Health Care REIT 8-K

HEALTH CARE REIT, INC.

/s/ GEORGE L. CHAPMAN

George L. Chapman

Exhibit 99.1

Item 6. Selected Financial Data

The following selected financial data for the five years ended December 31, 2005 are derived from our audited consolidated financial statements (in thousands, except per share data):


	Year Ended December 31
	2001		2002		2003		2004		2005
Operating Data
Revenues(1)	$	106,109	$	136,451	$	182,144	$	236,717	$	279,346
Expenses:
Interest expense(1)		24,436		34,242		48,603		67,996		79,409
Provision for depreciation(1)		20,407		28,946		42,739		66,111		79,167
Other operating expenses(2)		10,853		13,038		17,274		21,178		21,159
Impairment of assets				2,298		2,792		314
Loss on extinguishment of debt(3)		213		403						21,484

Total expenses		55,909		78,927		111,408		155,599		201,219

Income from continuing operations		50,200		57,524		70,736		81,118		78,127
Income from discontinued operations, net(1)		10,349		10,135		12,004		4,253		6,159

Net income		60,549		67,659		82,740		85,371		84,286
Preferred stock dividends		13,505		12,468		9,218		12,737		21,594
Preferred stock redemption charge						2,790

Net income available to common stockholders	$	47,044	$	55,191	$	70,732	$	72,634	$	62,692

Other Data
Average number of common shares outstanding:
Basic		30,534		36,702		43,572		51,544		54,110
Diluted		31,027		37,301		44,201		52,082		54,499
Per Share Data
Basic:
Income from continuing operations available to common stockholders	$	1.20	$	1.22	$	1.34	$	1.33	$	1.05
Discontinued operations, net		0.34		0.28		0.28		0.08		0.11

Net income available to common stockholders	$	1.54	$	1.50	$	1.62	$	1.41	$	1.16

Diluted:
Income from continuing operations available to common stockholders	$	1.19	$	1.21	$	1.33	$	1.31	$	1.04
Discontinued operations, net		0.33		0.27		0.27		0.08		0.11

Net income available to common stockholders	$	1.52	$	1.48	$	1.60	$	1.39	$	1.15

Cash distributions per common share	$	2.34	$	2.34	$	2.34	$	2.385	$	2.46


	December 31
	2001		2002		2003		2004		2005
Balance Sheet Data
Net real estate investments	$	1,213,564	$	1,524,457	$	1,992,446	$	2,441,972	$	2,849,518
Total assets		1,267,543		1,591,482		2,184,088		2,552,171		2,972,164
Total debt		488,916		673,703		1,014,541		1,192,958		1,500,818
Total liabilities		509,673		694,250		1,034,409		1,216,892		1,541,408
Total stockholders’ equity		757,870		897,232		1,149,679		1,335,279		1,430,756


(1)		In accordance with FASB Statement No. 144, we have reclassified the income and expenses attributable to the properties sold subsequent to January 1, 2002 through March 31, 2006 and attributable to the properties held for sale at March 31, 2006 to discontinued operations for all periods presented. See Note 15 to our audited consolidated financial statements.

(2)		Other operating expenses include loan expense, provision for loan losses and general and administrative expenses.

(3)		Effective January 1, 2003, in accordance with FASB Statement No. 145, we reclassified the losses on extinguishments of debt in 2001 and 2002 to income from continuing operations rather than as extraordinary items as previously required under FASB Statement No. 4.

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

The following discussion and analysis is based primarily on the consolidated financial statements of Health Care REIT, Inc. for the periods presented and should be read together with the notes thereto. Other important factors are identified in “Item 1 — Business” and “Item 1A — Risk Factors” in the Annual Report on Form 10-K for the year ended December 31, 2005.

Executive Overview

Business

Health Care REIT, Inc. is a self-administered, equity real estate investment trust that invests in health care and senior housing properties. Founded in 1970, we were the first REIT to invest exclusively in health care facilities. The following table summarizes our portfolio as of December 31, 2005:


	Investments(1)		Percentage of			Revenues(2)		Percentage of			Number of		Number of		Investment per		Number of		Number of
Type of Facility	(in thousands)		Investments			(in thousands)		Revenues			Facilities		Beds/Units		Beds/Units		Operators(4)		States(4)
Assisted Living Facilities	$	962,620		34	%	$	132,935		46	%		195		11,746	$	83,066		23		31
Skilled Nursing Facilities		1,266,196		44	%		121,986		42	%		203		27,748		45,828		23		29
Independent Living/CCRCs		425,845		15	%		17,725		6	%		31		4,400		100,872		13		15
Specialty Care Facilities		203,768		7	%		18,508		6	%		13		1,312		155,311		6		7

Totals	$	2,858,429		100	%	$	291,154		100	%		442		45,206


(1)		Investments include real estate investments and credit enhancements which amounted to $2,855,979,000 and $2,450,000, respectively.

(2)		Revenues include gross revenues and revenues from discontinued operations for the year ended December 31, 2005.

(3)		Investment per Bed/Unit was computed by using the total investment amount of $2,894,948,000 which includes real estate investments, credit enhancements and unfunded construction commitments for which initial funding has commenced which amounted to $2,855,979,000, $2,450,000 and $36,519,000, respectively.

(4)		We have investments in properties located in 36 states and managed by 54 different operators.

Our primary objectives are to protect stockholder 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 in properties 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 asset management process includes review of monthly financial statements for each facility, periodic 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 asset management and research efforts, we are typically able to intervene at an early stage to address payment risk, and in so doing, support both the collectibility of revenue and the value of our investment.

In addition to our asset management and research efforts, we also structure our investments to help mitigate payment risk. We typically limit our investments to no more than 90% of the appraised value of a property. Operating leases and loans are normally credit enhanced by guaranties and/or letters of credit. In addition, operating leases are typically structured as master leases and loans are generally cross-defaulted and cross-collateralized with other loans, operating leases or agreements between us and the operator and its affiliates. As of December 31, 2005, 87% of our real property was subject to master leases.

For the year ended December 31, 2005, rental income and interest income represented 90% and 8%, respectively, of total gross revenues (including 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 tenant’s properties. These escalators are not fixed, so no straight-line rent is recorded; however, rental income is recorded based on the contractual cash rental payments due for the period. This lease structure initially generates lower revenues and earnings compared to leases with fixed escalators that require straight-lining, but enables 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 investments in additional facilities. New investments are generally funded from temporary borrowings under our unsecured lines of credit arrangements, internally generated cash and the proceeds from sales of real property. Our investments generate internal cash from rent and interest receipts and principal payments on loans receivable. Permanent financing for future investments, which replaces funds drawn under the unsecured lines of credit arrangements, is expected to be provided through a combination of public and private offerings of debt and equity securities and the incurrence of secured debt. We believe our liquidity and various sources of available capital are sufficient to fund operations, meet debt service obligations (both principal and interest), make dividend distributions and finance future investments.

Depending upon market conditions, we believe that new investments will be available in the future with spreads over our cost of capital that will generate appropriate returns to our stockholders. We expect to complete gross new investments of $450,000,000 to $550,000,000 in 2006, including acquisitions of $300,000,000 and funded new development of $150,000,000 to $250,000,000. We anticipate the sale of real property and the repayment of loans receivable totaling approximately $100,000,000 to $150,000,000 during 2006. It is possible that additional loan repayments or sales of real property may occur in the future. 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 December 31, 2005, we had $36,237,000 of cash and cash equivalents and $345,000,000 of available borrowing capacity under our unsecured lines of credit arrangements.

Key Transactions in 2005

We completed the following key transactions during the year ended December 31, 2005:

	•		our Board of Directors increased our quarterly common dividend to $0.62 per share, which represents a two cent increase from the quarterly dividend of $0.60 paid for 2004. The dividend paid for the quarter ended December 31, 2005 represents the 139th consecutive dividend payment;

	•		we completed $642,483,000 of gross investments and had $147,021,000 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 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 completed a public offering of 3,000,000 shares of common stock with net proceeds to the company of $100,977,000 in November 2005; and

	•		we issued $300,000,000 of 6.2% senior unsecured notes due June 2016 at an effective yield of 6.246% in December 2005.

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, credit strength and concentration risk. 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 principals (“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. These earning measures 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 of our operating performance measures (in thousands, except per share data):


	Year Ended
	December 31		December 31		December 31
	2003		2004		2005
Net income available to common stockholders	$	70,732	$	72,634	$	62,692
Funds from operations		119,463		146,742		144,293
Funds available for distribution		104,535		132,950		145,020
Per share data (fully diluted):
Net income available to common stockholders	$	1.60	$	1.39	$	1.15
Funds from operations		2.70		2.82		2.65
Funds available for distribution		2.36		2.55		2.66

Credit Strength. We measure our credit strength both in terms of leverage ratios and coverage ratios. Our leverage ratios include debt to book capitalization and debt to market capitalization. The leverage ratios indicate how much of our balance sheet capitalization is related to long-term debt. Our coverage ratios include interest coverage ratio and fixed charge coverage ratio. The coverage ratios indicate our ability to service interest and fixed charges (interest plus preferred dividends). We expect to maintain capitalization ratios and coverage ratios sufficient to maintain investment grade ratings with Moody’s Investors Service, Standard & Poor’s Ratings Services and Fitch Ratings. 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, investment recommendations and rating of companies. The following table reflects the recent historical trends for our credit strength measures:


	Year Ended
	December 31			December 31			December 31
	2003			2004			2005
Debt to book capitalization ratio		47	%		47	%		51	%
Debt to market capitalization ratio		34	%		34	%		40	%
Interest coverage ratio		3.50	x		3.24	x		3.10	x
Fixed charge coverage ratio		3.01	x		2.77	x		2.47	x

Concentration Risk. We evaluate our concentration risk in terms of asset mix, investment mix, operator mix and geographic mix. Concentration risk is a valuable measure in understanding what portion of our investments could be at risk if certain sectors were to experience downturns. Asset mix measures the portion of our investments that are real property. In order to qualify as an equity REIT, at least 75% of our real estate investments must be real property whereby each property, which includes the land, buildings, improvements and related rights, is owned by us and

leased to an operator pursuant to a long-term operating lease. Investment mix measures the portion of our investments that relate to our various facility types. Operator mix measures the portion of our investments that relate to our top five operators. The following table reflects our recent historical trends of concentration risk:


	December 31			December 31			December 31
	2003			2004			2005
Asset mix:
Real property		87	%		90	%		93	%
Loans receivable		13	%		10	%		7	%
Investment mix:
Assisted living facilities		60	%		54	%		34	%
Skilled nursing facilities		32	%		39	%		44	%
Independent/CCRC(1)								15	%
Specialty care facilities		8	%		7	%		7	%


(1)		As a result of our significant independent living/continuing care retirement community acquisitions in the fourth quarter of 2005, we began to separately disclose this facility classification in our portfolio reporting. We adopted the National Investment Center definitions and reclassified certain of our existing facilities to this classification.


	December 31			December 31			December 31
	2003			2004			2005
Operator mix:
Emeritus Corporation		12	%		15	%		13	%
Merrill Gardens L.L.C.								7	%
Southern Assisted Living, Inc.		11	%		8	%		7	%
Life Care Centers of America, Inc.		6	%					7	%
Commonwealth Communities Holdings LLC		10	%		8	%		7	%
Delta Health Group, Inc.					7	%
Home Quality Management, Inc.		7	%		7	%
Remaining operators		54	%		55	%		59	%
Geographic mix:
Florida		9	%		15	%		14	%
Massachusetts		13	%		14	%		13	%
Texas		6	%		6	%		8	%
North Carolina		10	%		8	%		8	%
California								7	%
Ohio		6	%		6	%
Remaining states		56	%		51	%		50	%

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. Management regularly monitors various 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 “Item 1A — Risk Factors” in the Annual Report on Form 10-K for the year ended December 31, 2005 for further discussion.

Portfolio Update

Payment coverages in our portfolio continue to improve. Our overall payment coverage is at 1.92 times and represents an increase of 14 basis points from 2004 and 39 basis points from 2003. The following table reflects our recent historical trends of portfolio coverages. Coverage data reflects the 12 months ended for the periods presented. CBMF represents the ratio of facilities’ earnings before interest, taxes, depreciation, amortization, rent and management fees to contractual rent or interest due us. CAMF represents the ratio of earnings before interest, taxes, depreciation, amortization, and rent (but after management fees) to contractual rent or interest due us.

September 30, 2003

September 30, 2004

September 30, 2005

CBMF

CAMF

CBMF

CAMF

CBMF

CAMF

Assisted Living Facilities

1.31

1.10

1.45

1.23

1.52

1.30

Skilled Nursing Facilities

1.75

1.34

2.11

1.62

2.18

1.61

Independent/CCRCs

1.43

1.21

Specialty Care Facilities

1.92

1.48

2.69

2.08

3.36

2.77

Weighted Averages

1.53

1.23

1.78

1.44

1.92

1.53

Corporate Governance

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

Liquidity and Capital Resources

Sources and Uses of Cash

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

The following is a summary of our sources and uses of cash flows (dollars in thousands):


	Year Ended						One Year Change						Year Ended			One Year Change						Two Year Change
	Dec. 31, 2003			Dec. 31, 2004			$			%			Dec. 31, 2005			$			%			$			%
Cash and cash equivalents at beginning of period	$	9,550		$	124,496		$	114,946			1,204	%	$	19,763		$	(104,733	)		–84	%	$	10,213			107	%
Cash provided from (used in) operating activities		129,521			144,025			14,504			11	%		173,755			29,730			21	%		44,234			34	%
Cash provided from (used in) investing activities		(388,746	)		(507,362	)		(118,616	)		31	%		(449,069	)		58,293			–11	%		(60,323	)		16	%
Cash provided from (used in) financing activities		374,171			258,604			(115,567	)		–31	%		291,788			33,184			13	%		(82,383	)		–22	%

Cash and cash equivalents at end of period	$	124,496		$	19,763		$	(104,733	)		–84	%	$	36,237		$	16,474			83	%	$	(88,259	)		–71	%

Operating Activities. The increases in net cash provided from operating activities are primarily attributable to increases in net income, excluding the provision for depreciation and net straight-line rental income. Net income and the provision for depreciation increased primarily as a result of net new investments in properties owned by us. See the discussion of investing activities below for additional details. To the extent that we acquire or dispose of additional properties in the future, our net income and provision for depreciation will change accordingly. Net straight-line rental income decreased primarily due to a decrease in gross straight-line rental income and increases in cash payments outside normal monthly rental payments.

