we were the first REIT to invest exclusively in health care facilities. As of December 31, 2004, long-term care facilities, which include skilled nursing and assisted living facilities, comprised approximately 93% of our investment portfolio. The following table summarizes our portfolio as of December 31, 2004:


	Investments(1)		Percentage of		Revenues(2)		Percentage of		Number of		Number of		Investment per		Number of		Number of
Type of Facility	(in thousands)		Investments		(in thousands)		Revenues		Facilities		Beds/Units		Bed/Unit(3)		Operators(4)		States(4)

Assisted Living Facilities	$	1,335,717		54%	$	139,440		55%		234		15,776	$	84,911		31		33
Skilled Nursing Facilities		965,328		39%		98,677		39%		152		20,975		46,023		20		24
Specialty Care Facilities		151,833		7%		15,460		6%		8		1,111		136,663		5		5

Totals	$	2,452,878		100%	$	253,577		100%		394		37,862

(1)		Investments include real estate investments and credit enhancements which amounted to $2,447,233,000 and $5,645,000, respectively.
(2)		Revenues include gross revenues and revenues from discontinued operations for the year ended December 31, 2004.
(3)		Investment per Bed/Unit was computed by using the total investment amount of $2,456,711,000 which includes real estate investments, credit enhancements and unfunded construction commitments for which initial funding has commenced which amounted to $2,447,233,000, $5,645,000 and $3,833,000, respectively.
(4)		We have investments in properties located in 35 states and managed by 50 different operators.

Our primary objectives are to protect stockholders’ capital and enhance stockholder value. We seek to pay consistent cash dividends to stockholders and create opportunities to increase dividend payments to stockholders as a result of annual increases in rental and interest income and portfolio growth. To meet these objectives, we invest primarily in long-term care facilities managed by experienced operators and diversify our investment portfolio by operator and geographic location.

Substantially all of our revenues and sources of cash flows from operations are derived from operating lease rentals and interest earned on outstanding loans receivable. These items represent our primary source of liquidity to fund distributions and are dependent upon our operators’ continued ability to make contractual rent and interest payments to us. To the extent that our operators experience operating difficulties and are unable to generate sufficient cash to make payments to us, there could be a material adverse impact on our consolidated results of operations, liquidity and/or financial condition. To mitigate this risk, we monitor our investments through a variety of methods determined by the type of health care facility and operator. Our monitoring process includes review of monthly financial statements for each facility, quarterly review of operator credit, annual facility inspections and review of covenant compliance relating to licensure, real estate taxes, letters of credit and other collateral. In monitoring our portfolio, our personnel use a proprietary database to collect and analyze facility-specific data. Additionally, we conduct extensive research to ascertain industry trends and risks. Through these monitoring and research efforts, we are typically able to intervene at

an early stage and address payment risk, and in so doing, support both the collectibility of revenue and the value of our investment.

In addition to our monitoring and research efforts, we also structure our investments to help mitigate payment risk. We typically invest in or finance up to 90% of the appraised value of a property. Operating leases and loans are normally credit enhanced by guaranties and/or letters of credit. In addition, operating leases are typically structured as master leases and loans are generally cross-defaulted and cross-collateralized with other loans, operating leases or agreements between us and the operator and its affiliates. As of December 31, 2004, 85% of our real property was subject to master leases, 96% of our real estate investments were cross-defaulted with other investments relating to the same operator and 78% of our real property loans were cross-collateralized with other loans to the same operator.

For the year ended December 31, 2004, rental income and interest income represented 90% and 9%, respectively, of total gross revenues. Prior to June 2004, our standard lease structure contained fixed annual rental escalators, which were generally recognized on a straight-line basis over the initial lease period. Beginning in June 2004, our new standard lease structure contains annual rental escalators that are contingent upon changes in the Consumer Price Index and/or changes in the gross operating revenues of the property. These escalators are not fixed, so no straight-line rent is recorded; however, rental income is recorded based on the contractual cash rental payments due for the period. This lease structure will initially generate lower revenues, net income and funds from operations compared to leases with fixed escalators that require straight-lining, but will enable us to generate additional organic growth and minimize non-cash straight-line rent over time. This change does not affect our cash flow or our ability to pay dividends. Our yield on loans receivable depends upon a number of factors, including the stated interest rate, the average principal amount outstanding during the term of the loan and any interest rate adjustments.

Depending upon the availability and cost of external capital, we anticipate making additional investments in health care related facilities. New investments are generally funded from temporary borrowings under our unsecured lines of credit arrangements, internally generated cash and the proceeds from sales of real property. Our investments generate internal cash from rent and interest receipts and principal payments on loans receivable. Permanent financing for future investments, which replaces funds drawn under the unsecured lines of credit arrangements, is expected to be provided through a combination of public and private offerings of debt and equity securities and the incurrence of secured debt. We believe our liquidity and various sources of available capital are sufficient to fund operations, meet debt service obligations (both principal and interest), make dividend distributions and finance future investments.

Depending upon market conditions, we believe that new investments will be available in the future with spreads over our cost of capital that will generate appropriate returns to our stockholders. During the year ended December 31, 2004, we completed $584,931,000 of gross new investments and had $62,584,000 of real property sales and mortgage loan payoffs, resulting in net investments of $522,347,000. We previously issued investment guidance indicating that we anticipated net new investments of $250,000,000 in 2005. We recently adjusted our net new investment guidance for 2005 to $200,000,000, due to the anticipated disposition of two investments totaling approximately $50,000,000 that were not in the original guidance. Although no additional investment payoffs have been specifically identified, we anticipate the potential repayment of certain mortgage loans receivable and the possible sale of additional real property. To the extent that mortgage loan repayments and real property sales exceed new investments, our revenues and cash flows from operations could be adversely affected. We expect to reinvest the proceeds from any mortgage loan repayments and real property sales in new investments. To the extent that new investment requirements exceed our available cash on-hand, we expect to borrow under our unsecured lines of credit arrangements. At December 31, 2004, we had $19,763,000 of cash and cash equivalents and $189,000,000 of available borrowing capacity under our unsecured lines of credit arrangements.

Key Transactions in 2004

We completed the following key transactions during the year ended December 31, 2004:

•   our Board of Directors increased our quarterly dividend to $0.60 per share, which represented a one and one-half cent increase from the quarterly dividend of $0.585 paid for 2003. The dividend declared for the quarter ended December 31, 2004 represents the 135^th consecutive dividend payment;

•   we expanded our primary unsecured line of credit arrangement from $225,000,000 to $310,000,000. The existing bank group, in conjunction with two new participants, First Tennessee Bank, N.A. and LaSalle Bank National Association, provided the additional capacity;

•   we extended our $30,000,000 unsecured line of credit arrangement to May 2005;

•   we issued 7,000,000 shares of 7.625% Series F Cumulative Redeemable Preferred Stock, generating approximately $169,107,000 of net proceeds;

•   we issued $50,000,000 of senior unsecured notes due November 15, 2013, at an effective yield of 5.68%, generating approximately $50,708,000 of net proceeds;

•   we filed a registration statement with the Securities and Exchange Commission on December 1, 2004 for the issuance of up to $1,081,794,619 of securities. We anticipate that this shelf registration will be effective in the first half of 2005;

•   we completed $584,931,000 of new investments and had $62,584,000 of real property sales and mortgage loan payoffs; and

•   our only remaining operator bankruptcy was resolved with the April 2004 bankruptcy court approval of the debtors’ plan of reorganization for Doctors Community Healthcare Corporation.

Key Performance Indicators, Trends and Uncertainties

We utilize several key performance indicators to evaluate the various aspects of our business. These indicators are discussed below and relate to operating performance, concentration risk and credit strength. Management uses these key performance indicators to facilitate internal and external comparisons to our historical operating results, in making operating decisions and for budget planning purposes.

Operating Performance. We believe that net income available to common stockholders (“NICS”) is the most appropriate earnings measure. Other useful supplemental measures of our operating performance include funds from operations (“FFO”) and funds available for distribution (“FAD”); however, these supplemental measures are not defined by accounting principles generally accepted in the United States (“U.S. GAAP”). Please refer to the section entitled “Non-GAAP Financial Measures” for further discussion of FFO and FAD and for reconciliations of FFO and FAD to NICS. NICS, FFO, FAD and their relative per share amounts are widely used by investors and analysts in the valuation, comparison and investment recommendations of companies. The following table reflects the recent historical trends for our operating performance measures (dollars in thousands, except per share data):


	Year Ended
	December 31		December 31		December 31
	2002		2003		2004
Net income available to common stockholders	$	55,191	$	70,732	$	72,634
Funds from operations		96,573		119,463		146,742
Funds available for distribution		87,317		104,535		132,950
Per share data (fully diluted):
Net income available to common stockholders	$	1.48	$	1.60	$	1.39
Funds from operations		2.59		2.70		2.82
Funds available for distribution		2.34		2.36		2.55

Credit Strength. We measure our credit strength both in terms of leverage ratios and coverage ratios. Our leverage ratios include debt to book capitalization (“DBCR”) and debt to market capitalization (“DMCR”). The leverage ratios indicate how much of our balance sheet capitalization is related to long-term debt. We expect to maintain a DBCR between 40% and 50% and a DMCR between 30% and 40%. Our coverage ratios include interest coverage ratio (“ICR”) and fixed charge coverage ratio (“FCR”). The coverage ratios indicate our ability to service interest and fixed charges (interest plus preferred dividends). We expect to maintain an ICR in excess of 3.00 times and an FCR in excess of 2.50 times. The coverage ratios are based on earnings before interest, taxes, depreciation and amortization (“EBITDA”) which is discussed in further detail, and reconciled to net income, below in “Non-GAAP Financial Measures.” Leverage ratios and coverage ratios are widely used by investors, analysts and rating agencies in the valuation, comparison, rating and investment recommendations of companies. The following table reflects the recent historical trends for our credit strength measures:


	Year Ended
	December 31			December 31			December 31
	2002			2003			2004
Debt to book capitalization ratio		43	%		47	%		47	%
Debt to market capitalization ratio		36	%		34	%		34	%
Interest coverage ratio		3.67x			3.50x			3.24x
Fixed charge coverage ratio		2.84x			3.01x			2.77x

Concentration Risk. We evaluate our concentration risk in terms of asset mix, investment mix, operator mix and geographic mix. Concentration risk is a valuable measure in understanding what portion of our investments could be at risk if certain sectors were to experience downturns. Asset mix measures the portion of our investments that are real property. In order to qualify as an equity REIT, at least 75% of our real estate investments must be real property whereby each property, which includes the land, buildings, improvements and related rights, is owned by us and leased to an operator pursuant to a long-term operating lease. Investment mix measures the portion of our investments that relate to our various facility types. We invest primarily in long-term care facilities. Operator mix measures the portion of our investments that relate to our top five operators. We try to limit our top five operators to 50% of our total real estate investments. Geographic mix measures the portion of our investments that relate to our top five states. We try to limit our top five states to 50% of our total real estate investments. The following table reflects our recent historical trends of concentration risk:


	December 31			December 31			December 31
	2002			2003			2004
Asset mix:
Real property		85	%		87	%		90	%
Loans receivable		14	%		11	%		9	%
Subdebt investments		1	%		2	%		1	%

Investment mix:
Assisted living facilities		57	%		60	%		54	%
Skilled nursing facilities		35	%		32	%		39	%
Specialty care facilities		8	%		8	%		7	%


	December 31			December 31			December 31
	2002			2003			2004
Operator mix:
Emeritus Corporation					12	%		15	%
Southern Assisted Living, Inc.					11	%		8	%
Commonwealth Communities L.L.C.		13	%		10	%		8	%
Delta Health Group, Inc.								7	%
Home Quality Management, Inc.		8	%		7	%		7	%
Life Care Centers of America, Inc.		8	%		6	%
Merrill Gardens L.L.C.		9	%
Alterra Healthcare Corporation		7	%
Remaining operators		55	%		54	%		55	%

Geographic mix:
Florida		10	%		9	%		15	%
Massachusetts		15	%		13	%		14	%
North Carolina					10	%		8	%
Ohio		7	%		6	%		6	%
Texas		8	%		6	%		6	%
Tennessee		6	%
Remaining states		54	%		56	%		51	%

We evaluate our key performance indicators in conjunction with current expectations to determine if historical trends are indicative of future results. Our expected results may not be achieved and actual results may differ materially from our expectations. This may be a result of various factors, including, but not limited to:

•   the status of the economy;

•   the status of capital markets, including prevailing interest rates;

•   serious issues facing the health care industry, including compliance with, and changes to, regulations and payment policies and operators’ difficulty in obtaining and maintaining adequate liability and other insurance;

•   changes in financing terms;

•   competition within the health care and senior housing industries;

•   negative developments in the operating results or financial condition of operators, including, but not limited to, their ability to pay rent and repay loans;

•   the Company’s ability to transition or sell facilities with a profitable result;

•   operator bankruptcies;

•   government regulations affecting Medicare and Medicaid reimbursement rates;

•   liability claims and insurance costs for our operators;

•   unanticipated difficulties and/or expenditures relating to future acquisitions;

•   environmental laws affecting our properties;

•   delays in reinvestment of sale proceeds;

•   changes in rules or practices governing the Company’s financial reporting; and

• structure related factors, including REIT qualification, anti-takeover provisions and key management personnel.

Management regularly monitors the economic and other factors listed above. We develop strategic and tactical plans designed to improve performance and maximize our competitive position. Our ability to achieve our financial objectives is dependent upon our ability to effectively execute these plans and to appropriately respond to emerging economic and company-specific trends. Please refer to “Forward-Looking Statements and Risk Factors” below for further discussion of these risk factors.

Portfolio Update

Payment coverages in our portfolio continue to improve. Our overall payment coverage is at 1.78 times and represents an increase of 25 basis points from the prior year. The table below is a summary of the key performance measures for our portfolio. Census and payor mix data reflects the three months ended September 30, 2004. Coverage data reflects the 12 months ended September 30, 2004.


										Coverage Data
				Payor Mix
										Before		After
	Census			Private			Medicare			Management Fees		Management Fees
Assisted Living Facilities		87	%		86	%		0	%		1.45x		1.23x
Skilled Nursing Facilities		87	%		16	%		15	%		2.11x		1.62x
Specialty Care Facilities		66	%		23	%		40	%	2.69x		2.08x
							Weighted Averages				1.78x		1.44x

Assisted Living Portfolio. At December 31, 2004, our assisted living portfolio was comprised of 234 facilities with 15,776 units and an investment balance of $1,335,717,000. The stabilized portfolio was comprised of 230 facilities with 15,115 units, an investment balance of $1,298,820,000, and payment coverage of 1.45 times, an increase of 14 basis points from the prior year. Our fill-up and construction properties remained within our stated goal of having no more than 10% to 15% of the portfolio in construction and fill-up. We currently have two assisted living facilities remaining in fill-up, representing less than 1% of our revenues. Only one facility has occupancy of less than 50%. Finally, we have two assisted living facilities in construction.

Skilled Nursing Portfolio. At December 31, 2004, our skilled nursing portfolio was comprised of 152 facilities with 20,975 beds and an investment balance of $965,328,000. Average occupancies have risen from a low of 81% in the third quarter of 2000 to 87% in the third quarter of 2004. Our payment coverage remains strong at 2.11 times, an increase of 36 basis points from the prior year.

Specialty Care Portfolio. At December 31, 2004, our specialty care portfolio was comprised of eight facilities with 1,111 beds and an investment balance of $151,833,000. Our payment coverage remains strong at 2.69 times, an increase of 77 basis points from the prior year.

Corporate Governance

Maintaining investor confidence and trust has become increasingly important in today’s business environment. Health Care REIT, Inc.’s Board of Directors and management are strongly committed to policies and procedures that reflect the highest level of ethical business practices. Our corporate governance guidelines provide the framework for our business operations and emphasize our commitment to increase stockholder value while meeting all applicable legal requirements. In March 2004, the Board of Directors adopted its Corporate Governance Guidelines. These guidelines meet the listing standards adopted by the New York Stock Exchange and are available on our Web site at www.hcreit.com and from us upon written request sent to the Vice President and Corporate Secretary, Health Care REIT, Inc., One SeaGate, Suite 1500, P.O. Box 1475, Toledo, Ohio, 43603-1475.

On July 30, 2002, President George W. Bush signed into law the Sarbanes-Oxley Act of 2002 (“SOX”). SOX is designed to protect investors by improving the accuracy and reliability of corporate disclosures. SOX directed the Securities and Exchange Commission (“SEC”) to promulgate all necessary rules and regula-

tions. We believe we are in compliance with all of the new listing guidelines of the NYSE relating to corporate governance as well as the applicable provisions of SOX and the rules of the SEC adopted under SOX. The following is a summary of some of the important SOX related corporate governance initiatives for which we are compliant.

