Health Care REIT, Inc. 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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


		For the quarterly period ended June 30, 2005


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


		For the transition period from to

Commission File number 1-8923

HEALTH CARE REIT, INC.

(Exact name of registrant as specified in its charter)


Delaware		34-1096634

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

One SeaGate, Suite 1500, Toledo, Ohio		43604

(Address of principal executive office)		(Zip Code)

(Registrant’s telephone number, including area code) (419) 247-2800

(Former name, former address and former fiscal year,

if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes þ No o

As of July 15, 2005, the registrant had 53,892,200 shares of common stock outstanding.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS
HEALTH CARE REIT, INC. AND SUBSIDIARIES


	June 30			December 31
	2005			2004
	(Unaudited)			(Note)
	(In thousands)
Assets
Real estate investments:
Real property owned
Land	$	228,077		$	208,173
Buildings & improvements		2,420,555			2,176,327
Construction in progress		449			25,463

		2,649,081			2,409,963
Less accumulated depreciation		(257,543	)		(219,536	)

Total real property owned		2,391,538			2,190,427

Loans receivable
Real property loans		221,549			213,067
Subdebt investments		22,620			43,739

		244,169			256,806
Less allowance for losses on loans receivable		(5,861	)		(5,261	)

		238,308			251,545

Net real estate investments		2,629,846			2,441,972

Other assets:
Equity investments		3,298			3,298
Deferred loan expenses		9,172			6,958
Cash and cash equivalents		15,067			19,763
Receivables and other assets		82,556			77,652

		110,093			107,671

Total assets	$	2,739,939		$	2,549,643


Liabilities and stockholders’ equity
Liabilities:
Borrowings under unsecured lines of credit arrangements	$	318,000		$	151,000
Senior unsecured notes		894,830			875,000
Secured debt		168,790			160,225
Accrued expenses and other liabilities		44,354			28,139

Total liabilities		1,425,974			1,214,364

Stockholders’ equity:
Preferred stock		283,751			283,751
Common stock		53,772			52,860
Capital in excess of par value		1,166,234			1,139,723
Treasury stock		(1,766	)		(1,286	)
Cumulative net income		772,887			745,817
Cumulative dividends		(960,850	)		(884,890	)
Accumulated other comprehensive income		1			1
Other equity		(64	)		(697	)

Total stockholders’ equity		1,313,965			1,335,279

Total liabilities and stockholders’ equity	$	2,739,939		$	2,549,643

NOTE: The consolidated balance sheet at December 31, 2004 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

See notes to unaudited consolidated financial statements

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES


	Three Months Ended					Six Months Ended
	June 30					June 30
	2005			2004		2005			2004
	(In thousands, except per share data)
Revenues:
Rental income	$	62,791		$	52,413	$	124,765		$	105,632
Interest income		5,269			5,923		10,252			11,636
Transaction fees and other income		547			565		1,970			1,279

		68,607			58,901		136,987			118,547

Expenses:
Interest expense		19,984			17,104		39,579			35,245
Provision for depreciation		21,000			17,166		41,271			33,673
General and administrative		4,337			3,560		8,355			6,719
Loan expense		673			872		1,535			1,763
Loss on extinguishment of debt		18,448					18,448
Provision for loan losses		300			300		600			600

		64,742			39,002		109,788			78,000


Income from continuing operations		3,865			19,899		27,199			40,547

Discontinued operations:
Net gain (loss) on sales of properties		(24	)		1,129		(134	)		1,129
Income (loss) from discontinued operations, net		(11	)		401		5			678

		(35	)		1,530		(129	)		1,807

Net income		3,830			21,429		27,070			42,354

Preferred stock dividends		5,436			2,222		10,872			4,492


Net income (loss) available to common stockholders	$	(1,606	)	$	19,207	$	16,198		$	37,862


Average number of common shares outstanding:
Basic		53,429			51,232		53,207			50,919
Diluted		53,429			51,828		53,616			51,577

Earnings per share:
Basic:
Income (loss) from continuing operations available to common stockholders	$	(0.03	)	$	0.34	$	0.30		$	0.70
Discontinued operations, net					0.03					0.04

Net income (loss) available to common stockholders	$	(0.03	)	$	0.37	$	0.30		$	0.74

Diluted:
Income (loss) from continuing operations available to common stockholders	$	(0.03	)	$	0.34	$	0.30		$	0.69
Discontinued operations, net					0.03					0.04

Net income (loss) available to common stockholders	$	(0.03	)	$	0.37	$	0.30		$	0.73

Dividends declared and paid per common share	$	0.62		$	0.60	$	1.22		$	1.185

See notes to unaudited consolidated financial statements

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES


	Six Months Ended June 30, 2005
															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)
Balances at beginning of period	$	283,751	$	52,860	$	1,139,723	$	(1,286	)	$	745,817	$	(884,890	)	$	1	$	(697	)	$	1,335,279
Comprehensive income:
Net income											27,070										27,070
Other comprehensive income:
Unrealized gain (loss) on equity investments																					0

Total comprehensive income																					27,070

Proceeds from issuance of common shares from dividend reinvestment and stock incentive plans, net of forfeitures				912		26,511		(480	)												26,943
Restricted stock amortization																		368			368
Compensation expense related to stock options																		265			265
Cash dividends paid:
Common stock-$1.22 per share													(65,088	)							(65,088	)
Preferred stock, Series D-$0.984 per share													(3,937	)							(3,937	)
Preferred stock, Series E-$0.75 per share													(263	)							(263	)
Preferred stock, Series F-$0.953 per share													(6,672	)							(6,672	)

Balances at end of period	$	283,751	$	53,772	$	1,166,234	$	(1,766	)	$	772,887	$	(960,850	)	$	1	$	(64	)	$	1,313,965


	Six Months Ended June 30, 2004
																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)
Balances at beginning of period	$	120,761		$	50,298	$	1,069,887	$	(523	)	$	660,446	$	(749,166	)	$	1	$	(2,025	)	$	1,149,679
Comprehensive income:
Net income												42,354										42,354
Other comprehensive income:
Unrealized gain (loss) on equity investments																						0

Total comprehensive income																						42,354

Proceeds from issuance of common shares from dividend reinvestment and stock incentive plans, net of forfeitures					1,128		32,486		(327	)												33,287
Conversion of preferred stock		(3,902	)		120		3,782															0
Restricted stock amortization																			478			478
Compensation expense related to stock options																			189			189
Cash dividends paid:
Common stock-$1.185 per share														(60,410	)							(60,410	)
Preferred stock, Series D-$0.984 per share														(3,938	)							(3,938	)
Preferred stock, Series E-$0.75 per share														(554	)							(554	)

Balances at end of period	$	116,859		$	51,546	$	1,106,155	$	(850	)	$	702,800	$	(814,068	)	$	1	$	(1,358	)	$	1,161,085

See notes to unaudited consolidated financial statements

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES


	Six Months Ended
	June 30
	2005			2004
	(In thousands)
Operating activities
Net income	$	27,070		$	42,354
Adjustments to reconcile net income to net cash provided from operating activities:
Provision for depreciation		41,405			34,816
Amortization		3,356			2,210
Provision for loan losses		600			600
Rental income in excess of cash received		(4,032	)		(9,133	)
(Gain) loss on sales of properties		134			(1,129	)
Increase (decrease) in accrued expenses and other liabilities		(3,267	)		(2,308	)
Decrease (increase) in receivables and other assets		904			(4,566	)