The following is a summary of our straight-line rent (dollars in thousands):


	Year Ended						One Year Change						Year Ended			One Year Change						Two Year Change
	Dec. 31, 2003			Dec. 31, 2004			$			%			Dec. 31, 2005			$			%			$			%
Gross straight-line rental income	$	21,199		$	21,936		$	737			3	%	$	13,142		$	(8,794	)		–40	%	$	(8,057	)		–38	%
Cash receipts due to real property sales		(2,427	)		(3,756	)		(1,329	)		55	%		(9,384	)		(5,628	)		150	%		(6,957	)		287	%
Prepaid rent receipts		(3,844	)		(4,388	)		(544	)		14	%		(4,485	)		(97	)		2	%		(641	)		17	%

Cash receipts in excess of (less than) rental income	$	14,928		$	13,792		$	(1,136	)		–8	%	$	(727	)	$	(14,519	)		–105	%	$	(15,655	)		–105	%

Gross straight-line rental income represents the non-cash difference between contractual cash rent due and the average rent recognized pursuant to Statement of Financial Accounting Standards No. 13 “Accounting for Leases.” This amount is positive in the first half of a lease term (but declining every year due to annual increases in cash rent due) and is negative in the second half of a lease term. The decrease in gross straight-line rental income is primarily due to annual increases in cash rent due on leases with fixed increases and our decision in 2004 to change our standard lease structure. 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 tenant’s properties. These escalators are not fixed, so no straight-line rent is recorded. Instead, rental income is recorded based on the contractual cash rental payment due for the period. The increase in non-recurring cash receipts are primarily attributable to cash received in connection with real property sales that resulted in the payoff of existing straight-line receivable balances.

Investing Activities. The changes in net cash used in investing activities are primarily attributable to net changes in loans receivable and real property investments. The following is a summary of our investment and disposition activities (dollars in thousands):


	Year Ended
	December 31, 2003					December 31, 2004					December 31, 2005
	Facilities		Amount			Facilities		Amount			Facilities		Amount
Real property acquisitions:
Assisted living		71	$	350,062			22	$	179,940			4	$	47,660
Skilled nursing		25		120,823			52		338,951			45		262,084
Independent/CCRC												11		230,225
Specialty care												5		51,000

Total acquisitions		96		470,885			74		518,891			65		590,969
Less:
Assumed debt				(101,243	)				(14,555	)				(22,309	)
Preferred stock issuance				(26,500	)

Cash disbursed for acquisitions				343,142					504,336					568,660
Additions to CIP				31,771					11,883					8,790
Capital improvements to existing properties				35,500					26,328					21,841

Total cash invested in real property				410,413					542,547					599,291
Real property dispositions:
Assisted living		9		52,232			4		20,271			15		90,485
Skilled nursing		2		13,078			2		6,076
Specialty care							1		11,220
Land parcels				145										840

Proceeds from real property sales		11		65,455			7		37,567			15		91,325

Net cash investments in real property		85	$	344,958			67	$	504,980			50	$	507,966


Advances on loans receivable:
Investments in new loans			$	36,436				$	47,826				$	26,554
Draws on existing loans				69,219					14,062					13,833

Total investments in loans				105,655					61,888					40,387
Receipts on loans receivable:
Loan payoffs				30,631					38,450					82,379
Principal payments on loans				26,450					17,023					16,259

Total principal receipts on loans				57,081					55,473					98,638

Net cash advances/(receipts) on loans receivable			$	48,574				$	6,415				$	(58,251	)

Financing Activities. The changes in net cash provided from or used in financing activities are primarily attributable to changes related to our long-term debt, common stock issuances, preferred stock issuances and redemptions, and cash distributions to stockholders.

The following is a summary our senior unsecured note issuances (dollars in thousands):


Date Issued	Maturity Date	Interest Rate			Face Amount		Net Proceeds
March 2003	September 2012		8.000	%	$	100,000	$	103,167
October 2003	November 2013		6.000	%		250,000		247,303

2003 Totals					$	350,000	$	350,470

September 2004	November 2013		6.000	%	$	50,000	$	50,708

April 2005	May 2015		5.875	%	$	250,000	$	246,859
November 2005	June 2016		6.200	%		300,000		297,194

2005 Totals					$	550,000	$	544,053

We repaid $40,000,000 of 8.0% senior unsecured notes upon maturity in April 2004. In May 2005, we redeemed all of our outstanding $50,000,000 8.17% senior unsecured notes due March 2006, we completed a public 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. The increase in principal payments on secured debt during 2005 is primarily due to early extinguishments of outstanding mortgages. During the year ended December 31, 2005, we paid off mortgages with outstanding balances of $72,309,000 and average interest rates of 7.481%.

The change in common stock is primarily attributable to public and private issuances and common stock issuances related to our dividend reinvestment and stock purchase plan (“DRIP”). The remaining difference in common stock issuances is primarily due to issuances pursuant to stock incentive plans.

The following is a summary our common stock issuances (dollars in thousands, except per share amounts):


Date Issued	Shares Issued		Issue Price		Gross Proceeds		Net Proceeds
July 2003		1,583,100	$	30.32	$	48,000	$	47,933
September 2003		3,680,000	$	30.25		111,320		105,075
2003 DRIP		2,276,821	$	30.24		68,860		68,860

2003 Totals		7,539,921			$	228,180	$	221,868

2004 DRIP		1,532,819	$	33.65	$	51,575	$	51,575

November 2005		3,000,000	$	34.15	$	102,450	$	100,977
2005 DRIP		1,546,959	$	34.59		53,505		53,505

2005 Totals		4,546,959			$	155,955	$	154,482

In July 2003, we closed on a public offering of 4,000,000 shares of 7.875% Series D Cumulative Redeemable Preferred Stock, which generated net proceeds of approximately $96,850,000. A portion of the proceeds from this offering were used to redeem all 3,000,000 shares of our 8.875% Series B Cumulative Redeemable Preferred Stock on July 15, 2003, at a redemption price of $25 per share plus accrued and unpaid dividends. In September 2004, we closed on a public offering of 7,000,000 shares of 7.625% Series F Cumulative Redeemable Preferred Stock, which generated net proceeds of approximately $169,107,000. The proceeds were used to repay borrowings under our unsecured lines of credit arrangements and to invest in additional properties.

In order to qualify as a REIT for federal income tax purposes, we must distribute at least 90% of our taxable income (including 100% of capital gains) to our stockholders. The increases in dividends are primarily attributable to increases in outstanding common and preferred stock shares as discussed above and increases in our annual common stock dividend per share.

The following is a summary of our dividend payments (in thousands, except per share amounts):


	Year Ended
	December 31, 2003				December 31, 2004				December 31, 2005
	Per Share		Amount		Per Share		Amount		Per Share		Amount
Common Stock	$	2.34	$	101,863	$	2.385	$	122,987	$	2.46	$	132,548
Series B Preferred Stock		2.22		3,605
Series C Preferred Stock		2.25		1,439
Series D Preferred Stock		1.97		3,784		1.97		7,875		1.97		7,875
Series E Preferred Stock		1.50		390		1.50		933		1.50		375
Series F Preferred Stock						1.50		3,929		1.91		13,344

Totals			$	111,081			$	135,724			$	154,142

Off-Balance Sheet Arrangements

We have an outstanding letter of credit issued for the benefit of certain insurance companies that provide workers’ compensation insurance to one of our tenants. Our obligation under the letter of credit matures in 2009. At December 31, 2005, our obligation under the letter of credit was $2,450,000.

We are exposed to various market risks, including the potential loss arising from adverse changes in interest rates. We may or may not elect to use financial derivative instruments to hedge interest rate exposure. These decisions are principally based on the general trend in interest rates at the applicable dates, our perception of the future volatility of interest rates and our relative levels of variable rate debt and variable rate investments. As of December 31, 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.”

Contractual Obligations

The following table summarizes our payment requirements under contractual obligations as of December 31, 2005 (in thousands):


	Payments Due by Period
Contractual Obligations	Total		2006		2007-2008		2009-2010		Thereafter
Unsecured lines of credit arrangements(1)	$	540,000	$	40,000	$	500,000	$	0	$	0
Senior unsecured notes		1,194,830				94,830				1,100,000
Secured debt		107,540		2,596		24,269		41,301		39,374
Contractual interest obligations		749,475		108,125		198,062		161,471		281,817
Capital lease obligations
Operating lease obligations		14,257		1,275		1,994		1,857		9,131
Purchase obligations		81,449		15,096		48,007		17,991		355
Other long-term liabilities

Total contractual obligations	$	2,687,551	$	167,092	$	867,162	$	222,620	$	1,430,677


(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 (5.387% at December 31, 2005). The applicable margin is based on our ratings with Moody’s Investors Service and Standard & Poor’s Ratings Services and was 0.9% at December 31, 2005. 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 on our ratings with Moody’s Investors Service and Standard & Poor’s Ratings Services and was 0.225% at December 31, 2005. 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 a 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 (7.25% at December 31, 2005) or 1.3% over LIBOR interest rate, at our option. Principal is due upon expiration of the agreement. At December 31, 2005, we had $195,000,000 outstanding under the unsecured lines of credit arrangements and estimated total contractual interest obligations of $26,262,000. Contractual interest obligations are estimated based on the assumption that the balance of $195,000,000 at December 31, 2005 is constant until maturity at interest rates in effect at December 31, 2005.

We have $1,194,830,000 of senior unsecured notes principal 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 $647,298,000 at December 31, 2005. Additionally, we have mortgage loans totaling $107,540,000, collateralized by owned properties, with fixed annual interest rates ranging from 5.8% to 8.5%, payable monthly.

The carrying values of the properties securing the mortgage loans totaled $167,230,000 at December 31, 2005. Total contractual interest obligations on mortgage loans totaled $32,715,000 at December 31, 2005.

At December 31, 2005, we had operating lease obligations of $14,257,000 relating to our office space, five assisted living facilities and three skilled nursing facilities.

Purchase obligations are comprised of unfunded construction commitments and contingent purchase obligations. At December 31, 2005, we had outstanding construction financings of $3,906,000 for leased properties and were committed to providing additional financing of approximately $36,519,000 to complete construction. At December 31, 2005, we had contingent purchase obligations totaling $44,930,000. These contingent purchase obligations primarily relate to deferred acquisition fundings and capital improvements. Deferred acquisition fundings are contingent upon a tenant satisfying certain conditions in the lease. Upon funding, amounts due from the tenant are increased to reflect the additional investment in the property.

Capital Structure

As of December 31, 2005, we had stockholders’ equity of $1,430,756,000 and a total outstanding debt balance of $1,500,818,000, which represents a debt to total book capitalization ratio of 51%. Our ratio of debt to market capitalization was 40% at December 31, 2005. For the year ended December 31, 2005, our coverage ratio of EBITDA to interest was 3.08 to 1.00. For the year ended December 31, 2005, our coverage ratio of EBITDA to fixed charges was 2.45 to 1.00. Also, at December 31, 2005, we had $36,237,000 of cash and cash equivalents and $345,000,000 of available borrowing capacity under our unsecured lines of credit arrangements.

Our debt agreements contain various covenants, restrictions and events of default. Among other things, these provisions require us to maintain certain financial ratios and minimum net worth and impose certain limits on our ability to incur indebtedness, create liens and make investments or acquisitions. As of December 31, 2005, we were in compliance with all of the covenants under our debt agreements. None of our debt agreements contain provisions for acceleration which could be triggered by our debt ratings. However, under our unsecured lines of credit arrangements, the ratings on our senior unsecured notes are used to determine the fees and interest payable.

Our senior unsecured notes are rated Baa3 (stable), BBB- (positive) and BBB- (stable) 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 April 30, 2006, we had an effective shelf registration statement on file with the Securities and Exchange Commission under which we may issue up to $321,344,619 of securities including debt securities, common and preferred stock, depositary shares, warrants and units. Also, as of April 30, 2006, 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 April 30, 2006, 2,486,942 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 properties and to repay borrowings under our unsecured lines of credit arrangements.

Results of Operations


	Year Ended				One Year Change					Year Ended		One Year Change						Two Year Change
	Dec. 31, 2003		Dec. 31, 2004		$		%			Dec. 31, 2005		$			%			$			%
Net income available to common stockholders	$	70,732	$	72,634	$	1,902		3	%	$	62,692	$	(9,942	)		–14	%	$	(8,040	)		–11	%
Funds from operations		119,463		146,742		27,279		23	%		144,293		(2,449	)		–2	%		24,830			21	%
Funds available for distribution		104,535		132,950		28,415		27	%		145,020		12,070			9	%		40,485			39	%
EBITDA		194,944		236,189		41,245		21	%		256,713		20,524			9	%		61,769			32	%

Net income available to common stockholders decreased 14% from 2004 and 11% from 2003 primarily due to the losses on extinguishment of debt totaling $21,484,000, or $0.39 per diluted share, and increases in interest expense, provision for depreciation and preferred stock dividends, offset by increases in rental income. Net income available to common stockholders increased 3% from 2003 to 2004 due to an increase in rental income offset by increases in interest expense and provision for depreciation. These changes are discussed in further detail below. Net income available to common stockholders decreased on a per share basis during 2005 due to the lower net income available to common stockholders discussed above and higher outstanding shares. Net income available to common stockholders decreased on a per share basis during 2004 primarily due to higher outstanding shares. On a fully diluted basis, average common shares outstanding for the year ended December 31, 2005 was 54,499,000, a 5% increase from 52,082,000 for the same period in 2004 and an 18% increase from 44,201,000 for the same period in 2003. The increase in fully diluted average common shares outstanding is primarily the result of public and private common stock offerings and common stock issuances pursuant to our DRIP.

The following table represents the changes in outstanding common stock for the period from January 1, 2003 to December 31, 2005 (in thousands):


	Year Ended
	Dec. 31, 2003		Dec. 31, 2004		Dec. 31, 2005		Totals
Beginning balance		40,086		50,361		52,925		40,086
Public/private offerings		5,263				3,000		8,263
DRIP issuances		2,277		1,533		1,547		5,357
Preferred stock conversions		2,224		369		210		2,803
Other issuances		511		662		443		1,616

Ending balance		50,361		52,925		58,125		58,125

The decrease in FFO for the year ended December 31, 2005 is primarily due to the losses on extinguishment of debt. The increase in FFO for the year ended December 31, 2004 is primarily due to the increase in net income available to common stockholders. The increases in FAD are primarily due to the changes in net straight-line rental income offset by the losses on extinguishment of debt. 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.

The increases in EBITDA are primarily due to increases in net income, excluding interest expense and provision for depreciation. Our coverage ratio of EBITDA to total interest was 3.10 times for the year ended December 31, 2005 as compared with 3.24 times for the same period in 2004 and 3.50 times for the same period in 2003. Our coverage ratio of EBITDA to fixed charges was 2.47 times for the year ended December 31, 2005 as compared with 2.77 times for the same period in 2004 and 3.01 times for the same period in 2003. Our coverage ratios declined from the prior years primarily due to the losses on extinguishment of debt and increases in interest expense. Please refer to the discussion of “Non-GAAP Financial Measures” below for further information regarding EBITDA and a reconciliation of EBITDA and net income.

