HEALTH CARE REIT, INC. Form 10-Q

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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 September 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 incorporation or organization)		(I.R.S. Employer 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 the filing requirements for at least 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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

As of October 14, 2005, the registrant had 54,631,567 shares of common stock outstanding.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS
HEALTH CARE REIT, INC. AND SUBSIDIARIES


	September 30			December 31
	2005			2004
	(Unaudited)			(Note)
	(In thousands)
Assets
Real estate investments:
Real property owned
Land	$	225,604		$	208,173
Buildings & improvements		2,373,762			2,176,327
Real property held for sale, net of accumulated depreciation		52,167
Construction in progress		1,135			25,463

		2,652,668			2,409,963
Less accumulated depreciation		(265,478	)		(219,536	)

Total real property owned		2,387,190			2,190,427

Loans receivable
Real property loans		213,172			213,067
Subdebt investments		22,087			43,739

		235,259			256,806
Less allowance for losses on loans receivable		(6,161	)		(5,261	)

		229,098			251,545

Net real estate investments		2,616,288			2,441,972

Other assets:
Equity investments		3,298			3,298
Deferred loan expenses		8,781			6,958
Cash and cash equivalents		27,119			19,763
Receivables and other assets		81,412			77,652

		120,610			107,671

Total assets	$	2,736,898		$	2,549,643


Liabilities and stockholders’ equity
Liabilities:
Borrowings under unsecured lines of credit arrangements	$	304,000		$	151,000
Senior unsecured notes		894,830			875,000
Secured debt		174,324			160,225
Accrued expenses and other liabilities		44,048			28,139

Total liabilities		1,417,202			1,214,364

Stockholders’ equity:
Preferred stock		276,989			283,751
Common stock		54,534			52,860
Capital in excess of par value		1,191,240			1,139,723
Treasury stock		(1,766	)		(1,286	)
Cumulative net income		798,183			745,817
Cumulative dividends		(999,737	)		(884,890	)
Accumulated other comprehensive income		1			1
Other equity		252			(697	)

Total stockholders’ equity		1,319,696			1,335,279

Total liabilities and stockholders’ equity	$	2,736,898		$	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				Nine Months Ended
	September 30				September 30
	2005		2004		2005			2004
	(In thousands, except per share data)
Revenues:
Rental income	$	67,295	$	55,648	$	189,289		$	157,615
Interest income		4,997		5,560		15,249			17,196
Transaction fees and other income		773		593		2,742			1,873

		73,065		61,801		207,280			176,684

Expenses:
Interest expense		21,205		17,376		59,924			51,663
Provision for depreciation		21,176		18,088		60,665			50,038
General and administrative		4,640		3,618		12,993			10,339
Loan expense		673		805		2,209			2,568
Impairment of assets				314					314
Loss on extinguishment of debt						18,448
Provision for loan losses		300		300		900			900

		47,994		40,501		155,139			115,822

Income from continuing operations		25,071		21,300		52,141			60,862

Discontinued operations:
Net gain (loss) on sales of properties						(134	)		1,129
Income from discontinued operations, net		226		507		359			2,170

		226		507		225			3,299

Net income		25,297		21,807		52,366			64,161

Preferred stock dividends		5,389		2,803		16,261			7,295


Net income available to common stockholders	$	19,908	$	19,004	$	36,105		$	56,866


Average number of common shares outstanding:
Basic		54,038		51,538		53,498			51,200
Diluted		54,359		52,008		53,867			51,787

Earnings per share:
Basic:
Income from continuing operations available to common stockholders	$	0.37	$	0.36	$	0.67		$	1.05
Discontinued operations, net				0.01					0.06

Net income available to common stockholders	$	0.37	$	0.37	$	0.67		$	1.11

Diluted:
Income from continuing operations available to common stockholders	$	0.37	$	0.36	$	0.67		$	1.04
Discontinued operations, net				0.01					0.06

Net income available to common stockholders	$	0.37	$	0.37	$	0.67		$	1.10

Dividends declared and paid per common share	$	0.62	$	0.60	$	1.84		$	1.785

See notes to unaudited consolidated financial statements

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


	Nine Months Ended September 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												52,366										52,366
Other comprehensive income:
Unrealized gain (loss) on equity investments																						0

Total comprehensive income																						52,366

Proceeds from issuance of common shares from dividend reinvestment and stock incentive plans, net of forfeitures					1,467		44,962		(480	)												45,949
Conversion of preferred stock		(6,762	)		207		6,555															0
Restricted stock amortization																			552			552
Compensation expense related to stock options																			397			397
Cash dividends paid:
Common stock-$1.84 per share														(98,586	)							(98,586	)
Preferred stock, Series D-$1.4766 per share														(5,906	)							(5,906	)
Preferred stock, Series E-$1.125 per share														(347	)							(347	)
Preferred stock, Series F-$1.4297 per share														(10,008	)							(10,008	)