Net cash provided from (used in) operating activities		66,170			62,844

Investing activities
Investment in real property		(215,907	)		(155,407	)
Investment in loans receivable and subdebt investments		(23,076	)		(15,016	)
Principal collected on loans receivable and subdebt investments		31,723			12,724
Proceeds from sales of properties		9,900			34,937
Other		177			1,116

Net cash provided from (used in) investing activities		(197,183	)		(121,646	)

Financing activities
Net increase (decrease) under unsecured lines of credit arrangements		167,000			41,000
Proceeds from issuance of senior notes		250,000
Principal payments on senior notes		(230,170	)		(40,000	)
Principal payments on secured debt		(7,039	)		(1,248	)
Net proceeds from the issuance of common stock		27,423			33,614
Decrease (increase) in deferred loan expense		(4,937	)		(168	)
Cash distributions to stockholders		(75,960	)		(64,902	)

Net cash provided from (used in) financing activities		126,317			(31,704	)

Increase (decrease) in cash and cash equivalents		(4,696	)		(90,506	)
Cash and cash equivalents at beginning of period		19,763			124,496

Cash and cash equivalents at end of period	$	15,067		$	33,990


Supplemental cash flow information-interest paid	$	42,787		$	37,456

See notes to unaudited consolidated financial statements

HEALTH CARE REIT, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE A — Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered for a fair presentation have been included. Operating results for the six months ended June 30, 2005 are not necessarily an indication of the results that may be expected for the year ending December 31, 2005. For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2004.

NOTE B — Real Estate Investments

During the six months ended June 30, 2005, we invested $215,907,000 in real property (including $4,096,000 of advances for construction in progress) and provided loan financings of $23,076,000. As of June 30, 2005, we had approximately $1,746,000 in unfunded construction commitments. Also during the six months ended June 30, 2005, we sold real property generating $9,900,000 of net proceeds and collected $31,723,000 as repayment of principal on loans receivable.

NOTE C — Equity Investments

Equity investments, which consist of investments in private and public companies over 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.

NOTE D — Distributions Paid to Common Stockholders

On February 22, 2005, we paid a dividend of $0.60 per share to stockholders of record on January 31, 2005. This dividend related to the period from October 1, 2004 through December 31, 2004.

On May 20, 2005, we paid a dividend of $0.62 per share to stockholders of record on April 29, 2005. This dividend related to the period from January 1, 2005 through March 31, 2005.

NOTE E — Derivative Instruments

We are exposed to various market risks, including the potential loss arising from adverse changes in interest rates. We may 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.

In June 2000, the Financial Accounting Standards Board (“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 June 30, 2005, the Swaps were reported at their fair value as a $6,566,000 other asset. For the three and six months ended June 30, 2005, we generated $367,000 and $777,000, respectively, of savings related to the Swaps that was recorded as a reduction in interest expense. For the three and six months ended June 30, 2004, we generated $513,000 of savings related to the Swaps that was recorded as a reduction in interest expense.

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

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.

NOTE F — Discontinued Operations

During the six months ended June 30, 2005, we sold two assisted living facilities and one parcel of land with carrying values of $10,034,000 for a net loss of $134,000. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we have reclassified the income and expenses attributable to all properties sold subsequent to January 1, 2002 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 properties as discontinued operations for the periods presented (in thousands):


	Three Months Ended					Six Months Ended
	June 30					June 30
	2005			2004		2005		2004
Revenues:
Rental income	$	0		$	1,179	$	192	$	2,495

Expenses:
Interest expense		2			262		52		673
Provision for depreciation		9			516		135		1,144


Income (loss) from discontinued operations, net	$	(11	)	$	401	$	5	$	678

NOTE G — Contingent Liabilities

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 June 30, 2005, our obligation under the letter of credit was $2,450,000.

As of June 30, 2005, we had approximately $1,746,000 of unfunded construction commitments.

NOTE H — Accumulated Other Comprehensive Income

Accumulated other comprehensive income includes unrealized gains or losses on our equity investments. This item is included as a component of stockholders’ equity. We did not recognize any comprehensive income other than the recorded net income for the three and six months ended June 30, 2005 or 2004.

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

NOTE I — Earnings Per Share

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


	Three Months Ended					Six Months Ended
	June 30					June 30
	2005			2004		2005		2004
Numerator for basic and diluted earnings per share — net income (loss) available to common stockholders	$	(1,606	)	$	19,207	$	16,198	$	37,862


Denominator for basic earnings per share — weighted average shares		53,429			51,232		53,207		50,919

Effect of dilutive securities:
Employee stock options					390		211		452
Non-vested restricted shares					206		198		206


Dilutive potential common shares		0			596		409		658


Denominator for diluted earnings per share — adjusted weighted average shares		53,429			51,828		53,616		51,577


Basic earnings (loss) per share	$	(0.03	)	$	0.37	$	0.30	$	0.74

Diluted earnings (loss) per share	$	(0.03	)	$	0.37	$	0.30	$	0.73

The diluted earnings per share calculation excludes the dilutive effect of 138,000 stock options and 198,000 non-vested restricted shares for the three months ended June 30, 2005 because of the net loss to common stockholders. The diluted earnings per share calculation excludes the dilutive effect of 173,000 and 112,000 options for the three and six months ended June 30, 2005, respectively, because the exercise prices were greater than the average market price. The diluted earnings per share calculation excludes the dilutive effect of 112,000 options for the three and six months ended June 30, 2004 because the exercise prices were greater than the average market price. The Series E Cumulative Convertible and Redeemable Preferred Stock was not included in these calculations as the effect of the conversion into common stock was anti-dilutive for the periods presented.

NOTE J — Other Equity

Other equity consists of the following (in thousands):


	June 30			December 31
	2005			2004
Accumulated compensation expense related to stock options	$	817		$	552
Unamortized restricted stock		(881	)		(1,249	)

	$	(64	)	$	(697	)

Unamortized restricted stock represents the unamortized value of restricted stock granted to employees and directors prior to January 1, 2003. Expense, which is recognized as the shares vest based on the market value at the date of the award, totaled $184,000 and $368,000 for the three and six months ended June 30, 2005, respectively, and $239,000 and $478,000 for the same periods in 2004.

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

In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, that we are required to adopt for fiscal years beginning after December 15, 2002, with transition provisions for certain matters. Statement No. 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 No. 148 amends the disclosure requirements of Statement No. 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 No. 123, as amended, on a prospective basis. Accumulated option compensation expense represents the amount of amortized compensation costs related to stock options awarded to employees and directors subsequent to January 1, 2003. Expense, which is recognized as the options vest based on the market value at the date of the award, totaled $132,000 and $265,000 for the three and six months ended June 30, 2005, respectively, and $94,000 and $189,000 for the same periods in 2004.