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


	Year Ended				One Year Change						Year Ended		One Year Change						Two Year Change
	Dec. 31, 2003		Dec. 31, 2004		$			%			Dec. 31, 2005		$			%			$		%
Rental income	$	157,617	$	211,417	$	53,800			34	%	$	250,805	$	39,388			19	%	$	93,188		59	%
Interest income		20,768		22,818		2,050			10	%		23,993		1,175			5	%		3,225		16	%
Transaction fees and other income		3,759		2,432		(1,327	)		–35	%		4,548		2,116			87	%		789		21	%
Prepayment fees				50		50			n/a					(50	)		n/a					n/a

Totals	$	182,144	$	236,717	$	54,573			30	%	$	279,346	$	42,629			18	%	$	97,202		53	%

The increase in gross revenues is primarily attributable to increased rental income resulting from the acquisitions of new properties from which we receive rent. See the discussion of investing activities in “Liquidity and Capital Resources” above for further information. 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 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 tenant’s properties. These escalators are not fixed, so no straight-line rent is recorded; however, rental income is recorded based on the contractual cash rental payments due for the period. While this change does not affect our cash flow or our ability to pay dividends, it is anticipated that we will generate additional organic growth and minimize non-cash straight-line rent over time. If gross operating revenues at our facilities and/or the Consumer Price Index do not increase, a portion of our revenues may not continue to increase. Sales of real property would offset revenue increases and, to the extent that they exceed new acquisitions, could result in decreased revenues. Our leases could renew above or below current rent rates, resulting in an increase or decrease in rental income. As of December 31, 2005, we had no leases expiring prior to 2009 with the exception of our master lease with Commonwealth Communities Holdings LLC. In October 2005, Kindred Healthcare, Inc. (“Kindred”) announced its intent to acquire Commonwealth. As part of this transaction, which closed on February 28, 2006, we leased the Commonwealth facilities to Kindred under two master leases.

Interest income increased in 2005 primarily due to recognition of additional interest income of approximately $4,509,000 offset by loan payoffs. The additional interest income related to the payoffs of loans that were either on non-accrual or partial accrual and all contractual interest was received from the borrowers. Transaction fees and other income fluctuated primarily due to $822,000 of extinguishment recoveries, $750,000 in termination fees as well as additional fees from loan payoffs recognized during the year ended December 31, 2005. The decrease from 2003 to 2004 is primarily due to the $902,000 gain from the sale of our investment in Atlantic Healthcare Finance L.P. in October 2003.

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


	Year Ended				One Year Change						Year Ended		One Year Change						Two Year Change
	Dec. 31, 2003		Dec. 31, 2004		$			%			Dec. 31, 2005		$			%			$			%
Interest expense	$	48,603	$	67,996	$	19,393			40	%	$	79,409	$	11,413			17	%	$	30,806			63	%
Provision for depreciation		42,739		66,111		23,372			55	%		79,167		13,056			20	%		36,428			85	%
General and administrative		11,483		16,585		5,102			44	%		17,249		664			4	%		5,766			50	%
Loan expense		2,921		3,393		472			16	%		2,710		(683	)		–20	%		(211	)		–7	%
Impairment of assets		2,792		314		(2,478	)		–89	%				(314	)		–100	%		(2,792	)		–100	%
Loss on extinguishment of debt												21,484		21,484			n/a			21,484			n/a
Provision for loan losses		2,870		1,200		(1,670	)		–58	%		1,200		0			0	%		(1,670	)		–58	%

Totals	$	111,408	$	155,599	$	44,191			40	%	$	201,219	$	45,620			29	%	$	89,811			81	%

The increase in total expenses is primarily attributable to increases in interest expense, the provision for depreciation and the recognition of losses on extinguishment of debt. The increases in interest expense are primarily due to higher average borrowings and changes in the amount of capitalized interest offsetting interest expense. This was partially offset by lower average interest rates and savings generated from interest rate swap agreements. If we borrow under our unsecured lines of credit arrangements, issue additional senior unsecured notes or assume additional secured debt, our interest expense will increase.

The following is a summary of our interest expense (dollars in thousands):


	Year Ended						One Year Change						Year Ended			One Year Change					Two Year Change
	Dec. 31, 2003			Dec. 31, 2004			$			%			Dec. 31, 2005			$		%			$			%
Senior unsecured notes	$	48,527		$	61,216		$	12,689			26	%	$	63,080		$	1,864		3	%	$	14,553			30	%
Secured debt		5,514			11,069			5,555			101	%		11,769			700		6	%		6,255			113	%
Unsecured lines of credit		2,871			2,916			45			2	%		9,412			6,496		223	%		6,541			228	%
Capitalized interest		(1,535	)		(875	)		660			–43	%		(665	)		210		–24	%		870			–57	%
SWAP earnings					(1,770	)		(1,770	)		n/a			(972	)		798		–45	%		(972	)		n/a
Discontinued operations		(6,774	)		(4,560	)		2,214			–33	%		(3,215	)		1,345		–29	%		3,559			–53	%

Totals	$	48,603		$	67,996		$	19,393			29	%	$	79,409		$	11,413		17	%	$	30,806			63	%

The increase in interest expense on senior unsecured notes is due to the net effect and timing of issuances and extinguishments. See the discussion of financing activities in “Liquidity and Capital Resources” above for further information.

The following is a summary of our senior unsecured notes principal activity (dollars in thousands):


	Year Ended December 31, 2003					Year Ended December 31, 2004						Year Ended December 31, 2005
			Weighted Average						Weighted Average						Weighted Average
	Amount		Interest Rate			Amount			Interest Rate			Amount			Interest Rate
Beginning balance	$	515,000		7.781	%	$	865,000			7.291	%	$	875,000			7.181	%
Debt issued		350,000		6.571	%		50,000			6.000	%		550,000			6.052	%
Debt extinguished							(40,000	)		8.090	%		(230,170	)		7.677	%

Ending balance	$	865,000		7.291	%	$	875,000			7.181	%	$	1,194,830			6.566	%

Monthly averages	$	630,385		7.699	%	$	852,692			7.242	%	$	961,469			6.829	%

The increase in interest expense on secured debt is due to the net effect and timing of assumptions, extinguishments and principal amortizations. The following is a summary of our secured debt activity (dollars in thousands):


	Year Ended December 31, 2003						Year Ended December 31, 2004						Year Ended December 31, 2005
				Weighted Average						Weighted Average						Weighted Average
	Amount			Interest Rate			Amount			Interest Rate			Amount			Interest Rate
Beginning balance	$	51,831			7.447	%	$	148,184			7.512	%	$	160,225			7.508	%
Debt assumed		101,243			7.403	%		14,555			7.500	%		22,309			6.561	%
Debt extinguished		(4,000	)		3.790	%								(72,309	)		7.481	%
Principal payments		(890	)		8.095	%		(2,514	)		7.709	%		(2,685	)		7.584	%

Ending balance	$	148,184			7.512	%	$	160,225			7.508	%	$	107,540			7.328	%

Monthly averages	$	82,644			7.594	%	$	148,141			7.510	%	$	156,027			7.452	%

The increase in interest expense on unsecured lines of credit arrangements is due primarily to higher average outstanding borrowings. The following is a summary of our unsecured lines of credit arrangements (dollars in thousands):


	Year Ended December 31
	2003			2004			2005
Balance outstanding at December 31	$	0		$	151,000		$	195,000
Maximum amount outstanding at any month end	$	156,900		$	159,000		$	318,000
Average amount outstanding (total of daily principal balances divided by days in year)	$	61,677		$	54,770		$	181,232
Weighted average interest rate (actual interest expense divided by average borrowings outstanding)		4.65	%		5.32	%		5.19	%

We capitalize certain interest costs associated with funds used to finance the construction of properties owned directly by us. The amount capitalized is based upon the borrowings outstanding during the construction period using the rate of interest that approximates our cost of financing. Our interest expense is reduced by the amount capitalized. Capitalized interest for the years ended December 31, 2003, 2004 and 2005 totaled $1,535,000, $875,000 and $665,000, respectively.

The provision for depreciation increased primarily as a result of additional investments in properties owned directly by us. See the discussion of investing activities in “Liquidity and Capital Resources” above for further information. To the extent that we acquire or dispose of additional properties in the future, our provision for depreciation will change accordingly.

General and administrative expenses as a percentage of revenues (including revenues from discontinued operations) for the year ended December 31, 2005, were 5.89% as compared with 6.54% and 5.55% for the same periods in 2004 and 2003, respectively. The change from 2004 to 2005 is due to increased costs to attract and retain appropriate personnel to achieve our business objectives offset by a decrease in professional service fees and other operating costs as a result of focused expense control. Approximately one-half of the increases from 2003 to 2004 were related to costs associated with our initiatives to attract and retain appropriate personnel to achieve our business objectives. The remainder was comprised of increases relating to professional services fees (including costs associated with SOX compliance), taxes and transition costs associated with the removal of an underperforming operator in December 2004.

The change in loan expense was primarily due to increased costs in 2003 and 2004 related to amending our primary unsecured line of credit arrangement, costs related to obtaining consents to modify the covenants under our senior unsecured notes and costs related to the issuance of senior unsecured notes.

During the year ended December 31, 2004, it was determined that the projected undiscounted cash flows from a property did not exceed its related net book value and an impairment charge of $314,000 was recorded to reduce the property to its estimated fair market value. The estimated fair market value of the property was determined by an independent appraisal. During the year ended December 31, 2003, it was determined that the projected undiscounted cash flows from a property did not exceed its related net book value and an impairment charge of $2,792,000 was recorded to reduce the property to its estimated fair market value. The estimated fair market value of the property was determined by an independent appraisal.

The provision for loan losses is related to our critical accounting estimate for the allowance for loan losses and is discussed below in “Critical Accounting Policies.”

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


	Year Ended						One Year Change						Year Ended			One Year Change						Two Year Change
	Dec. 31, 2003			Dec. 31, 2004			$			%			Dec. 31, 2005			$			%			$			%
Gain (loss) on sales of properties	$	4,139		$	(143	)	$	(4,282	)		n/a		$	3,227		$	3,370			n/a		$	(912	)		–22	%
Discontinued operations, net		7,865			4,396			(3,469	)		–44	%		2,932			(1,464	)		–33	%		(4,933	)		–63	%
Preferred dividends		(9,218	)		(12,737	)		(3,519	)		38	%		(21,594	)		(8,857	)		70	%		(12,376	)		134	%
Preferred stock redemption charge		(2,790	)					2,790			100	%					0			0	%		2,790			100	%

Totals	$	(4	)	$	(8,484	)	$	(8,480	)		212,000	%	$	(15,435	)	$	(6,951	)		82	%	$	(15,431	)		385,775	%

During the years ended December 31, 2003, 2004 and 2005, we sold properties with carrying values of $61,316,000, $37,710,000 and $88,098,000 for net gains of $4,139,000, net losses of $143,000 and net gains of $3,227,000, respectively. During the three months ended March 31, 2006, we sold properties with carrying values of $15,393,000 for a net gain of $1,553,000. Also, at March 31, 2006, three assisted living facilities and one skilled nursing facility were classified as held for sale. In accordance with Statement of Financial Accounting Standards No. 144, we have reclassified the income and expenses attributable to the properties held for sale at March 31, 2006 or sold subsequent to January 1, 2002 to discontinued operations. These properties generated $7,865,000, $4,396,000 and $2,932,000 of income after deducting depreciation and interest expense from rental revenue for the years ended December 31, 2003, 2004 and 2005, respectively. Please refer to Note 15 of our audited consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2005 for further discussion.

The increase in preferred dividends is primarily due to the increase in average outstanding preferred shares. The following is a summary of our preferred stock activity:


	Year Ended December 31, 2003						Year Ended December 31, 2004						Year Ended December 31, 2005
				Weighted Average						Weighted Average						Weighted Average
	Shares			Dividend Rate			Shares			Dividend Rate			Shares			Dividend Rate
Beginning balance		5,100,000			8.926	%		4,830,444			7.553	%		11,350,045			7.663	%
Shares issued		5,060,000			7.482	%		7,000,000			7.625	%
Shares redeemed		(3,000,000	)		8.875	%
Shares converted		(2,329,556	)		8.704	%		(480,399	)		6.000	%		(275,056	)		6.000	%

Ending balance		4,830,444			7.553	%		11,350,045			7.663	%		11,074,989			7.704	%

Monthly averages		4,983,803			8.357	%		6,786,481			7.621	%		11,245,073			7.679	%

In July 2003, we closed a public offering of 4,000,000 shares of 7.875% Series D Cumulative Redeemable Preferred Stock. A portion of the proceeds from this offering were used to redeem all 3,000,000 shares of our 8.875% Series B Cumulative Redeemable Preferred Stock on July 15, 2003. In accordance with Emerging Issues Task Force (“EITF”) Topic D-42, the costs to issue these securities were recorded as a non-cash, non-recurring charge of $2,790,000, or $0.06 per diluted share, in the third quarter of 2003 to reduce net income available to common stockholders. No such transactions or charges occurred in 2004 or 2005.

Non-GAAP Financial Measures

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

In April 2002, the Financial Accounting Standards Board issued Statement No. 145 that requires gains and losses on extinguishment 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 and have properly reflected the $21,484,000, or $0.39 per diluted share, of losses on extinguishment of debt for the year ended December 31, 2005. These charges have not been added back for the calculations of FFO, FAD or EBITDA.

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

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

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

FFO, FAD and EBITDA are financial measures that are widely used by investors, equity and debt analysts and rating agencies in the valuation, comparison, investment recommendations and rating of companies. Management uses these financial measures to facilitate internal and external comparisons to our historical operating results, in making operating decisions and for budget planning purposes. Additionally, FFO and FAD are internal evaluation metrics utilized by the Board of Directors to evaluate management. FFO, FAD and EBITDA do not represent net income or cash flow provided from operating activities as determined in accordance with U.S. GAAP and should not be considered as alternative measures of profitability or liquidity. Finally, FFO, FAD and EBITDA, as defined by us, may not be comparable to similarly entitled items reported by other real estate investment trusts or other companies.