Balances at end of period	$	276,989		$	54,534	$	1,191,240	$	(1,766	)	$	798,183	$	(999,737	)	$	1	$	252		$	1,319,696


	Nine Months Ended September 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													64,161										64,161
Other comprehensive income:
Unrealized gain (loss) on equity investments																							0

Total comprehensive income																							64,161

Proceeds from issuance of common shares from dividend reinvestment and stock incentive plans, net of forfeitures					1,631		47,254			(327	)												48,558
Proceeds from issuance of preferred shares		175,000					(5,628	)															169,372
Conversion of preferred stock		(6,467	)		198		6,269																0
Restricted stock amortization																				716			716
Compensation expense related to stock options																				284			284
Cash dividends paid:
Common stock-$1.785 per share															(91,461	)							(91,461	)
Preferred stock, Series D-$1.4766 per share															(5,907	)							(5,907	)
Preferred stock, Series E-$1.125 per share															(795	)							(795	)
Preferred stock, Series F-$0.085 per share															(593	)							(593	)

Balances at end of period	$	289,294		$	52,127	$	1,117,782		$	(850	)	$	724,607	$	(847,922	)	$	1	$	(1,025	)	$	1,334,014

See notes to unaudited consolidated financial statements

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


	Nine Months Ended
	September 30
	2005			2004
	(In thousands)
Operating activities
Net income	$	52,366		$	64,161
Adjustments to reconcile net income to net cash provided from operating activities:
Provision for depreciation		63,473			53,705
Amortization		4,267			3,231
Provision for loan losses		900			900
Impairment of assets					314
Rental income in excess of cash received		(4,149	)		(12,135	)
(Gain) loss on sales of properties		134			(1,129	)
Increase (decrease) in accrued expenses and other liabilities		(1,243	)		(8,483	)
Decrease (increase) in receivables and other assets		(775	)		(5,266	)

Net cash provided from (used in) operating activities		114,973			95,298

Investing activities
Investment in real property		(226,085	)		(431,923	)
Investment in loans receivable and subdebt investments		(39,125	)		(39,702	)
Principal collected on loans receivable and subdebt investments		56,373			22,732
Proceeds from sales of properties		9,900			34,937
Other		259			1,328

Net cash provided from (used in) investing activities		(198,678	)		(412,628	)

Financing activities
Net increase (decrease) under unsecured lines of credit arrangements		153,000			80,000
Proceeds from issuance of senior notes		250,000			50,801
Principal payments on senior notes		(230,170	)		(40,000	)
Principal payments on secured debt		(8,210	)		(1,843	)
Net proceeds from the issuance of common stock		46,429			48,885
Net proceeds from the issuance of preferred stock					169,372
Decrease (increase) in deferred loan expense		(5,141	)		(206	)
Cash distributions to stockholders		(114,847	)		(98,756	)

Net cash provided from (used in) financing activities		91,061			208,253

Increase (decrease) in cash and cash equivalents		7,356			(109,077	)
Cash and cash equivalents at beginning of period		19,763			124,496

Cash and cash equivalents at end of period	$	27,119		$	15,419


Supplemental cash flow information-interest paid	$	63,283		$	62,373

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 nine months ended September 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 nine months ended September 30, 2005, we invested $226,085,000 in real property (including $4,782,000 of advances for construction in progress) and provided loan financings of $39,125,000. Real property acquisitions included the assumption of debt totaling $22,309,000. As of September 30, 2005, we had approximately $1,060,000 in unfunded construction commitments. Also during the nine months ended September 30, 2005, we sold real property generating $9,900,000 of net proceeds and collected $56,373,000 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.

On August 22, 2005, we paid a dividend of $0.62 per share to stockholders of record on July 29, 2005. This dividend related to the period from April 1, 2005 through June 30, 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.

HEALTH CARE REIT, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 September 30, 2005, the Swaps were reported at their fair value as a $3,237,000 other asset. For the three and nine months ended September 30, 2005, we generated $200,000 and $977,000, respectively, of savings related to the Swaps that was recorded as a reduction in interest expense. For the three and nine months ended September 30, 2004, we generated $719,000 and $1,232,000, respectively, of savings related to the Swaps that was recorded as a reduction in interest expense.