The following table illustrates the effect on net income available to common stockholders for the periods presented if we had applied the fair value recognition provisions of Statement No. 123, as amended, to stock-based compensation for options granted since 1995 but prior to adoption at January 1, 2003 (in thousands, except per share data):


	Three Months Ended					Six Months Ended
	June 30					June 30
	2005			2004		2005		2004
Numerator:
Net income (loss) available to common stockholders — as reported	$	(1,606	)	$	19,207	$	16,198	$	37,862

Deduct: Stock based employee compensation expense determined under fair value based method for all awards		45			76		91		153


Net income (loss) available to common stockholders — pro forma	$	(1,651	)	$	19,131	$	16,107	$	37,709


Denominator:
Basic weighted average shares — as reported and pro forma		53,429			51,232		53,207		50,919

Effect of dilutive securities:
Employee stock options — pro forma					373		357		436
Non-vested restricted shares					206		198		206


Dilutive potential common shares		0			579		555		642


Diluted weighted average shares — pro forma		53,429			51,811		53,762		51,561


Net income (loss) available to common stockholders per share — as reported
Basic	$	(0.03	)	$	0.37	$	0.30	$	0.74
Diluted		(0.03	)		0.37		0.30		0.73

Net income (loss) available to common stockholders per share — pro forma
Basic	$	(0.03	)	$	0.37	$	0.30	$	0.74
Diluted		(0.03	)		0.37		0.30		0.73

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

NOTE K — New Accounting Policies

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 No. 123(R) on January 1, 2006. Because Statement No. 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 No. 123(R), and because we adopted Statement No. 123 using the prospective transition method (which applied only to awards granted, modified or settled after the adoption date of Statement No. 123), compensation cost for some previously granted awards that were not recognized under Statement No. 123 will be recognized under Statement No. 123(R). However, had we adopted Statement No. 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement No. 123 as described in the disclosure of pro forma net income and earnings per share in Note J. We do not expect the adoption of Statement No. 123(R) to have a material impact on the consolidated financial statements.

NOTE L — Significant Changes and Events

We issued $250,000,000 of 5.875% senior unsecured notes due May 2015 at an effective yield of 5.913% in April 2005. We used proceeds from this offering to fund: (a) a redemption of all of our outstanding $50,000,000 8.17% senior unsecured notes due March 2006; (b) a redemption of $122,500,000 of our outstanding $175,000,000 7.5% senior unsecured notes due August 2007; and (c) a public tender offer for $57,670,000 of our outstanding $100,000,000 7.625% senior unsecured notes due March 2008. We recognized one-time charges on the extinguishment of debt totaling approximately $18,448,000 in the second quarter of 2005 as a result of this activity.

We closed on a $500,000,000 unsecured revolving credit facility to replace our $310,000,000 facility which was scheduled to mature in May 2006. Among other things, the new facility provides us with additional financial flexibility and borrowing capacity, reduces our all-in borrowing costs by approximately 50 basis points, extends our agreement to June 2008 and permits us to increase the facility by $50,000,000 through an accordion feature during the first 24 months.

We closed on a $40,000,000 unsecured line of credit facility to replace our $30,000,000 facility which matured in May 2005. The new facility is an annual revolver scheduled to mature in May 2006 and reflects reduced pricing from the previous facility.

Item 2. 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 contained in this Quarterly Report on Form 10-Q. Other important factors are identified in our Annual Report on Form 10-K for the year ended December 31, 2004, including factors identified under the headings “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Executive Overview

Business

Health Care REIT, Inc. is a self-administered, equity real estate investment trust that invests primarily in 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 June 30, 2005, 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 June 30, 2005:


Type	(1)		Percentage			(2)		Percentage			Number		Number		Investment		Number		Number
of	Investments		of			Revenues		of			of		of		per		of		of
Facility	(in thousands)		Investments			(in thousands)		Revenues			Facilities		Beds/Units		Bed/Unit (3)		Operators (4)		States (4)
Assisted Living Facilities	$	1,333,583		51	%	$	73,099		53	%		234		15,707	$	85,015		30		33
Skilled Nursing Facilities		1,097,372		42	%		55,747		41	%		179		24,505		44,782		22		26
Specialty Care Facilities		207,202		7	%		8,333		6	%		13		1,267		163,537		6		7


Totals	$	2,638,157		100	%	$	137,179		100	%		426		41,479

(1)		Investments include real estate investments and credit enhancements which amounted to $2,635,707,000 and $2,450,000, respectively.

(2)		Revenues include gross revenues and revenues from discontinued operations for the six months ended June 30, 2005.

(3)		Investment per Bed/Unit was computed by using the total investment amount of $2,639,903,000 which includes real estate investments, credit enhancements and unfunded construction commitments for which initial funding has commenced which amounted to $2,635,707,000, $2,450,000 and $1,746,000, respectively.

(4)		We have investments in properties located in 37 states and managed by 51 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 facility and operator. Our monitoring process includes review of monthly financial statements for each facility, quarterly review of operator credit, periodic 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 June 30, 2005, 85% of our real property was subject to master leases, 97% of our real estate investments were cross-defaulted with other investments relating to the same operator and 87% of our real property loans were cross-collateralized with other loans to the same operator.

For the six months ended June 30, 2005, rental income and interest income represented 91% and 7%, respectively, of total gross revenues (including revenues from discontinued operations). 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. Instead, 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 new facility investments. 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 six months ended June 30, 2005, we completed $250,608,000 of gross new investments and had $33,528,000 of investment payoffs, resulting in net investments of $217,080,000. We revised 2005 net investment guidance to a range of $100,000,000 to $200,000,000 from the previous guidance of $200,000,000. The revision in net investment guidance is due to an increase in anticipated dispositions pursuant to our active asset management program to a range of approximately $50,000,000 to $200,000,000 during the second half of 2005. Although no additional investment payoffs appear highly likely at this time, we anticipate the potential repayment of certain loans receivable and the possible sale of additional real property. To the extent that 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 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 June 30, 2005, we had $15,067,000 of cash and cash equivalents and $222,000,000 of available borrowing capacity under our unsecured lines of credit arrangements.

Key Transactions in 2005

We have completed the following key transactions to date in 2005:

• our Board of Directors increased our quarterly dividend to $0.62 per share, which represents a two cent increase from the quarterly dividend of $0.60 paid for 2004. The dividend declared for the quarter ended June 30, 2005 represents the 137^th consecutive dividend payment;

• we completed $250,608,000 of gross investments and had $33,528,000 of investment payoffs;

• we closed on a $500,000,000 unsecured revolving credit facility to replace our $310,000,000 facility which was scheduled to mature in May 2006. Among other things, the new facility provides us with additional financial flexibility and borrowing capacity, reduces our all-in borrowing costs by approximately 50 basis points, extends our agreement to June 2008 and permits us to increase the facility by $50,000,000 through an accordion feature during the first 24 months;

• we closed on a $40,000,000 unsecured line of credit facility to replace our $30,000,000 facility which matured in May 2005. The new facility is an annual revolver scheduled to mature in May 2006 and reflects reduced pricing from the previous facility; and

• we issued $250,000,000 of 5.875% senior unsecured notes due May 2015 at an effective yield of 5.913% in April 2005. We used proceeds from this offering to fund: (a) a redemption of all of our outstanding $50,000,000 8.17% senior unsecured notes due March 2006; (b) a redemption of $122,500,000 of our outstanding $175,000,000 7.5% senior unsecured notes due August 2007; and (c) a public tender offer for $57,670,000 of our outstanding $100,000,000 7.625% senior unsecured notes due March 2008.