•   Prohibition on director/officer loans – effective July 2002, new officer and director loans are prohibited;

•   CEO/CFO certifications – beginning with the Form 10-Q for the period ended September 30, 2002, we provide the required CEO and CFO certifications attesting to the effectiveness of our disclosure controls and procedures for all necessary SEC filings;

•   Acceleration of Section 16 reports – we continue to meet the two day filing requirement for Section 16 reports, effective August 29, 2002, and we submit them electronically as of June 30, 2003;

•   Form 8-K Item 12 – our quarterly earnings releases are now furnished to the SEC via Form 8-K Item 12 (renumbered as Item 2.01 effective as of August 23, 2004) beginning with the quarter ended March 31, 2003;

•   Non-GAAP financial measures – all public disclosures issued subsequent to March 28, 2003 contain the required reconciliations and discussion of non-GAAP financial measures. Our primary non-GAAP financial measures are FFO, FAD and EBITDA;

•   Off-balance sheet arrangements and contractual obligations – we have always reported these items and adopted the new disclosure format beginning with our Annual Report on Form 10-K for the year ended December 31, 2003;

•   Prohibition on hiring former employees of the independent registered public accounting firm – effective May 2003, we may not hire former team members of our independent registered public accounting firm unless they have passed the “cooling-off period” as defined by the SEC;

•   Pre-approval of non-audit services – the Audit Committee of the Board of Directors adopted a pre-approval policy in May 2003 and has continued to refine it as the SEC issues additional interpretations and guidance. A description of the current pre-approval policy can be found in our Proxy Statement for the 2004 Annual Meeting of Stockholders (“Proxy Statement”);

•   Audit Committee financial expert – the Board has determined that at least one member of the Audit Committee satisfies the definition of a “financial expert” and we have made the required disclosures in our Proxy Statement;

•   Filing deadline accelerations – we have met and plan to continue to meet the SEC’s staged acceleration plan regarding Forms 10-Q and 10-K filing deadlines;

•   Code of ethics – in connection with the adoption of our Corporate Governance Guidelines in March 2004, we adopted a Code of Business Conduct and Ethics that is applicable to all of our directors, officers and employees. Our Code of Business Conduct and Ethics is available on our Web site at www.hcreit.com;

•   Independence – seven of our nine directors are independent and all members of our audit, compensation and nominating/corporate governance committees are independent. At each Board meeting, the non-management directors meet in a special session. Mr. Ballard, the chairman of the nominating/corporate governance committee, is the Presiding Director of such sessions;

•   Whistleblower mechanism – on January 28, 2004, the Audit Committee approved procedures for (a) the receipt, retention and treatment of complaints that we receive regarding accounting, internal accounting controls or auditing matters and (b) the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters. Information regarding our Corporate Governance Hotline is available on our Web site at www.hcreit.com; and

• Disclosures regarding committee functions and communications between security holders and the Board – beginning with the 2004 Proxy Statement, we have made the required disclosures regarding the independence and functions of the committees of the Board of Directors and have provided our security holders with information so they can communicate with our Board of Directors or any specific director.

In addition to the items discussed above, the SEC has issued its final rules regarding compliance with SOX Section 404, Management Assessment of Internal Controls (“SOX404”). Pursuant to SOX404, we must develop enhanced procedures to understand, document, evaluate and monitor our internal controls and procedures for financial statement purposes. Beginning with this Annual Report on Form 10-K for the year ended December 31, 2004, we must provide an assessment report from management on the effectiveness of our internal controls. In addition, our independent registered public accounting firm must attest to and report on management’s assertions. See “Item 9A – Controls and Procedures” of the Annual Report on Form 10-K for the year ended December 31, 2004 for additional information. We implemented a SOX404 compliance plan in April 2003 and have completed all necessary documentation and testing of our internal controls in time to provide the required management report for the current year. To date, we have incurred costs (both internal and external) related to SOX404 and other corporate governance compliance initiatives and we anticipate that we will incur additional costs. These costs are included in general and administrative expenses.

Liquidity and Capital Resources

Sources and Uses of Cash

Our primary sources of cash include rent and interest receipts, borrowings under unsecured lines of credit arrangements, public and private offerings of debt and equity securities, proceeds from the sales of real property and principal payments on loans receivable. Our primary uses of cash include dividend distributions, debt service payments (including principal and interest), real property acquisitions, loan advances and general and administrative expenses. These sources and uses of cash are reflected in our Consolidated Statements of Cash Flows and are discussed in further detail below. The following is a summary of our sources and uses of cash flows (dollars in thousands):


	Year Ended						One Year Change						Year Ended			One Year Change						Two Year Change
	Dec. 31, 2002			Dec. 31, 2003			$			%			Dec. 31, 2004			$			%			$			%
Cash and cash equivalents at beginning of period	$	9,826		$	9,550		$	(276	)		-3	%	$	124,496		$	114,946			1204	%	$	114,670			1167	%
Cash provided from (used in) operating activities		105,367			129,521			24,154			23	%		144,025			14,504			11	%		38,658			37	%
Cash provided from (used in) investing activities		(353,430	)		(388,746	)		(35,316	)		10	%		(507,362	)		(118,616	)		31	%		(153,932	)		44	%
Cash provided from (used in) financing activities		247,787			374,171			126,384			51	%		258,604			(115,567	)		-31	%		10,817			4	%

Cash and cash equivalents at end of period	$	9,550		$	124,496		$	114,946			1204	%	$	19,763		$	(104,733	)		-84	%	$	10,213			107	%

Operating Activities. The increases in net cash provided from operating activities are primarily attributable to increases in net income and the provision for depreciation offset by changes in receivables and other assets. Net income and the provision for depreciation increased primarily as a result of net new investments in properties owned by us. See the discussion of investing activities below for additional details. To the extent that we acquire or dispose of additional properties in the future, our provision for depreciation will change accordingly. Changes in receivables and other assets are primarily due to timing of cash receipts relating to rent, debt service and other contractual obligations and the fair value of our interest rate swap agreements.

Investing Activities. The increases in net cash used in investing activities are primarily attributable to increases in net real property investments. At December 31, 2004, 90% of our real estate investments were real property investments. The investment activity during the year ended December 31, 2004 was approximately 95% real property investments and 5% loans. Investments for the year ended December 31, 2004 included the acquisition of 22 assisted living facilities and 52 skilled nursing facilities for $518,891,000, including the assumption of debt totaling $14,555,000. The remaining $38,211,000 of real property investments relates primarily to funding of construction and renovations on existing facilities. Of this amount, $9,523,000 related to construction advances on two assisted living facilities. For the same period in 2003, we acquired 69 assisted living facilities and 26 skilled nursing facilities for $474,385,000. The prior year acquisitions included the assumption of debt totaling $101,243,000 and the issuance of preferred stock totaling $26,500,000, resulting in $346,643,000 of cash disbursed for the acquisitions. In addition, we advanced $63,770,000 relating to construction and renovations on existing facilities. Of this amount, $29,496,000 related to construction advances on three assisted living facilities and one specialty care facility. We converted $36,794,000 of completed construction projects relating to one assisted living facility and the specialty care facility into operating lease properties in 2003. For the same period in 2002, we acquired 24 assisted living facilities, 21 skilled nursing facilities and one specialty care facility for $354,672,000. The 2002 acquisitions included the assumption of debt which reduced the amount funded by $2,248,000, resulting in $352,424,000 of cash disbursed for the acquisitions. In addition, we advanced $57,282,000 relating to construction and renovations on existing facilities. Of this amount, $19,595,000 related to construction advances on three assisted living facilities and one specialty care facility.

Financing Activities. The changes in net cash provided from or used in financing activities are primarily attributable to changes related to our long-term debt, preferred stock issuances and redemptions, common stock issuances and cash distributions to stockholders. In September 2002, we issued $150,000,000 of 8.0% senior unsecured notes, maturing in September 2012, at an effective yield of 8.05%. In March 2003, we issued $100,000,000 of 8.0% senior unsecured notes, maturing in September 2012, at an effective yield of 7.40%. These notes were an add-on to the $150,000,000 senior unsecured notes issued in September 2002. In November 2003, we issued $250,000,000 of 6.0% senior unsecured notes, maturing in November 2013, at an effective yield of 6.01%. In September 2004, we issued $50,000,000 of 6.0% senior unsecured notes, maturing in November 2013, at an effective yield of 5.68%. These notes were an add-on to the $250,000,000 senior unsecured notes issued in November 2003. We extinguished $40,000,000 of 8.0% senior unsecured notes that matured in April 2004.

There was no preferred stock activity for the year ended December 31, 2002. In July 2003, we closed on a public offering of 4,000,000 shares of 7.875% Series D Cumulative Redeemable Preferred Stock, which generated net proceeds of approximately $96,850,000. The shares have a liquidation value of $25 per share. The preferred stock, which has no stated maturity, may be redeemed by us on or after July 9, 2008. A portion of the proceeds from this offering were used to redeem all 3,000,000 shares of our 8.875% Series B Cumulative Redeemable Preferred Stock on July 15, 2003, at a redemption price of $25 per share plus accrued and unpaid dividends.

In September 2003, we issued 1,060,000 shares of 6% Series E Cumulative Convertible and Redeemable Preferred Stock as partial consideration for an acquisition of assets by us, with the shares valued at $26,500,000 for such purposes. The shares were issued to Southern Assisted Living, Inc. and certain of its shareholders without registration in reliance upon the federal statutory exemption of Section 4(2) of the Securities Act of 1933, as amended. The shares have a liquidation value of $25 per share. The preferred stock, which has no stated maturity, may be redeemed by us on or after August 15, 2008. The preferred shares are convertible into common stock at a conversion price of $32.66 per share at any time. As of December 31, 2004, certain holders of our Series E Preferred Stock have converted 709,955 shares into 543,438 shares of our common stock, leaving 350,045 of such shares outstanding at December 31, 2004.

In September 2004, we closed on a public offering of 7,000,000 shares of 7.625% Series F Cumulative Redeemable Preferred Stock, which generated net proceeds of approximately $169,107,000. The shares have a liquidation value of $25 per share. The preferred stock, which has no stated maturity, may be redeemed by us

on or after September 14, 2009. The proceeds were used to repay borrowings under our unsecured lines of credit arrangements and to invest in additional health care properties.

The change in common stock issuances is primarily attributable to public and private issuances in 2002 and 2003. In February 2002, we issued 906,000 shares of common stock, $1 par value, at a price of $27.59 per share, which generated net proceeds of approximately $23,657,000. In May 2002, we issued 3,450,000 shares of common stock, $1 par value, at a price of $28.00 per share, which generated net proceeds of approximately $91,578,000. In November 2002, we issued 930,000 shares of common stock, $1 par value, at a price of $26.90 per share, which generated net proceeds of approximately $24,952,000.

In July 2003, we issued 1,583,100 shares of common stock, $1 par value, at a price of $30.32 per share, which generated net proceeds of approximately $47,950,000. In September 2003, we issued 3,200,000 shares of common stock, $1 par value, at a price of $30.25 per share, which generated net proceeds of approximately $91,583,000. In October 2003, we issued an additional 480,000 shares of common stock pursuant to the over-allotment exercise, which generated net proceeds of approximately $13,795,000.

The remaining difference in common stock issuances is primarily related to our dividend reinvestment and stock purchase plan (“DRIP”), stock option exercises, restricted stock grants and preferred stock conversions. During the year ended December 31, 2002, we issued 355,000 shares of common stock pursuant to our DRIP, which generated net proceeds of $9,572,000. In May 2003, we instituted our enhanced DRIP. Existing stockholders, in addition to reinvesting dividends, may purchase up to $5,000 of common stock per month at a discount. Previously, stockholders could only purchase once per quarter. During the year ended December 31, 2004, we issued 1,533,000 shares of common stock pursuant to our DRIP, which generated net proceeds of approximately $51,575,000 as compared to 2,277,000 shares issued and $68,860,000 of net proceeds generated for the same period in 2003. As of February 28, 2005, we had an effective registration statement on file with the Securities and Exchange Commission under which we may issue up to 6,314,213 shares of common stock pursuant to our DRIP. As of February 28, 2005, 4,357,361 shares of common stock remained available for issuance under this registration statement.

In order to qualify as a REIT for federal income tax purposes, we must distribute at least 90% of our taxable income (excluding capital gains) to our stockholders. During the year ended December 31, 2004, we paid dividends totaling $122,987,000 (or $2.385 per share) and $12,737,000 to holders of our common stock and preferred stock, respectively. For the same periods in 2003, we paid dividends totaling $101,863,000 (or $2.34 per share) and $9,218,000 to holders of our common stock and preferred stock, respectively. For the same periods in 2002, we paid dividends totaling $84,671,000 (or $2.34 per share) and $12,468,000 to holders of our common stock and preferred stock, respectively. The increase in common stock dividends is primarily attributable to the increase in common stock outstanding as discussed below in “Results of Operations.”

Off-Balance Sheet Arrangements

We have guaranteed the payment of industrial revenue bonds for one assisted living facility in the event that the present owner defaults upon its obligations. In consideration for this guaranty, we receive and recognize fees annually related to this arrangement. This guaranty expires upon the repayment of the industrial revenue bonds which currently mature in 2009. At December 31, 2004, we were contingently liable for $3,195,000 under this guaranty.

We have an outstanding letter of credit issued for the benefit of certain insurance companies that provide workers’ compensation insurance to one of our tenants. Our obligation under the letter of credit matures in 2009. At December 31, 2004, our obligation under the letter of credit was $2,450,000.

We are exposed to various market risks, including the potential loss arising from adverse changes in interest rates. We may or may not elect to use financial derivative instruments to hedge interest rate exposure. These decisions are principally based on our policy to match our variable rate investments with comparable borrowings, but are also based on the general trend in interest rates at the applicable dates and our perception of the future volatility of interest rates. As of December 31, 2004, we participated in two interest rate swap

agreements related to our long-term debt. Our interest rate swaps are discussed below in “Contractual Obligations.”

Contractual Obligations

The following table summarizes our payment requirements under contractual obligations as of December 31, 2004 (in thousands):


	Payments Due by Period
			Less than						More than
Contractual Obligations	Total		1 Year		1-3 Years		3-5 Years		5 Years
Unsecured lines of credit arrangements (1)	$	340,000	$	30,000	$	310,000	$	0	$	0
Senior unsecured notes		875,000				225,000		100,000		550,000
Secured debt		160,225		6,276		17,981		23,472		112,496
Contractual interest obligations		571,375		83,630		150,137		105,568		232,041
Capital lease obligations
Operating lease obligations		16,036		1,778		2,341		1,857		10,060
Purchase obligations		86,648		7,646		63,110		4,500		11,392
Other long-term liabilities

Total contractual obligations	$	2,049,284	$	129,330	$	768,569	$	235,397	$	915,989

(1)

Unsecured lines of credit arrangements reflected at 100% capacity.

We have an unsecured credit arrangement with a consortium of eight banks providing for a revolving line of credit (“revolving credit”) in the amount of $310,000,000, which expires on May 15, 2006 (with the ability to extend for one year at our discretion if we are in compliance with all covenants). The agreement specifies that borrowings under the revolving credit are subject to interest payable in periods no longer than three months at either the agent bank’s prime rate of interest or 1.3% over LIBOR interest rate, at our option (3.7375% at December 31, 2004). In addition, we pay a commitment fee based on an annual rate of 0.325% and an annual agent’s fee of $50,000. Principal is due upon expiration of the agreement. We have another unsecured line of credit arrangement with a consortium of three banks for a total of $30,000,000, which expires May 31, 2005. Borrowings under this line of credit are subject to interest at either the lead bank’s prime rate of interest (5.25% at December 31, 2004) or 2.0% over LIBOR interest rate, at our option, and are due on demand. At December 31, 2004, we had $151,000,000 outstanding under the unsecured lines of credit arrangements and estimated total contractual interest obligations of $6,410,000. Contractual interest obligations are estimated based on the assumption that the balance of $151,000,000 at December 31, 2004 is constant until maturity at interest rates in effect at December 31, 2004.

We have $875,000,000 of senior unsecured notes with fixed annual interest rates ranging from 6% to 8.17%, payable semi-annually. Total contractual interest obligations on senior unsecured notes totaled $394,191,000 at December 31, 2004. Additionally, we have 32 mortgage loans totaling $160,225,000, collateralized by health care facilities, with fixed annual interest rates ranging from 5.5% to 12%, payable monthly. The carrying values of the health care properties securing the mortgage loans totaled $233,591,000 at December 31, 2004. Total contractual interest obligations on mortgage loans totaled $139,454,000 at December 31, 2004.

variable rate based on six-month LIBOR plus a spread. At December 31, 2004, total contractual interest obligations were estimated to be $31,320,000.

At December 31, 2004, we had operating lease obligations of $16,036,000 relating to our office space, six assisted living facilities and three skilled nursing facilities.

Purchase obligations are comprised of unfunded construction commitments and contingent purchase obligations. At December 31, 2004, we had outstanding construction financings of $26,183,000 ($25,463,000 for leased properties and $720,000 for construction loans) and were committed to providing additional financing of approximately $3,833,000 to complete construction. At December 31, 2004, we had contingent purchase obligations totaling $82,815,000. These contingent purchase obligations primarily relate to deferred acquisition fundings. Deferred acquisition fundings are contingent upon a tenant satisfying certain conditions in the lease. Upon funding, amounts due from the tenant are increased to reflect the additional investment in the property.

Capital Structure

As of December 31, 2004, we had stockholders’ equity of $1,335,279,000 and a total outstanding debt balance of $1,186,225,000, which represents a debt to total book capitalization ratio of 47%. Our ratio of debt to market capitalization was 34% at December 31, 2004. For the year ended December 31, 2004, our coverage ratio of EBITDA to interest was 3.24 to 1.00. For the year ended December 31, 2004, our coverage ratio of EBITDA to fixed charges was 2.77 to 1.00. Also, at December 31, 2004, we had $19,763,000 of cash and cash equivalents and $189,000,000 of available borrowing capacity under our unsecured lines of credit arrangements.