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

Six assisted living facilities were held for sale as of September 30, 2005. We did not recognize an impairment loss on these assets as the fair value less estimated costs to sell exceeded our carrying values. See Note M for further discussion. Also, during the nine months ended September 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 held for sale and 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				Nine Months Ended
	September 30				September 30
	2005		2004		2005		2004
Revenues:
Rental income	$	1,536	$	1,828	$	4,498	$	7,987

Expenses:
Interest expense		419		520		1,331		2,150
Provision for depreciation		891		801		2,808		3,667

Income from discontinued operations, net	$	226	$	507	$	359	$	2,170

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

As of September 30, 2005, we had approximately $1,060,000 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 nine months ended September 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				Nine Months Ended
	September 30				September 30
	2005		2004		2005		2004
Numerator for basic and diluted earnings per share — net income available to common stockholders	$	19,908	$	19,004	$	36,105	$	56,866


Denominator for basic earnings per share — weighted average shares		54,038		51,538		53,498		51,200

Effect of dilutive securities:
Employee stock options		137		283		185		400
Non-vested restricted shares		184		187		184		187


Dilutive potential common shares		321		470		369		587


Denominator for diluted earnings per share — adjusted weighted average shares		54,359		52,008		53,867		51,787


Basic earnings per share	$	0.37	$	0.37	$	0.67	$	1.11

Diluted earnings per share	$	0.37	$	0.37	$	0.67	$	1.10

The diluted earnings per share calculation excludes the dilutive effect of 0 and 112,000 options for the three and nine months ended September 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 nine months ended September 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):


	September 30			December 31
	2005			2004
Accumulated compensation expense related to stock options	$	949		$	552
Unamortized restricted stock		(697	)		(1,249	)

	$	252		$	(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 $552,000 for the three and nine months ended September 30, 2005, respectively, and $238,000 and $716,000 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, which we were 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 $397,000 for the three and nine months ended September 30, 2005, respectively, and $95,000 and $284,000 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				Nine Months Ended
	September 30				September 30
	2005		2004		2005		2004
Numerator:
Net income available to common stockholders — as reported	$	19,908	$	19,004	$	36,105	$	56,866

Deduct: Stock based employee compensation expense determined under fair value based method for all awards		45		76		136		229


Net income available to common stockholders — pro forma	$	19,863	$	18,928	$	35,969	$	56,637


Denominator:
Basic weighted average shares — as reported and pro forma		54,038		51,538		53,498		51,200

Effect of dilutive securities:
Employee stock options — pro forma		129		269		379		386
Non-vested restricted shares		184		187		184		187


Dilutive potential common shares		313		456		563		573


Diluted weighted average shares — pro forma		54,351		51,994		54,061		51,773


Net income available to common stockholders per share — as reported
Basic	$	0.37	$	0.37	$	0.67	$	1.11
Diluted		0.37		0.37		0.67		1.10

Net income available to common stockholders per share — pro forma
Basic	$	0.37	$	0.37	$	0.67	$	1.11
Diluted		0.37		0.36		0.67		1.09

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.

NOTE M – Subsequent Events

On October 12, 2005, we closed on the sale of a portfolio of six assisted living facilities that were held for sale as of September 30, 2005. The facilities were sold to the tenant for cash, with financing provided by a third-party. In connection with this sale, we anticipate recognizing a $1,538,000 gain on sale after repayment of $7,614,000 of outstanding loans receivable, $328,000 of equity investments and $4,157,000 of straight-line rent receivable. In addition, we anticipate the recognition of $1,500,000 of previously unrecorded interest income relating to the loans receivable which were on non-accrual status.

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 September 30, 2005, long-term care facilities, which include skilled nursing and assisted living facilities, comprised approximately 92% of our investment portfolio. The following table summarizes our portfolio as of September 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	$	1,325,489		50	%	$	109,685		52	%		233		15,639	$	84,823		31		33
Skilled Nursing Facilities		1,093,750		42	%		88,678		42	%		180		24,626		44,414		22		26
Specialty Care Facilities		205,660		8	%		13,415		6	%		13		1,267		162,320		6		7


Totals	$	2,624,899		100	%	$	211,778		100	%		426		41,532


(1)		Investments include gross real estate investments and credit enhancements which amounted to $2,622,449,000 and $2,450,000, respectively.

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

(3)		Investment per Bed/Unit was computed by using the total investment amount of $2,625,959,000 which includes gross real estate investments, credit enhancements and unfunded construction commitments for which initial funding has commenced which amounted to $2,622,449,000, $2,450,000 and $1,060,000, respectively.

(4)		We have investments in properties located in 37 states and managed by 52 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 September 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 86% of our real property loans were cross-collateralized with other loans to the same operator.

For the nine months ended September 30, 2005, rental income and interest income represented 92% 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 nine months ended September 30, 2005, we completed $267,849,000 of gross new investments and had $42,545,000 of investment payoffs, resulting in net investments of $225,304,000. We refined 2005 net investment guidance to a range of $125,000,000 to $175,000,000 from the previous guidance of $100,000,000 to $200,000,000. 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 September 30, 2005, we had $27,119,000 of cash and cash equivalents and $236,000,000 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 September 30, 2005 represents the 138^th consecutive dividend payment;

	•		we completed $267,849,000 of gross investments and had $42,545,000 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			September 30
	2004		2004		2004		2004		2005		2005			2005