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 U.S. generally accepted accounting principles (“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):


	Three Months Ended
	March 31		June 30		September 30		December 31		March 31		June 30
	2004		2004		2004		2004		2005		2005
Net income (loss) available to common stockholders	$	18,655	$	19,207	$	19,004	$	15,767	$	17,803	$	(1,606	)
Funds from operations		35,789		35,760		37,893		37,299		38,309		19,427
Funds available for distribution		29,125		33,291		34,891		35,642		35,454		18,251

Per share data (fully diluted):
Net income (loss) available to common stockholders	$	0.36	$	0.37	$	0.37	$	0.30	$	0.33	$	(0.03	)
Funds from operations		0.70		0.69		0.73		0.71		0.72		0.36
Funds available for distribution		0.57		0.64		0.67		0.68		0.66		0.34

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:


	Period Ended
	March 31			June 30			September 30			December 31			March 31			June 30
	2004			2004			2004			2004			2005			2005
Asset mix:
Real property		87	%		88	%		89	%		90	%		90	%		91	%
Loans receivable		11	%		10	%		9	%		9	%		9	%		8	%
Subdebt investments		2	%		2	%		2	%		1	%		1	%		1	%

Investment mix:
Assisted living facilities		58	%		57	%		57	%		54	%		55	%		51	%
Skilled nursing facilities		34	%		36	%		37	%		39	%		39	%		42	%
Specialty care facilities		8	%		7	%		6	%		7	%		6	%		7	%

Operator mix:
Emeritus Corporation		11	%		11	%		15	%		15	%		15	%		14	%
Southern Assisted Living, Inc.		10	%		10	%		9	%		8	%		8	%		8	%
Commonwealth Communities L.L.C.		10	%		10	%		8	%		8	%		8	%		7	%
Delta Health Group, Inc.								8	%		7	%		7	%		7	%
Home Quality Management, Inc.		9	%		9	%		8	%		7	%		7	%		7	%
Life Care Centers of America, Inc.		6	%		6	%
Remaining operators		54	%		54	%		52	%		55	%		55	%		57	%

Geographic mix:
Florida		9	%		11	%		16	%		15	%		15	%		15	%
Massachusetts		14	%		14	%		12	%		14	%		15	%		14	%
Texas								7	%		6	%					9	%
North Carolina		10	%		10	%		9	%		8	%		8	%		7	%
Ohio		6	%		6	%					6	%		6	%		6	%
Tennessee		7	%		7	%		6	%					6	%
Remaining states		54	%		52	%		50	%		51	%		50	%		49	%

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:


	Three Months Ended
	March 31			June 30			September 30			December 31			March 31			June 30
	2004			2004			2004			2004			2005			2005
Debt to book capitalization ratio		47	%		47	%		45	%		47	%		48	%		51	%
Debt to market capitalization ratio		32	%		36	%		34	%		34	%		38	%		37	%

Interest coverage ratio		3.11	x		3.31	x		3.31	x		3.25	x		3.26	x		2.35	x
Fixed charge coverage ratio		2.78	x		2.93	x		2.87	x		2.53	x		2.56	x		1.85	x

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. Factors that may cause actual results to differ from expected results are described in more detail in “Forward-Looking Statements and Risk Factors” and other sections of this Quarterly Report on Form 10-Q. Management regularly monitors economic and other factors to 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 our Annual Report on Form 10-K for the year ended December 31, 2004, under the headings “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of these risk factors.

Portfolio Update

Payment coverages in our portfolio continue to improve. Our overall payment coverage is at 1.90 times and represents an increase of six basis points from the prior quarter. The table below is a summary of the key performance measures for our portfolio. Census and payor mix data reflects the three months ended March 31, 2005. Coverage data reflects the 12 months ended March 31, 2005.


													Coverage Data
				Pay or Mix									Before			After
	Census			Private			Medicare			Medicaid			Management Fees			Management Fees

Assisted Living Facilities		88	%		85	%		0	%		15	%		1.49	x		1.27	x
Skilled Nursing Facilities		86	%		15	%		17	%		68	%		2.18	x		1.65	x
Specialty Care Facilities		66	%		29	%		40	%		31	%		3.46	x		2.82	x

Weighted Averages														1.90	x		1.52	x

Assisted Living Portfolio. At June 30, 2005, our assisted living portfolio was comprised of 234 facilities with 15,707 units and an investment balance of $1,333,583,000. The stabilized portfolio was comprised of 231 facilities with 15,406 units, an investment balance of $1,309,106,000, and payment coverage of 1.49 times, an increase of two basis points from the prior quarter. 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.

Skilled Nursing Portfolio. At June 30, 2005, our skilled nursing portfolio was comprised of 179 facilities with 24,505 beds and an investment balance of $1,097,372,000. Average occupancies have risen from a low of 81% in the third quarter of 2000 to 86% in the first quarter of 2005. Our payment coverage remains strong at 2.18 times, an increase of three basis points from the prior quarter.

Specialty Care Portfolio. At June 30, 2005, our specialty care portfolio was comprised of 13 facilities with 1,267 beds and an investment balance of $207,202,000. Our payment coverage remains strong at 3.46 times, an increase of 46 basis points from the prior quarter.

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. 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 regulations. We believe we are in compliance with the applicable provisions of SOX and the rules of the SEC adopted under SOX as well as the listing guidelines of the NYSE relating to corporate governance. Beginning with the Annual Report on Form 10-K for the year ended December 31, 2004, we have provided the required annual report on management’s assessment of the effectiveness of the Company’s internal control over financial reporting. To date, we have incurred costs (both internal and external) related to SOX Section 404 (Management Assessment of Internal Controls) 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):


	Six Months Ended						Change
	Jun. 30, 2005			Jun. 30, 2004			$			%
Cash and cash equivalents at beginning of period	$	19,763		$	124,496		$	(104,733	)		-84	%
Cash provided from (used in) operating activities		66,170			62,844			3,326			5	%
Cash provided from (used in) investing activities		(197,183	)		(121,646	)		(75,537	)		62	%
Cash provided from (used in) financing activities		126,317			(31,704	)		158,021			-498	%

Cash and cash equivalents at end of period	$	15,067		$	33,990		$	(18,923	)		-56	%

Operating Activities. The increase in net cash provided from operating activities is primarily attributable to changes in receivables and accrued expenses. Changes in receivables are primarily due to timing of cash receipts of rent and interest from our operators. Changes in accrued expenses are primarily attributable to timing of cash disbursements for our contractual interest obligations.

Investing Activities. The increase in net cash used in investing activities is primarily attributable to an increase in real property investments. At June 30, 2005, 91% of our real estate investments were real property investments. The investment activity during the six months ended June 30, 2005 was approximately 92% real property investments. Investments for the six months ended June 30, 2005 included the acquisition of three assisted living facilities, 26 skilled nursing facilities and five specialty care facilities for $213,801,000. These acquisitions included the assumption of debt totaling $15,603,000, resulting in $198,198,000 of cash disbursed for the acquisitions. The remaining $17,709,000 of real property investments relates primarily to funding of construction and renovations on existing facilities. Of this amount, $4,096,000 related to construction advances on three assisted living facilities. For the same period in 2004, we acquired three assisted living facilities and 19 skilled nursing facilities for $131,221,000. The prior year acquisitions included no assumption of debt. In addition, we advanced $24,186,000 relating to construction and renovations on existing facilities. Of this amount, $6,198,000 related to construction advances on three assisted living facilities.

Financing Activities. The change in net cash provided from or used in financing activities is primarily attributable to changes related to our long-term debt and cash distributions to stockholders. For the six months ended June 30, 2005, we had a net increase of $167,000,000 on our unsecured lines of credit arrangements as compared to a $41,000,000 net increase for the same period in 2004. This was partially offset by an increase in our principal payments on secured debt which was primarily due to the payoff of $5,695,000 of mortgages in March 2005. Principal payments on secured debt for the same period in 2004 were only regularly scheduled mortgage amortization payments.