Our debt agreements contain various covenants, restrictions and events of default. Among other things, these provisions require us to maintain certain financial ratios and minimum net worth and impose certain limits on our ability to incur indebtedness, create liens and make investments or acquisitions. As of December 31, 2004, we were in compliance with all of the covenants under our debt agreements. None of our debt agreements contain provisions for acceleration which could be triggered by our debt ratings. However, under our unsecured lines of credit arrangements, the ratings on our senior unsecured notes are used to determine the fees and interest payable.

Our senior unsecured notes are rated Baa3 (stable), BBB- (stable) and BBB- (positive) by Moody’s Investors Service, Standard and Poor’s Investor Service and Fitch Ratings, respectively. We plan to manage the Company to maintain investment grade status with a capital structure consistent with our current profile. Any downgrades in terms of ratings or outlook by any or all of the noted rating agencies could have a material adverse impact on our cost and availability of capital, which could in turn have a material adverse impact on our consolidated results of operations, liquidity and/or financial condition.

As of February 28, 2005, we had an effective shelf registration statement on file with the Securities and Exchange Commission under which we may issue up to $356,794,619 of securities including debt securities, common and preferred stock, depositary shares, warrants and units. We filed a registration statement with the Securities and Exchange Commission on December 1, 2004 for the issuance of up to $1,081,794,619 of securities to replace the existing shelf registration. We anticipate that this shelf registration will be effective in the first half of 2005. Also, as of February 28, 2005, we had an effective registration statement on file in connection with our enhanced DRIP program under which we may issue up to 6,314,213 shares of common stock. As of February 28, 2005, 4,357,361 shares of common stock remained available for issuance under this registration statement. Depending upon market conditions, we anticipate issuing securities under our registration statements to invest in additional health care facilities and to repay borrowings under our unsecured lines of credit arrangements.

Results of Operations


	Year Ended				One Year Change					Year Ended		One Year Change					Two Year Change
	Dec. 31, 2002		Dec. 31, 2003		$		%			Dec. 31, 2004		$		%			$		%
Net income available to common stockholders	$	55,191	$	70,732	$	15,541		28	%	$	72,634	$	1,902		3	%	$	17,443		32	%
Funds from operations		96,573		119,463		22,890		24	%		146,742		27,279		23	%		50,169		52	%
Funds available for distribution		87,317		104,535		17,218		20	%		132,950		28,415		27	%		45,633		52	%
EBITDA		155,208		199,349		44,141		28	%		238,264		38,915		20	%		83,056		54	%

Net income available to common stockholders for the year ended December 31, 2004 totaled $72,634,000, or $1.39 per diluted share, as compared with $70,732,000, or $1.60 per diluted share, for the same period in 2003 and $55,191,000, or $1.48 per diluted share, for the same period in 2002. Net income available to common stockholders increased on a year-to-date basis primarily due to an increase in rental income offset by increases in interest expense and provision for depreciation. These changes are discussed in further detail below. Although net income available to common stockholders increased by 3% from 2003 and 32% from 2002, it decreased on a per share basis primarily due to significantly higher outstanding shares. On a fully diluted basis, average common shares outstanding for the year ended December 31, 2004 were 52,082,000, an 18% increase from 44,201,000 for the same period in 2003 and a 40% increase from 37,301,000 for the same period in 2002. The increase in fully diluted average common shares outstanding is primarily the result of public and private common stock offerings, common stock issuances pursuant to our DRIP and conversions of preferred stock into common stock. The following table represents the changes in outstanding common stock for the period from January 1, 2003 to December 31, 2004 (amounts in thousands):


	Year Ended
	Dec. 31, 2003		Dec. 31, 2004		Totals
Beginning balance		40,086		50,361		40,086
Public/private offerings		5,263				5,263
DRIP issuances		2,277		1,533		3,810
Preferred stock conversions		2,224		369		2,593
Other issuances		511		662		1,173

Ending balance		50,361		52,925		52,925

FFO for the year ended December 31, 2004 totaled $146,742,000, or $2.82 per diluted share, as compared with $119,463,000, or $2.70 per diluted share, for the same period in 2003 and $96,573,000, or $2.59 per diluted share, for the same period in 2002. The increase in FFO is primarily due to increases in net income available to common stockholders and the provision for depreciation. FAD for the year ended December 31, 2004 totaled $132,950,000, or $2.55 per diluted share, as compared to $104,535,000, or $2.36 per diluted share, for the same period in 2003 and $87,317,000, or $2.34 per diluted share, for the same period in 2002. The increase in FAD is primarily due to increases in net income available to common stockholders and the provision for depreciation offset by changes in rental income in excess of cash received. Please refer to the discussion of “Non-GAAP Financial Measures” below for further information regarding FFO and FAD and for reconciliations of FFO and FAD to NICS.

EBITDA for the year ended December 31, 2004 totaled $238,264,000, as compared with $199,349,000 for the same period in 2003 and $155,208,000 for the same period in 2002. The increase in EBITDA is primarily due to increases in net income, interest expense and provision for depreciation. Our coverage ratio of EBITDA to total interest was 3.24 times for the year ended December 31, 2004 as compared with 3.50 times for the same period in 2003 and 3.67 times for the same period in 2002. Our coverage ratio of EBITDA to fixed charges was 2.77 times for the year ended December 31, 2004 as compared with 3.01 times for the same period in 2003 and 2.84 times for the same period in 2002. Our coverage ratios declined from the prior years primarily due to the fact that interest expense increased 29% to $73,431,000 from $56,912,000 in 2003 and

74% from $42,271,000 in 2002, whereas EBITDA only increased by 20% from 2003 and 54% from 2002. The increase in interest expense is discussed in further detail below. Please refer to the discussion of “Non-GAAP Financial Measures” below for further information regarding EBITDA and a reconciliation of EBITDA and net income.

Revenues were comprised of the following (dollars in thousands):


	Year Ended				One Year Change						Year Ended		One Year Change						Two Year Change
	Dec. 31, 2002		Dec. 31, 2003		$			%			Dec. 31, 2004		$			%			$			%
Rental income	$	119,831	$	171,050	$	51,219			43	%	$	224,956	$	53,906			32	%	$	105,125			88	%
Interest income		26,525		20,768		(5,757	)		-22	%		22,818		2,050			10	%		(3,707	)		-14	%
Transaction fees and other income		2,802		3,759		957			34	%		2,432		(1,327	)		-35	%		(370	)		-13	%
Prepayment fees												50		50			n/a			50			n/a

Totals	$	149,158	$	195,577	$	46,419			31	%	$	250,256	$	54,679			28	%	$	101,098			68	%

The increase in gross revenues is primarily attributable to increased rental income resulting from the acquisitions of new properties for which we receive rent offset by sales of real property. Investments for the year ended December 31, 2004 included the acquisition of 22 assisted living facilities and 52 skilled nursing facilities for $518,891,000, including the assumption of debt totaling $14,555,000. The remaining $38,211,000 of real property investments related primarily to funding of construction and renovations on existing facilities. Of this amount, $9,523,000 related to construction advances on two assisted living facilities. For the same period in 2003, we acquired 69 assisted living facilities and 26 skilled nursing facilities for $474,385,000. However, the prior year acquisitions included the assumption of debt totaling $101,243,000 and the issuance of preferred stock totaling $26,500,000, resulting in $346,643,000 of cash disbursed for the acquisitions. In addition, we advanced $63,770,000 relating to construction and renovations on existing facilities. Of this amount, $29,496,000 related to construction advances on three assisted living facilities and one specialty care facility. We converted $36,794,000 of completed construction projects relating to one assisted living facility and the specialty care facility into operating lease properties in 2003. For the same period in 2002, we acquired 24 assisted living facilities, 21 skilled nursing facilities and one specialty care facility for $354,672,000. However, the 2002 acquisitions included the assumption of debt which reduced the amount funded by $2,248,000, resulting in $352,424,000 of cash disbursed for the acquisitions. In addition, we advanced $57,282,000 relating to construction and renovations on existing facilities. Of this amount, $19,595,000 related to construction advances on three assisted living facilities and one specialty care facility. During the year ended December 31, 2004, we sold four assisted living facilities, two skilled nursing facilities and one specialty care facility, generating $37,567,000 of net proceeds. For the same period in 2003, we sold 14 assisted living facilities, two skilled nursing facilities and one parcel of land, generating $65,455,000 of net proceeds. For the same period in 2002, we sold nine assisted living facilities, generating $52,279,000 of net proceeds.

As discussed above, prior to June 2004, our standard lease structure contained fixed annual rental escalators, which were generally recognized on a straight-line basis over the minimum lease period. Beginning in June 2004, our new standard lease structure contains annual rental escalators that are contingent upon changes in the Consumer Price Index and/or changes in the gross operating revenues of the property. These escalators are not fixed, so no straight-line rent is recorded; however, rental income is recorded based on the contractual cash rental payments due for the period. While this change does not affect our cash flow or our ability to pay dividends, it is anticipated that we will generate additional organic growth and minimize non-cash straight-line rent over time. If gross operating revenues at our facilities and/or the Consumer Price Index do not increase, a portion of our revenues may not continue to increase. Sales of real property would offset revenue increases and, to the extent that they exceed new acquisitions, could result in decreased revenues. Our leases could renew above or below current rent rates, resulting in an increase or decrease in rental income. As of December 31, 2004, we had no leases expiring prior to 2009.

Interest income decreased from 2002 primarily due to lower average yields on our loans receivable and non-recognition of interest income related to loans on non-accrual. Interest income increased from 2003 primarily due to a full year of interest income on loans made in 2003 and recognition of interest income related to our mortgage loans with Doctors Community Healthcare Corporation as a result of the bankruptcy resolution. Transaction fees and other income fluctuated primarily due to the $902,000 gain from the sale of our investment in Atlantic Healthcare Finance L.P. in October 2003 and the resulting lack of income subsequent to the date of sale.

Expenses were comprised of the following (dollars in thousands):


	Year Ended				One Year Change						Year Ended		One Year Change						Two Year Change
	Dec. 31, 2002		Dec. 31, 2003		$			%			Dec. 31, 2004		$			%			$			%
Interest expense	$	37,890	$	52,499	$	14,609			39	%	$	71,715	$	19,216			37	%	$	33,825			89	%
Provision for depreciation		34,318		48,760		14,442			42	%		72,447		23,687			49	%		38,129			111	%
General and administrative		9,665		11,483		1,818			19	%		16,585		5,102			44	%		6,920			72	%
Loan expense		2,373		2,921		548			23	%		3,393		472			16	%		1,020			43	%
Impairment of assets		2,298		2,792		494			21	%		314		(2,478	)		-89	%		(1,984	)		-86	%
Loss on extinguishment of debt		403				(403	)		n/a											(403	)		n/a
Provision for loan losses		1,000		2,870		1,870			187	%		1,200		(1,670	)		-58	%		200			20	%

Totals	$	87,947	$	121,325	$	33,378			38	%	$	165,654	$	44,329			37	%	$	77,707			88	%

The increase in total expenses is primarily attributable to increases in interest expense, the provision for depreciation and general and administrative expenses. The increases in interest expense are primarily due to higher average borrowings and changes in the amount of capitalized interest offsetting interest expense. This was partially offset by lower average interest rates and savings generated from interest rate swap agreements. In September 2002, we issued $150,000,000 of 8.0% senior unsecured notes, maturing in September 2012, at an effective yield of 8.05%, resulting in 12 months of expense in the current year as compared to three months of expense in 2002 and 12 months of expense in 2003. In March 2003, we issued $100,000,000 of 8.0% senior unsecured notes, maturing in September 2012, at an effective yield of 7.40%, resulting in nine months of interest expense in 2003 compared to 12 months of expense in the current year. In November 2003, we issued $250,000,000 of 6.0% senior unsecured notes, maturing in November 2013, resulting in 12 months of expense in the current year as compared to no expense in 2002 and one month of expense in 2003. In September 2004, we issued $50,000,000 of 6.0% senior unsecured notes, maturing in November 2013, at an effective yield of 5.68% resulting in three months of expense in the current year as compared to no expense in the prior years. Additionally, during the year ended December 31, 2004 we had an average daily outstanding balance of $54,770,000 under our unsecured lines of credit arrangements compared to $61,677,000 and $69,180,000 during the same periods in 2003 and 2002, respectively. Also, in 2004, we assumed $14,555,000 of secured debt with weighted average interest rates of 7.50% in conjunction with new acquisitions. In 2003, we assumed $101,243,000 of secured debt with weighted average interest rates of 7.39% in conjunction with new acquisitions. In 2002, we assumed $2,248,000 of secured debt with weighted average interest rates of 7.75% in conjunction with new acquisitions. Effective April 15, 2004, we repaid our $40,000,000 8.0% senior unsecured notes, which will result in a decrease of interest expense of $3,200,000 on an annualized basis. If we borrow under our unsecured lines of credit arrangements, issue additional senior unsecured notes or assume additional secured debt, our interest expense will increase.

We capitalize certain interest costs associated with funds used to finance the construction of properties owned directly by us. The amount capitalized is based upon the borrowings outstanding during the construction period using the rate of interest that approximates our cost of financing. Our interest expense is reduced by the amount capitalized. Capitalized interest for the years ended December 31, 2002, 2003 and 2004 totaled $170,000, $1,535,000 and $875,000, respectively.

On May 6, 2004, we entered into two interest rate swap agreements (the “Swaps”) for a total notional amount of $100,000,000 to hedge changes in fair value attributable to changes in the LIBOR swap rate of $100,000,000 of fixed rate debt with a maturity date of November 15, 2013. The Swaps are treated as fair-value hedges for accounting purposes and we utilize the short-cut method in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. The Swaps are with highly rated counterparties in which we receive a fixed rate of 6.0% and pay a variable rate based on six-month LIBOR plus a spread. For the year ended December 31, 2004, we generated $1,770,000 of savings related to our Swaps that was recorded as a reduction of interest expense. We had no interest rate swap agreements outstanding at December 31, 2003 or December 31, 2002.

The provision for depreciation increased primarily as a result of additional investments in properties owned directly by us offset by sales of real property. See the discussion of rental income above for additional details. To the extent that we acquire or dispose of additional properties in the future, our provision for depreciation will change accordingly.

General and administrative expenses as a percentage of revenues (including revenues from discontinued operations) for the year ended December 31, 2004, were 6.54% as compared with 5.55% and 5.79% for the same periods in 2003 and 2002, respectively. Approximately one-half of the increases from 2002 and 2003 are related to costs associated with our initiatives to attract and retain appropriate personnel to achieve our business objectives. The remainder is comprised of increases relating to professional services fees (including costs associated with SOX compliance), taxes and transition costs associated with the removal of an underperforming operator in December 2004.

The increase in loan expense was primarily due to the additional amortization of costs related to amending our primary unsecured line of credit arrangement, costs related to obtaining consents to modify the covenant packages of our senior unsecured notes and costs related to senior unsecured notes issued in 2003 and 2004.

In May 2003, we announced the amendment and extension of our primary unsecured line of credit arrangement. The line of credit was expanded to $225,000,000 and extended to expire in May 2006 (with the ability to extend for one year at our discretion if we are in compliance with all covenants). In August 2003, we further amended the line of credit to modify certain financial covenants that enhanced our financial flexibility and aligned our covenant package with other investment-grade REITs. Finally, in December 2003 and January 2004, we expanded this line of credit to $310,000,000.

In August and September 2003, we solicited the consents of registered holders of our senior unsecured notes to the adoption of certain amendments to the supplemental indentures to modify the indentures to require us to (a) limit the use of secured debt to 40% of undepreciated assets, (b) limit total debt to 60% of undepreciated total assets, and (c) maintain total unencumbered assets at 150% of total unsecured debt. These amendments to all of our then outstanding senior unsecured notes were intended to modernize the covenant package and make it consistent with other investment-grade REITs.

During the year ended December 31, 2004, it was determined that the projected undiscounted cash flows from a property did not exceed its related net book value and an impairment charge of $314,000 was recorded to reduce the property to its estimated fair market value. The estimated fair market value was determined by an offer to purchase received from a third party. During the year ended December 31, 2003, it was determined that the projected undiscounted cash flows from a property did not exceed its related net book value and an impairment charge of $2,792,000 was recorded to reduce the property to its estimated fair market value. The estimated fair market value of the property was determined by an independent appraisal. During the year ended December 31, 2002, it was determined that the projected undiscounted cash flows from three properties did not exceed their related net book values and impairment charges of $2,298,000 were recorded to reduce the properties to their estimated fair market values. The estimated fair market values of the properties were determined by offers to purchase received from third parties or estimated net sales proceeds.

In April 2002, we purchased $35,000,000 of our outstanding senior unsecured notes that were due in 2003 and recorded a charge of $403,000 in connection with this early extinguishment. No such transactions or charges occurred in 2003 or 2004.

The provision for loan losses is related to our critical accounting estimate for the allowance for loan losses and is discussed below in “Critical Accounting Policies.” Due to collectibility concerns related to portions of our loan portfolio, we increased our allowance for losses on loans receivable by an additional $1,870,000 for the year ended December 31, 2003.