Net income (loss) available to common stockholders	$	18,655	$	19,207	$	19,004	$	15,767	$	17,803	$	(1,606	)	$	19,908
Funds from operations		35,789		35,760		37,893		37,299		38,309		19,427			41,975
Funds available for distribution		29,125		33,291		34,891		35,642		35,454		18,251			41,857

Per share data (fully diluted):
Net income (loss) available to common stockholders	$	0.36	$	0.37	$	0.37	$	0.30	$	0.33	$	(0.03	)	$	0.37
Funds from operations		0.70		0.69		0.73		0.71		0.72		0.36			0.77
Funds available for distribution		0.57		0.64		0.67		0.68		0.66		0.34			0.77

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, including the land, buildings, improvements and related rights, which 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			September 30
	2004			2004			2004			2004			2005			2005			2005

Asset mix:
Real property		87	%		88	%		89	%		90	%		90	%		91	%		91	%
Loans receivable		11	%		10	%		9	%		9	%		9	%		8	%		8	%
Subdebt Investments		2	%		2	%		2	%		1	%		1	%		1	%		1	%

Investment mix:
Assisted living facilities		58	%		57	%		57	%		54	%		55	%		51	%		50	%
Skilled nursing facilities		34	%		36	%		37	%		39	%		39	%		42	%		42	%
Specialty care facilities		8	%		7	%		6	%		7	%		6	%		7	%		8	%

Operator mix:
Emeritus Corporation		11	%		11	%		15	%		15	%		15	%		14	%		14	%
Southern Assisted Living, Inc.		10	%		10	%		9	%		8	%		8	%		8	%		8	%
Commonwealth Communities L.L.C.		10	%		10	%		8	%		8	%		8	%		7	%		7	%
Delta Health Group, Inc.								8	%		7	%		7	%		7	%		7	%
Home Quality Management, Inc.		9	%		9	%		8	%		7	%		7	%		7	%		6	%
Life Care Centers of America, Inc.		6	%		6	%
Remaining operators		54	%		54	%		52	%		55	%		55	%		57	%		58	%

Geographic mix:
Florida		9	%		11	%		16	%		15	%		15	%		15	%		15	%
Massachusetts		14	%		14	%		12	%		14	%		15	%		14	%		13	%
Texas								7	%		6	%					9	%		8	%
North Carolina		10	%		10	%		9	%		8	%		8	%		7	%		7	%
Ohio		6	%		6	%					6	%		6	%		6	%		6	%
Tennessee		7	%		7	%		6	%					6	%
Remaining states		54	%		52	%		50	%		51	%		50	%		49	%		51	%

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			September 30
	2004			2004			2004			2004			2005			2005			2005

Debt to book capitalization ratio		47	%		47	%		45	%		47	%		48	%		51	%		51	%
Debt to market capitalization ratio		32	%		36	%		34	%		34	%		38	%		37	%		37	%
Interest coverage ratio		3.11	x		3.31	x		3.31	x		3.25	x		3.26	x		2.35	x		3.25	x
Fixed charge coverage ratio		2.78	x		2.93	x		2.87	x		2.53	x		2.56	x		1.85	x		2.60	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 stable payment coverage is at 1.91 times and represents an increase of one basis point 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 June 30, 2005. Coverage data reflects the 12 months ended June 30, 2005.


													Coverage Data
				Payor Mix									Before		After
	Census			Private			Medicare			Medicaid			Management Fees		Management Fees

Assisted Living Facilities		88	%		85	%		0	%		15	%		1.51x		1.28x
Skilled Nursing Facilities		86	%		15	%		16	%		69	%		2.20x		1.65x
Specialty Care Facilities		67	%		29	%		39	%		32	%		3.53x		2.91x

Weighted Averages														1.91x		1.54x

Assisted Living Portfolio. At September 30, 2005, our assisted living portfolio was comprised of 233 facilities with 15,639 units and an investment balance of $1,325,489,000. The stabilized portfolio was comprised of 230 facilities with 15,370 units, an investment balance of $1,300,783,000, and payment coverage of 1.51 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 September 30, 2005, our skilled nursing portfolio was comprised of 180 facilities with 24,626 beds and an investment balance of $1,093,750,000. Average occupancies have risen from a low of 81% in the third quarter of 2000 to 86% in the second quarter of 2005. Our stable payment coverage remains strong at 2.20 times, an increase of two basis points from the prior quarter.

Specialty Care Portfolio. At September 30, 2005, our specialty care portfolio was comprised of 13 facilities with 1,267 beds and an investment balance of $205,660,000. Our stable payment coverage remains strong at 3.53 times, an increase of seven 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 — Administration 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):


	Nine Months Ended						Change
	Sep. 30, 2005			Sep. 30, 2004			$			%
Cash and cash equivalents at beginning of period	$	19,763		$	124,496		$	(104,733	)		-84	%
Cash provided from (used in) operating activities		114,973			95,298			19,675			21	%
Cash provided from (used in) investing activities		(198,678	)		(412,628	)		213,950			-52	%
Cash provided from (used in) financing activities		91,061			208,253			(117,192	)		-56	%

Cash and cash equivalents at end of period	$	27,119		$	15,419		$	11,700			76	%

Operating Activities. The increase in net cash provided from operating activities is primarily attributable to changes in receivables and accrued expenses and a decrease in rental income in excess of cash received. 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. The decrease in rental income in excess of cash received is due primarily to an increase in cash payments outside normal monthly rental payments in 2005. In addition, 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 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.