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


	Year Ended
	December 31			December 31			December 31
	2003			2004			2005
FFO Reconciliation:
Net income available to common stockholders	$	70,732		$	72,634		$	62,692
Provision for depreciation		52,870			74,015			84,828
Loss (gain) on sales of properties		(4,139	)		143			(3,227	)
Prepayment fees					(50	)

Funds from operations		119,463			146,742			144,293
Preferred stock redemption charge		2,790

Funds from operations — adjusted	$	122,253		$	146,742		$	144,293
Average common shares outstanding:
Basic		43,572			51,544			54,110
Diluted		44,201			52,082			54,499
Per share data:
Net income available to common stockholders
Basic	$	1.62		$	1.41		$	1.16
Diluted		1.60			1.39			1.15
Funds from operations
Basic	$	2.74		$	2.85		$	2.67
Diluted		2.70			2.82			2.65
Funds from operations — adjusted
Basic	$	2.81		$	2.85		$	2.67
Diluted		2.77			2.82			2.65

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


	Year Ended
	December 31			December 31			December 31
	2003			2004			2005
FAD Reconciliation:
Net income available to common stockholders	$	70,732		$	72,634		$	62,692
Provision for depreciation		52,870			74,015			84,828
Loss (gain) on sales of properties		(4,139	)		143			(3,227	)
Prepayment fees					(50	)
Rental income in excess of cash received		(14,928	)		(13,792	)		727

Funds available for distribution		104,535			132,950			145,020
Preferred stock redemption charge		2,790

Funds available for distribution — adjusted	$	107,325		$	132,950		$	145,020
Average common shares outstanding:
Basic		43,572			51,544			54,110
Diluted		44,201			52,082			54,499
Per share data:
Net income available to common stockholders
Basic	$	1.62		$	1.41		$	1.16
Diluted		1.60			1.39			1.15
Funds available for distribution
Basic	$	2.40		$	2.58		$	2.68
Diluted		2.36			2.55			2.66
Funds available for distribution — adjusted
Basic	$	2.46		$	2.58		$	2.68
Diluted		2.43			2.55			2.66

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


	Year Ended
	December 31			December 31			December 31
	2003			2004			2005
EBITDA Reconciliation:
Net income	$	82,740		$	85,371		$	84,286
Interest expense		55,377			72,556			82,624
Capitalized interest		1,535			875			665
Provision for depreciation		52,870			74,015			84,828
Amortization		3,957			4,247			4,975
Provision for loan losses		2,870			1,200			1,200

EBITDA	$	199,349		$	238,264		$	258,578
Interest Coverage Ratio:
Interest expense	$	55,377		$	72,556		$	82,624
Capitalized interest		1,535			875			665

Total interest		56,912			73,431			83,289
EBITDA	$	199,349		$	238,264		$	258,578

Interest coverage ratio		3.50	x		3.24	x		3.10	x
Fixed Charge Coverage Ratio:
Total interest	$	56,912		$	73,431		$	83,289
Preferred dividends		9,218			12,737			21,594

Total fixed charges		66,130			86,168			104,883
EBITDA	$	199,349		$	238,264		$	258,578

Fixed charge coverage ratio		3.01	x		2.77	x		2.47	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 Note 1 of our audited consolidated financial statements for further information on significant accounting policies that impact us. There were no material changes to these policies in 2005.

We adopted the fair value-based method of accounting for share-based payments effective January 1, 2003 using the prospective method described in FASB Statement No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure. Because Statement 123(R) must be applied not only to new awards but to previously granted awards that are not fully vested on the effective date of Statement 123(R), and because we adopted Statement 123 using the prospective transition method (which applied only to awards granted, modified or settled after the adoption date of Statement 123), compensation cost for some previously granted awards that were not recognized under Statement 123 will be recognized under Statement 123(R). Additionally, we amortize compensation cost for share based payments to the date that the awards become fully vested or to the expected

retirement date, if sooner. Effective with the adoption of Statement 123(R) on January 1, 2006, we will begin recognizing compensation cost to the date the awards become fully vested or to the retirement eligible date, if sooner. Had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of pro forma net income and earnings per share in Note 9 to our audited consolidated financial statements. We expect that the adoption of Statement 123(R) will increase compensation cost by approximately $1,287,000 for 2006 as a result of amortizing share based awards to the retirement eligible date.

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


Nature of Critical		Assumptions/
Accounting Estimate		Approach Used
*Allowance for Loan Losses*

We maintain an allowance for loan losses in accordance with Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, as amended, and SEC Staff Accounting Bulletin No. 102, Selected Loan Loss Allowance Methodology and Documentation Issues. The allowance for loan losses is maintained at a level believed adequate to absorb potential losses in our loans receivable. The determination of the allowance is based on a quarterly evaluation of all outstanding loans. If this evaluation indicates that there is a greater risk of loan charge-offs, additional allowances or placement on non-accrual status may be required. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due as scheduled according to the contractual terms of the original loan agreement. Consistent with this definition, all loans on non-accrual are deemed impaired. To the extent circumstances improve and the risk of collectibility is diminished, we will return these loans to full accrual status.		The determination of the allowance is based on a quarterly evaluation of all outstanding loans, including general economic conditions and estimated collectibility of loan payments and principal. We evaluate the collectibility of our loans receivable based on a combination of factors, including, but not limited to, delinquency status, historical loan charge-offs, financial strength of the borrower and guarantors and value of the underlying property. For the year ended December 31, 2005 we recorded $1,200,000 as provision for loan losses, resulting in an allowance for loan losses of $6,461,000 relating to loans with outstanding balances of $31,416,000 at December 31, 2005. At December 31, 2005, we had loans with outstanding balances of $16,770,000 on non-accrual status.

*Depreciation and Useful Lives*

Substantially all of the properties owned by us are leased under operating leases and are recorded at cost. The cost of our real property is allocated to land, buildings, improvements and intangibles in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations. The allocation of the acquisition costs of properties is based on appraisals commissioned from independent real estate appraisal firms.		We compute depreciation on our properties using the straight-line method based on their estimated useful lives which range from 15 to 40 years for buildings and five to 15 years for improvements. For the year ended December 31, 2005, we recorded $68,061,000 and $16,767,000 as provision for depreciation relating to buildings and improvements, respectively, including amounts reclassified as discontinued operations. The average useful life of our buildings and improvements was 31.7 years and 9.8 years, respectively, at December 31, 2005.


Nature of Critical		Assumptions/
Accounting Estimate		Approach Used
*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 year ended December 31, 2005.

*Fair Value of Derivative Instruments*

The valuation of derivative instruments is accounted for in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS133”), as amended by Statement of Financial Accounting Standards No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. SFAS133, as amended, requires companies to record derivatives at fair market value on the balance sheet as assets or liabilities.		The valuation of derivative instruments requires us to make estimates and judgments that affect the fair value of the instruments. Fair values for our derivatives are estimated by a third party consultant, which utilizes pricing models that consider forward yield curves and discount rates. Such amounts and the recognition of such amounts are subject to significant estimates which may change in the future. At December 31, 2005, we participated in two interest rate swap agreements related to our long-term debt. At December 31, 2005, the swaps were reported at their fair value as a $2,211,000 other asset. For the year ended December 31, 2005, we generated $972,000 of savings related to our swaps that was recorded as a reduction in interest expense.

*Revenue Recognition*

Revenue is recorded in accordance with Statement of Financial Accounting Standards No. 13, Accounting for Leases, and SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, as amended (“SAB101”). SAB101 requires that revenue be recognized after four basic criteria are met. These four criteria include persuasive evidence of an arrangement, the rendering of service, fixed and determinable income and reasonably assured collectibility. If the collectibility of revenue is determined incorrectly, the amount and timing of our reported revenue could be significantly affected. Interest income on loans is recognized as earned based upon the principal amount outstanding subject to an evaluation of collectibility risk. Prior to June 2004, our standard lease structure contained fixed annual rental escalators, which were generally recognized on a straight-line basis over the initial lease period. Beginning in June 2004, our new standard lease structure contains annual rental escalators that are contingent upon changes in the Consumer Price Index and/or changes in the gross operating revenues of the property. These escalators are not fixed, so no straight-line rent is recorded; however, rental income is recorded based on the contractual cash rental payments due for the period.		We evaluate the collectibility of our revenues and related receivables on an on-going basis. We evaluate collectibility based on assumptions and other considerations including, but not limited to, the certainty of payment, payment history, the financial strength of the investment’s underlying operations as measured by cash flows and payment coverages, the value of the underlying collateral and guaranties and current economic conditions. If our evaluation indicates that collectibility is not reasonably assured, we may place an investment on non-accrual or reserve against all or a portion of current income as an offset to revenue. For the year ended December 31, 2005 we recognized $23,993,000 of interest income and $262,613,000 of rental income, including discontinued operations. Cash receipts on leases with deferred revenue provisions were $13,869,000 as compared to gross straight-line rental income recognized of $13,142,000. At December 31, 2005, our straight-line receivable balance was $63,725,000. Also at December 31, 2005, we had loans with outstanding balances of $16,770,000 on non-accrual status.

Impact of Inflation

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

Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Stockholders and Directors
Health Care REIT, Inc.

We have audited the accompanying consolidated balance sheets of Health Care REIT, Inc. as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedules listed in Item 15(a)(2) of the Annual Report on Form 10-K for the year ended December 31, 2005. These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Health Care REIT, Inc. at December 31, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Health Care REIT, Inc.’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2006 (not provided herein) expressed an unqualified opinion thereon.


		/s/ Ernst & Young LLP

Toledo, Ohio
February 22, 2006
except for Note 15, as to which the date is May 9, 2006

HEALTH CARE REIT, INC.

CONSOLIDATED BALANCE SHEETS


	December 31
	2005			2004
	(In thousands)
ASSETS
Real estate investments:
Real property owned
Land	$	261,236		$	208,173
Buildings & improvements		2,659,746			2,176,327
Real property held for sale, net of accumulated depreciation		11,912
Construction in progress		3,906			25,463

		2,936,800			2,409,963
Less accumulated depreciation		(274,875	)		(219,536	)

Total real property owned		2,661,925			2,190,427
Loans receivable		194,054			256,806
Less allowance for losses on loans receivable		(6,461	)		(5,261	)

		187,593			251,545

Net real estate investments		2,849,518			2,441,972
Other assets:
Equity investments		2,970			3,298
Deferred loan expenses		12,228			9,486
Cash and cash equivalents		36,237			19,763
Receivables and other assets		71,211			77,652

		122,646			110,199

Total assets	$	2,972,164		$	2,552,171

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Borrowings under unsecured lines of credit arrangements	$	195,000		$	151,000
Senior unsecured notes		1,198,278			881,733
Secured debt		107,540			160,225
Accrued expenses and other liabilities		40,590			23,934

Total liabilities		1,541,408			1,216,892
Stockholders’ equity:
Preferred stock, $1.00 par value:		276,875			283,751
Authorized — 25,000,000 shares
Issued and outstanding — 11,074,989 shares in 2005 and 11,350,045 shares in 2004 at liquidation preference
Common stock, $1.00 par value:		58,050			52,860
Authorized — 125,000,000 shares
Issued — 58,182,592 shares in 2005 and 52,960,317 shares in 2004
Outstanding — 58,124,657 shares in 2005 and 52,924,601 shares in 2004
Capital in excess of par value		1,306,471			1,139,723
Treasury stock		(2,054	)		(1,286	)
Cumulative net income		830,103			745,817
Cumulative dividends		(1,039,032	)		(884,890	)
Accumulated other comprehensive income					1
Other equity		343			(697	)

Total stockholders’ equity		1,430,756			1,335,279

Total liabilities and stockholders’ equity	$	2,972,164		$	2,552,171

See accompanying notes

HEALTH CARE REIT, INC.

CONSOLIDATED STATEMENTS OF INCOME


	Year Ended December 31
	2005		2004			2003
	(In thousands, except per share data)
Revenues:
Rental income	$	250,805	$	211,417		$	157,617
Interest income		23,993		22,818			20,768
Transaction fees and other income		4,548		2,432			3,759
Prepayment fees				50

		279,346		236,717			182,144

Expenses:
Interest expense		79,409		67,996			48,603
Provision for depreciation		79,167		66,111			42,739
General and administrative		17,249		16,585			11,483
Loan expense		2,710		3,393			2,921
Impairment of assets				314			2,792
Loss on extinguishment of debt		21,484
Provision for loan losses		1,200		1,200			2,870

		201,219		155,599			111,408

Income from continuing operations		78,127		81,118			70,736
Discontinued operations:
Net gain (loss) on sales of properties		3,227		(143	)		4,139
Income from discontinued operations, net		2,932		4,396			7,865

		6,159		4,253			12,004
Net income		84,286		85,371			82,740
Preferred stock dividends		21,594		12,737			9,218
Preferred stock redemption charge							2,790

Net income available to common stockholders	$	62,692	$	72,634		$	70,732

Average number of common shares outstanding:
Basic		54,110		51,544			43,572
Diluted		54,499		52,082			44,201
Earnings per share:
Basic:
Income from continuing operations available to common stockholders	$	1.05	$	1.33		$	1.34
Discontinued operations, net		0.11		0.08			0.28

Net income available to common stockholders	$	1.16	$	1.41		$	1.62

Diluted:
Income from continuing operations and after preferred stock dividends	$	1.04	$	1.31		$	1.33
Discontinued operations, net		0.11		0.08			0.27

Net income available to common stockholders	$	1.15	$	1.39		$	1.60

See accompanying notes

HEALTH CARE REIT, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


																		Accumulated
						Capital in												Other
	Preferred			Common		Excess of			Treasury			Cumulative			Cumulative			Comprehensive			Other
	Stock			Stock		Par Value			Stock			Net Income			Dividends			Income			Equity			Total
	(In thousands, except per share data)
Balances at January 1, 2003	$	127,500		$	40,086	$	790,838		$	0		$	580,496		$	(638,085	)	$	(170	)	$	(3,433	)	$	897,232
Comprehensive income:
Net income													82,740												82,740
Other comprehensive income:
Unrealized loss on equity investments																			(11	)					(11	)
Foreign currency translation adjustment																			182						182

Total comprehensive income																									82,911

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

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

Total comprehensive income																									85,371

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

Balances at December 31, 2004		283,751			52,860		1,139,723			(1,286	)		745,817			(884,890	)		1			(697	)		1,335,279
Comprehensive income:
Net income													84,286												84,286
Other comprehensive income:
Unrealized loss on equity investments																			(1	)					(1	)

Total comprehensive income																									84,285

Proceeds from issuance of common stock from dividend reinvestment and stock incentive plans, net of forfeitures					1,980		62,105			(768	)														63,317
Restricted stock amortization																						728			728
Option compensation expense																						312			312
Net proceeds from sale of common stock					3,000		97,977																		100,977
Conversion of preferred stock		(6,876	)		210		6,666																		0
Cash dividends:
Common stock-$2.46 per share																(132,548	)								(132,548	)
Preferred stock, Series D-$1.97 per share																(7,875	)								(7,875	)
Preferred stock, Series E-$1.50 per share																(375	)								(375	)
Preferred stock, Series F-$1.91 per share																(13,344	)								(13,344	)