In April 2005, we closed on a public offering of $250,000,000 of 5.875% senior unsecured notes due May 2015 at an effective yield of 5.913%. In May 2005, we redeemed all of our outstanding $50,000,000 8.17% senior unsecured notes due March 2006, we completed a tender offer for $57,670,000 of our outstanding $100,000,000 7.625% senior unsecured notes due March 2008 and we

redeemed $122,500,000 of our outstanding $175,000,000 7.5% senior unsecured notes due August 2007. We recognized one-time charges on the extinguishment of debt totaling approximately $18,448,000 in the second quarter of 2005 as a result of this activity.

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 six months ended June 30, 2005, we paid dividends totaling $65,088,000 (or $1.22 per share) and $10,872,000 to holders of our common stock and preferred stock, respectively. For the same period in 2004, we paid dividends totaling $60,410,000 (or $1.185 per share) and $4,492,000 to holders of our common stock and preferred stock, respectively. The increase in common stock dividends is attributable to the increase in common stock outstanding primarily as a result of common stock issuances pursuant to our DRIP, issuances pursuant to stock option exercises and restricted stock grants, and conversions of preferred stock into common stock. The increase in preferred dividends is primarily due to the issuance of 7,000,000 shares of 7.625% Series F Cumulative Redeemable Preferred Stock in September 2004.

Off-Balance Sheet Arrangements

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 June 30, 2005, we participated in two interest rate swap agreements related to our long-term debt. Our interest rate swaps are discussed below in “Contractual Obligations” and “Results of Operations.”

Contractual Obligations

The following table summarizes our payment requirements under contractual obligations as of June 30, 2005 (in thousands):


	Payments Due by Period
Contractual Obligations	Total		2005		2006-2007		2008-2009		Thereafter

Unsecured lines of credit arrangements (1)	$	540,000	$	0	$	40,000	$	500,000	$	0
Senior unsecured notes		894,830				52,500		42,330		800,000
Secured debt		168,790		1,674		18,579		44,597		103,940
Contractual interest obligations		886,127		49,942		320,527		204,644		311,014
Capital lease obligations
Operating lease obligations		15,149		891		2,341		1,857		10,060
Purchase obligations		65,522		7,212		26,193		25,000		7,117
Other long-term liabilities

Total contractual obligations	$	2,570,418	$	59,719	$	460,140	$	818,428	$	1,232,131

(1) Unsecured lines of credit arrangements reflected at 100% capacity.

We have an unsecured credit arrangement with a consortium of ten banks providing for a revolving line of credit (“revolving credit”) in the amount of $500,000,000, which expires on June 22, 2008 (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 the applicable margin over LIBOR interest rate, at our option (4.590% at June 30, 2005). The applicable margin is based on our ratings with Moody’s Investors Service and Standard & Poor’s Ratings Services and is currently 0.9%. In addition, we pay a facility fee annually to each bank based on the bank’s commitment under the revolving credit facility. The facility fee depends upon our rating with Moody’s and Standard & Poor’s and is currently 0.225% of each bank’s commitment. We also pay 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 one bank for a total of $40,000,000, which expires May 31, 2006. Borrowings under this line of credit are subject to interest at either the bank’s prime rate of interest (6.00% at June 30, 2005) or 1.3% plus the applicable LIBOR interest rate, at our option. Principal is due upon expiration of the agreement. At June 30, 2005, we had $318,000,000 outstanding under the unsecured lines of credit arrangements and estimated total contractual interest obligations of $54,672,000. Contractual interest obligations are estimated based on the assumption that the balance of $318,000,000 at June 30, 2005 is constant until maturity at interest rates in effect at June 30, 2005.

At June 30, 2005, we had $894,830,000 of senior unsecured notes outstanding with fixed annual interest rates ranging from 5.875% to 8.0%, payable semi-annually. Total contractual interest obligations on senior unsecured notes totaled $662,764,000 at June 30, 2005. Additionally, we have 32 mortgage loans totaling $168,790,000, collateralized by health care facilities, with fixed annual interest

rates ranging from 6.18% to 12%, payable monthly. The carrying values of the health care properties securing the mortgage loans totaled $236,795,000 at June 30, 2005. Total contractual interest obligations on mortgage loans totaled $131,376,000 at June 30, 2005.

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% and pay a variable rate based on six-month LIBOR plus a spread. At June 30, 2005, total contractual interest obligations were estimated to be $37,315,000 based on interest rates in effect at June 30, 2005.

At June 30, 2005, we had operating lease obligations of $15,149,000 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 June 30, 2005, we had outstanding construction financings of $449,000 for leased properties and were committed to providing additional financing of approximately $1,746,000 to complete construction. At June 30, 2005, we had contingent purchase obligations totaling $63,776,000. 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 June 30, 2005, we had stockholders’ equity of $1,313,965,000 and a total outstanding debt balance of $1,381,620,000, which represents a debt to total book capitalization ratio of 51%. Our ratio of debt to market capitalization was 37% at June 30, 2005. For the six months ended June 30, 2005, our coverage ratio of EBITDA to interest was 2.80 to 1.00 and our coverage ratio of EBITDA to fixed charges was 2.20 to 1.00. Also, at June 30, 2005, we had $15,067,000 of cash and cash equivalents and $222,000,000 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 June 30, 2005, we were in compliance with all of the covenants under our debt agreements. None of our debt agreements contain provisions for acceleration that 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 & Poor’s Ratings Services 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 July 15, 2005, we had an effective shelf registration statement on file with the SEC under which we may issue up to $831,794,619 of securities including debt securities, common and preferred stock, depositary shares, warrants and units. Also, as of July 15, 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 July 15, 2005, 4,001,564 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

Net income (loss) available to common stockholders for the three months ended June 30, 2005 totaled ($1,606,000), or ($0.03) per diluted share, as compared with $19,207,000, or $0.37 per diluted share, for the same period in 2004. Net income available to common stockholders for the six months ended June 30, 2005 totaled $16,198,000, or $0.30 per diluted share, as compared with $37,862,000, or $0.73 per diluted share, for the same period in 2004. Net income available to common stockholders decreased from the prior year primarily due to the loss on extinguishment of debt totaling $18,448,000, or $0.34 per diluted share. This charge is discussed in further detail below.

FFO for the three months ended June 30, 2005 totaled $19,427,000, or $0.36 per diluted share, as compared with $35,760,000, or $0.69 per diluted share, for the same period in 2004. FAD for the three months ended June 30, 2005 totaled $18,251,000, or $0.34 per diluted share, as compared to $33,291,000, or $0.64 per diluted share, for the same period in 2004. FFO for the six months ended June 30, 2005 totaled $57,738,000, or $1.08 per diluted share, as compared with $71,550,000, or $1.39 per diluted share, for the same period in 2004. FAD for the six months ended June 30,

2005 totaled $53,706,000, or $1.00 per diluted share, as compared to $62,417,000, or $1.21 per diluted share, for the same period in 2004. Net income available to common stockholders decreased from the prior year primarily due to the loss on extinguishment of debt totaling $18,448,000, or $0.34 per diluted share. This charge is discussed in further detail below. 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 three months ended June 30, 2005 totaled $47,787,000, as compared with $58,068,000 for the same period in 2004. EBITDA for the six months ended June 30, 2005 totaled $112,677,000, as compared with $116,235,000 for the same period in 2004. Our coverage ratio of EBITDA to total interest was 2.80 times for the six months ended June 30, 2005 as compared with 3.21 times for the same period in 2004. Our coverage ratio of EBITDA to fixed charges was 2.20 times for the six months ended June 30, 2005 as compared with 2.85 times for the same period in 2004. EBITDA, interest coverage and fixed charge coverage all decreased from the prior year primarily due to the loss on extinguishment of debt totaling $18,448,000, or $0.34 per diluted share. This charge 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 to net income.