Other items were comprised of the following (dollars in thousands):


	Year Ended						One Year Change						Year Ended			One Year Change						Two Year Change
	Dec. 31, 2002			Dec. 31, 2003			$			%			Dec. 31, 2004			$			%			$			%
Gain (loss) on sales of properties	$	(1,032	)	$	4,139		$	5,171			-501	%	$	(143	)	$	(4,282	)		-103	%	$	889			-86	%
Discontinued operations, net		7,480			4,349			(3,131	)		-42	%		912			(3,437	)		-79	%		(6,568	)		-88	%
Preferred dividends		(12,468	)		(9,218	)		3,250			-26	%		(12,737	)		(3,519	)		38	%		(269	)		2	%
Preferred stock redemption charge					(2,790	)		(2,790	)		n/a						2,790			-100	%					n/a

Totals	$	(6,020	)	$	(3,520	)	$	2,500			-42	%	$	(11,968	)	$	(8,448	)		240	%	$	(5,948	)		99	%

During the years ended December 31, 2002, 2003 and 2004, we sold properties with carrying values of $53,311,000, $61,316,000 and $37,710,000 for net losses of $1,032,000, net gains of $4,139,000 and net losses of $143,000, respectively. During the three months ended March 31, 2005, we sold properties with carrying values of $9,298,000 for a net loss of $110,000. In August 2001, the Financial Accounting Standards Board issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which is effective for fiscal years beginning after December 15, 2001. We adopted the standard effective January 1, 2002. In accordance with Statement No. 144, we have reclassified the income and expenses attributable to the properties sold subsequent to January 1, 2002 to discontinued operations. These properties generated $7,480,000, $4,349,000 and $912,000 of income after deducting depreciation and interest expense from rental revenue for the years ended December 31, 2002, 2003 and 2004, respectively. Please refer to Note 15 of our audited consolidated financial statements for further discussion.

The increase in preferred dividends is primarily due to the increase in average outstanding preferred shares. We issued 3,000,000 shares of 8.875% Series B Cumulative Redeemable Preferred Stock in May 1998, and 3,000,000 shares of 9.0% Series C Cumulative Convertible Preferred Stock in January 1999. We issued 4,000,000 shares of 7.875% Series D Cumulative Redeemable Preferred Stock in July 2003 and used the proceeds to redeem our outstanding Series B Preferred Stock. We issued 7,000,000 shares of 7.625% Series F Cumulative Redeemable Preferred Stock in September 2004. During the year ended December 31, 2002, the holder of our Series C Preferred Stock converted 900,000 shares into 878,049 shares of our common stock, leaving 2,100,000 of such shares outstanding at December 31, 2002. During the year ended December 31, 2003, the holder of our Series C Preferred Stock converted 2,100,000 shares into 2,048,781 shares of our common stock, leaving no such shares outstanding at December 31, 2003. We issued 1,060,000 shares of 6% Series E Cumulative Convertible and Redeemable Preferred Stock in September 2003. During the year ended December 31, 2003, certain holders of our Series E Preferred Stock converted 229,556 shares into 175,714 shares of our common stock, leaving 830,444 of such shares outstanding at December 31, 2003. During the year ended December 31, 2004, certain holders of our Series E Preferred Stock converted 480,399 shares into 367,724 shares of our common stock, leaving 350,045 of such shares outstanding at December 31, 2004.

As noted above, in July 2003, we closed a public offering of 4,000,000 shares of 7.875% Series D Cumulative Redeemable Preferred Stock. A portion of the proceeds from this offering were used to redeem all 3,000,000 shares of our 8.875% Series B Cumulative Redeemable Preferred Stock on July 15, 2003. In accordance with Emerging Issues Task Force (“EITF”) Topic D-42, the costs to issue these securities were recorded as a non-cash, non-recurring charge of $2,790,000, or $0.06 per diluted share, in the third quarter of

2003 to reduce net income available to common stockholders. No such transactions or charges occurred in 2002 or 2004.

Non-GAAP Financial Measures

We believe that net income, as defined by U.S. GAAP, is the most appropriate earnings measurement. However, we consider FFO and FAD to be useful supplemental measures of our operating performance. Historical cost accounting for real estate assets in accordance with U.S. GAAP implicitly assumes that the value of real estate assets diminishes predictably over time as evidenced by the provision for depreciation. However, since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient. In response, the National Association of Real Estate Investment Trusts (“NAREIT”) created FFO as a supplemental measure of operating performance for REITs that excludes historical cost depreciation from net income. FFO, as defined by NAREIT, means net income, computed in accordance with U.S. GAAP, excluding gains (or losses) from sales of real estate, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. FAD represents FFO excluding the non-cash straight-line rental adjustments. Additionally, our historical results include an adjustment for a preferred stock redemption charge for the year ended December 31, 2003 but exclude adjustments for impairment charges.

In August 2003, we adopted the SEC clarification of EITF Topic D-42. To implement the clarified accounting pronouncement, our 2003 results reflect a reduction in net income available to common stockholders resulting from a non-cash, non-recurring charge of $2,790,000, or $0.06 per diluted share, due to the redemption of our 8.875% Series B Cumulative Redeemable Preferred Stock in July 2003. NAREIT has issued its recommendation that preferred stock redemption charges should not be added back to net income in the calculation of FFO. Although we have adopted this recommendation, we have also disclosed FFO and FAD adjusted for the preferred stock redemption charge for enhanced clarity. Additionally, we believe that the nature of the charge is non-recurring because there was not a similar charge during the two preceding years and we do not anticipate a similar charge in the succeeding two years.

In October 2003, NAREIT informed its member companies that the SEC had changed its position on certain aspects of the NAREIT FFO definition, including impairment charges. Previously, the SEC accepted NAREIT’s view that impairment charges were effectively an early recognition of an expected loss on an impending sale of property and thus should be added back to net income in the calculation of FFO and FAD similar to other gains and losses on sales. However, the SEC’s clarified interpretation is that recurring impairments taken on real property may not be added back to net income in the calculation of FFO and FAD. We have adopted this interpretation and have not added back impairment charges of $2,298,000, or $0.06 per diluted share, recorded for the year ended December 31, 2002, $2,792,000, or $0.06 per diluted share, recorded for the year ended December 31, 2003 and $314,000, or $0.01 per diluted share, recorded for the year ended December 31, 2004.

EBITDA stands for earnings before interest, taxes, depreciation and amortization. Additionally, we exclude the non-cash provision for loan losses in calculating EBITDA. We believe that EBITDA, along with net income and cash flow provided from operating activities, is an important supplemental measure because it provides additional information to assess and evaluate the performance of our operations. Additionally, restrictive covenants in our long-term debt arrangements contain financial ratios based on EBITDA. We primarily utilize EBITDA to measure our interest coverage ratio, which represents EBITDA divided by total interest, and our fixed charge coverage ratio, which represents EBITDA divided by fixed charges. Fixed charges include total interest and preferred dividends.

FFO, FAD and EBITDA are financial measures that are widely used by investors, equity and debt analysts and rating agencies in the valuation, comparison, rating and investment recommendations of companies. Management uses these financial measures to facilitate internal and external comparisons to our historical operating results, in making operating decisions and for budget planning purposes. Additionally, FFO and FAD are internal evaluation metrics utilized by the Board of Directors to evaluate management. FFO, FAD and EBITDA do not represent net income or cash flow provided from operating activities as

determined in accordance with U.S. GAAP and should not be considered as alternative measures of profitability or liquidity. Finally, FFO, FAD and EBITDA, as defined by us, may not be comparable to similarly entitled items reported by other real estate investment trusts or other companies.

The table below reflects the reconciliation of FFO to net income available to common stockholders, the most directly comparable U.S. GAAP measure, for the periods presented. The provision for depreciation includes provision for depreciation from discontinued operations. Amounts are in thousands except for per share data.


	Year Ended
	December 31		December 31			December 31
	2002		2003			2004
FFO Reconciliation:
Net income available to common stockholders	$	55,191	$	70,732		$	72,634
Provision for depreciation		40,350		52,870			74,015
Loss (gain) on sales of properties		1,032		(4,139	)		143
Prepayment fees							(50	)

Funds from operations		96,573		119,463			146,742
Preferred stock redemption charge				2,790

Funds from operations — adjusted	$	96,573	$	122,253		$	146,742
Average common shares outstanding:
Basic		36,702		43,572			51,544
Diluted		37,301		44,201			52,082
Per share data:
Net income available to common stockholders
Basic	$	1.50	$	1.62		$	1.41
Diluted		1.48		1.60			1.39
Funds from operations
Basic	$	2.63	$	2.74		$	2.85
Diluted		2.59		2.70			2.82
Funds from operations — adjusted
Basic	$	2.63	$	2.81		$	2.85
Diluted		2.59		2.77			2.82

The table below reflects the reconciliation of FAD to net income available to common stockholders, the most directly comparable U.S. GAAP measure, for the periods presented. The provision for depreciation includes provision for depreciation from discontinued operations. Amounts are in thousands except for per share data.


	Year Ended
	December 31			December 31			December 31
	2002			2003			2004
FAD Reconciliation:
Net income available to common stockholders	$	55,191		$	70,732		$	72,634
Provision for depreciation		40,350			52,870			74,015
Loss (gain) on sales of properties		1,032			(4,139	)		143
Prepayment fees								(50	)
Rental income in excess of cash received		(9,256	)		(14,928	)		(13,792	)

Funds available for distribution		87,317			104,535			132,950
Preferred stock redemption charge					2,790

Funds available for distribution — adjusted	$	87,317		$	107,325		$	132,950
Average common shares outstanding:
Basic		36,702			43,572			51,544
Diluted		37,301			44,201			52,082
Per share data:
Net income available to common stockholders
Basic	$	1.50		$	1.62		$	1.41
Diluted		1.48			1.60			1.39
Funds available for distribution
Basic	$	2.38		$	2.40		$	2.58
Diluted		2.34			2.36			2.55
Funds available for distribution — adjusted
Basic	$	2.38		$	2.46		$	2.58
Diluted		2.34			2.43			2.55

The table below reflects the reconciliation of EBITDA to net income, the most directly comparable U.S. GAAP measure, for the periods presented. The provision for depreciation and interest expense includes provision for depreciation and interest expense from discontinued operations. Amortization includes amortization of deferred loan expenses, restricted stock and stock options. Dollars are in thousands.


	Year Ended
	December 31		December 31		December 31
	2002		2003		2004
EBITDA Reconciliation:
Net income	$	67,659	$	82,740	$	85,371
Interest expense		42,101		55,377		72,556
Capitalized interest		170		1,535		875
Provision for depreciation		40,350		52,870		74,015
Amortization		3,928		3,957		4,247
Provision for loan losses		1,000		2,870		1,200

EBITDA	$	155,208	$	199,349	$	238,264
Interest Coverage Ratio:
Interest expense	$	42,101	$	55,377	$	72,556
Capitalized interest		170		1,535		875

Total interest		42,271		56,912		73,431
EBITDA	$	155,208	$	199,349	$	238,264

Interest coverage ratio		3.67x		3.50x		3.24x
Fixed Charge Coverage Ratio:
Total interest	$	42,271	$	56,912	$	73,431
Preferred dividends		12,468		9,218		12,737

Total fixed charges		54,739		66,130		86,168
EBITDA	$	155,208	$	199,349	$	238,264

Fixed charge coverage ratio		2.84x		3.01x		2.77x

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions. Management considers an accounting estimate or assumption critical if:

• the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and

• the impact of the estimates and assumptions on financial condition or operating performance is material.

Management has discussed the development and selection of its critical accounting policies with the Audit Committee of the Board of Directors and the Audit Committee has reviewed the disclosure presented below relating to them. Management believes the current assumptions and other considerations used to estimate amounts reflected in our consolidated financial statements are appropriate and are not reasonably likely to change in the future. However, since these estimates require assumptions to be made that were uncertain at the time the estimate was made, they bear the risk of change. If actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our consolidated financial statements, the resulting changes could have a material adverse effect on our consolidated results of operations, liquidity and/or financial condition. Please refer to Note 1 of our audited consolidated financial statements for further information on significant accounting policies that impact us. There have been no

material changes to these policies in 2004, except for the new policy regarding the fair value of derivative instruments.

We adopted the fair value-based method of accounting for share-based payments effective January 1, 2003 using the prospective method described in FASB Statement No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. Because Statement 123(R) must be applied not only to new awards but to previously granted awards that are not fully vested on the effective date of Statement 123(R), and because we adopted Statement 123 using the prospective transition method (which applied only to awards granted, modified or settled after the adoption date of Statement 123), compensation cost for some previously granted awards that were not recognized under Statement 123 will be recognized under Statement 123(R). However, had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of pro forma net income and earnings per share in Note 9 to our audited consolidated financial statements. We do not expect the adoption of Statement 123(R) to have a material impact on the consolidated financial statements.

The following table presents information about our critical accounting policies, as well as the material assumptions used to develop each estimate:


Nature of Critical		Assumptions/
Accounting Estimate		Approach Used

*Allowance for Loan Losses* We maintain an allowance for loan losses in accordance with Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, as amended, and SEC Staff Accounting Bulletin No. 102, Selected Loan Loss Allowance Methodology and Documentation Issues. The allowance for loan losses is maintained at a level believed adequate to absorb potential losses in our loans receivable. The determination of the allowance is based on a quarterly evaluation of all outstanding loans. If this evaluation indicates that there is a greater risk of loan charge-offs, additional allowances or placement on non-accrual status may be required. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due as scheduled according to the contractual terms of the original loan agreement. Consistent with this definition, all loans on non-accrual are deemed impaired. To the extent circumstances improve and the risk of collectibility is diminished, we will return these loans to full accrual status.		The determination of the allowance is based on a quarterly evaluation of all outstanding loans, including general economic conditions and estimated collectibility of loan payments and principal. We evaluate the collectibility of our loans receivable based on a combination of factors, including, but not limited to, delinquency status, historical loan charge-offs, financial strength of the borrower and guarantors and value of the underlying property. For the year ended December 31, 2004 we recorded $1,200,000 as provision for loan losses, resulting in an allowance for loan losses of $5,261,000 relating to loans with outstanding balances of $41,277,000 at December 31, 2004. During the fourth quarter of 2004, we transitioned a portfolio of 11 properties from an underperforming operator to three new operators. Primarily as a result of the transition, we incurred a $3,764,000 write-off relating to outstanding loans with the prior operator. Also at December 31, 2004, we had loans with outstanding balances of $35,918,000 on non-accrual status.


*Depreciation and Useful Lives* Substantially all of the properties owned by us are leased under operating leases and are recorded at cost. The cost of our real property is allocated to land, buildings, improvements and intangibles in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations. The allocation of the acquisition costs of properties is based on appraisals commissioned from independent real estate appraisal firms.		We compute depreciation on our properties using the straight-line method based on their estimated useful lives which range from 15 to 40 years for buildings and five to 15 years for improvements. For the year ended December 31, 2004, we recorded $58,671,000 and $15,344,000 as provision for depreciation relating to buildings and improvements, respectively. The average useful life of our buildings and improvements was 30.7 years and 9.2 years, respectively, at December 31, 2004.


*Impairment of Long-Lived Assets* We review our long-lived assets for potential impairment in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment and Disposal of Long-Lived Assets. An impairment charge must be recognized when the carrying value of a long-lived asset is not recoverable. The carrying value is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If it is determined that a permanent impairment of a long-lived asset has occurred, the carrying value of the asset is		The net book value of long-lived assets is reviewed quarterly on a property by property basis to determine if there are indicators of impairment. These indicators may include anticipated operating losses at the property level, the tenant’s inability to make rent payments, a decision to dispose of an asset before the end of its estimated useful life and changes in the market that may permanently reduce the value of the property. If indicators of impairment exist, then the undiscounted future cash flows from the most likely use of the property are compared to the current net


Nature of Critical		Assumptions/
Accounting Estimate		Approach Used

reduced to its fair value and an impairment charge is recognized for the difference between the carrying value and the fair value.		book value. This analysis requires us to determine if indicators of impairment exist and to estimate the most likely stream of cash flows to be generated from the property during the period the property is expected to be held. During the year ended December 31, 2004, it was determined that the projected undiscounted cash flows from a property did not exceed its related net book value and an impairment charge of $314,000 was recorded to reduce the property to its estimated fair market value. The estimated fair market value was determined by an offer to purchase received from a third party.


*Fair Value of Derivative Instruments* The valuation of derivative instruments is accounted for in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS133”), as amended by Statement of Financial Accounting Standards No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. SFAS133, as amended, requires companies to record derivatives at fair market value on the balance sheet as assets or liabilities.		The valuation of derivative instruments requires us to make estimates and judgments that affect the fair value of the instruments. Fair values for our derivatives are estimated by a third party consultant, which utilizes pricing models that consider forward yield curves and discount rates. Such amounts and the recognition of such amounts are subject to significant estimates which may change in the future. At December 31, 2004, we participated in two interest rate swap agreements related to our long-term debt. At December 31, 2004, the swaps were reported at their fair value as a $4,206,000 other asset. For the year ended December 31, 2004, we generated $1,770,000 of savings related to our swaps that was recorded as a reduction in interest expense.