Balances at December 31, 2005	$	276,875		$	58,050	$	1,306,471		$	(2,054	)	$	830,103		$	(1,039,032	)	$	0		$	343		$	1,430,756

See accompanying notes

HEALTH CARE REIT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Year Ended December 31
	2005			2004			2003
	(In thousands)
Operating activities
Net income	$	84,286		$	85,371		$	82,740
Adjustments to reconcile net income to net cash provided from operating activities:
Provision for depreciation		84,828			74,015			52,870
Amortization		4,975			4,247			3,957
Provision for loan losses		1,200			1,200			2,870
Impairment of assets					314			2,792
Rental income less than (in excess of) cash received		727			(13,792	)		(14,928	)
Equity in losses (earnings) of affiliated companies								(270	)
Loss (gain) on sales of properties		(3,227	)		143			(4,139	)
Increase (decrease) in accrued expenses and other liabilities		(1,467	)		4,063			(679	)
Decrease (increase) in receivables and other assets		2,433			(11,536	)		4,308

Net cash provided from (used in) operating activities		173,755			144,025			129,521
Investing activities
Investment in real property		(599,291	)		(542,547	)		(410,413	)
Investment in loans receivable		(40,387	)		(61,888	)		(105,655	)
Other investments, net of payments		328						4,637
Principal collected on loans receivable		98,638			55,473			57,081
Proceeds from sales of properties		91,325			37,567			65,455
Other		318			4,033			149

Net cash provided from (used in) investing activities		(449,069	)		(507,362	)		(388,746	)
Financing activities
Net increase (decrease) under unsecured lines of credit arrangements		44,000			151,000			(109,500	)
Proceeds from issuance of senior unsecured notes		544,053			50,708			350,470
Principal payments on senior unsecured notes		(230,170	)		(40,000	)
Principal payments on secured debt		(74,994	)		(2,514	)		(4,891	)
Net proceeds from the issuance of common stock		165,062			66,281			231,435
Net proceeds from the issuance of preferred stock					169,107			96,850
Redemption of preferred stock								(75,000	)
Decrease (increase) in deferred loan expense		(2,021	)		(254	)		(4,112	)
Cash distributions to stockholders		(154,142	)		(135,724	)		(111,081	)

Net cash provided from (used in) financing activities		291,788			258,604			374,171

Increase (decrease) in cash and cash equivalents		16,474			(104,733	)		114,946
Cash and cash equivalents at beginning of year		19,763			124,496			9,550

Cash and cash equivalents at end of year	$	36,237		$	19,763		$	124,496

Supplemental cash flow information-interest paid	$	85,123		$	73,308		$	50,698

See accompanying notes

HEALTH CARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Accounting Policies and Related Matters

Industry

We are a self-administered, equity real estate investment trust that invests in health care and senior housing properties, which primarily include skilled nursing facilities, independent living/continuing care retirement communities, assisted living facilities and specialty care facilities.

Principles of Consolidation

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

Use of Estimates

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

Cash and Cash Equivalents

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

Loans Receivable

Loans receivable consist of mortgage loans, construction loans and working capital loans. Interest income on loans is recognized as earned based upon the principal amount outstanding subject to an evaluation of collectibility risks. The mortgage loans and construction loans are primarily collateralized by a first or second mortgage lien or leasehold mortgage on, or an assignment of the partnership interest in, the related facilities. Working capital loans are generally either unsecured or secured by the operator’s leasehold rights, corporate guaranties and/or personal guaranties.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level believed adequate to absorb potential losses in our loans receivable. The determination of the allowance is based on a quarterly evaluation of these loans, including general economic conditions and estimated collectibility of loan payments. We evaluate the collectibility of our loans receivable based on a combination of factors, including, but not limited to, delinquency status, historical loan charge-offs, financial strength of the borrower and guarantors and value of the underlying collateral. If such factors indicate that there is greater risk of loan charge-offs, additional allowances or placement on non-accrual status may be required. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due as scheduled according to the contractual terms of the original loan agreement. Consistent with this definition, all loans on non-accrual are deemed impaired. At December 31, 2005, we had loans with outstanding balances of $16,770,000 on non-accrual status ($35,918,000 at December 31, 2004). To the extent circumstances improve and the risk of collectibility is diminished, we will return these loans to full accrual status. While a loan is on non-accrual status, any cash receipts are applied against the outstanding balance.

Real Property Owned

The cost of our real property is allocated to land, buildings, improvements and intangibles in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations. The allocation of the acquisition costs of properties is based on appraisals commissioned from independent real estate appraisal firms. Substantially

HEALTH CARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

all of the properties owned by us are leased under operating leases and are recorded at cost. These properties are depreciated on a straight-line basis over their estimated useful lives which range from 15 to 40 years for buildings and five to 15 years for improvements. The net book value of long-lived assets is reviewed quarterly on a property by property basis to determine if facts and circumstances suggest that the assets may be impaired or that the depreciable life may need to be changed. We consider external factors relating to each asset. If these external factors and the projected undiscounted cash flows of the asset over the remaining depreciation period indicate that the asset will not be recoverable, the carrying value may be reduced to the estimated fair market value. The leases generally extend for a minimum seven-year period and provide for payment of all taxes, insurance and maintenance by the tenants. Prior to June 2004, our standard lease structure contained fixed annual rental escalators, which are generally recognized on a straight-line basis over the minimum lease period subject to an evaluation of collectibility risks. This income is greater than the amount of cash received during the first half of the lease term. Beginning in June 2004, our new standard lease structure contains annual rental escalators that are contingent upon changes in the Consumer Price Index and/or changes in the gross operating revenues of the tenants’ properties. 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 recognized $4,274,000 and $922,500 of contingent rental income for the years ended December 31, 2005 and 2004, respectively. We did not recognize any contingent rental income for the year ended December 31, 2003.

Capitalization of Construction Period Interest

We capitalize interest costs associated with funds used to finance the construction of properties owned directly by us. The amount capitalized is based upon the balance outstanding during the construction period using the rate of interest which approximates our cost of financing. We capitalized interest costs of $665,000, $875,000, and $1,535,000, during 2005, 2004 and 2003, respectively, related to construction of real property owned by us. Our interest expense reflected in the consolidated statements of income has been reduced by the amounts capitalized.

Deferred Loan Expenses

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

Equity Investments

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

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

HEALTH CARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Foreign Currency Translation

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

Transaction Fees

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

Accumulated Other Comprehensive Income

Accumulated other comprehensive income includes unrealized gains or losses on our equity investments and foreign currency translation adjustments. Accumulated unrealized gains and losses totaled $0, $1,000 and $1,000 at December 31, 2005, 2004 and 2003, respectively, and is included as a component of stockholders’ equity.

Fair Value of Derivative Instruments

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.

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

On May 6, 2004, we entered into two interest rate swap agreements (the “Swaps”) for a total notional amount of $100,000,000 to hedge changes in fair value attributable to changes in the LIBOR swap rate of $100,000,000 of fixed rate debt with a maturity date of November 15, 2013. The Swaps are treated as fair-value hedges for accounting purposes and we utilize the short-cut method in accordance with Statement No. 133, as amended. The Swaps are with highly rated counterparties in which we receive a fixed rate of 6.0% and pay a variable rate based on six-month LIBOR plus a spread. The hedging arrangement is considered highly effective and, as such, changes in the Swaps’ fair values exactly offset the corresponding changes in the fair value of senior unsecured notes and, as a result, the changes in fair value do not result in an impact on net income. At December 31, 2005 and 2004, the Swaps were reported at their fair value of $2,211,000 and $4,206,000, respectively, in other assets with an offsetting adjustment to the underlying senior unsecured notes. For the years ended December 31, 2005 and 2004, we generated $972,000 and $1,770,000, respectively, of savings related to the Swaps that was recorded as a reduction in interest expense. We had no interest rate swap agreements outstanding at December 31, 2003.

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 that may change in the future.

HEALTH CARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Net Income Per Share

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

Federal Income Tax

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

New Accounting Standards

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 of 123(R) on January 1, 2006. Because Statement 123(R) must be applied not only to new awards but to previously granted awards that are not fully vested on the effective date of Statement 123(R), and because we adopted Statement 123 using the prospective transition method (which applied only to awards granted, modified or settled after the adoption date of Statement 123), compensation cost for some previously granted awards that were not recognized under Statement 123 will be recognized under Statement 123(R). Additionally, we amortize compensation cost for share based payments to the date that the awards become fully vested or to the expected retirement date, if sooner. Effective with the adoption of Statement 123(R), we will begin recognizing compensation cost to the date the awards become fully vested or to the retirement eligible date, if sooner. Had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of pro forma net income and earnings per share in Note 9. We expect that the adoption of Statement 123(R) will increase compensation cost by approximately $1,287,000 for 2006 as a result of amortizing share based awards to the retirement eligible date.

Reclassifications

Certain amounts in prior years have been reclassified to conform with the current year presentation.

2. Loans Receivable

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


	December 31
	2005		2004
Mortgage loans	$	141,467	$	155,266
Construction loans				720
Working capital loans		52,587		100,820

Totals	$	194,054	$	256,806

Loans to related parties (an entity whose ownership included one Company director) that existed in prior years were at rates comparable to loans to other third-party borrowers and were equal to or greater than our net interest cost on borrowings to support such loans. There were no such loans outstanding during 2005. The amount of interest income and commitment fees from related parties amounted to $0, $682,000 and $36,000 for 2005, 2004 and 2003, respectively.

HEALTH CARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following is a summary of mortgage loans at December 31, 2005:


Final	Number		Principal
Payment	of		Amount at		Carrying
Due	Loans	Payment Terms	Inception		Amount
			(In thousands)
2006	9	Monthly payments from $415 to $160,377, including interest from 1.98% to 17.15%	$	31,859	$	30,122

2007	2	Monthly payments from $1,479 to $7,934, including interest from 7.52% to 19.26%		1,175		1,441

2008	4	Monthly payments from $4,312 to $109,395, including interest from 8.66% to 15.61%		41,975		33,221

2009	4	Monthly payments from $2,535 to $147,455, including interest from 7.12% to 19.26%		12,100		25,875

2010	2	Monthly payments from $29,575 to $122,383, including interest from 10.14% to 13.18%		12,980		14,643

2011	1	Monthly payments of $1,112, including interest of 12.17%		38		110

2012	2	Monthly payments from $73,954 to $126,969, including interest from 7.00% to 11.275%		25,891		17,741

2015	1	Monthly payments of $20,991, including interest of 11.13%		2,016		1,995

2016	1	Monthly payments of $7,355, including interest of 10.50%		40		841

2018	1	Monthly payments of $52,708, including interest of 5.75%		11,000		11,000

2020	1	Monthly payments of $39,730, including interest of 9.632%		4,500		4,478


		Totals	$	143,574	$	141,467

3. Allowance for Loan Losses

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


	Year Ended December 31
	2005		2004			2003
Balance at beginning of year	$	5,261	$	7,825		$	4,955
Provision for loan losses		1,200		1,200			2,870
Charge-offs				(3,764	)

Balance at end of year	$	6,461	$	5,261		$	7,825

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


	December 31
	2005		2004		2003
Balance of impaired loans at year end	$	16,770	$	35,918	$	30,523
Allowance for loan losses		6,461		5,261		7,825

Balance of impaired loans not reserved	$	10,309	$	30,657	$	22,698

Average impaired loans for the year	$	26,344	$	33,221	$	22,917

Interest income recognized on non-accrual loans was $2,391,000 for the year ended December 31, 2005. We did not recognize any interest on non-accrual loans for the years ended December 31, 2004 and 2003.

HEALTH CARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4. Real Property Owned

The following table summarizes certain information about our real property owned as of December 31, 2005 (dollars in thousands):


	Number of				Building &		Total		Accumulated
	Facilities		Land		Improvements		Investment		Depreciation
Assisted Living Facilities:
Arizona		4	$	2,100	$	17,563	$	19,663	$	1,917
California		9		8,950		56,323		65,273		6,338
Colorado		1		940		3,721		4,661		395
Connecticut		6		8,690		46,660		55,350		7,064
Delaware		1		560		21,220		21,780		690
Florida		19		9,387		95,168		104,555		15,899
Georgia		2		1,080		3,688		4,768		341
Idaho		3		1,125		14,875		16,000		943
Indiana		2		220		5,520		5,740		685
Kansas		1		600		10,590		11,190		351
Kentucky		1		490		7,610		8,100		512
Louisiana		1		1,100		10,161		11,261		3,045
Maryland		2		870		9,155		10,025		664
Massachusetts		7		8,160		62,490		70,650		3,200
Mississippi		2		1,080		13,470		14,550		1,117
Montana		3		1,460		14,772		16,232		1,256
Nevada		3		1,820		25,126		26,946		2,711
New Jersey		3		2,040		16,855		18,895		3,566
New York		2		880		12,992		13,872		971
North Carolina		41		15,862		181,932		197,794		17,637
Ohio		9		4,504		40,601		45,105		6,988
Oklahoma		16		1,928		24,346		26,274		6,466
Oregon		4		1,767		16,249		18,016		2,344
Pennsylvania		3		2,434		14,835		17,269		1,198
South Carolina		7		2,452		31,741		34,193		3,832
Tennessee		6		2,376		17,376		19,752		3,214
Texas		20		5,366		72,749		78,115		9,810
Utah		2		1,420		12,842		14,262		1,071
Virginia		5		2,674		40,486		43,160		1,672
Washington		6		5,150		24,286		29,436		2,149
Wisconsin		1		420		4,006		4,426		420
Construction in progress		2						1,793
Assets held for sale		1						11,912

		195		97,905		929,408		1,041,018		108,466

HEALTH CARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Number of				Building &		Total		Accumulated
	Facilities		Land		Improvements		Investment		Depreciation
Skilled Nursing Facilities:
Alabama		8	$	3,000	$	41,419	$	44,419	$	3,198
Arizona		3		2,050		19,966		22,016		1,011
California		1		1,460		3,942		5,402		1,534
Colorado		4		3,460		31,246		34,706		1,600
Connecticut		4		2,170		9,801		11,971		276
Florida		38		18,722		236,592		255,314		22,869
Georgia		3		2,650		14,932		17,582		867
Idaho		3		2,010		20,662		22,672		4,745
Illinois		4		1,110		24,700		25,810		5,795
Indiana		6		1,824		30,459		32,283		4,043
Kansas		1		1,120		8,360		9,480
Kentucky		10		3,015		65,432		68,447		2,447
Louisiana		6		543		29,257		29,800		81
Maryland		1		390		4,010		4,400		384
Massachusetts		25		21,588		213,632		235,220		24,100
Mississippi		11		1,625		52,651		54,276		4,694
Missouri		3		1,247		23,827		25,074		3,954
Nevada		1		182		2,503		2,685		587
New Hampshire		1		340		4,360		4,700		62
New Jersey		1		1,850		3,050		4,900		134
Ohio		12		7,086		117,295		124,381		9,374
Oklahoma		2		954		11,190		12,144		1,621
Oregon		1		300		5,316		5,616		1,273
Pennsylvania		3		2,979		19,839		22,818		4,309
Tennessee		21		8,250		117,584		125,834		12,428
Texas		15		8,347		69,545		77,892		3,204
Utah		1		991		6,850		7,841
Virginia		2		1,891		7,312		9,203		770
Construction in progress		1						911