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


	Three Months Ended				Change						Six Months Ended				Change
	Jun. 30, 2005		Jun. 30, 2004		$			%			Jun. 30, 2005		Jun. 30, 2004		$			%
Rental income	$	62,791	$	52,413	$	10,378			20	%	$	124,765	$	105,632	$	19,133			18	%
Interest income		5,269		5,923		(654	)		-11	%		10,252		11,636		(1,384	)		-12	%
Transaction fees and other income		547		565		(18	)		-3	%		1,970		1,279		691			54	%

Totals	$	68,607	$	58,901	$	9,706			16	%	$	136,987	$	118,547	$	18,440			16	%

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. During the period July 1, 2004 to June 30, 2005, we acquired 22 assisted living facilities, 59 skilled nursing facilities and five specialty care facilities for $601,471,000. During that same period, we sold two assisted living facilities, one skilled nursing facility and one parcel of land with carrying values of $13,936,000. On a net basis, this represents the addition of 83 revenue producing facilities totaling $587,535,000.

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 June 30, 2005, we had no leases expiring prior to March 2009.

Interest income decreased from 2004 primarily due to a decrease in the balance of outstanding loans and non-recognition of interest income related to loans on non-accrual. Transaction fees and other income increased for the year-to-date period primarily due to a $750,000 assignment consent fee received in the first quarter of 2005 relating to a payoff which did not occur. There was no such fee in the prior year.

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


	Three Months Ended				Change						Six Months Ended				Change
	Jun. 30, 2005		Jun. 30, 2004		$			%			Jun. 30, 2005		Jun. 30, 2004		$			%
Interest expense	$	19,984	$	17,104	$	2,880			17	%	$	39,579	$	35,245	$	4,334			12	%
Provision for depreciation		21,000		17,166		3,834			22	%		41,271		33,673		7,598			23	%
General and administrative		4,337		3,560		777			22	%		8,355		6,719		1,636			24	%
Loan expense		673		872		(199	)		-23	%		1,535		1,763		(228	)		-13	%
Loss on extinguishment of debt		18,448				18,448			n/a			18,448				18,448			n/a
Provision for loan losses		300		300		0			0	%		600		600		0			0	%

Totals	$	64,742	$	39,002	$	25,740			66	%	$	109,788	$	78,000	$	31,788			41	%

The increase in total expenses is primarily attributable to the loss on extinguishment of debt in 2005 and increases in interest expense and the provision for depreciation. In April 2005, we closed on a public offering of $250,000,000 of 5.875% senior unsecured notes due May 2015 at an effective yield of 5.913%. In May 2005, we redeemed all of our outstanding $50,000,000 8.17% senior unsecured notes due March 2006, we completed a tender offer for $57,670,000 of our outstanding $100,000,000 7.625% senior unsecured notes due March 2008 and we redeemed $122,500,000 of our outstanding $175,000,000 7.5% senior unsecured notes due August 2007. We recognized one-time charges on the extinguishment of debt totaling approximately $18,448,000 in the second quarter of 2005 as a result of this activity.

The increase in interest expense is primarily due to higher average borrowings offset by lower average borrowing costs. For the six months ended June 30, 2005, we had an average monthly outstanding balance of $942,519,000 of unsecured senior notes as compared to $845,000,000 for the same period in 2004. Our weighted average interest rate on unsecured senior notes has declined from 7.25% at June 30, 2004 to 6.69% at June 30, 2005. In addition, during the six months ended June 30, 2005, we had an average daily outstanding balance of $123,600,000. During the same period in 2004, we did not carry an outstanding balance under our unsecured lines of credit until June 30, 2004.

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 three and six months ended June 30, 2005, we generated $367,000 and $777,000, respectively, of savings related to our Swaps that was recorded as a reduction of interest expense. For the three and six months ended June 30, 2004, we generated $513,000 of savings related to the Swaps that was recorded as a reduction of interest expense.

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 three and six months ended June 30, 2005 totaled $348,000 and $614,000, respectively, as compared with $199,000 and $336,000 for the same periods in 2004.

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 three and six months ended June 30, 2005, were 6.32% and 6.08%, respectively, as compared with 6.04% and 5.60% for the same periods in 2004. The increase from 2004 is primarily related to costs associated with our initiatives to attract and retain appropriate personnel to achieve our business objectives and to costs associated with various professional service fees (including costs associated with SOX compliance).

Loan expense and the provision for loan losses are consistent with the prior year. 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.”

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


	Three Months Ended						Change						Six Months Ended						Change
	Jun. 30, 2005			Jun. 30, 2004			$			%			Jun. 30, 2005			Jun. 30, 2004			$			%
Gain (loss) on sales of properties	$	(24	)	$	1,129		$	(1,153	)		-102	%	$	(134	)	$	1,129		$	(1,263	)		-112	%
Discontinued operations, net		(11	)		401			(412	)		-103	%		5			678			(673	)		-99	%
Preferred dividends		(5,436	)		(2,222	)		(3,214	)		145	%		(10,872	)		(4,492	)		(6,380	)		142	%

Totals	$	(5,471	)	$	(692	)	$	(4,779	)		691	%	$	(11,001	)	$	(2,685	)	$	(8,316	)		310	%

During the six months ended June 30, 2005, we sold properties with carrying values of $10,034,000 for a net loss of $134,000. These properties generated $5,000 of income after deducting depreciation and interest expense from rental revenue for the six months ended June 30, 2005. All properties sold subsequent to January 1, 2004 generated $678,000 of income after deducting depreciation and interest expense from rental revenue for the six months ended June 30, 2004. Please refer to Note F of our unaudited consolidated financial statements for further discussion.

The increase in preferred dividends is primarily due to the issuance of 7,000,000 shares of 7.625% Series F Cumulative Redeemable Preferred Stock in September 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.

In April 2002, the Financial Accounting Standards Board issued Statement No. 145 that requires gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under Statement No. 4. We adopted the standard effective January 1, 2003. We have properly reflected the loss on extinguishment of debt and we have not added back $18,448,000, or $0.34 per diluted share, to net income in the calculation of FFO, FAD or EBITDA.

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 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.


	Three Months Ended
	March 31		June 30			September 30		December 31			March 31		June 30
	2004		2004			2004		2004			2005		2005

FFO Reconciliation:
Net income (loss) available to common stockholders	$	18,655	$	19,207		$	19,004	$	15,767		$	17,803	$	(1,606	)
Provision for depreciation		17,134		17,682			18,889		20,310			20,396		21,009
Loss (gain) on sales of properties				(1,129	)				1,272			110		24
Prepayments fees									(50	)

Funds from operations	$	35,789	$	35,760		$	37,893	$	37,299		$	38,309	$	19,427

Average common shares outstanding:
Basic		50,580		51,232			51,538		52,326			52,963		53,429
Diluted - for net income (loss) purposes		51,358		51,828			52,008		52,784			53,454		53,429
Diluted - for FFO purposes		51,358		51,828			52,008		52,784			53,454		53,765

Per share data:
Net income (loss) available to common stockholders
Basic	$	0.37	$	0.37		$	0.37	$	0.30		$	0.34	$	(0.03	)
Diluted		0.36		0.37			0.37		0.30			0.33		(0.03	)

Funds from operations
Basic	$	0.71	$	0.70		$	0.74	$	0.71		$	0.72	$	0.36
Diluted		0.70		0.69			0.73		0.71			0.72		0.36

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.