*Revenue Recognition* Revenue is recorded in accordance with Statement of Financial Accounting Standards No. 13, Accounting for Leases, and SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, as amended (“SAB101”). SAB101 requires that revenue be recognized after four basic criteria are met. These four criteria include persuasive evidence of an arrangement, the rendering of service, fixed and determinable income and reasonably assured collectibility. If the collectibility of revenue is determined incorrectly, the amount and timing of our reported revenue could be significantly affected. Interest income on loans is recognized as earned based upon the principal amount outstanding subject to an evaluation of collectibility risk. Prior to June 2004, our standard lease structure contained fixed annual rental escalators, which were generally recognized on a straight-line basis over the initial lease period. Beginning in June 2004, our new standard lease structure contains annual rental escalators that are contingent upon changes in the Consumer Price Index and/or changes in the gross operating revenues of the property. These escalators are not fixed, so no straight-line rent is recorded; however, rental income is recorded based on the contractual cash rental payments due for the period.		We evaluate the collectibility of our revenues and related receivables on an on-going basis. We evaluate collectibility based on assumptions and other considerations including, but not limited to, the certainty of payment, payment history, the financial strength of the investment’s underlying operations as measured by cash flows and payment coverages, the value of the underlying collateral and guaranties and current economic conditions. If our evaluation indicates that collectibility is not reasonably assured, we may place an investment on non-accrual or reserve against all or a portion of current income as an offset to revenue. For the year ended December 31, 2004 we recognized $22,818,000 of interest income and $228,277,000 of rental income, including discontinued operations. Rental income includes $13,792,000 of straight-line rental income. At December 31, 2004, our straight-line receivable balance was $62,456,000. Also at December 31, 2004, we had loans with outstanding balances of $35,918,000 on non-accrual status.

Impact of Inflation

During the past three years, inflation has not significantly affected our earnings because of the moderate inflation rate. Additionally, our earnings are primarily long-term investments with fixed rates of return. These investments are mainly financed with a combination of equity, senior unsecured notes and borrowings under our lines of credit arrangements. During inflationary periods, which generally are accompanied by rising interest rates, our ability to grow may be adversely affected because the yield on new investments may increase at a slower rate than new borrowing costs. Presuming the current inflation rate remains moderate and long-term interest rates do not increase significantly, we believe that inflation will not impact the availability of equity and debt financing.

Forward-Looking Statements and Risk Factors

     The Annual Report on Form 10-K for the year ended December 31, 2004 and the documents incorporated by reference contain statements that constitute “forward-looking statements” as that term is defined in the federal securities laws. These forward-looking statements include those regarding:

•   the possible expansion of our portfolio;

•   the performance of our operators and properties;

•   our ability to enter into agreements with new viable tenants for properties that we take back from financially troubled tenants, if any;

•   our ability to make distributions;

•   our policies and plans regarding investments, financings and other matters;

•   our tax status as a real estate investment trust;

•   our ability to appropriately balance the use of debt and equity;

•   our ability to access capital markets or other sources of funds; and

•   our ability to meet our earnings guidance.

For example, when we use words such as “may,” “will,” “intend,” “should,” “believe,” “expect,” “anticipate,” “estimate” or similar expressions, we are making forward-looking statements. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Our expected results may not be achieved, and actual results may differ materially from our expectations. This may be a result of various factors, including, but not limited to:

Risk factors related to our operators’ revenues and expenses

Our skilled nursing and specialty care facility operators’ revenues are primarily driven by occupancy, Medicare and Medicaid reimbursement and private pay rates. Our assisted living facility operators’ revenues are primarily driven by occupancy and private pay rates. Expenses for these three types of facilities are primarily driven by the costs of labor, food, utilities, taxes, insurance and rent or debt service. Revenues from government reimbursement have, and may continue, to come under pressure due to reimbursement cuts and state budget shortfalls. Liability insurance and staffing costs continue to increase for our operators. To the extent that any decrease in revenues and/or any increase in operating expenses result in a facility not generating enough cash to make payments to us, the credit of our operator and the value of other collateral would have to be relied upon.

Risk factors related to operator bankruptcies

We are exposed to the risk that our operators may not be able to meet the rent, principal and interest or other payments due us, which may result in an operator bankruptcy or insolvency, or that an operator might become subject to bankruptcy or insolvency proceedings for other reasons. Although our operating lease agreements provide us the right to evict an operator, demand immediate payment of rent and exercise other remedies, and our mortgage loans provide us the right to terminate any funding obligation, demand immediate repayment of principal and unpaid interest, foreclose on the collateral and exercise other remedies, the bankruptcy laws afford certain rights to a party that has filed for bankruptcy or reorganization. An operator in bankruptcy may be able to limit or delay our ability to collect unpaid rent in the case of a lease or to receive unpaid principal and interest in the case of a mortgage loan, and to exercise other rights and remedies.

We may be required to fund certain expenses (e.g., real estate taxes and maintenance) to preserve the value of a facility, avoid the imposition of liens on a facility and/or transition a facility to a new operator. In some instances, we have terminated our lease with an operator and relet the facility to another operator. In some of those situations, we provided working capital loans to and limited indemnification of the new operator. If we cannot transition a leased facility to a new operator, we may take possession of that facility, which may expose us to certain successor liabilities. Should such events occur, our revenue and operating cash flow may be adversely affected. See “Item 3 – Legal Proceedings” of the Annual Report on Form 10-K for the year ended December 31, 2004.

Risk factors related to government regulations

Our operators’ businesses are affected by government reimbursement and private payor rates. To the extent that any skilled nursing or specialty care facility receives a significant portion of its revenues from governmental payors, primarily Medicare and Medicaid, such revenues may be subject to statutory and regulatory changes, retroactive rate adjustments, recovery of program overpayments or set-offs, administrative rulings, policy interpretations, payment or other delays by fiscal intermediaries, government funding restrictions (at a program level or with respect to specific facilities) and interruption or delays in payments due to any ongoing governmental investigations and audits at such facility. In recent years, governmental payors have frozen or reduced payments to health care providers due to budgetary pressures. Changes in health care reimbursement will likely continue to be of paramount importance to federal and state authorities. We cannot make any assessment as to the ultimate timing or effect any future legislative reforms may have on the financial condition of the skilled nursing industry, the specialty care industry or the health care industry in general. There can be no assurance that adequate reimbursement levels will continue to be available for services provided by any facility operator, whether the facility receives reimbursement from Medicare, Medicaid or private payors. Significant limits on the scope of services reimbursed and on reimbursement rates and fees could have a material adverse effect on an operator’s liquidity, financial condition and results of operations, which could adversely affect the ability of an operator to meet its obligations to us. In addition, the replacement of an operator that has defaulted on its lease or loan could be delayed by the approval process of any federal, state or local agency necessary for the transfer of the facility or the replacement of the operator licensed to manage the facility. See “Item 1 – Business – Certain Government Regulations – Reimbursement” of the Annual Report on Form 10-K for the year ended December 31, 2004.

Risk factors related to liability claims and insurance costs

Long-term care facility operators (assisted living and skilled nursing facilities) have experienced substantial increases in both the number and size of patient care liability claims in recent years, particularly in the states of Texas and Florida. As a result, general and professional liability costs have increased and may continue to increase. Nationwide, long-term care liability insurance rates are increasing because of large jury awards in states like Texas and Florida. Over the past two years, both Texas and Florida have adopted skilled nursing facility liability laws that modify or limit tort damages. Despite some of these reforms, the long-term care industry overall continues to experience very high general and professional liability costs. Insurance companies have responded to this claims crisis by severely restricting their capacity to write long-term care general and professional liability policies. No assurances can be given that the climate for long-term care general and professional liability insurance will improve in any of the foregoing states or any other states where the facility operators conduct business. Insurance companies may continue to reduce or stop writing general and professional liability policies for assisted living and skilled nursing facilities. Thus, general professional liability insurance coverage may be restricted or very costly, which may adversely affect the facility operators’ future operations, cash flows and financial condition, and may have a material adverse effect on the facility operators’ ability to meet their obligations to us.

Risk factors related to acquisitions

We are exposed to the risk that our future acquisitions may not prove to be successful. We could encounter unanticipated difficulties and expenditures relating to any acquired properties, including contingent liabilities, and newly acquired properties might require significant management attention that would otherwise be devoted to our ongoing business. If we agree to provide construction funding to an operator and the project is not completed, we may need to take steps to ensure completion of the project or we could lose the property. Moreover, if we issue equity securities or incur additional debt, or both, to finance future acquisitions, it may reduce our per share financial results. These costs may negatively affect our results of operations.

Risk factors related to environmental laws

Under various federal and state laws, owners or operators of real estate may be required to respond to the release of hazardous substances on the property and may be held liable for property damage, personal injuries or penalties that result from environmental contamination. These laws also expose us to the possibility that we may become liable to reimburse the government for damages and costs it incurs in connection with the contamination. Generally, such liability attaches to a person based on the person’s relationship to the property. Our tenants or borrowers are primarily responsible for the condition of the property and since we are a passive landlord, we do not “participate in the management” of any property in which we have an interest. Moreover, we review environmental site assessments of the properties that we own or encumber prior to taking an interest in them. Those assessments are designed to meet the “all appropriate inquiry” standard, which qualifies us for the innocent purchaser defense if environmental liabilities arise. Based upon such assessments, we do not believe that any of our properties are subject to material environmental contamination. However, environmental liabilities may be present in our properties and we may incur costs to remediate contamination, which could have a material adverse effect on our business or financial condition.

Risk factors related to reinvestment of sale proceeds

From time to time, we will have cash available from (1) the proceeds of sales of our securities, (2) principal payments on our loans receivable and (3) the sale of properties, including non-elective dispositions, under the terms of master leases or similar financial support arrangements. We must re-invest these proceeds, on a timely basis, in health care investments or in qualified short-term investments. We compete for real estate investments with a broad variety of potential investors. This competition for attractive investments may negatively affect our ability to make timely investments on terms acceptable to us. Delays in acquiring properties may negatively impact revenues and perhaps our ability to make distributions to stockholders.

Risk factors related to our structure

We are also subject to a number of risks on the corporate level. First, we might fail to qualify or remain qualified as a REIT. We intend to operate as a REIT under the Internal Revenue Code and believe we have and will continue to operate in such a manner. Since REIT qualification requires us to meet a number of complex requirements, it is possible that we may fail to fulfill them, and if we do, our earnings will be reduced by the amount of federal taxes owed. A reduction in our earnings would affect the amount we could distribute to our stockholders. Also, if we were not a REIT, we would not be required to make distributions to stockholders since a non-REIT is not required to pay dividends to stockholders amounting to at least 90% of its annual taxable income. See “Item 1 – Business – Taxation” of the Annual Report on Form 10-K for the year ended December 31, 2004 for a discussion of the provisions of the Internal Revenue Code that apply to us and the effects of non-qualification.

Second, our Second Restated Certificate of Incorporation and Amended and Restated By-Laws contain anti-takeover provisions (staggered board provisions, restrictions on share ownership and transfer, and super majority stockholder approval requirements for business combinations) that could make it more difficult for or even prevent a third party from acquiring us without the approval of our incumbent Board of Directors. Provisions and agreements that inhibit or discourage takeover attempts could reduce the market value of our common stock.

Third, we are dependent on key personnel. Although we have entered into employment agreements with our executive officers, losing any one of them could, at least temporarily, have an adverse impact on our operations. We believe that losing more than one would have a material adverse impact on our business.

Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Stockholders and Directors
Health Care REIT, Inc.

We have audited the accompanying consolidated balance sheets of Health Care REIT, Inc. as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedules listed in Item 15(a)(2) of the Annual Report on Form 10-K for the year ended December 31, 2004. These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as 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 Health Care REIT, Inc. at December 31, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

As discussed in Note 9 to the consolidated financial statements, in 2003 the Company adopted the provisions of Financial Accounting Standards Board Statement No. 123, Accounting for Stock-Based Compensation.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Health Care REIT, Inc.’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 11, 2005 expressed an unqualified opinion thereon.


		/s/ Ernst & Young LLP
Toledo, Ohio March 11, 2005 except for Note 15, as to which the date is May 11, 2005

HEALTH CARE REIT, INC.
CONSOLIDATED BALANCE SHEETS


	December 31
	2004			2003
ASSETS		(In thousands)
Real estate investments:
Real property owned
Land	$	208,173		$	166,408
Buildings & improvements		2,176,327			1,712,868
Construction in progress		25,463			14,701

		2,409,963			1,893,977
Less accumulated depreciation		(219,536	)		(152,440	)

Total real property owned		2,190,427			1,741,537

Loans receivable
Real property loans		213,067			213,480
Subdebt investments		43,739			45,254

		256,806			258,734
Less allowance for losses on loans receivable		(5,261	)		(7,825	)

		251,545			250,909

Net real estate investments		2,441,972			1,992,446

Other assets:
Equity investments		3,298			3,299
Deferred loan expenses		6,958			10,331
Cash and cash equivalents		19,763			124,496
Receivables and other assets		77,652			52,159

		107,671			190,285

Total assets	$	2,549,643		$	2,182,731


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Borrowings under unsecured lines of credit arrangements	$	151,000		$	0
Senior unsecured notes		875,000			865,000
Secured debt		160,225			148,184
Accrued expenses and other liabilities		28,139			19,868

Total liabilities		1,214,364			1,033,052
Stockholders’ equity:
Preferred stock, $1.00 par value:		283,751			120,761
Authorized - 25,000,000 shares
Issued and outstanding - 11,350,045 shares in 2004 and 4,830,444 shares in 2003 at liquidation preference
Common stock, $1.00 par value:		52,860			50,298
Authorized - 125,000,000 shares
Issued - 52,960,317 shares in 2004 and 50,376,551 shares in 2003
Outstanding - 52,924,601 shares in 2004 and 50,361,505 shares in 2003
Capital in excess of par value		1,139,723			1,069,887
Treasury stock		(1,286	)		(523	)
Cumulative net income		745,817			660,446
Cumulative dividends		(884,890	)		(749,166	)
Accumulated other comprehensive income		1			1
Other equity		(697	)		(2,025	)

Total stockholders’ equity		1,335,279			1,149,679

Total liabilities and stockholders’ equity	$	2,549,643		$	2,182,731

See accompanying notes

30

HEALTH CARE REIT, INC.
CONSOLIDATED STATEMENTS OF INCOME


	Year Ended December 31
	2004			2003		2002
	(In thousands, except per share data)
Revenues:
Rental income	$	224,956		$	171,050	$	119,831
Interest income		22,818			20,768		26,525
Transaction fees and other income		2,432			3,759		2,802
Prepayment fees		50

		250,256			195,577		149,158

Expenses:
Interest expense		71,715			52,499		37,890
Provision for depreciation		72,447			48,760		34,318
General and administrative		16,585			11,483		9,665
Loan expense		3,393			2,921		2,373
Impairment of assets		314			2,792		2,298
Loss on extinguishment of debt							403
Provision for loan losses		1,200			2,870		1,000

		165,654			121,325		87,947

Income from continuing operations		84,602			74,252		61,211

Discontinued operations:
Net gain (loss) on sales of properties		(143	)		4,139		(1,032	)
Income from discontinued operations, net		912			4,349		7,480

		769			8,488		6,448

Net income		85,371			82,740		67,659
Preferred stock dividends		12,737			9,218		12,468
Preferred stock redemption charge					2,790

Net income available to common stockholders	$	72,634		$	70,732	$	55,191


Average number of common shares outstanding:
Basic		51,544			43,572		36,702
Diluted		52,082			44,201		37,301

Earnings per share:
Basic:
Income from continuing operations available to common stockholders	$	1.40		$	1.43	$	1.32
Discontinued operations, net		0.01			0.19		0.18

Net income available to common stockholders	$	1.41		$	1.62	$	1.50
Diluted:
Income from continuing operations and after preferred stock dividends	$	1.38		$	1.41	$	1.31
Discontinued operations, net		0.01			0.19		0.17

Net income available to common stockholders	$	1.39		$	1.60	$	1.48

See accompanying notes

31

HEALTH CARE REIT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


																		Accumulated
						Capital in												Other
	Preferred			Common		Excess of			Treasury			Cumulative			Cumulative			Comprehensive			Other
	Stock			Stock		Par Value			Stock			Net Income			Dividends			Income			Equity			Total
			(In thousands, except per share data)
Balances at January 1, 2002	$	150,000		$	32,740	$	608,942		$	0		$	512,837		$	(540,946	)	$	(923	)	$	(4,780	)	$	757,870
Comprehensive income:
Net income													67,659												67,659
Other comprehensive income:
Unrealized loss on equity investments																			(66	)					(66	)
Foreign currency translation adjustment																			819						819

Total comprehensive income																									68,412

Proceeds from issuance of common stock from dividend reinvestment and stock incentive plans, net of forfeitures					1,182		25,373															(208	)		26,347
Restricted stock amortization																						1,555			1,555
Proceeds from sale of common stock					5,286		134,901																		140,187
Conversion of preferred stock		(22,500	)		878		21,622																		0
Cash dividends:
Common stock-$2.34 per share																(84,671	)								(84,671	)
Preferred stock, Series B-$2.22 per share																(6,656	)								(6,656	)
Preferred stock, Series C-$2.28 per share																(5,812	)								(5,812	)

Balances at December 31, 2002		127,500			40,086		790,838			0			580,496			(638,085	)		(170	)		(3,433	)		897,232
Comprehensive income:
Net income													82,740												82,740
Other comprehensive income:
Unrealized loss on equity investments																			(11	)					(11	)
Foreign currency translation adjustment																			182						182