		192		101,154		1,195,732		1,297,797		115,360

HEALTH CARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Number of				Building &		Total		Accumulated
	Facilities		Land		Improvements		Investment		Depreciation
Independent Living/CCRC Facilities:
Arizona		2	$	3,533	$	24,823	$	28,356	$	4,510
California		6		17,200		109,625		126,825
Florida		3		6,842		66,832		73,674		7,301
Georgia		3		3,256		24,759		28,015		7,412
Idaho		1		550		14,740		15,290		1,256
Illinois		1		670		6,780		7,450		752
Indiana		1		175		7,305		7,480		1,480
Nevada		1		1,144		10,831		11,975		3,612
New York		1		1,510		9,490		11,000		963
North Carolina		2		3,120		19,980		23,100
South Carolina		4		7,190		61,675		68,865		809
Texas		2		5,670		16,620		22,290		2,522
Washington		1		620		4,780		5,400		278
Construction in progress								1,202

		28		51,480		378,240		430,922		30,895

Specialty Care Facilities:
Illinois		1		3,650		16,582		20,232		2,147
Massachusetts		3		3,425		61,941		65,366		15,077
Ohio		1		3,020		27,445		30,465		2,261
Oklahoma		1		146		3,854		4,000		57
Texas		4		456		46,544		47,000		612

		10		10,697		156,366		167,063		20,154

Total Real Property Owned		425	$	261,236	$	2,659,746	$	2,936,800	$	274,875

At December 31, 2005, future minimum lease payments receivable under operating leases are as follows (in thousands):


2006	$	286,047
2007		289,764
2008		293,387
2009		296,410
2010		298,296
Thereafter		2,276,510

Totals	$	3,740,414

We purchased $3,908,000, $8,500,000 and $12,433,000 of real property that had previously been financed by the Company with loans in 2005, 2004 and 2003, respectively. We converted $29,238,000 of completed construction projects into operating lease properties in 2005. We acquired properties which included the assumption of mortgages totaling $22,309,000, $14,555,000 and $101,243,000 in 2005, 2004 and 2003, respectively. We issued $26,050,000 of preferred stock relating to acquisitions in 2003. Certain of our 2005 acquisitions included deferred acquisition payments totaling $18,125,000. These non-cash activities are appropriately not reflected in the accompanying statements of cash flows.

During the year ended December 31, 2004, it was determined that the projected undiscounted cash flows from a property did not exceed its related net book value and an impairment charge of $314,000 was recorded to reduce the property to its estimated fair market value. The estimated fair market value was determined by an offer to purchase received from a third party. During the year ended December 31, 2003, it was determined that the projected undiscounted cash flows from a property did not exceed its related net book value and an impairment charge of $2,792,000 was recorded to reduce the property to its estimated fair market value. The estimated fair market value of the property was determined by an independent appraisal. We did not record any impairment charges during the year ended December 31, 2005.

HEALTH CARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

At December 31, 2005, we had $11,912,000 related to assets held for sale. See Note 15 for further discussion of discontinued operations.

5. Concentration of Risk

As of December 31, 2005, long-term care facilities, which include skilled nursing, independent living/continuing care retirement communities and assisted living facilities, comprised 93% (93% at December 31, 2004) of our real estate investments and were located in 36 states. The following table summarizes certain information about our operator concentration as of December 31, 2005 (dollars in thousands):


	Number of		Total		Percent of
	Facilities		Investments(1)		Investment(2)
Concentration by investment:
Emeritus Corporation		50	$	362,832		13	%
Merrill Gardens L.L.C.		13		204,907		7	%
Southern Assisted Living, Inc.		43		195,794		7	%
Life Care Centers of America, Inc.		23		195,129		7	%
Commonwealth Communities Holdings LLC		13		190,558		7	%
Remaining operators (49)		300		1,709,209		59	%

Totals		442	$	2,858,429		100	%


	Number of		Total		Percent of
	Facilities		Revenues(3)		Revenue(4)
Concentration by revenue:
Emeritus Corporation		50	$	35,425		12	%
Commonwealth Communities Holdings LLC		13		26,734		9	%
Southern Assisted Living, Inc.		43		24,611		8	%
Home Quality Management, Inc.		30		22,679		8	%
Delta Health Group, Inc.		25		17,096		6	%
Remaining operators (49)		281		164,609		57	%

Totals		442	$	291,154		100	%


(1)		Investments include real estate investments and credit enhancements which amounted to $2,855,979,000 and $2,450,000, respectively.

(2)		Investments with top five operators comprised 45% of total investments at December 31, 2004.

(3)		Revenues include gross revenues and revenues from discontinued operations for the year ended December 31, 2005.

(4)		Revenues from top five operators were 46% and 41% for the years ended December 31, 2004 and 2003, respectively.

HEALTH CARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

6. Borrowings Under Lines of Credit Arrangements and Related Items

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


	Year Ended December 31
	2005			2004			2003
Balance outstanding at December 31	$	195,000		$	151,000		$	0
Maximum amount outstanding at any month end	$	318,000		$	159,000		$	156,900
Average amount outstanding (total of daily principal balances divided by days in year)	$	181,232		$	54,770		$	61,677
Weighted average interest rate (actual interest expense divided by average borrowings outstanding)		5.19	%		5.32	%		4.65	%

7. Senior Unsecured Notes and Secured Debt

We have $1,198,278,000 of senior unsecured notes with annual interest rates ranging from 5.88% to 8.00%. The carrying amounts of the senior unsecured notes represent the par value of $1,194,830,000 adjusted for any unamortized premiums or discounts and other basis adjustments related to hedging the debt with derivative instruments. See Note 1 for further discussion regarding derivative instruments.

We have mortgage loans totaling $107,540,000, collateralized by owned properties with annual interest rates ranging from 5.80% to 8.50%. The carrying values of the properties securing the mortgage loans totaled $167,230,000 at December 31, 2005.

At December 31, 2005, the annual principal payments on these long-term obligations are as follows (in thousands):


	Senior		Mortgage
	Unsecured Notes		Loans		Totals
2006	$	0	$	2,596	$	2,596
2007		52,500		14,544		67,044
2008		42,330		9,725		52,055
2009				33,207		33,207
2010				8,094		8,094
2011				19,791		19,791
2012		250,000		14,126		264,126
Thereafter		850,000		5,457		855,457

Totals	$	1,194,830	$	107,540	$	1,302,370

HEALTH CARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

8. Stock Incentive Plans

Our 2005 Long-Term Incentive Plan authorizes up to 2,200,000 shares of common stock to be issued at the discretion of the Compensation Committee of the Board of Directors. The 2005 Plan replaced the 1995 Stock Incentive Plan and the Stock Plan for Non-Employee Directors. The options granted to officers and key employees under the 1995 Plan continue to vest through 2015 and expire ten years from the date of grant. Our non-employee directors, officers and key employees are eligible to participate in the 2005 Plan. The 2005 Plan allows for the issuance of, among other things, stock options, restricted stock, deferred stock units and dividend equivalent rights. There were no dividend equivalent rights outstanding under the 1995 Plan for 2003.

The following summarizes the activity in the plans (shares in thousands):


	Year Ended December 31
	2005					2004					2003
	Number			Average		Number			Average		Number			Average
	of			Exercise		of			Exercise		of			Exercise
Stock Options	Shares			Price		Shares			Price		Shares			Price
Options at beginning of year		1,015		$	24.86		1,503		$	23.15		1,606		$	21.99
Options granted		60			34.88		112			36.92		340			25.82
Options exercised		(380	)		22.84		(600	)		22.83		(420	)		20.95
Options terminated		(10	)		25.24							(23	)		22.35

Options at end of year		685		$	26.87		1,015		$	24.86		1,503		$	23.15

Options exercisable at end of year		257		$	23.16		639		$	23.54		817		$	22.69
Weighted average fair value of options granted during the year				$	12.48				$	12.09				$	1.74

Vesting periods for options and restricted shares range from three years for directors to five years for officers and key employees. Options expire ten years from the date of grant. We granted 85,000, 112,000 and 110,000 restricted shares during 2005, 2004 and 2003, respectively, including 16,000, 10,000 and 12,000 shares to non-employee directors in 2005, 2004 and 2003, respectively. Expense, which is recognized as the shares vest based on the market value at the date of the award, totaled $2,948,000, $2,887,000 and $2,157,000, in 2005, 2004 and 2003, respectively.

The following table summarizes information about stock options outstanding at December 31, 2005 (options in thousands):


	Options Outstanding
					Weighted		Options Exercisable
Range of Per			Weighted		Average				Weighted
Share Exercise	Number		Average		Remaining		Number		Average
Prices	Outstanding		Exercise Price		Contract Life		Exercisable		Exercise Price
$16–$20		92	$	16.81		4.0		92	$	16.81
$20–$25		191		24.42		5.0		98		24.42
$25–$30		229		25.90		6.6		43		26.27
$30–$40		173		36.21		8.4		24		36.88

Totals		685	$	26.87		6.3		257	$	23.16

9. Other Equity

Other equity consists of the following (in thousands):


	December 31
	2005			2004			2003
Accumulated compensation expense related to stock options	$	864		$	552		$	173
Unamortized restricted stock		(521	)		(1,249	)		(2,198	)

Totals	$	343		$	(697	)	$	(2,025	)

HEALTH CARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Unamortized restricted stock represents the unamortized value of restricted stock granted to employees and non-employee directors prior to January 1, 2003. Expense related to these grants, which is recognized as the shares vest based on the market value at the date of the award, totaled $728,000, $949,000 and $1,182,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

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

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


	Year Ended December 31
	2005		2004		2003
Numerator:
Net income available to common stockholders — as reported	$	62,692	$	72,634	$	70,732
Deduct: Additional stock-based employee compensation expense determined under fair value based method for all awards		181		274		405

Net income available to common stockholders — pro forma	$	62,511	$	72,360	$	70,327

Denominator:
Basic weighted average shares — as reported and pro forma		54,110		51,544		43,572
Effect of dilutive securities:
Employee stock options — pro forma				365		388
Non-vested restricted shares		208		161		202

Dilutive potential common shares		208		526		590

Diluted weighted average shares — pro forma		54,318		52,070		44,162


Net income available to common stockholders per share — as reported
Basic	$	1.16	$	1.41	$	1.62

Diluted	$	1.15	$	1.39	$	1.60


Net income available to common stockholders per share — pro forma
Basic	$	1.16	$	1.40	$	1.61

Diluted	$	1.15	$	1.39	$	1.59

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


	2005			2004			2003
Dividend yield(1)		0.0	%		0.6	%		9.1	%
Expected volatility		22.8	%		22.4	%		25.2	%
Risk-free interest rate		4.25	%		4.11	%		3.73	%
Expected life (in years)		7			7			7
Weighted-average fair value(1)	$	12.48		$	12.09		$	1.74


(1)		Options granted to employees in 2005 and 2004 include dividend equivalent rights. These options are assumed to have a dividend yield of 0% for purposes of the Black-Scholes-Merton option pricing model and result in higher fair values than options without dividend equivalent rights.

HEALTH CARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

10. Preferred Stock

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

In September 2003, we issued 1,060,000 shares of 6% Series E Cumulative Convertible and Redeemable Preferred Stock as partial consideration for an acquisition of assets by the Company, with the shares valued at $26,500,000 for such purposes. The shares were issued to Southern Assisted Living, Inc. and certain of its stockholders without registration in reliance upon the federal statutory exemption of Section 4(2) of the Securities Act of 1933, as amended. The shares have a liquidation value of $25.00 per share. Dividends are payable quarterly in arrears. The preferred stock, which has no stated maturity, may be redeemed by us at a redemption price of $25.00 per share, plus accrued and unpaid dividends on such shares to the redemption date, on or after August 15, 2008. The preferred shares are convertible into common stock at a conversion price of $32.66 per share at any time. During the year ended December 31, 2005, certain holders of our Series E Preferred Stock converted 275,056 shares into 210,541 shares of our common stock, leaving 74,989 of such shares outstanding at December 31, 2005.

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

11. Income Taxes and Distributions

To qualify as a real estate investment trust for federal income tax purposes, 90% of taxable income (including 100% of capital gains) must be distributed to stockholders. Real estate investment trusts that do not distribute a certain amount of current year taxable income in the current year are also subject to a 4% federal excise tax. The principal differences between undistributed net income for federal income tax purposes and financial statement purposes are the recognition of straight-line rent for reporting purposes, differing useful lives and depreciation methods for real property and the provision for loan losses for reporting purposes versus bad debt expense for tax purposes.

Cash distributions paid to common stockholders, for federal income tax purposes, are as follows:


	Year Ended December 31
	2005		2004		2003
Per Share:
Ordinary income	$	1.266	$	1.189	$	1.365
Return of capital		1.194		1.196		0.896
Capital gains						0.079

Totals	$	2.460	$	2.385	$	2.340

12. Commitments and Contingencies

HEALTH CARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

At December 31, 2005, we had outstanding construction financings of $3,906,000 for leased properties and were committed to providing additional financing of approximately $36,519,000 to complete construction. At December 31, 2005, we had contingent purchase obligations totaling $44,930,000. These contingent purchase obligations primarily relate to deferred acquisition fundings and capital improvements. Deferred acquisition fundings are contingent upon an operator satisfying certain conditions such as payment coverage and value tests. Amounts due from the tenant are increased to reflect the additional investment in the property.

At December 31, 2005, we had operating lease obligations of $14,257,000 relating to Company office space, six assisted living facilities and three skilled nursing facilities. We incurred rental expense relating to our Company office space of $283,000, $292,000 and $348,000 for the years ended December 31, 2005, 2004 and 2003, respectively. Regarding the facility leases, we have sublease agreements with certain of our operators that require the operators to reimburse us for our monthly operating lease obligations. At December 31, 2005, aggregate future minimum rentals to be received under these noncancelable subleases totaled $14,185,000.