	Three Months Ended
	March 31			June 30			September 30			December 31			March 31			June 30
	2004			2004			2004			2004			2005			2005

FAD Reconciliation:
Net income (loss) available to common stockholders	$	18,655		$	19,207		$	19,004		$	15,767		$	17,803		$	(1,606	)
Provision for depreciation		17,134			17,682			18,889			20,310			20,396			21,009
Loss (gain) on sales of properties					(1,129	)					1,272			110			24
Prepayments fees											(50	)
Rental income in excess of cash received		(6,664	)		(2,469	)		(3,002	)		(1,657	)		(2,855	)		(1,176	)

Funds available for distribution	$	29,125		$	33,291		$	34,891		$	35,642		$	35,454		$	18,251

Average common shares outstanding:
Basic		50,580			51,232			51,538			52,326			52,963			53,429
Diluted - for net income (loss) purposes		51,358			51,828			52,008			52,784			53,454			53,429
Diluted - for FAD purposes		51,358			51,828			52,008			52,784			53,454			53,765

Per share data:
Net income (loss) available to common stockholders
Basic	$	0.37		$	0.37		$	0.37		$	0.30		$	0.34		$	(0.03	)
Diluted		0.36			0.37			0.37			0.30			0.33			(0.03	)

Funds available for distribution
Basic	$	0.58		$	0.65		$	0.68		$	0.68		$	0.67		$	0.34
Diluted		0.57			0.64			0.67			0.68			0.66			0.34

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.


	Three Months Ended
	March 31			June 30			September 30			December 31			March 31			June 30
	2004			2004			2004			2004			2005			2005
EBITDA Reconciliation:
Net income	$	20,925		$	21,429		$	21,807		$	21,209		$	23,239		$	3,830
Interest expense		18,552			17,366			17,896			18,742			19,645			19,986
Capitalized interest		137			199			254			285			265			348
Provision for depreciation		17,134			17,682			18,889			20,310			20,396			21,009
Amortization		1,118			1,092			1,021			1,016			1,042			2,314
Provision for loan losses		300			300			300			300			300			300

EBITDA	$	58,166		$	58,068		$	60,167		$	61,862		$	64,887		$	47,787

Interest Coverage Ratio:
Interest expense	$	18,552		$	17,366		$	17,896		$	18,742		$	19,645		$	19,986
Capitalized interest		137			199			254			285			265			348

Total interest		18,689			17,565			18,150			19,027			19,910			20,334
EBITDA	$	58,166		$	58,068		$	60,167		$	61,862		$	64,887		$	47,787

Interest coverage ratio		3.11	x		3.31	x		3.31	x		3.25	x		3.26	x		2.35	x

Fixed Charge Coverage Ratio:
Total interest	$	18,689		$	17,565		$	18,150		$	19,027		$	19,910		$	20,334
Preferred dividends		2,270			2,222			2,803			5,442			5,436			5,436

Total fixed charges		20,959			19,787			20,953			24,469			25,346			25,770
EBITDA	$	58,166		$	58,068		$	60,167		$	61,862		$	64,887		$	47,787

Fixed charge coverage ratio		2.78	x		2.93	x		2.87	x		2.53	x		2.56	x		1.85	x

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 our Annual Report on Form 10-K for the year ended December 31, 2004 for further information on significant accounting policies that impact us. There have been no material changes to these policies in 2005.

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/Approach
Accounting Estimate		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 six months ended June 30, 2005, we recorded $600,000 as provision for loan losses, resulting in an allowance for loan losses of $5,861,000 relating to loans with outstanding balances of $41,194,000 at June 30, 2005. Also at June 30, 2005, we had loans with outstanding balances of $35,558,000 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 six months ended June 30, 2005, we recorded $33,599,000 and $7,807,000 as provision for depreciation relating to buildings and improvements, respectively. The average useful life of our buildings and improvements was 31.0 years and 9.6 years, respectively, at June 30, 2005.

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 reduced to its fair value and an impairment charge is recognized for the difference between the arrying value and the fair value.		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 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.

		We did not record any impairment charges for the six months ended June 30, 2005.


Nature of Critical		Assumptions/Approach
Accounting Estimate		Used
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 June 30, 2005, we participated in two interest rate swap agreements related to our long-term debt. At June 30, 2005, the swaps were reported at their fair value as a $6,566,000 other asset. For the six months ended June 30, 2005, we generated $777,000 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 six months ended June 30, 2005, we recognized $10,252,000 of interest income and $124,957,000 of rental income, including discontinued operations. Rental income includes $4,032,000 of straight-line rental income. At June 30, 2005, our straight-line receivable balance was $67,351,000. Also at June 30, 2005, we had loans with outstanding balances of $35,558,000 on non-accrual status.

Forward-Looking Statements and Risk Factors

This Quarterly Report on Form 10-Q may contain “forward-looking” statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements concern and are based upon, among other things, 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. 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 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 available to us; competition within the health care and senior housing industries; changes in federal, state and local legislation; negative developments in the operating results or financial condition of operators, including, but not limited to, their ability to pay rent and repay loans; our ability to transition or sell underperforming facilities with a profitable result; inaccuracies in any of our assumptions; 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 sales proceeds; changes in rules or practices governing our financial

reporting; and structure related factors, including REIT qualification, anti-takeover provisions and key management personnel. Other important factors are identified in our Annual Report on Form 10-K for the year ended December 31, 2004, including factors identified under the headings “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Finally, we assume no obligation to update or revise any forward-looking statements or to update the reasons why actual results could differ from those projected in any forward-looking statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to various market risks, including the potential loss arising from adverse changes in interest rates. We seek to mitigate the effects of fluctuations in interest rates by matching the terms of new investments with new long-term fixed rate borrowings to the extent possible. 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. The following section is presented to provide a discussion of the risks associated with potential fluctuations in interest rates.

We historically borrow on our unsecured lines of credit arrangements to make acquisitions of, loans to, or to construct health care facilities. Then, as market conditions dictate, we will issue equity or long-term fixed rate debt to repay the borrowings under the unsecured lines of credit arrangements.

A change in interest rates will not affect the interest expense associated with our fixed rate debt. Interest rate changes, however, will affect the fair value of our fixed rate debt. A 1% increase in interest rates would result in a decrease in fair value of our senior unsecured notes by approximately $37,354,000 at June 30, 2005 ($28,566,000 at June 30, 2004). Changes in the interest rate environment upon maturity of this fixed rate debt could have an effect on our future cash flows and earnings, depending on whether the debt is replaced with other fixed rate debt, variable rate debt, or equity or repaid by the sale of assets.

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. At June 30, 2005, the Swaps were reported at their fair value as a $6,566,000 other asset. A 1% increase in interest rates would result in a decrease in fair value of our Swaps by approximately $7,123,000 at June 30, 2005 ($7,433,000 at June 30, 2004).