Total comprehensive income																									82,911

Proceeds from issuance of common stock from dividend reinvestment and stock incentive plans, net of forfeitures					2,725		75,649			(523	)											53			77,904
Restricted stock amortization																						1,182			1,182
Option compensation expense																						173			173
Proceeds from issuance of preferred stock		126,500					(3,150	)																	123,350
Redemption of preferred stock		(75,000	)				2,790						(2,790	)											(75,000	)
Proceeds from sale of common stock					5,263		147,745																		153,008
Conversion of preferred stock		(58,239	)		2,224		56,015																		0
Cash dividends:
Common stock-$2.34 per share																(101,863	)								(101,863	)
Preferred stock, Series B-$2.22 per share																(3,605	)								(3,605	)
Preferred stock, Series C-$2.25 per share																(1,439	)								(1,439	)
Preferred stock, Series D-$1.97 per share																(3,784	)								(3,784	)
Preferred stock, Series E-$1.50 per share																(390	)								(390	)

Balances at December 31, 2003		120,761			50,298		1,069,887			(523	)		660,446			(749,166	)		1			(2,025	)		1,149,679
Comprehensive income:
Net income													85,371												85,371
Other comprehensive income:
Unrealized loss on equity investments																									0

Total comprehensive income																									85,371

Proceeds from issuance of common stock from dividend reinvestment and stock incentive plans, net of forfeitures					2,194		64,087			(763	)														65,518
Restricted stock amortization																						949			949
Option compensation expense																						379			379
Proceeds from issuance of preferred stock		175,000					(5,893	)																	169,107
Conversion of preferred stock		(12,010	)		368		11,642																		0
Cash dividends:
Common stock-$2.385 per share																(122,987	)								(122,987	)
Preferred stock, Series D-$1.97 per share																(7,875	)								(7,875	)
Preferred stock, Series E-$1.50 per share																(933	)								(933	)
Preferred stock, Series F-$1.50 per share																(3,929	)								(3,929	)

Balances at December 31, 2004	$	283,751		$	52,860	$	1,139,723		$	(1,286	)	$	745,817		$	(884,890	)	$	1		$	(697	)	$	1,335,279

See accompanying notes

32

HEALTH CARE REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS


	Year Ended December 31
	2004			2003			2002
	(In thousands)
Operating activities
Net income	$	85,371		$	82,740		$	67,659
Adjustments to reconcile net income to net cash provided from operating activities:
Provision for depreciation		74,015			52,870			40,350
Amortization		4,247			3,957			3,928
Provision for loan losses		1,200			2,870			1,000
Impairment of assets		314			2,792			2,298
Transaction fees earned greater than cash received								(1,530	)
Rental income in excess of cash received		(13,792	)		(14,928	)		(9,256	)
Equity in losses (earnings) of affiliated companies					(270	)		(15	)
Loss (gain) on sales of properties		143			(4,139	)		1,032
Increase (decrease) in accrued expenses and other liabilities		4,063			(679	)		1,320
Decrease (increase) in receivables and other assets		(11,536	)		4,308			(1,419	)

Net cash provided from (used in) operating activities		144,025			129,521			105,367
Investing activities
Investment in real property		(542,547	)		(410,413	)		(409,706	)
Investment in loans receivable and subdebt investments		(61,888	)		(105,655	)		(88,516	)
Other investments, net of payments					4,637			(228	)
Principal collected on loans receivable and subdebt investments		55,473			57,081			92,970
Proceeds from sales of properties		37,567			65,455			52,279
Other		4,033			149			(229	)

Net cash provided from (used in) investing activities		(507,362	)		(388,746	)		(353,430	)
Financing activities
Net increase (decrease) under unsecured lines of credit arrangements		151,000			(109,500	)		109,500
Proceeds from issuance of senior unsecured notes and secured debt		50,708			350,000			150,000
Principal payments on senior unsecured notes		(40,000	)					(47,250	)
Principal payments on secured debt		(2,514	)		(4,891	)		(29,383	)
Net proceeds from the issuance of common stock		66,281			231,435			166,534
Net proceeds from the issuance of preferred stock		169,107			96,850
Redemption of preferred stock					(75,000	)
Decrease (increase) in deferred loan expense		(254	)		(3,642	)		(4,475	)
Cash distributions to stockholders		(135,724	)		(111,081	)		(97,139	)

Net cash provided from (used in) financing activities		258,604			374,171			247,787

Increase (decrease) in cash and cash equivalents		(104,733	)		114,946			(276	)
Cash and cash equivalents at beginning of year		124,496			9,550			9,826

Cash and cash equivalents at end of year	$	19,763		$	124,496		$	9,550

Supplemental cash flow information-interest paid	$	73,308		$	50,698		$	39,466

See accompanying notes

HEALTH CARE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Accounting Policies and Related Matters

Industry

We are a self-administered, equity real estate investment trust that invests primarily in long-term care facilities, which include skilled nursing and assisted living facilities. We also invest in specialty care facilities.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and our wholly owned subsidiaries after the elimination of all significant intercompany accounts and transactions.

Use of Estimates

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

Cash and Cash Equivalents

Cash and cash equivalents consist of all highly liquid investments with an original maturity of three months or less.

Loans Receivable

Loans receivable consist of mortgage loans, construction loans, working capital loans and subdebt investments. Interest income on loans is recognized as earned based upon the principal amount outstanding subject to an evaluation of collectibility risks. The mortgage loans are primarily collateralized by a first or second mortgage lien or leasehold mortgage on or assignment of partnership interest in the related facilities. Working capital loans are loans made to operators of facilities and are typically either secured and/or guaranteed. Subdebt investments represent debt instruments to operators of facilities that have been financed by us. These obligations are generally secured by the operator’s leasehold rights and corporate guaranties.

Real Property Owned

The cost of our real property is allocated to land, buildings, improvements and intangibles in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations. The allocation of the acquisition costs of properties is based on appraisals commissioned from independent real estate appraisal firms. Substantially all of the properties owned by us are leased under operating leases and are recorded at cost. These properties are depreciated on a straight-line basis over their estimated useful lives which range from 15 to 40 years for buildings and five to 15 years for improvements. The net book value of long-lived assets is reviewed quarterly on a property by property basis to determine if facts and circumstances suggest that the assets may be impaired or that the depreciable life may need to be changed. We consider external factors relating to each asset. If these external factors and the projected undiscounted cash flows of the asset over the remaining depreciation period indicate that the asset will not be recoverable, the carrying value will be adjusted to the estimated fair market value. The leases generally extend for a minimum seven-year period and provide for payment of all taxes, insurance and maintenance by the tenants. Prior to June 2004, our standard lease structure contained fixed annual rental escalators, which are generally recognized on a straight-line basis over the minimum lease period subject to an evaluation of collectibility risks. This income is greater than the amount of cash received during the first half of the lease term. Beginning in June 2004, our new standard lease structure contains annual rental escalators that are contingent upon changes in the Consumer Price Index and/or changes in the gross operating revenues of the property. These escalators are not fixed, so no straight-line rent is recorded; however, rental income is recorded based on the contractual cash rental payments due for

HEALTH CARE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

the period. We recognized $922,500 of contingent rental income for the year ended December 31, 2004. We did not recognize any contingent rental income for the years ended December 31, 2002 or 2003.

Capitalization of Construction Period Interest

We capitalize interest costs associated with funds used to finance the construction of properties owned directly by us. The amount capitalized is based upon the balance outstanding during the construction period using the rate of interest which approximates our cost of financing.

We capitalized interest costs of $875,000, $1,535,000, and $170,000, during 2004, 2003 and 2002, respectively, related to construction of real property owned by us. Our interest expense reflected in the consolidated statements of income has been reduced by the amounts capitalized.

Deferred Loan Expenses

Deferred loan expenses are costs incurred by us in connection with the issuance and amendments of short-term and long-term debt. We amortize these costs over the term of the debt using the straight-line method, which approximates the interest yield method.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level believed adequate to absorb potential losses in our loans receivable. The determination of the allowance is based on a quarterly evaluation of these loans, including general economic conditions and estimated collectibility of loan payments. We evaluate the collectibility of our loans receivable based on a combination of factors, including, but not limited to, delinquency status, historical loan charge-offs, financial strength of the borrower and guarantors and value of the underlying property. If such factors indicate that there is greater risk of loan charge-offs, additional allowances or placement on non-accrual status may be required. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due as scheduled according to the contractual terms of the original loan agreement. Consistent with this definition, all loans on non-accrual are deemed impaired. At December 31, 2004, we had loans with outstanding balances of $35,918,000 on non-accrual status ($30,523,000 at December 31, 2003). To the extent circumstances improve and the risk of collectibility is diminished, we will return these loans to full accrual status. While a loan is on non-accrual status, any cash receipts are applied against the outstanding balance.

Equity Investments

We had an investment in Atlantic Healthcare Finance L.P., a property group that specializes in the financing, through sale and leaseback transactions, of nursing and care homes located in the United Kingdom. This investment was accounted for using the equity method of accounting because we had the ability to exercise significant influence, but not control, over the investee due to our 31% ownership interest. In October 2003, we sold our investment in Atlantic Healthcare Finance L.P. generating a net gain of $902,000.

Other equity investments, which consist of investments in private and public companies for which we do not have the ability to exercise influence, are accounted for under the cost method. Under the cost method of accounting, investments in private companies are carried at cost and are adjusted only for other-than-temporary declines in fair value, distributions of earnings and additional investments. For investments in public companies that have readily determinable fair market values, we classify our equity investments as available-for-sale and, accordingly, record these investments at their fair market values with unrealized gains and losses included in accumulated other comprehensive income, a separate component of stockholders’ equity. These investments represent a minimal ownership interest in these companies.

HEALTH CARE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Foreign Currency Translation

For fiscal years 2002 and 2003, the functional currency of our investment in Atlantic Healthcare Finance L.P. was the local currency. The income and expenses of the entity were translated into U.S. dollars using the average exchange rates for the reporting period to derive our equity earnings. Translation adjustments were recorded in accumulated other comprehensive income, a separate component of stockholders’ equity. As noted above, we sold this investment in October 2003.

Transaction Fees

Transaction fees are earned by us for our agreement to provide direct and standby financing to, and credit enhancement for, owners and operators of health care facilities. We amortize transaction fees over the initial fixed term of the lease, the loan or the construction period related to such investments.

Accumulated Other Comprehensive Income

Accumulated other comprehensive income includes unrealized gains or losses on our equity investments and foreign currency translation adjustments. Accumulated unrealized gains and losses totaled $1,000, $1,000 and $12,000 at December 31, 2004, 2003 and 2002, respectively. Due to the sale of our investment in Atlantic Healthcare Finance L.P. in October 2003, accumulated foreign currency translation adjustments totaled $0, $0 and ($182,000) at December 31, 2004, 2003 and 2002, respectively. These items are included as components of stockholders’ equity.

Fair Value of Derivative Instruments

In June 2000, the FASB issued Statement No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, which amends Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. Statement No. 133, as amended, requires companies to record derivatives at fair market value on the balance sheet as assets or liabilities.

On May 6, 2004, we entered into two interest rate swap agreements (the “Swaps”) for a total notional amount of $100,000,000 to hedge changes in fair value attributable to changes in the LIBOR swap rate of $100,000,000 of fixed rate debt with a maturity date of November 15, 2013. The Swaps are treated as fair-value hedges for accounting purposes and we utilize the short-cut method in accordance with Statement No. 133, as amended. The Swaps are with highly rated counterparties in which we receive a fixed rate of 6.0% and pay a variable rate based on six-month LIBOR plus a spread. At December 31, 2004, the Swaps were reported at their fair value as a $4,206,000 other asset. For the year ended December 31, 2004, we generated $1,770,000 of savings related to the Swaps that was recorded as a reduction in interest expense. We had no interest rate swap agreements outstanding at December 31, 2003 or 2002.

The valuation of derivative instruments requires us to make estimates and judgments that affect the fair value of the instruments. Fair values for our derivatives are estimated by a third party consultant, which utilizes pricing models that consider forward yield curves and discount rates. Such amounts and the recognition of such amounts are subject to significant estimates which may change in the future.

HEALTH CARE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Net Income Per Share

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of shares outstanding for the period adjusted for non-vested shares of restricted stock. The computation of diluted earnings per share is similar to basic earnings per share, except that the number of shares is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued.

Federal Income Tax

No provision has been made for federal income taxes since we have elected to be treated as a real estate investment trust under the applicable provisions of the Internal Revenue Code, and we believe that we have met the requirements for qualification as such for each taxable year. See Note 11.

New Accounting Standards

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51 (the “Interpretation”). The Interpretation requires the consolidation of variable interest entities in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Previously, entities were generally consolidated by an enterprise that had a controlling financial interest through ownership of a majority voting interest in the entity. We have performed a quantitative analysis for certain variable interests in our operators and determined that none of the operators’ businesses are variable interest entities because the fair value of the equity of these businesses exceeds the expected losses as calculated. In addition to our quantitative analysis, our evaluation also included an analysis of aspects of our operators’ businesses, such as involvement in the day to day decision making of the operators’ businesses, ownership or voting rights in any of these businesses and participation in the profits or losses of such businesses, to further determine the absence of a controlling financial interest in the context of the Interpretation.

We adopted the fair value-based method of accounting for share-based payments effective January 1, 2003 using the prospective method described in FASB Statement No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. Currently, we use the Black-Scholes-Merton option pricing model to estimate the value of stock option grants and expect to continue to use this acceptable option valuation model upon the required adoption of Statement 123(R) on July 1, 2005. Because Statement 123(R) must be applied not only to new awards but to previously granted awards that are not fully vested on the effective date of Statement 123(R), and because we adopted Statement 123 using the prospective transition method (which applied only to awards granted, modified or settled after the adoption date of Statement 123), compensation cost for some previously granted awards that were not recognized under Statement 123 will be recognized under Statement
123(R). However, had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of pro forma net income and earnings per share in Note 9. We do not expect the adoption of Statement 123(R) to have a material impact on the consolidated financial statements.

HEALTH CARE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

2. Loans Receivable

The following is a summary of loans receivable (in thousands):


	December 31
	2004		2003
Mortgage loans	$	155,266	$	163,869
Mortgage loans to related parties				270
Construction loans		720		164
Working capital loans		57,081		49,177
Subdebt investments		43,739		45,254

Totals	$	256,806	$	258,734

Loans to related parties (an entity whose ownership includes one Company director) included above are at rates comparable to other third-party borrowers equal to or greater than our net interest cost on borrowings to support such loans. The amount of interest income and commitment fees from related parties amounted to $682,000, $36,000, and $59,000 for 2004, 2003 and 2002, respectively.

The following is a summary of mortgage loans at December 31, 2004:


Final	Number			Principal
Payment	of			Amount at		Carrying
Due	Loans		Payment Terms	Inception		Amount
				(In thousands)
2005		5	Monthly payments from $1,268 to $212,425, including interest from 10.50% to 15.21%	$	8,508	$	7,583
2006		9	Monthly payments from $406 to $209,479, including interest from 1.98% to 15.21%		27,195		31,563
2007		5	Monthly payments from $6,058 to $80,100, including interest from 7.27% to 14.06%		29,336		22,930
2008		3	Monthly payments from $4,282 to $111,233, including interest from 7.10% to 13.00%		26,010		26,340
2009		8	Monthly payments from $15,672 to $40,536, including interest from 6.97% to 11.15%		23,851		25,137
2012		1	Monthly payments of $124,934, including interest of 11.05%		12,700		12,668
2013		1	Monthly payments of $30,793, including interest of 12.42%		185		2,975
2015		1	Monthly payments of $2,824, including interest of 12.17%		154		278
2016		2	Monthly payments from $7,180 to $28,630, including interest of 10.25%		4,045		4,192
2017		1	Monthly payments of $31,622, including interest of 8.11%		907		4,679
2018		2	Monthly payments of $52,700 to $56,182, including interest from 5.75% to 10.90%		18,000		16,921

			Totals	$	150,891	$	155,266

HEALTH CARE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

3. Real Property Owned

The following table summarizes certain information about our real property owned as of December 31, 2004 (dollars in thousands):


	Number of			Building &		Total		Accumulated
	Facilities	Land		Improvements		Investment		Depreciation
Assisted Living Facilities:
Arizona	6	$	3,685	$	43,409	$	47,094	$	4,393
California	9		8,950		56,323		65,273		4,702
Colorado	1		940		3,721		4,661		290
Connecticut	6		8,690		46,565		55,255		5,302
Delaware	1		560		21,220		21,780		138
Florida	21		11,173		113,542		124,715		18,083
Georgia	5		4,336		28,446		32,782		6,302
Idaho	4		1,675		29,615		31,290		1,361
Illinois	1		670		6,780		7,450		551
Indiana	14		3,101		67,805		70,906		12,455
Kansas	1		600		10,590		11,190		70
Kentucky	1		490		7,610		8,100		307
Louisiana	1		1,100		10,161		11,261		2,496
Maryland	7		5,330		62,438		67,768		10,698
Massachusetts	7		8,320		73,361		81,681		2,935
Mississippi	2		1,080		13,470		14,550		736
Montana	2		910		7,282		8,192		1,003
Nevada	4		2,964		35,957		38,921		5,048
New Jersey	3		2,040		16,841		18,881		2,842
New York	3		2,390		22,482		24,872		1,309
North Carolina	42		18,133		193,081		211,214		14,178
Ohio	9		4,504		40,349		44,853		5,182
Oklahoma	16		1,928		24,346		26,274		5,755
Oregon	4		1,767		16,249		18,016		1,883
Pennsylvania	1		484		4,663		5,147		769
South Carolina	9		5,282		42,699		47,981		3,354
Tennessee	6		2,376		17,397		19,773		2,485
Texas	23		11,586		98,866		110,452		12,046
Utah	2		1,420		12,842		14,262		710
Virginia	5		2,624		28,035		30,659		1,869
Washington	7		5,770		29,066		34,836		1,620
Wisconsin	1		420		4,006		4,426		315
Construction in progress	2						25,463