Investing Activities. The increase in net cash used in investing activities is primarily attributable to an increase in real property investments. At September 30, 2005, 91% of our real estate investments were real property investments. The investment activity during the nine months ended September 30, 2005 was approximately 93% real property investments. Investments for the nine months ended September 30, 2005 included the acquisition of four assisted living facilities, 27 skilled nursing facilities and five specialty care facilities for $224,841,000. These acquisitions included the assumption of debt totaling $22,309,000, resulting in $202,532,000 of cash disbursed for the acquisitions. The remaining $23,552,000 of real property investments relates primarily to funding of construction and renovations on existing facilities. Of this amount, $4,782,000 related to construction advances on three assisted living facilities. For the same period in 2004, we acquired 21 assisted living facilities and 35 skilled nursing facilities for $400,731,000. The prior year acquisitions included no assumption of debt. In addition, we advanced $31,192,000 relating to construction and renovations on existing facilities. Of this amount, $9,324,000 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 nine months ended September 30, 2005, we had a net increase of $153,000,000 on our unsecured lines of credit arrangements as compared to an $80,000,000 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 $6,168,000 of mortgages in 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.

On September 14, 2004, we closed on a public offering of 7,000,000 shares of 7.625% Series F Cumulative Redeemable Preferred Stock, which generated net proceeds of approximately $169,372,000. The shares have a liquidation value of $25 per share. The preferred stock, which has no stated maturity, may be redeemed by us at par on or after September 14, 2009. The proceeds were used to repay borrowings under our unsecured lines of credit arrangements and to invest in additional health care properties.

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 nine months ended September 30, 2005, we paid dividends totaling $98,586,000 (or $1.84 per share) and $16,261,000 to holders of our common stock and preferred stock, respectively. For the same period in 2004, we paid dividends totaling $91,461,000 (or $1.785 per share) and $7,295,000 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 September 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 September 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		174,324		977		18,669		44,703		109,975
Contractual interest obligations		857,973		25,719		313,774		204,224		314,256
Capital lease obligations
Operating lease obligations		14,702		444		2,341		1,857		10,060
Purchase obligations		47,680		5,045		21,345		20,500		790
Other long-term liabilities

Total contractual obligations	$	2,529,509	$	32,185	$	448,629	$	813,614	$	1,235,081


(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 (4.832% at September 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 ratings 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 (6.75% at September 30, 2005) or 1.3% plus the applicable LIBOR interest rate, at our option. Principal is due upon expiration of the agreement. At September 30, 2005, we had $304,000,000 outstanding under the unsecured lines of credit arrangements and estimated total contractual interest obligations of $38,367,000. Contractual interest obligations are estimated based on the assumption that the balance of $304,000,000 at September 30, 2005 is constant until maturity at interest rates in effect at September 30, 2005.

At September 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 $646,983,000 at September 30, 2005. Additionally, we have 31 mortgage loans totaling $174,324,000, collateralized by health care facilities, with fixed annual interest rates ranging from 5.8% to 8.5%, payable monthly. The carrying values of the health care properties securing the mortgage loans totaled $245,968,000 at September 30, 2005. Total contractual interest obligations on mortgage loans totaled $130,803,000 at September 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 September 30, 2005, total contractual interest obligations were estimated to be $41,820,000 based on interest rates in effect at September 30, 2005.

At September 30, 2005, we had operating lease obligations of $14,702,000 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 September 30, 2005, we had outstanding construction financings of $1,135,000 for leased properties and were committed to providing additional financing of approximately $1,060,000 to complete construction. At September 30, 2005, we had contingent purchase obligations totaling $46,620,000. 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 September 30, 2005, we had stockholders’ equity of $1,319,696,000 and a total outstanding debt balance of $1,373,154,000, which represents a debt to total book capitalization ratio of 51%. Our ratio of debt to market capitalization was 37% at September 30, 2005. For the nine months ended September 30, 2005, our coverage ratio of EBITDA to interest was 2.96 to 1.00 and our coverage ratio of EBITDA to fixed charges was 2.34 to 1.00. Also, at September 30, 2005, we had $27,119,000 of cash and cash equivalents and $236,000,000 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 September 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 October 14, 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 October 14, 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 October 14, 2005, 3,540,924 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 available to common stockholders for the three months ended September 30, 2005 totaled $19,908,000, or $0.37 per diluted share, as compared with $19,004,000, or $0.37 per diluted share, for the same period in 2004. Net income available to common stockholders for the nine months ended September 30, 2005 totaled $36,105,000, or $0.67 per diluted share, as compared with $56,866,000, or $1.10 per diluted share, for the same period in 2004. Net income available to common stockholders decreased on a year-to-date basis from the prior year primarily due to the loss on extinguishment of debt totaling $18,448,000, or $0.34 per diluted share in the second quarter of 2005. This charge is discussed in further detail below.