At December 31, 2005, future minimum lease payments due under operating leases are as follows (in thousands):


2006	$	1,275
2007		1,066
2008		928
2009		928
2010		929
Thereafter		9,131

Totals	$	14,257

13. Earnings Per Share

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


	Year Ended December 31
	2005		2004		2003
Numerator for basic and diluted earnings per share — net income available to common stockholders	$	62,692	$	72,634	$	70,732

Denominator for basic earnings per share — weighted average shares		54,110		51,544		43,572
Effect of dilutive securities:
Employee stock options		181		377		427
Non-vested restricted shares		208		161		202

Dilutive potential common shares		389		538		629

Denominator for diluted earnings per share — adjusted weighted average shares		54,499		52,082		44,201

Basic earnings per share	$	1.16	$	1.41	$	1.62

Diluted earnings per share	$	1.15	$	1.39	$	1.60

The diluted earnings per share calculation excludes the dilutive effect of 112,000, 112,000 and 0 options for 2005, 2004 and 2003, respectively, because the exercise price was greater than the average market price. The Series C Cumulative Convertible Preferred Stock was not included in the calculations for 2003 as the effect of the conversions was anti-dilutive. The Series E Cumulative Convertible and Redeemable Preferred Stock was not included in the calculations for 2005, 2004 and 2003 as the effect of the conversions was anti-dilutive.

14. Disclosure about Fair Value of Financial Instruments

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

HEALTH CARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

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

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

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

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

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

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

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

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


	December 31, 2005				December 31, 2004
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial Assets:
Mortgage loans receivable	$	141,467	$	150,105	$	155,266	$	165,551
Working capital loans		52,587		52,587		100,820		100,820
Construction loans						720		720
Cash and cash equivalents		36,237		36,237		19,763		19,763
Interest rate swap agreements		2,211		2,211		4,206		4,206
Equity investments						1		1
Financial Liabilities:
Borrowings under lines of credit arrangements	$	195,000	$	195,000	$	151,000	$	151,000
Senior unsecured notes		1,198,278		1,271,370		881,733		1,068,132
Mortgage loans payable		107,540		107,540		160,225		160,225

15. Discontinued Operations

In August 2001, the Financial Accounting Standards Board issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which is effective for fiscal years beginning after December 15, 2001. We adopted the standard effective January 1, 2002.

HEALTH CARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

During the years ended December 31, 2003, 2004 and 2005, we sold properties with carrying values of $61,316,000, $37,710,000 and $88,098,000 for net gains of $4,139,000, net losses of $143,000, and net gains of $3,227,000, respectively. During the three months ended March 31, 2006, we sold properties with carrying values of $15,393,000 for a net gain of $1,553,000. Also, at March 31, 2006, three assisted living facilities and one skilled nursing facility were classified as held for sale. In accordance with Statement No. 144, we have reclassified the income and expenses attributable to these properties to discontinued operations. Expenses include an allocation of interest expense based on property carrying values and our weighted average cost of debt. The following illustrates the reclassification impact of Statement No. 144 as a result of classifying the properties as discontinued operations (in thousands):


	Year Ended December 31
	2005		2004		2003
Revenues:
Operating lease rents	$	11,808	$	16,860	$	24,770
Expenses:
Interest expense		3,215		4,560		6,774
Provision for depreciation		5,661		7,904		10,131

Income from discontinued operations, net	$	2,932	$	4,396	$	7,865

16. Retirement Arrangements

We have a Retirement Plan and Trust (the “401(k) Plan”) covering all eligible employees. Under the 401(k) Plan, eligible employees may make contributions, and we may make matching contributions and a profit sharing contribution. Our contributions to this 401(k) Plan totaled $337,000, $289,000 and $206,000 in 2005, 2004 and 2003, respectively.

We have a Supplemental Executive Retirement Plan (“SERP”), a non-qualified defined benefit pension plan, which provides certain executive officers with supplemental deferred retirement benefits. The SERP provides an opportunity for participants to receive retirement benefits that cannot be paid under our tax-qualified plans because of the restrictions imposed by ERISA and the Internal Revenue Code of 1986, as amended. Benefits are based on compensation and length of service and the SERP is unfunded. No contributions by the Company are anticipated for the 2005 fiscal year. No benefit payments are expected to occur during the next five fiscal years and total $778,000 during the succeeding five fiscal years. We use a December 31 measurement date for the SERP. The accrued liability on our balance sheet for the SERP was $1,032,000 at December 31, 2005 ($703,000 at December 31, 2004).

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


	Year Ended December 31
	2005		2004
Reconciliation of benefit obligation:
Obligation at January 1	$	729	$	454
Service cost		286		262
Interest cost		44		28
Actuarial (gain)/loss		196		(15	)

Obligation at December 31	$	1,255	$	729


	December 31
	2005			2004
Funded status:
Funded status at December 31	$	(1,255	)	$	(729	)
Unrecognized (gain)/loss		223			26

Prepaid/(accrued) benefit cost	$	(1,032	)	$	(703	)

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


	Year Ended December 31
	2005		2004
Service cost	$	286	$	262
Interest cost		44		28

Net periodic benefit cost	$	330	$	290

HEALTH CARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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


	December 31
	2005		2004
Projected benefit obligation	$	1,255	$	729
Accumulated benefit obligation		831		529
Fair value of assets		n/a		n/a

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

Benefit Obligations

Net Periodic Benefit Cost

December 31

Year Ended December 31

2005

2004

2005

2004

Discount rate

5.75

6.00

6.00

6.25

Rate of compensation increase

4.00

4.25

4.25

4.50

Expected long-term return on plan assets

n/a

n/a

n/a

n/a

17. Quarterly Results of Operations (Unaudited)

The following is a summary of our unaudited quarterly results of operations for the years ended December 31, 2005 and 2004 (in thousands, except per share data):

Year Ended December 31, 2005

1st

2nd

3rd

4th

Quarter

Quarter(2)

Quarter

Revenues — as reported

68,379

68,607

73,065

77,967

Discontinued operations

(3,180

)

(3,214

)

(1,728

)

(550

)

Revenues — as adjusted(1)

65,199

65,393

71,337

77,417

Net income (loss) available to common stockholders

17,803

(1,606

)

19,908

26,587

Net income (loss) available to common stockholders per share:

Basic

0.34

(0.03

)

0.37

0.47

Diluted

0.33

(0.03

)

0.37

0.47


	Year Ended December 31, 2004
	1st			2nd			3rd			4th
	Quarter			Quarter			Quarter			Quarter(3)
Revenues — as reported	$	60,961		$	59,334		$	63,629		$	68,794
Discontinued operations		(4,947	)		(4,093	)		(3,530	)		(3,431	)

Revenues — as adjusted (1)	$	56,014		$	55,241		$	60,099		$	65,363

Net income available to common stockholders	$	18,655		$	19,207		$	19,004		$	15,767

Net income available to common stockholders per share:
Basic	$	0.37		$	0.37		$	0.37		$	0.30
Diluted		0.36			0.37			0.37			0.30


(1)		In accordance with FASB Statement No. 144, we have reclassified the income attributable to the properties sold subsequent to January 1, 2002 through March 31, 2006 and attributable to the properties held for sale at March 31, 2006 to discontinued operations. See Note 15.

(2)		The net loss and amounts per share are primarily attributable to the loss on extinguishment of debt recorded in second quarter 2005.

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

HEALTH CARE REIT, INC.

SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2005


									Gross Amount at Which
			Initial Cost to Company				Cost Capitalized		Carried at Close of Period
(Dollars in thousands)					Buildings &		Subsequent to				Buildings &		Accumulated		Year		Year
Description	Encumbrances		Land		Improvements		Acquisition		Land		Improvements		Depreciation		Acquired		Built
Assisted Living Facilities:
Alhambra, CA	$	0	$	420	$	2,534	$	0	$	420	$	2,534	$	338		1999		1999
Amarillo, TX				390		5,100				390		5,100		168		2004		1996
Asheboro, NC(3)		3,617		290		5,032		21		290		5,053		321		2003		1998
Asheville, NC				204		3,489				204		3,489		692		1999		1999
Asheville, NC				280		1,955		351		280		2,306		162		2003		1992
Auburn, MA(1)		4,633		1,050		7,950				1,050		7,950		533		2003		1997
Azusa, CA				570		3,141				570		3,141		439		1998		1988
Baltimore, MD				510		4,515				510		4,515		356		2003		1999
Bartlesville, OK				100		1,380				100		1,380		393		1996		1995
Beaumont, TX				520		6,050				520		6,050		210		2004		1997
Bellingham, WA				300		3,200				300		3,200		197		2003		1994
Bluffton, SC				700		5,598		3,085		700		8,683		991		1999		2000
Bradenton, FL				252		3,298				252		3,298		955		1996		1995
Bradenton, FL				100		1,700		801		100		2,501		689		1999		1996
Brandon, FL				860		7,140				860		7,140		421		2003		1990
Brick, NJ				1,300		9,394		14		1,300		9,408		2,771		1999		2000
Burlington, NC				280		4,297		707		280		5,004		307		2003		2000
Burlington, NC(3)		2,835		460		5,501		5		460		5,506		348		2003		1997
Butte, MT				550		3,957		43		550		4,000		556		1998		1999
Canton, OH				300		2,098				300		2,098		424		1998		1998
Cape Coral, FL				530		3,281				530		3,281		345		2002		2000
Cary, NC				1,500		4,350		986		1,500		5,336		955		1998		1996
Cedar Hill, TX				171		1,490				171		1,490		392		1997		1996
Chapel Hill, NC				354		2,646		783		354		3,429		296		2002		1997
Chelmsford, MA(2)		9,256		1,040		10,960				1,040		10,960		654		2003		1997
Chickasha, OK				85		1,395				85		1,395		390		1996		1996
Chubbuck, ID				125		5,375				125		5,375		338		2003		1996
Claremore, OK				155		1,428				155		1,428		374		1996		1996
Clarksville, TN				330		2,292				330		2,292		458		1998		1998
Clermont, FL				350		5,232		449		350		5,681		1,538		1996		1997
Coeur D’ Alene, ID				530		7,570				530		7,570		472		2003		1987
Columbia, TN				341		2,295				341		2,295		452		1999		1999
Concord, NC(3)		4,801		550		3,921		78		550		3,999		279		2003		1997
Corpus Christi, TX				155		2,935		15		155		2,950		1,024		1997		1996
Corpus Christi, TX				420		4,796		139		420		4,935		2,189		1996		1997
Danville, VA				410		3,954		722		410		4,676		299		2003		1998
Dayton, OH				690		2,970		1,365		690		4,335		482		2003		1994
Desoto, TX				205		1,383				205		1,383		354		1996		1996
Duncan, OK				103		1,347				103		1,347		369		1995		1996
Durham, NC				1,476		10,659		2,196		1,476		12,855		3,843		1997		1999
Easley, SC				250		3,266				250		3,266		258		2003		1999
Eden, NC(3)		3,117		390		5,039		89		390		5,128		320		2003		1998
Edmond, OK				175		1,564				175		1,564		420		1995		1996
Elizabeth City, NC				200		2,760		2,011		200		4,771		677		1998		1999
Encinitas, CA				1,460		7,721				1,460		7,721		1,189		2000		2000
Enid, OK				90		1,390				90		1,390		395		1995		1995
Eugene, OR				600		5,150				600		5,150		544		2002		2000
Everett, WA				1,400		5,476				1,400		5,476		1,007		1999		1999
Fairfield, CA				1,460		14,040				1,460		14,040		1,504		2002		1998
Fairhaven, MA				770		6,230				770		6,230		290		2004		1999
Fayetteville, NY				410		3,962		500		410		4,462		459		2001		1997
Federal Way, WA				540		3,960				540		3,960		244		2003		1978
Findlay, OH				200		1,800				200		1,800		438		1997		1997
Flagstaff, AZ				540		4,460				540		4,460		281		2003		1999
Florence, NJ				300		2,978				300		2,978		311		2002		1999
Forest City, NC(3)		3,190		320		4,576		51		320		4,627		297		2003		1999
Fort Myers, FL				440		2,560				440		2,560		166		2003		1980
Fort Worth, TX				65		3,790		91		65		3,881		1,387		1996		1984
Fredricksburg, VA(4)		7,678		1,000		20,000				1,000		20,000		393		2005		1999
Gaffney, SC				200		1,892				200		1,892		167		2003		1999
Gastonia, NC(3)		4,244		470		6,129		9		470		6,138		387		2003		1998
Gastonia, NC(3)		1,977		310		3,096		38		310		3,134		211		2003		1994
Gastonia, NC(3)		3,951		400		5,029				400		5,029		324		2003		1996
Georgetown, TX				200		2,100				200		2,100		499		1997		1997
Grand Terrace, CA				530		2,770				530		2,770		109		2004		1982
Greensboro, NC				330		2,970		554		330		3,524		231		2003		1996
Greensboro, NC				560		5,507		1,013		560		6,520		424		2003		1997
Greenville, NC(3)		3,710		290		4,393		20		290		4,413		281		2003		1998
Greenville, SC				310		4,750				310		4,750		175		2004		1997
Hagerstown, MD				360		4,640				360		4,640		308		2003		1999
Haines City, FL				80		1,937		174		80		2,111		658		1999		1999
Hamden, CT				1,470		4,530				1,470		4,530		543		2002		1998