Our variable rate debt, including our unsecured lines of credit arrangements, is reflected at fair value. At June 30, 2005, we had $318,000,000 outstanding related to our variable rate debt and assuming no changes in outstanding balances, a 1% increase in interest rates would result in increased annual interest expense of $3,180,000. At June 30, 2004, we had $41,000,000 outstanding related to our variable rate debt and assuming no changes in outstanding balances, a 1% increase in interest rates would have resulted in increased annual interest expense of $410,000.

We are subject to risks associated with debt financing, including the risk that existing indebtedness may not be refinanced or that the terms of refinancing may not be as favorable as the terms of current indebtedness. The majority of our borrowings were completed under indentures or contractual agreements that limit the amount of indebtedness we may incur. Accordingly, in the event that we are unable to raise additional equity or borrow money because of these limitations, our ability to acquire additional properties may be limited.

Item 4. Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed by us in the reports we file with or submit to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. No change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

Our annual meeting of stockholders was duly called and held on May 5, 2005 in Toledo, Ohio. Proxies for the meeting were solicited on behalf of the Board of Directors pursuant to Regulation 14A of the General Rules and Regulations of the SEC. There was no solicitation in opposition to the Board’s nominees for election as directors as listed in the Proxy Statement, and all such nominees were elected.

Votes were cast at the meeting upon the proposals described in the Proxy Statement for the meeting (filed with the SEC pursuant to Regulation 14A and incorporated herein by reference) as follows:

Proposal #1 — Election of three directors for a term of three years:


Nominee	For		Withheld
William C. Ballard, Jr.		49,932,932		516,584
Peter J. Grua		50,134,345		315,171
R. Scott Trumbull		49,923,100		526,416

Proposal #2 — Approval of the Health Care REIT, Inc. 2005 Long-Term Incentive Plan:


For			30,300,101
Against			3,587,092
Abstain			402,271

Proposal #3 — Ratification of the appointment of Ernst & Young LLP as independent registered public accounting firm for the fiscal year 2005:


For			49,806,888
Against			501,476
Abstain			141,151

Item 6. Exhibits


4.1		Indenture for Senior Debt Securities, dated as of September 6, 2002, between the Company and Fifth Third Bank (filed with the Commission as Exhibit 4.1 to the Company’s Form 8-K filed September 9, 2002, and incorporated herein by reference thereto).

4.2		Supplemental Indenture No. 2, dated as of September 10, 2003, to Indenture for Senior Debt Securities, dated as of September 6, 2002, between the Company and Fifth Third Bank (filed with the Commission as Exhibit 4.2 to the Company’s Form 8-K filed September 24, 2003, and incorporated herein by reference thereto).

4.3		Amendment No. 1, dated September 16, 2003, to Supplemental Indenture No. 2, dated as of September 10, 2003, to Indenture for Senior Debt Securities, dated as of September 6, 2002, between the Company and Fifth Third Bank (filed with the Commission as Exhibit 4.4 to the Company’s Form 8-K filed September 24, 2003, and incorporated herein by reference thereto).


4.4		Supplemental Indenture No. 4, dated as of April 27, 2005, to Indenture for Senior Debt Securities, dated as of September 6, 2002, between the Company and The Bank of New York Trust Company, N.A., as successor to Fifth Third Bank (filed with the Commission as Exhibit 4.1 to the Company’s Form 8-K filed April 28, 2005, and incorporated herein by reference thereto).

10.1		Credit Agreement by and among the Company and certain of its subsidiaries and Fifth Third Bank, dated as of May 31, 2005 (filed with the Commission as Exhibit 10.1 to the Company’s Form 8-K filed June 6, 2005, and incorporated herein by reference thereto).

10.2		Second Amended and Restated Loan Agreement by and among the Company and certain of its subsidiaries, the banks signatory thereto, KeyBank National Association, as administrative agent, Deutsche Bank Securities Inc., as syndication agent, and UBS Securities LLC, Bank of America, N.A. and JPMorgan Chase Bank, N.A., as documentation agents, dated as of June 22, 2005 (filed with the Commission as Exhibit 10.1 to the Company’s Form 8-K filed June 28, 2005, and incorporated herein by reference thereto).

10.3		Form of Restricted Stock Agreement for Executive Officers under the Health Care REIT, Inc. 2005 Long-Term Incentive Plan (filed with the Commission as Exhibit 10.2 to the Company’s Form 8-K filed June 28, 2005, and incorporated herein by reference thereto).

31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.

31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.

32.1		Certification pursuant to 18 U.S.C. Section 1350 by Chief Executive Officer.

32.2		Certification pursuant to 18 U.S.C. Section 1350 by Chief Financial Officer.

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

HEALTH CARE REIT, INC.


Date: July 22, 2005	By:	/s/ George L. Chapman

	George L. Chapman,
	Chairman and Chief Executive Officer
	(Principal Executive Officer)

Date: July 22, 2005	By:	/s/ Raymond W. Braun

	Raymond W. Braun,
	President and Chief Financial Officer
	(Principal Financial Officer)

Date: July 22, 2005	By:	/s/ Paul D. Nungester, Jr.

	Paul D. Nungester, Jr.,
	Controller
	(Principal Accounting Officer)


		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets - June 30, 2005 and December 31, 2004		3

	Consolidated Statements of Income - Three and six months ended June 30, 2005 and 2004		4

	Consolidated Statements of Stockholders’ Equity – Six months ended June 30, 2005 and 2004		5

	Consolidated Statements of Cash Flows – Six months ended June 30, 2005 and 2004		6

	Notes to Unaudited Consolidated Financial Statements		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		12

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		26

Item 4.	Controls and Procedures		27

PART II.	OTHER INFORMATION

Item 4.	Submission of Matters to a Vote of Security Holders		27

Item 6.	Exhibits		27

SIGNATURES			28
EX-31.1 Rule 13a-14(a)/15d-14(a) Certification of CEO
EX-31.2 Rule 13a-14(a)/15d-14(a) Certification of CFO
EX-32.1 Certification Pursuant to 18 U.S.C. Section 1350 by CEO
EX-32.2 Certification Pursuant to 18 U.S.C. Section 1350 by CFO

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	•		our Board of Directors increased our quarterly dividend to $0.62 per share, which represents a two cent increase from the quarterly dividend of $0.60 paid for 2004. The dividend declared for the quarter ended June 30, 2005 represents the 137^th consecutive dividend payment;

	•		we completed $250,608,000 of gross investments and had $33,528,000 of investment payoffs;

	•		we closed on a $500,000,000 unsecured revolving credit facility to replace our $310,000,000 facility which was scheduled to mature in May 2006. Among other things, the new facility provides us with additional financial flexibility and borrowing capacity, reduces our all-in borrowing costs by approximately 50 basis points, extends our agreement to June 2008 and permits us to increase the facility by $50,000,000 through an accordion feature during the first 24 months;

	•		we closed on a $40,000,000 unsecured line of credit facility to replace our $30,000,000 facility which matured in May 2005. The new facility is an annual revolver scheduled to mature in May 2006 and reflects reduced pricing from the previous facility; and

	•		we issued $250,000,000 of 5.875% senior unsecured notes due May 2015 at an effective yield of 5.913% in April 2005. We used proceeds from this offering to fund: (a) a redemption of all of our outstanding $50,000,000 8.17% senior unsecured notes due March 2006; (b) a redemption of $122,500,000 of our outstanding $175,000,000 7.5% senior unsecured notes due August 2007; and (c) a public tender offer for $57,670,000 of our outstanding $100,000,000 7.625% senior unsecured notes due March 2008.

	•		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.