FFO for the three months ended September 30, 2005 totaled $41,975,000, or $0.77 per diluted share, as compared with $37,893,000, or $0.73 per diluted share, for the same period in 2004. FAD for the three months ended September 30, 2005 totaled $41,857,000, or $0.77 per diluted share, as compared to $34,891,000, or $0.67 per diluted share, for the same period in 2004. The increase in third quarter FFO is due primarily to an increase in rental income (including discontinued operations) offset by an increase in interest expense (including discontinued operations) and preferred stock dividends. The increase in third quarter FAD is primarily due to the items noted above for FFO and a decrease in rental income in excess of cash received. FFO for the nine months ended September 30, 2005 totaled $99,712,000, or $1.85 per diluted share, as compared with $109,442,000, or $2.11 per diluted share, for the same period in 2004. FAD for the nine months ended September 30, 2005 totaled $95,563,000, or $1.77 per diluted share, as compared to $97,307,000, or $1.88 per diluted share, for the same period in 2004. The decrease in year-to-date FFO is due primarily to an increase in rental income (including discontinued operations) offset by a decrease in interest income, the loss on extinguishment of debt and increases in interest expense (including discontinued operations), preferred stock dividends and general and administrative expenses. The decrease in year-to-date FAD is primarily due to the items noted above for FFO and a decrease in rental income in excess of cash received. These items are 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 September 30, 2005 totaled $70,211,000, as compared with $60,167,000 for the same period in 2004. EBITDA for the nine months ended September 30, 2005 totaled $182,887,000, as compared with $176,400,000 for the same period in 2004. Our coverage ratio of EBITDA to total interest was 2.96 times for the nine months ended September 30, 2005 as compared with 3.24 times for the same period in 2004. Our coverage ratio of EBITDA to fixed charges was 2.34 times for the nine months ended September 30, 2005 as compared with 2.86 times for the same period in 2004. The increase in third quarter EBITDA is primarily due to the increase in rental income (including discontinued operations). The increase in year-to-date EBITDA is primarily due to an increase in rental income (including discontinued operations) offset by a decrease in interest income, the loss on extinguishment of debt and an increase in general and administrative expenses. The decrease in our interest coverage ratio is primarily due to the loss on extinguishment of debt. The decrease in our fixed charge coverage ratio is primarily due to the loss on extinguishment of debt and an increase in preferred stock dividends. These items are 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						Nine Months Ended				Change
	Sep. 30, 2005		Sep. 30, 2004		$			%			Sep. 30, 2005		Sep. 30, 2004		$			%
Rental income	$	67,295	$	55,648	$	11,647			21	%	$	189,289	$	157,615	$	31,674			20	%
Interest income		4,997		5,560		(563	)		-10	%		15,249		17,196		(1,947	)		-11	%
Transaction fees and other income		773		593		180			30	%		2,742		1,873		869			46	%

Totals	$	73,065	$	61,801	$	11,264			18	%	$	207,280	$	176,684	$	30,596			17	%

The increase in gross revenues is primarily attributable to increased rental income resulting from the acquisitions of new properties for which we receive rent. During the period from October 1, 2004 to September 30, 2005, we acquired five assisted living facilities, 44 skilled nursing facilities and five specialty care facilities for $343,001,000.

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 September 30, 2005, we had no leases scheduled to expire before March 2009, except for the master lease referenced in Note M to the unaudited Financial Statements.

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						Nine Months Ended				Change
	Sep. 30, 2005		Sep. 30, 2004		$			%			Sep. 30, 2005		Sep. 30, 2004		$			%
Interest expense	$	21,205	$	17,376	$	3,829			22	%	$	59,924	$	51,663	$	8,261			16	%
Provision for depreciation		21,176		18,088		3,088			17	%		60,665		50,038		10,627			21	%
General and administrative		4,640		3,618		1,022			28	%		12,993		10,339		2,654			26	%
Loan expense		673		805		(132	)		-16	%		2,209		2,568		(359	)		-14	%
Impairment of assets				314		(314	)		n/a					314		(314	)		n/a
Loss on extinguishment of debt						0			n/a			18,448				18,448			n/a
Provision for loan losses		300		300		0			0	%		900		900		0			0	%

Totals	$	47,994	$	40,501	$	7,493			19	%	$	155,139	$	115,822	$	39,317			34	%

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 nine months ended September 30, 2005, we had an average outstanding balance of $926,623,000 of unsecured senior notes as compared to $843,889,000 for the same period in 2004. Our weighted average interest rate on unsecured senior notes has declined from 7.18% at September 30, 2004 to 6.69% at September 30, 2005. In addition, during the nine months ended September 30, 2005, we had an average daily outstanding balance of $137,918,000. During the same period in 2004, had an average daily outstanding balance of $54,770,000.