	226		125,298		1,189,217		1,339,978		131,187

HEALTH CARE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Number of			Building &		Total		Accumulated
	Facilities	Land		Improvements		Investment		Depreciation
Skilled Nursing Facilities:
Alabama	8	$	3,000	$	41,419	$	44,419	$	1,857
Arizona	1		180		3,988		4,168		877
California	1		1,460		3,943		5,403		1,290
Colorado	1		370		6,051		6,421		1,302
Connecticut	4		2,170		6,440		8,610		18
Florida	34		14,422		221,692		236,114		14,880
Georgia	2		2,190		9,392		11,582		467
Idaho	3		2,010		20,662		22,672		4,116
Illinois	4		1,110		24,700		25,810		3,949
Indiana	2		251		4,449		4,700		15
Kentucky	3		1,160		15,787		16,947		1,199
Maryland	1		390		4,010		4,400		252
Massachusetts	22		19,318		178,264		197,582		15,626
Mississippi	11		1,625		52,651		54,276		2,530
Missouri	3		1,247		23,827		25,074		2,464
Nevada	1		182		1,718		1,900		477
New Jersey	1		1,850		3,050		4,900		10
Ohio	7		5,086		85,692		90,778		6,839
Oklahoma	1		470		5,673		6,143		1,173
Oregon	1		300		5,316		5,616		1,104
Pennsylvania	3		869		15,224		16,093		3,904
Tennessee	21		8,250		117,584		125,834		8,181
Texas	4		2,000		26,125		28,125		1,729
Virginia	2		1,891		7,312		9,203		515

	141		71,801		884,969		956,770		74,774

Specialty Care Facilities:
Florida	1		979				979
Illinois	1		3,650		14,496		18,146		1,138
Massachusetts	3		3,425		60,200		63,625		10,841
Ohio	1		3,020		27,445		30,465		1,596

	6		11,074		102,141		113,215		13,575

Total Real Property Owned	373	$	208,173	$	2,176,327	$	2,409,963	$	219,536

HEALTH CARE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

At December 31, 2004, future minimum lease payments receivable under operating leases are as follows (in thousands):


2005	$	237,182
2006		245,618
2007		252,440
2008		258,788
2009		257,484
Thereafter		2,138,683

Totals	$	3,390,195

We purchased $8,500,000, $12,433,000 and $33,972,000 of real property that had previously been financed by the Company with loans in 2004, 2003 and 2002, respectively. We converted $36,794,000 of completed construction projects into operating lease properties in 2003. We acquired properties which included the assumption of mortgages totaling $14,555,000, $101,243,000 and $2,248,000 in 2004, 2003 and 2002, respectively. These non-cash activities are appropriately not reflected in the accompanying statements of cash flows.

4. Concentration of Risk

As of December 31, 2004, long-term care facilities, which include skilled nursing and assisted living facilities, comprised 93% (92% at December 31, 2003) of our real estate investments and were located in 35 states. Investments in assisted living facilities comprised 54% (60% at December 31, 2003) of our real estate investments. The following table summarizes certain information about our operator concentration as of December 31, 2004 (dollars in thousands):


	Number of	Total		Percent of
Concentration by investment:	Facilities	Investment (1)		Investment (2)

Emeritus Corporation	48	$	361,367		15	%
Southern Assisted Living, Inc.	43		200,750		8	%
Commonwealth Communities L.L.C.	13		196,560		8	%
Delta Health Group, Inc.	25		178,221		7	%
Home Quality Management, Inc.	32		176,081		7	%
Remaining operators (45)	233		1,339,899		55	%

Totals	394	$	2,452,878		100	%

HEALTH CARE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


	Number of	Total		Percent of
Concentration by revenue:	Facilities	Revenues (3)		Revenue (4)
Commonwealth Communities L.L.C.	13	$	26,910		11	%
Emeritus Corporation	48		26,904		11	%
Southern Assisted Living, Inc.	43		26,087		10	%
Home Quality Management, Inc.	32		21,165		8	%
Life Care Centers of America, Inc.	16		14,927		6	%
Remaining operators (45)	242		137,584		54	%

Totals	394	$	253,577		100	%

(1)		Investments include real estate investments and credit enhancements which amounted to $2,447,233,000 and $5,645,000, respectively.

(2)		Investments with top five operators comprised 46% of total investments at December 31, 2003.

(3)		Revenues include gross revenues and revenues from discontinued operations for the year ended December 31, 2004.

(4)		Revenues from top five operators were 41% and 43% for the years ended December 31, 2003 and 2002, respectively.

5. Allowance for Loan Losses

The following is a summary of the allowance for loan losses (in thousands):


	Year Ended December 31
	2004			2003		2002
Balance at beginning of year	$	7,825		$	4,955	$	6,861
Provision for loan losses		1,200			2,870		1,000
Charge-offs		(3,764	)				(2,906	)


Balance at end of year	$	5,261		$	7,825	$	4,955

The following is a summary of our loan impairments (in thousands):


	Year Ended December 31
	2004		2003		2002
Balance of impaired loans at year end	$	35,918	$	30,523	$	15,311
Allowance for loan losses		5,261		7,825		4,955

Balance of impaired loans not reserved		30,657		22,698		10,356

Average impaired loans for the year		33,221		22,917		16,950

6. Borrowings Under Lines of Credit Arrangements and Related Items

We have an unsecured credit arrangement with a consortium of eight banks providing for a revolving line of credit (“revolving credit”) in the amount of $310,000,000, which expires on May 15, 2006. The agreement specifies that borrowings under the revolving credit are subject to interest payable in periods no longer than three months at either the agent bank’s prime rate of interest or 1.3% over LIBOR interest rate, at our option (3.7375% at December 31, 2004). In addition, we pay a commitment fee based on an annual rate of 0.325% and an annual agent’s fee of $50,000. Principal is due upon expiration of the agreement. We have another

HEALTH CARE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

unsecured line of credit arrangement with a consortium of three banks for a total of $30,000,000, which expires May 31, 2005. Borrowings under this line of credit are subject to interest at either the lead bank’s prime rate of interest or 2.00% over LIBOR interest rate, at our option (5.25% at December 31, 2004) and are due on demand.

The following information relates to aggregate borrowings under the unsecured lines of credit arrangements (in thousands, except percentages):


	Year Ended December 31
	2004			2003			2002
Balance outstanding at December 31	$	151,000		$	0		$	109,500
Maximum amount outstanding at any month end		159,000			156,900			130,000
Average amount outstanding (total of daily principal balances divided by days in year)		54,770			61,677			69,180
Weighted average interest rate (actual interest expense divided by average borrowings outstanding)		5.32	%		4.65	%		4.58	%

7. Senior Unsecured Notes and Secured Debt

We have $875,000,000 of senior unsecured notes with annual interest rates ranging from 6.00% to 8.17%.

We have 32 mortgage loans totaling $160,225,000, collateralized by health care facilities with annual interest rates ranging from 5.50% to 12.00%. The carrying values of the health care properties securing the mortgage loans totaled $233,591,000 at December 31, 2004.

At December 31, 2004, the annual principal payments on these long-term obligations are as follows (in thousands):


	Senior		Mortgage
	Unsecured Notes		Loans		Totals
2005	$	0	$	6,276	$	6,276
2006		50,000		2,977		52,977
2007		175,000		15,004		190,004
2008		100,000		10,194		110,194
2009				13,278		13,278
2010				9,313		9,313
2011				21,149		21,149
Thereafter		550,000		82,034		632,034

Totals	$	875,000	$	160,225	$	1,035,225

8. Stock Incentive Plans

Our 1995 Stock Incentive Plan authorizes up to 3,768,000 shares of common stock to be issued at the discretion of the Board of Directors. The 1995 Plan replaced the 1985 Incentive Stock Option Plan. The options granted under the 1985 Plan continue to vest through 2005 and expire ten years from the date of grant. Our officers and key salaried employees are eligible to participate in the 1995 Plan. The 1995 Plan allows for the issuance of, among other things, stock options, restricted stock grants and dividend equivalent rights.

HEALTH CARE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

There were no dividend equivalent rights outstanding under the 1995 Plan for 2003 or 2002. In addition, we have a Stock Plan for Non-Employee Directors, which authorizes up to 480,000 shares to be issued.

The following summarizes the activity in the plans for the years ended December 31 (shares in thousands):


	Year Ended December 31

	2004					2003					2002

	Number			Average		Number			Average		Number			Average
	of			Exercise		of			Exercise		of			Exercise
Stock Options	Shares			Price		Shares			Price		Shares			Price

Options at beginning of year		1,503		$	23.15		1,606		$	21.99		2,387		$	21.23
Options granted		112			36.92		340			25.82		40			27.17
Options exercised		(600	)		22.83		(420	)		20.95		(821	)		20.54
Options terminated							(23	)		22.35

Options at end of year		1,015		$	24.86		1,503		$	23.15		1,606		$	21.99

Options exercisable at end of year		639		$	23.54		817		$	22.69		838		$	21.98
Weighted average fair value of options granted during the year				$	12.09				$	1.74				$	2.10

Vesting periods for options and restricted shares range from six months for directors to five years for officers and key salaried employees. Options expire ten years from the date of grant. We granted 112,000, 110,000, and 8,000 restricted shares during 2004, 2003 and 2002, respectively, including 10,000, 12,000, and 8,000 shares for directors in 2004, 2003 and 2002, respectively. Expense, which is recognized as the shares vest based on the market value at the date of the award, totaled $2,887,000, $2,157,000 and $1,555,000, in 2004, 2003 and 2002, respectively.

The following table summarizes information about stock options outstanding at December 31, 2004 (shares in thousands):


	Options Outstanding						Options Exercisable

					Weighted				Weighted
Range of Per			Weighted		Average				Average
Share Exercise	Number		Average		Remaining		Number		Exercise
Prices	Outstanding		Exercise Price		Contract Life		Exercisable		Price

$16–$20		226	$	17.70		5.8		197	$	17.84
$20–$25		324		24.39		6.7		206		24.38
$25–$30		353		26.04		8.3		206		26.19
$30–$40		112		36.92		10.0		30		36.71

Totals		1,015	$	24.86		7.4		639	$	23.54

9. Other Equity

Other equity consists of the following (in thousands):


	December 31
	2004			2003			2002
Accumulated compensation expense related to stock options	$	552		$	173		$	0
Unamortized restricted stock		(1,249	)		(2,198	)		(3,433	)

Totals	$	(697	)	$	(2,025	)	$	(3,433	)

HEALTH CARE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Unamortized restricted stock represents the unamortized value of restricted stock granted to employees and directors prior to January 1, 2003. Expense related to these grants, which is recognized as the shares vest based on the market value at the date of the award, totaled $949,000, $1,182,000 and $1,555,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

In December 2002, the Financial Accounting Standards Board issued Statement No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, which we are required to adopt for fiscal years beginning after December 15, 2002, with transition provisions for certain matters. Statement 148 amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, Statement 148 amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Effective January 1, 2003, we commenced recognizing compensation expense in accordance with Statement 123 on a prospective basis. Accumulated compensation expense related to stock options represents the amount of amortized compensation costs related to stock options awarded to employees and directors subsequent to January 1, 2003.

The following table illustrates the effect on net income available to common stockholders if we had applied the fair value recognition provisions of Statement 123 to stock-based compensation for options granted since 1995 but prior to adoption at January 1, 2003 (in thousands, except per share data):


	Year Ended December 31
	2004		2003		2002
Numerator:
Net income available to common stockholders — as reported	$	72,634	$	70,732	$	55,191
Deduct: Additional stock-based employee compensation expense determined under fair value based method for all awards		274		405		539

Net income available to common stockholders — pro forma	$	72,360	$	70,327	$	54,652

Denominator:
Basic weighted average shares - as reported and pro forma		51,544		43,572		36,702
Effect of dilutive securities:
Employee stock options — pro forma		365		388		394
Non-vested restricted shares		161		202		162

Dilutive potential common shares		526		590		556

Diluted weighted average shares - pro forma		52,070		44,162		37,258


Net income available to common stockholders per share — as reported
Basic	$	1.41	$	1.62	$	1.50
Diluted		1.39		1.60		1.48

Net income available to common stockholders per share — pro forma
Basic	$	1.40	$	1.61	$	1.49
Diluted		1.39		1.59		1.47

HEALTH CARE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The fair value of each option grant is estimated on the date of grant using a Black-Scholes-Merton option pricing model with the following weighted-average assumptions:


	2004			2003			2002
Dividend yield (1)		0.6	%		9.1	%		8.0	%
Expected volatility		22.4	%		25.2	%		24.3	%
Risk-free interest rate		4.11	%		3.73	%		3.44	%
Expected life (in years)		7			7			7
Weighted-average fair value (1)	$	12.09		$	1.74		$	2.10

(1)

Options granted to employees in 2004 include dividend equivalent rights. These options are assumed to have a dividend yield of 0% for purposes of the Black-Scholes-Merton option pricing model and result in higher fair values than options without dividend equivalent rights.

10. Preferred Stock

In July 2003, we closed a public offering of 4,000,000 shares of 7.875% Series D Cumulative Redeemable Preferred Stock. These shares have a liquidation value of $25.00 per share. Dividends are payable quarterly in arrears. The preferred stock, which has no stated maturity, may be redeemed by us at a redemption price of $25.00 per share, plus accrued and unpaid dividends thereon to the redemption date, on or after July 9, 2008. A portion of the proceeds from this offering were used to redeem all 3,000,000 shares of our 8.875% Series B Cumulative Redeemable Preferred Stock on July 15, 2003, at a redemption price of $25.00 per share plus accrued and unpaid dividends. In accordance with Emerging Issues Task Force Topic D-42, the costs to issue the Series B Preferred Stock were recorded as a non-cash, non-recurring charge of $2,790,000, or $0.06 per diluted share, in the third quarter of 2003 to reduce net income available to common stockholders.

In September 2003, we issued 1,060,000 shares of 6% Series E Cumulative Convertible and Redeemable Preferred Stock as partial consideration for an acquisition of assets by the Company, with the shares valued at $26,500,000 for such purposes. The shares were issued to Southern Assisted Living, Inc. and certain of its stockholders without registration in reliance upon the federal statutory exemption of Section 4(2) of the Securities Act of 1933, as amended. The shares have a liquidation value of $25.00 per share. Dividends are payable quarterly in arrears. The preferred stock, which has no stated maturity, may be redeemed by us at a redemption price of $25.00 per share, plus accrued and unpaid dividends thereon to the redemption date, on or after August 15, 2008. The preferred shares are convertible into common stock at a conversion price of $32.66 per share at any time. During the year ended December 31, 2004, certain holders of our Series E Preferred Stock converted 480,399 shares into 367,724 shares of our common stock, leaving 350,045 of such shares outstanding at December 31, 2004.

In September 2004, we closed a public offering of 7,000,000 shares of 7.625% Series F Cumulative Redeemable Preferred Stock. These shares have a liquidation value of $25.00 per share. Dividends are payable quarterly in arrears. The preferred stock, which has no stated maturity, may be redeemed by us at a redemption price of $25.00 per share, plus accrued and unpaid dividends thereon to the redemption date, on or after September 14, 2009.

11. Income Taxes and Distributions

To qualify as a real estate investment trust for federal income tax purposes, 90% of taxable income (including 100% of capital gains) must be distributed to stockholders. Real estate investment trusts that do not distribute a certain amount of current year taxable income in the current year are also subject to a 4% federal excise tax. The principal reasons for the difference between undistributed net income for federal income tax purposes and financial statement purposes are the recognition of straight-line rent for reporting

HEALTH CARE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

purposes, different useful lives and depreciation methods for real property and the provision for loan losses for reporting purposes versus bad debt expense for tax purposes. Cash distributions paid to common stockholders, for federal income tax purposes, are as follows:


	Year Ended December 31
	2004		2003		2002
Per Share:
Ordinary income	$	1.189	$	1.365	$	1.655
Return of capital		1.196		0.896		0.671
Capital gains		0.000		0.079		0.014

Totals	$	2.385	$	2.340	$	2.340

12. Commitments and Contingencies

We have guaranteed the payment of industrial revenue bonds for one assisted living facility, in the event that the present owner defaults upon its obligations. In consideration for this guaranty, we receive and recognize fees annually related to this arrangement. This guaranty expires upon the repayment of the industrial revenue bonds which currently mature in 2009. At December 31, 2004, we were contingently liable for $3,195,000 under this guaranty.