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 nine months ended September 30, 2005, we generated $200,000 and $977,000, respectively, of savings related to our Swaps that was recorded as a reduction of interest expense. For the three and nine months ended September 30, 2004, we generated $719,000 and $1,232,000, respectively, of savings related to our 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 nine months ended September 30, 2005 totaled $12,000 and $626,000, respectively, as compared with $254,000 and $590,000 for the same periods in 2004.

The provision for depreciation increased primarily as a result of additional investments in properties owned directly by us. 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 nine months ended September 30, 2005, were 6.22% and 6.13%, respectively, as compared with 5.69% and 5.63% 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.”

During the nine months ended September 30, 2004, it was determined that the projected undiscounted cash flows from a property did not exceed its related net book value and an impairment charge of $314,000 was recorded to reduce the property to its estimated fair market value. The estimated fair market value was determined by an offer to purchase received from a third party. There were no impairments for the same period in 2005.

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


	Three Months Ended						Change						Nine Months Ended						Change
	Sep. 30, 2005			Sep. 30, 2004			$			%			Sep. 30, 2005			Sep. 30, 2004			$			%
Gain (loss) on sales of properties	$	0		$	0		$	0			n/a		$	(134	)	$	1,129		$	(1,263	)		-112	%
Discontinued operations, net		226			507			(281	)		-55	%		359			2,170			(1,811	)		-83	%
Preferred dividends		(5,389	)		(2,803	)		(2,586	)		92	%		(16,261	)		(7,295	)		(8,966	)		123	%

Totals	$	(5,163	)	$	(2,296	)	$	(2,867	)		125	%	$	(16,036	)	$	(3,996	)	$	(12,040	)		301	%

Six assisted living facilities were held for sale as of September 30, 2005. We did not recognize an impairment loss on these assets as the fair value less estimated costs to sell exceeded our carrying values. Also, during the nine months ended September 30, 2005, we sold properties with carrying values of $10,034,000 for a net loss of $134,000. These properties generated $359,000 of income after deducting depreciation and interest expense from rental revenue for the nine months ended September 30, 2005. All properties held for sale or sold subsequent to January 1, 2004 generated $2,170,000 of income after deducting depreciation and interest expense from rental revenue for the nine months ended September 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.

In October 2003, NAREIT informed its member companies that the SEC had changed its position on certain aspects of the NAREIT FFO definition, including impairment charges. Previously, the SEC accepted NAREIT’s view that impairment charges were effectively an early recognition of an expected loss on an impending sale of property and thus should be excluded from FFO similar to other gains and losses on sales. However, the SEC’s clarified interpretation is that recurring impairments taken on real property may not be added back to net income in the calculation of FFO. We have adopted this interpretation and have excluded impairment charges of $314,000, or $0.01 per diluted share, recorded for the three months ended September 30, 2004.

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

FFO, FAD and EBITDA are financial measures that are widely used by investors, equity and debt analysts and rating agencies in the valuation, comparison, rating and investment recommendations of companies. Management uses these financial measures to facilitate internal and external comparisons to our historical operating results, in making operating decisions and for budget planning purposes. Additionally, FFO and FAD are 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			September 30
	2004		2004			2004		2004			2005		2005			2005

FFO Reconciliation:
Net income (loss) available to common stockholders	$	18,655	$	19,207		$	19,004	$	15,767		$	17,803	$	(1,606	)	$	19,908
Provision for depreciation		17,134		17,682			18,889		20,310			20,396		21,009			22,067
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		$	41,975

Average common shares outstanding:
Basic		50,580		51,232			51,538		52,326			52,963		53,429			54,038
Diluted — for net income (loss) purposes		51,358		51,828			52,008		52,784			53,454		53,429			54,359
Diluted — for FFO purposes		51,358		51,828			52,008		52,784			53,454		53,765			54,359

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

Funds from operations
Basic	$	0.71	$	0.70		$	0.74	$	0.71		$	0.72	$	0.36		$	0.78
Diluted		0.70		0.69			0.73		0.71			0.72		0.36			0.77

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			September 30
	2004			2004			2004			2004			2005			2005			2005

FAD Reconciliation:
Net income (loss) available to common stockholders	$	18,655		$	19,207		$	19,004		$	15,767		$	17,803		$	(1,606	)	$	19,908
Provision for depreciation		17,134			17,682			18,889			20,310			20,396			21,009			22,067
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	)		(118	)