At December 31, 2004, we had outstanding construction financings of $26,183,000 ($25,463,000 for leased properties and $720,000 for construction loans) and were committed to providing additional financing of approximately $3,833,000 to complete construction. At December 31, 2004, we had contingent purchase obligations totaling $82,815,000. These contingent purchase obligations primarily relate to deferred acquisition fundings. Deferred acquisition fundings are contingent upon an operator satisfying certain conditions such as payment coverage and value tests. Amounts due from the tenant are increased to reflect the additional investment in the property.

At December 31, 2004, we had operating lease obligations of $16,036,000 relating to Company office space, six assisted living facilities and three skilled nursing facilities. We incurred rental expense relating to our Company office space of $292,000, $348,000 and $213,000 for the years ended December 31, 2004, 2003 and 2002, respectively. Regarding the facility leases, we have sublease agreements with certain of our operators that require the operators to reimburse us for our monthly operating lease obligations. At December 31, 2004, aggregate future minimum rentals to be received under these noncancelable subleases totaled $14,509,000. At December 31, 2004, future minimum lease payments due under operating leases are as follows (in thousands):


2005	$	1,778
2006		1,275
2007		1,066
2008		928
2009		929
Thereafter		10,060

Totals	$	16,036

HEALTH CARE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

13. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):


	Year Ended December 31
	2004		2003		2002
Numerator for basic and diluted earnings per share — net income available to common stockholders	$	72,634	$	70,732	$	55,191

Denominator for basic earnings per share — weighted average shares		51,544		43,572		36,702
Effect of dilutive securities:
Employee stock options		377		427		437
Non-vested restricted shares		161		202		162

Dilutive potential common shares		538		629		599

Denominator for diluted earnings per share — adjusted weighted average shares		52,082		44,201		37,301

Basic earnings per share	$	1.41	$	1.62	$	1.50

Diluted earnings per share	$	1.39	$	1.60	$	1.48

The diluted earnings per share calculation excludes the dilutive effect of 112,000, 0 and 10,000 options for 2004, 2003 and 2002, respectively, because the exercise price was greater than the average market price. The Series C Cumulative Convertible Preferred Stock was not included in the calculations for 2002 and 2003 as the effect of the conversions was anti-dilutive. The Series E Cumulative Convertible and Redeemable Preferred Stock was not included in the calculations for 2003 and 2004 as the effect of the conversions was anti-dilutive.

14. Disclosure about Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.

Mortgage Loans Receivable — The fair value of all mortgage loans receivable is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Working Capital Loans, Construction Loans and Subdebt Investments — The carrying amount is a reasonable estimate of fair value based on the interest rates received, which approximates current market rates.

Cash and Cash Equivalents — The carrying amount approximates fair value.

Equity Investments — Equity investments are recorded at their fair market value.

Borrowings Under Lines of Credit Arrangements — The carrying amount of the lines of credit arrangements approximates fair value because the borrowings are interest rate adjustable.

Senior Unsecured Notes — The fair value of the senior unsecured notes payable was estimated by discounting the future cash flows using the current borrowing rate available to the Company for similar debt.

HEALTH CARE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Mortgage Loans Payable — Mortgage loans payable is a reasonable estimate of fair value based on the interest rates paid, which approximates current market rates.

Interest Rate Swap Agreements — Our interest rate swap agreements are recorded as assets or liabilities on the balance sheet at fair market value. Fair market value is estimated by a third party consultant, which utilizes pricing models that consider forward yield curves and discount rates.

The carrying amounts and estimated fair values of our financial instruments are as follows (in thousands):


	December 31, 2004				December 31, 2003
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial Assets:
Mortgage loans receivable	$	155,266	$	165,551	$	164,139	$	167,610
Working capital loans		57,081		57,081		49,177		49,177
Construction loans		720		720		164		164
Subdebt investments		43,739		43,739		45,254		45,254
Cash and cash equivalents		19,763		19,763		124,496		124,496
Interest rate swap agreements		4,206		4,206
Equity investments		1		1		1		1

Financial Liabilities:
Borrowings under lines of credit arrangements	$	151,000	$	151,000	$	0	$	0
Senior unsecured notes		875,000		1,068,132		865,000		1,111,712
Mortgage loans payable		160,225		160,225		148,184		148,184

15. Discontinued Operations

In August 2001, the Financial Accounting Standards Board issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which is effective for fiscal years beginning after December 15, 2001. We adopted the standard effective January 1, 2002 and have reflected the results of properties disposed of through March 31, 2005 in discontinued operations for all periods presented.

During the years ended December 31, 2002, 2003 and 2004, we sold properties with carrying values of $53,311,000, $61,316,000 and $37,710,000 for net losses of $1,032,000, net gains of $4,139,000 and net losses of $143,000, respectively. During the three months ended March 31, 2005, we sold properties with carrying values of $9,298,000 for a net loss of $110,000. In accordance with Statement No. 144, we have reclassified the income and expenses attributable to these properties to discontinued operations. Expenses include an allocation of interest expense based on property carrying values and our weighted average cost of debt. The following illustrates the reclassification impact of Statement No. 144 as a result of classifying the properties as discontinued operations (in thousands):


	Year Ended December 31
	2004		2003		2002
Revenues:
Operating lease rents	$	3,321	$	11,337	$	17,723
Expenses:
Interest expense		841		2,878		4,211
Provision for depreciation		1,568		4,110		6,032

Income from discontinued operations, net	$	912	$	4,349	$	7,480

HEALTH CARE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

16. Retirement Arrangements

We have a Retirement Plan and Trust (the “401(k) Plan”) covering all eligible employees. Under the 401(k) Plan, eligible employees may make contributions, and we may make matching contributions and a profit sharing contribution. Our contributions to this 401(k) Plan totaled $289,000, $206,000 and $184,000 in 2004, 2003 and 2002, respectively.

We have a Supplemental Executive Retirement Plan (“SERP”), a non-qualified defined benefit pension plan, which provides certain executive officers with supplemental deferred retirement benefits. The SERP provides an opportunity for participants to receive retirement benefits that cannot be paid under our tax-qualified Plan because of the restrictions imposed by ERISA and the Internal Revenue Code of 1986, as amended. Benefits are based on compensation and length of service and the SERP is unfunded. No company contributions are anticipated for the 2005 fiscal year. No benefit payments are expected to occur during the next five fiscal years and total $470,000 during the succeeding five fiscal years. We use a December 31 measurement date for the SERP. The accrued liability on our balance sheet for the SERP was $703,000 at December 31, 2004 ($412,000 at December 31, 2003).

The following tables provide a reconciliation of the changes in the SERP’s benefit obligations and fair value, and a statement of the funded status for the periods indicated (in thousands):


	Year Ended December 31
	2004			2003
Reconciliation of benefit obligation:
Obligation at January 1	$	454		$	231
Service cost		262			191
Interest cost		28			15
Actuarial (gain)/loss		(15	)		17

Obligation at December 31	$	729		$	454


	December 31
	2004			2003
Funded status:
Funded status at December 31	$	(729	)	$	(454	)
Unrecognized (gain)/loss		26			42

Prepaid/(accrued) benefit cost	$	(703	)	$	(412	)

The following table shows the components of net periodic benefit costs for the periods indicated (in thousands):


	Year Ended December 31
	2004		2003
Service cost	$	262	$	191
Interest cost		28		15

Net periodic benefit cost	$	290	$	206

HEALTH CARE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table provides information for the SERP which has an accumulated benefit in excess of plan assets (in thousands):


	December 31
	2004		2003
Projected benefit obligation	$	729	$	454
Accumulated benefit obligation		529		288
Fair value of assets		n/a		n/a

The following table reflects the weighted-average assumptions used to determine the benefit obligations and net periodic benefit cost for the SERP:


	Benefit Obligations						Net Periodic Benefit Cost
	December 31						Year Ended December 31
	2004			2003			2004			2003
Discount rate		6.00	%		6.25	%		6.25	%		6.75	%
Rate of compensation increase		4.25	%		4.50	%		4.50	%		5.00	%
Expected long-term return on plan assets		n/a			n/a			n/a			n/a

17. Quarterly Results of Operations (Unaudited)

The following is a summary of our unaudited quarterly results of operations for the years ended December 31, 2004 and 2003 (in thousands, except per share data):

Year Ended December 31, 2004

1st

2nd

3rd

4th

Quarter

Quarter (2)

Revenues — as reported

60,961

59,334

63,629

68,794

Discontinued operations

(1,316

)

(432

)

(431

)

(283

)

Revenues — as adjusted (1)

59,645

58,902

63,198

68,511

Net income available to common stockholders

18,655

19,207

19,004

15,767

Net income available to common stockholders per share:

Basic

0.37

0.30

Diluted

0.36

0.37

0.30


	Year Ended December 31, 2003
	1st			2nd			3rd			4th
	Quarter			Quarter			Quarter			Quarter (3)
Revenues — as reported	$	46,292		$	47,856		$	49,975		$	61,240
Discontinued operations		(3,572	)		(3,571	)		(1,328	)		(1,315	)

Revenues — as adjusted (1)		42,720			44,285			48,647			59,925
Net income available to common stockholders		16,451			16,744			20,601			16,935
Net income available to common stockholders per share:
Basic		0.41			0.41			0.47			0.34
Diluted		0.41			0.41			0.46			0.34

	•	our Board of Directors increased our quarterly dividend to $0.60 per share, which represented a one and one-half cent increase from the quarterly dividend of $0.585 paid for 2003. The dividend declared for the quarter ended December 31, 2004 represents the 135^th consecutive dividend payment;
	•	we expanded our primary unsecured line of credit arrangement from $225,000,000 to $310,000,000. The existing bank group, in conjunction with two new participants, First Tennessee Bank, N.A. and LaSalle Bank National Association, provided the additional capacity;
	•	we extended our $30,000,000 unsecured line of credit arrangement to May 2005;
	•	we issued 7,000,000 shares of 7.625% Series F Cumulative Redeemable Preferred Stock, generating approximately $169,107,000 of net proceeds;
	•	we issued $50,000,000 of senior unsecured notes due November 15, 2013, at an effective yield of 5.68%, generating approximately $50,708,000 of net proceeds;
	•	we filed a registration statement with the Securities and Exchange Commission on December 1, 2004 for the issuance of up to $1,081,794,619 of securities. We anticipate that this shelf registration will be effective in the first half of 2005;
	•	we completed $584,931,000 of new investments and had $62,584,000 of real property sales and mortgage loan payoffs; and
	•	our only remaining operator bankruptcy was resolved with the April 2004 bankruptcy court approval of the debtors’ plan of reorganization for Doctors Community Healthcare Corporation.

(1)		In accordance with FASB Statement No. 144, we have reclassified the income attributable to the properties sold subsequent to January 1, 2002 to discontinued operations. See Note 15.

(2)		The decrease in net income and amounts per share is primarily attributable to losses on sale in fourth quarter 2004 and increased preferred stock dividends in fourth quarter 2004 resulting from the September 2004 issuance of Series F preferred stock.

(3)		The decrease in net income and amounts per share is primarily attributable to impairment of assets recorded in fourth quarter 2003 and a common stock issuance completed in third quarter 2003.


									Gross Amount at Which Carried at
			Initial Cost to Company						Close of Period
(Dollars in thousands)							Cost Capitalized
					Buildings &		Subsequent to				Buildings &		Accumulated		Year		Year
Description	Encumbrances		Land		Improvements		Acquisition		Land		Improvements		Depreciation		Acquired		Built

Assisted Living Facilities:
Alhambra, CA	$	0	$	420	$	2,534	$	0	$	420	$	2,534	$	267		1999		1999
Amarillo, TX				390		5,100				390		5,100		34		2004		1996
Anderson, SC				710		6,290				710		6,290		226		2003		1986
Asheboro, NC(3)		3,682		290		5,032		18		290		5,050		178		2003		1998
Asheville, NC				204		3,489				204		3,489		589		1999		1999
Asheville, NC				280		1,955		345		280		2,300		90		2003		1992
Atlanta, GA				2,059		14,914				2,059		14,914		3,319		1997		1999
Auburn, IN				145		3,511		1,855		145		5,366		1,132		1998		1999
Auburn, MA(1)		4,806		1,050		7,950				1,050		7,950		320		2003		1997
Austin, TX				880		9,520				880		9,520		1,603		1999		1998
Avon, IN				170		3,504		2,961		170		6,465		1,218		1998		1999
Azusa, CA				570		3,141				570		3,141		347		1998		1988
Baltimore, MD				510		4,515				510		4,515		226		2003		1999
Bartlesville, OK				100		1,380				100		1,380		353		1996		1995
Beaumont, TX				520		6,050				520		6,050		42		2004		1997
Bellingham, WA				300		3,200				300		3,200		109		2003		1994
Bluffton, SC				700		5,598		3,072		700		8,670		756		1999		2000
Boonville, IN				190		5,510				190		5,510		414		2002		2000
Bradenton, FL				252		3,298				252		3,298		859		1996		1995
Bradenton, FL				100		1,700		801		100		2,501		522		1999		1996
Brandon, FL				860		7,140				860		7,140		234		2003		1990
Brick, NJ				1,300		9,394				1,300		9,394		2,251		1999		2000
Burlington, NC				280		4,297		697		280		4,994		171		2003		2000
Burlington, NC(3)		2,879		460		5,501		5		460		5,506		194		2003		1997
Butte, MT				550		3,957		43		550		4,000		445		1998		1999
Canton, OH				300		2,098				300		2,098		364		1998		1998
Cape Coral, FL				530		3,281				530		3,281		253		2002		2000
Cary, NC				1,500		4,350		897		1,500		5,247		812		1998		1996
Cedar Hill, TX				171		1,490				171		1,490		347		1997		1996
Chapel Hill, NC				354		2,646		773		354		3,419		197		2002		1997
Chelmsford, MA(2)		9,475		1,040		10,960				1,040		10,960		363		2003		1997
Chickasha, OK				85		1,395				85		1,395		349		1996		1996
Chubbuck, ID				125		5,375				125		5,375		188		2003		1996
Claremore, OK				155		1,428				155		1,428		333		1996		1996
Clarksville, TN				330		2,292				330		2,292		394		1998		1998
Clermont, FL				350		5,232		449		350		5,681		1,226		1996		1997
Coeur D’ Alene, ID				530		7,570				530		7,570		262		2003		1997
Columbia, SC				2,120		4,860				2,120		4,860		255		2003		2000
Columbia, TN				341		2,295				341		2,295		385		1999		1999
Columbus, IN				530		5,170		90		530		5,260		392		2002		2001
Concord, NC(3)		4,897		550		3,921		36		550		3,957		155		2003		1997
Corpus Christi, TX				155		2,935		15		155		2,950		794		1997		1996
Corpus Christi, TX				420		4,796		139		420		4,935		1,850		1996		1997
Danville, VA				410		3,954		664		410		4,618		165		2003		1998
Dayton, OH				690		2,970		1,179		690		4,149		224		2003		1994
Desoto, TX				205		1,383				205		1,383		314		1996		1996
Douglasville, GA				90		217				90		217		11		2003		1985
Duncan, OK				103		1,347				103		1,347		330		1995		1996
Durham, NC				1,476		10,659		2,173		1,476		12,832		3,149		1997		1999
Easley, SC				250		3,266				250		3,266		164		2003		1999
Eden, NC(3)		3,182		390		5,039		2		390		5,041		177		2003		1998
Edmond, OK				175		1,564				175		1,564		376		1995		1996
Elizabeth City, NC				200		2,760		1,998		200		4,758		541		1998		1999
Ellicott City, MD				1,320		13,641		1,669		1,320		15,310		3,931		1997		1999
Encinitas, CA				1,460		7,721				1,460		7,721		957		2000		2000
Enid, OK				90		1,390				90		1,390		355		1995		1995
Eugene, OR				600		5,150				600		5,150		396		2002		2000


(1)	In June 2003, three wholly-owned subsidiaries of the Company completed the acquisitions of three assisted living facilities from Emeritus Corporation. The properties were subject to existing mortgage debt of $13,981,000. The three wholly-owned subsidiaries are included in the Company’s consolidated financial statements. Notwithstanding consolidation for financial statement purposes, it is the Company’s intention that the subsidiaries be separate legal entities wherein the assets and liabilities are not available to pay other debts or obligations of the consolidated Company.

(2)	In September 2003, four wholly-owned subsidiaries of the Company completed the acquisitions of four assisted living facilities from Emeritus Corporation. The properties were subject to existing mortgage debt of $24,291,000. The four wholly-owned subsidiaries are included in the Company’s consolidated financial statements. Notwithstanding consolidation for financial statement purposes, it is the Company’s intention that the subsidiaries be separate legal entities wherein the assets and liabilities are not available to pay other debts or obligations of the consolidated Company.

(3)	In September 2003, 17 wholly-owned subsidiaries of the Company completed the acquisitions of 17 assisted living facilities from Southern Assisted Living, Inc. The properties were subject to existing mortgage debt of $59,471,000. The 17 wholly-owned subsidiaries are included in the Company’s consolidated financial statements. Notwithstanding consolidation for financial statement purposes, it is the Company’s intention that the subsidiaries be separate legal entities wherein the assets and liabilities are not available to pay other debts or obligations of the consolidated Company.


(1)	Represents assumed mortgages.

(2)	The aggregate cost for tax purposes for real property equals $2,411,323,000 at December 31, 2004.


(1)	Includes collection of negative principal amortization.

(2)	Includes mortgage loans that were reclassified to working capital loans during the periods indicated.