Funds available for distribution	$	29,125		$	33,291		$	34,891		$	35,642		$	35,454		$	18,251		$	41,857

Average common shares outstanding:
Basic		50,580			51,232			51,538			52,326			52,963			53,429			54,038
Diluted — for net income (loss) purposes		51,358			51,828			52,008			52,784			53,454			53,429			54,359
Diluted — for FAD purposes		51,358			51,828			52,008			52,784			53,454			53,765			54,359

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

Funds available for distribution
Basic	$	0.58		$	0.65		$	0.68		$	0.68		$	0.67		$	0.34		$	0.77
Diluted		0.57			0.64			0.67			0.68			0.66			0.34			0.77

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			September 30
	2004			2004			2004			2004			2005			2005			2005

EBITDA Reconciliation:
Net income	$	20,925		$	21,429		$	21,807		$	21,209		$	23,239		$	3,830		$	25,297
Interest expense		18,552			17,366			17,896			18,742			19,645			19,986			21,624
Capitalized interest		137			199			254			285			265			348			12
Provision for depreciation		17,134			17,682			18,889			20,310			20,396			21,009			22,067
Amortization		1,118			1,092			1,021			1,016			1,042			2,314			911
Provision for loan losses		300			300			300			300			300			300			300

EBITDA	$	58,166		$	58,068		$	60,167		$	61,862		$	64,887		$	47,787		$	70,211

Interest Coverage Ratio:
Interest expense	$	18,552		$	17,366		$	17,896		$	18,742		$	19,645		$	19,986		$	21,624
Capitalized interest		137			199			254			285			265			348			12

Total interest		18,689			17,565			18,150			19,027			19,910			20,334			21,636
EBITDA	$	58,166		$	58,068		$	60,167		$	61,862		$	64,887		$	47,787		$	70,211

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

Fixed Charge Coverage Ratio:
Total interest	$	18,689		$	17,565		$	18,150		$	19,027		$	19,910		$	20,334		$	21,636
Preferred dividends		2,270			2,222			2,803			5,442			5,436			5,436			5,389

Total fixed charges		20,959			19,787			20,953			24,469			25,346			25,770			27,025
EBITDA	$	58,166		$	58,068		$	60,167		$	61,862		$	64,887		$	47,787		$	70,211

Fixed charge coverage ratio		2.78	x		2.93	x		2.87	x		2.53	x		2.56	x		1.85	x		2.60	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 nine months ended September 30, 2005, we recorded $900,000 as provision for loan losses, resulting in an allowance for loan losses of $6,161,000 relating to loans with outstanding balances of $28,475,000 at September 30, 2005. Also at September 30, 2005, we had loans with outstanding balances of $22,005,000 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 nine months ended September 30, 2005, we recorded $51,481,000 and $11,992,000 as provision for depreciation relating to buildings and improvements, respectively. The average useful life of our buildings and improvements was 31.1 years and 9.6 years, respectively, at September 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 carrying 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 nine months ended September 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 September 30, 2005, we participated in two interest rate swap agreements related to our long-term debt. At September 30, 2005, the swaps were reported at their fair value as a $3,237,000 other asset. For the nine months ended September 30, 2005, we generated $977,000 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 nine months ended September 30, 2005, we recognized $15,249,000 of interest income and $193,787,000 of rental income, including discontinued operations. Rental income includes $4,149,000 of straight-line rental income. At September 30, 2005, our straight-line receivable balance was $67,857,000. Also at September 30, 2005, we had loans with outstanding balances of $22,005,000 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 $36,931,000 at September 30, 2005 ($28,847,000 at September 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 September 30, 2005, the Swaps were reported at their fair value as a $3,237,000 other asset. A 1% increase in interest rates would result in a decrease in fair value of our Swaps by approximately $6,945,000 at September 30, 2005 ($7,878,000 at September 30, 2004).

Our variable rate debt, including our unsecured lines of credit arrangements, is reflected at fair value. At September 30, 2005, we had $304,000,000 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 $3,040,000. At September 30, 2004, we had $80,000,000 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 $800,000.

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 6. Exhibits


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.


	Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Consolidated Balance Sheets — September 30, 2005 and December 31, 2004		3

Consolidated Statements of Income — Three and nine months ended September 30, 2005 and 2004		4

Consolidated Statements of Stockholders’ Equity — Nine months ended September 30, 2005 and 2004		5

Consolidated Statements of Cash Flows — Nine months ended September 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		27

Item 4. Controls and Procedures		28

PART II. OTHER INFORMATION

Item 6. Exhibits		28

SIGNATURES		28
EX-31.1 302 Certification - CEO
EX-31.2 302 Certification - CFO
EX-32.1 906 Certification - CEO
EX-32.2 906 Certification - CFO

Date: October 21, 2005

/s/ George L. Chapman

George L. Chapman,

Chairman and Chief Executive Officer

(Principal Executive Officer)