									Gross Amount at Which
			Initial Cost to Company				Cost Capitalized		Carried at Close of Period
(Dollars in thousands)					Buildings &		Subsequent to				Buildings &		Accumulated		Year		Year
Description	Encumbrances		Land		Improvements		Acquisition		Land		Improvements		Depreciation		Acquired		Built
Hamilton, NJ	$	0	$	440	$	4,469	$	0	$	440	$	4,469	$	484		2001		1998
Harlingen, TX				92		2,057		127		92		2,184		721		1997		1989
Hattiesburg, MS				560		5,790				560		5,790		650		2002		1998
Henderson, NV				380		9,220		65		380		9,285		1,722		1998		1998
Henderson, NV				380		4,360		41		380		4,401		602		1999		2000
Hickory, NC				290		987		232		290		1,219		107		2003		1994
High Point, NC				560		4,443		793		560		5,236		337		2003		2000
High Point, NC				370		2,185		410		370		2,595		179		2003		1999
High Point, NC(3)		2,714		330		3,395		34		330		3,429		223		2003		1994
High Point, NC(3)		3,062		430		4,147		3		430		4,150		268		2003		1998
Highlands Ranch, CO				940		3,721				940		3,721		395		2002		1999
Hilton Head Island, SC				510		6,037		2,380		510		8,417		1,207		1998		1999
Hopedale, MA				130		8,170				130		8,170		199		2005		1999
Houston, TX				360		2,640				360		2,640		241		2002		1999
Houston, TX				360		2,640				360		2,640		238		2002		1999
Hutchinson, KS				600		10,590				600		10,590		351		2004		1997
Jackson, TN				540		1,633		177		540		1,810		145		2003		1998
Jonesboro, GA				460		1,304				460		1,304		94		2003		1992
Kalispell, MT				360		3,282				360		3,282		649		1998		1998
Kenner, LA				1,100		10,036		125		1,100		10,161		3,045		1998		2000
Kikland, WA(2)		5,066		1,880		4,320				1,880		4,320		274		2003		1996
Knoxville, TN				314		2,756				314		2,756		242		2002		1998
Lake Havasu City, AZ				450		4,223				450		4,223		757		1998		1999
Lake Havasu City, AZ				110		2,244		136		110		2,380		464		1998		1994
Lake Wales, FL				80		1,939		172		80		2,111		660		1999		1999
Lakeland, FL				520		4,580				520		4,580		284		2003		1991
Lakewood, NY				470		8,530				470		8,530		513		2003		1999
Lawton, OK				144		1,456				144		1,456		395		1995		1996
Lecanto, FL				200		6,900				200		6,900		243		2004		1986
Lenoir, NC				190		3,748		641		190		4,389		281		2003		1998
Lexington, NC				200		3,900		1,015		200		4,915		415		2002		1997
Litchfield, CT				660		9,652		208		660		9,860		3,750		1997		1998
Longview, TX				320		4,440				320		4,440		156		2004		1997
Louisville, KY(1)		3,444		490		7,610				490		7,610		512		2003		1997
Lubbock, TX				280		6,220		1,255		280		7,475		385		2003		1996
Manassas, VA(2)		3,855		750		7,450				750		7,450		452		2003		1996
Margate, FL				500		7,303		2,459		500		9,762		3,656		1998		1972
Martinsville, NC				349						349						2003
Marysville, CA				450		4,172		44		450		4,216		588		1998		1999
Matthews, NC(3)		3,897		560		4,869		182		560		5,051		323		2003		1998
Middleburg Heights, OH				960		7,780				960		7,780		263		2004		1998
Middleton, WI				420		4,006				420		4,006		420		2001		1991
Middletown, OH				800		3,700				800		3,700		159		2004		2000
Midland, TX				400		4,930				400		4,930		168		2004		1997
Midwest City, OK				95		1,385				95		1,385		394		1996		1995
Missoula, MT(5)		6,660		550		7,490				550		7,490		52		2005		1998
Monroe, NC				470		3,681		648		470		4,329		285		2003		2001
Monroe, NC				310		4,799		857		310		5,656		349		2003		2000
Monroe, NC(3)		3,387		450		4,021		12		450		4,033		269		2003		1997
Morehead City, NC				200		3,104		1,648		200		4,752		663		1999		1999
Morristown, TN				400		3,808		155		400		3,963		932		1998		1999
Moses Lake, WA				260		5,940				260		5,940		371		2003		1986
Newark, DE				560		21,220				560		21,220		690		2004		1998
Newark, OH				410		5,711		312		410		6,023		1,770		1998		1987
Newburyport, MA				960		8,290				960		8,290		795		2002		1999
Norman, OK				55		1,484				55		1,484		482		1995		1995
North Augusta, SC				332		2,558				332		2,558		496		1999		1998
North Miami Beach, FL				300		5,709		2,006		300		7,715		2,685		1998		1987
North Oklahoma City, OK				87		1,508				87		1,508		389		1996		1996
Oak Ridge, TN				450		4,066		196		450		4,262		985		1998		1999
Ocean Shores, WA				770		1,390				770		1,390		56		2004		1996
Ogden, UT				360		6,700				360		6,700		229		2004		1998
Oklahoma City, OK				130		1,350				130		1,350		374		1995		1996
Oklahoma City, OK				220		2,943				220		2,943		502		1999		1999
Ontario, OR				90		2,110				90		2,110		130		2003		1985
Orange City, FL				80		2,239		273		80		2,512		822		1999		1998
Orlando, FL				1,390		4,630				1,390		4,630		191		2004		1973
Owasso, OK				215		1,380				215		1,380		360		1996		1996
Palestine, TX				173		1,410				173		1,410		370		1996		1996
Paso Robles, CA				1,770		8,630				1,770		8,630		918		2002		1998
Phoenix, AZ				1,000		6,500				1,000		6,500		414		2003		1999
Pinehurst, NC				290		2,690		484		290		3,174		216		2003		1998
Piqua, OH				204		1,885				204		1,885		408		1997		1997
Pittsburgh, PA				1,750		8,572				1,750		8,572		182		2005		1998
Pocatello, ID				470		1,930				470		1,930		133		2003		1991
Ponca City, OK				114		1,536				113		1,537		437		1995		1995
Portland, OR				628		3,585		232		628		3,817		680		1998		1999
Quincy, MA				2,690		15,410				2,690		15,410		406		2004		1999


									Gross Amount at Which
			Initial Cost to Company				Cost Capitalized		Carried at Close of Period
(Dollars in thousands)					Buildings &		Subsequent to				Buildings &		Accumulated		Year		Year
Description	Encumbrances		Land		Improvements		Acquisition		Land		Improvements		Depreciation		Acquired		Built
Reidsville, NC	$	0	$	170	$	3,830	$	857	$	170	$	4,687	$	403		2002		1998
Reno, NV				1,060		11,440				1,060		11,440		386		2004		1998
Rheems, PA				200		1,575				200		1,575		112		2003		1996
Ridgeland, MS(2)		4,897		520		7,680				520		7,680		467		2003		1997
Rocky Hill, CT				1,460		7,040				1,460		7,040		765		2002		1998
Rocky Hill, CT(1)		4,752		1,090		6,710				1,090		6,710		455		2003		1996
Roswell, GA				620		2,200		184		620		2,384		247		2002		1997
Salem, OR				449		5,172				449		5,172		989		1999		1998
Salisbury, NC(3)		3,669		370		5,697		57		370		5,754		365		2003		1997
Salt Lake City, UT				1,060		6,142				1,060		6,142		842		1999		1986
San Angelo, TX				260		8,800				260		8,800		291		2004		1997
San Juan Capistrano, CA				1,390		6,942				1,390		6,942		817		2000		2001
Sarasota, FL				475		3,175				475		3,175		919		1996		1995
Sarasota, FL				1,190		4,810				1,190		4,810		315		2003		1988
Seven Fields, PA				484		4,663		25		484		4,688		904		1999		1999
Shawnee, OK				80		1,400				80		1,400		395		1996		1995
Smithfield, NC(3)		3,632		290		5,777		53		290		5,830		366		2003		1998
Statesville, NC				150		1,447		266		150		1,713		116		2003		1990
Statesville, NC(3)		2,945		310		6,183		32		310		6,215		381		2003		1996
Statesville, NC(3)		2,551		140		3,798		34		140		3,832		236		2003		1999
Staunton, VA				140		8,360				140		8,360		528		2003		1999
Stillwater, OK				80		1,400				80		1,400		397		1995		1995
Sunrise, FL				1,480		15,950				1,480		15,950		560		2004		1988
Tewksbury, MA				1,520		5,480				1,520		5,480		324		2003		1989
Texarkana, TX				192		1,403				192		1,403		365		1996		1996
Troy, OH				200		2,000				200		2,000		477		1997		1997
Vacaville, CA				900		6,329				900		6,329		436		2002		2003
Valparaiso, IN				112		2,558				112		2,558		321		2001		1998
Valparaiso, IN				108		2,962				108		2,962		364		2001		1999
Vero Beach, FL				263		3,187				263		3,187		389		2001		1999
Vero Beach, FL				297		3,263				297		3,263		402		2001		1996
W. Hartford, CT				2,650		5,980				2,650		5,980		297		2004		1905
Waco, TX				180		4,500				180		4,500		164		2004		1997
Wake Forest, NC				200		3,003		1,742		200		4,745		738		1998		1999
Walterboro, SC				150		1,838		337		150		2,175		539		1999		1992
Waterford, CT				1,360		12,540				1,360		12,540		1,253		2002		2000
Waxahachie, TX				154		1,429				154		1,429		375		1996		1996
Westerville, OH				740		8,287		2,693		740		10,980		2,567		1998		2001
Wichita Falls, TX				470		3,010				470		3,010		114		2004		1997
Williamsburg, VA				374						374						2003
Wilmington, NC				210		2,991				210		2,991		567		1999		1999
Winston-Salem, NC				360		2,514		459		360		2,973		195		2003		1996

Total Assisted Living Facilities:		107,540		97,906		889,036		40,371		97,905		929,408		108,466
Skilled Nursing Facilities:
Agawam, MA				880		16,112		2,136		880		18,248		1,553		2002		1993
Akron, OH				290		8,219				290		8,219				2005		1961
Amarillo, TX				540		7,260				540		7,260		106		2005		1986
Atlanta, GA				460		5,540				460		5,540		88		2005		1972
Auburndale, FL				750		5,950				750		5,950		90		2005		1983
Baytown, TX				450		6,150				450		6,150		597		2002		2000
Beachwood, OH				1,260		23,478				1,260		23,478		2,612		2001		1990
Beattyville, KY				100		6,900				100		6,900		34		2005		1972
Bernice, LA				16		1,017				16		1,017		5		2005		1969
Birmingham, AL				390		4,902				390		4,902		387		2003		1977
Birmingham, AL				340		5,734				340		5,734		410		2003		1974
Boise, ID				810		5,401				810		5,401		1,362		1998		1966
Boise, ID				600		7,383				600		7,383		1,645		1998		1997
Boonville, IN				190		5,510				190		5,510		569		2002		2000
Bountiful, UT				991		6,850				991		6,850				2005		1987
Boynton Beach, FL				980		8,112				980		8,112		347		2004		1999
Braintree, MA				170		7,157		1,290		170		8,447		3,390		1997		1968
Brandon, MS				115		9,549				115		9,549		714		2003		1963
Bridgewater, NJ				1,850		3,050				1,850		3,050		134		2004		1970
Brighton, MA				240		3,859				240		3,859		74		2005		1982
Broadview Heights, OH				920		12,400				920		12,400		1,383		2001		1984
Bunnell, FL				260		7,118				260		7,118		322		2004		1985
Butler, AL				90		3,510				90		3,510		166		2004		1960
Byrdstown, TN						2,414						2,414		282		2004		1982
Canton, MA				820		8,201		263		820		8,464		853		2002		1993
Carrollton, TX				730		2,770				730		2,770		51		2005		1976
Centerville, MA				1,490		9,650				1,490		9,650		286		2004		1982
Cheswick, PA				384		6,041		1,293		384		7,334		1,594		1998		1933
Clearwater, FL				160		7,218				160		7,218		296		2004		1961
Clearwater, FL				1,260		2,740				1,260		2,740		54		2005		1983
Cleveland, MS						1,850						1,850		463		2003		1977
Cleveland, TN				350		5,000		123		350		5,123		616		2001		1987
Coeur d’Alene, ID				600		7,878				600		7,878		1,738		1998		1996


										Gross Amount at Which
				Initial Cost to Company				Cost Capitalized		Carried at Close of Period
(Dollars in thousands)						Buildings &		Subsequent to				Buildings &		Accumulated		Year		Year
Description	Encumbrances			Land		Improvements		Acquisition		Land		Improvements		Depreciation		Acquired		Built
Colorado Springs, CO		$	0	$	310	$	6,290	$	0	$	310	$	6,290	$	98		2005		1985
Columbia, TN					590		3,787				590		3,787		308		2003		1974
Columbus, IN					530		5,170		1,540		530		6,710		566		2002		2001
Columbus, OH					1,070		11,726				1,070		11,726				2005		1968
Corpus Christi, TX					307		443				307		443		18		2005		1985
Corpus Christi, TX					400		1,916				400		1,916				2005		1985
Dade City, FL					250		7,150				250		7,150		290		2004		1975
Daytona Beach, FL					470		5,930				470		5,930		262		2004		1986
Daytona Beach, FL					490		5,710				490		5,710		262		2004		1961
Daytona Beach, FL					1,850		2,650				1,850		2,650		54		2005		1964
DeBary, FL					440		7,460				440		7,460		301		2004		1965
Dedham, MA					1,790		12,936				1,790		12,936		1,386		2002		1996
DeLand, FL					220		7,080				220		7,080		289		2004		1967
Denton, MD					390		4,010				390		4,010		384		2003		1982
Denver, CO					2,530		9,514				2,530		9,514				2005		1987
Douglasville, GA					1,350		7,471				1,350		7,471		593		2003		1975
Easton, PA					285		6,315				285		6,315		2,606		1993		1959
Eight Mile, AL					410		6,110				410		6,110		505		2003		1973
El Paso, TX					539		8,961				539		8,961		132		2005		1970
El Paso, TX					642		3,958				642		3,958		70		2005		1969
Elizabethton, TN					310		4,604		336		310		4,940		650		2001		1980
Erin, TN					440		8,060		134		440		8,194		946		2001		1981
Eugene, OR					300		5,316				300		5,316		1,273		1998		1972
Fairfield, AL					530		9,134				530		9,134		687		2003		1965
Fall River, MA					620		5,829		4,847		620		10,676		2,038		1996		1973
Falmouth, MA					670		3,145		97		670		3,242		939		1999		1966
Farmerville, LA					147		4,087				147		4,087		12		2005		1984
Florence, AL					320		3,975				320		3,975		353		2003		1972
Fort Myers, FL					636		6,026				636		6,026		1,889		1998		1984
Fort Pierce, FL					440		3,560				440		3,560		28		2005		1973
Gardnerville, NV					182		1,718		785		182		2,503		587		2004		2000
Grand Prairie, TX					574		3,426				574		3,426		61		2005		1982
Granite City, IL					610		7,143		842		610		7,985		2,206		1998		1973
Granite City, IL					400		4,303		707		400		5,010		1,320		1999		1964
Greeneville, TN					400		8,290				400		8,290		422		2004		1979
Hanover, IN					210		4,430				210		4,430		196		2004		2000
Hardin, IL					50		5,350		135		50		5,485		1,087		2002		1996
Harriman, TN					590		8,060		158		590		8,218		1,010		2001		1972
Herculaneum, MO					127		10,373		393		127		10,766		2,055		2002		1984
Hilliard, FL					150		6,990				150		6,990		1,447		1999		1990
Houston, TX					600		2,700				600		2,700		50		2005		1974
Houston, TX					630		5,970		750		630		6,720		615		2002		1995
Huron, OH					160		6,088				160		6,088				2005		1983
Indianapolis, IN					75		925				75		925		55		2004		1942
Jackson, MS					410		1,814				410		1,814		167		2003		1968
Jackson, MS							4,400						4,400		1,100		2003		1980
Jackson, MS							2,150						2,150		538		2003		1970
Jamestown, TN							6,707						6,707		782		2004		1966
Jefferson City, MO					370		6,730		301		370		7,031		1,333		2002		1982
Jonesboro, GA					840		1,921				840		1,921		186		2003		1992
Kent, OH					215		3,367				215		3,367		1,255		1989		1983
Kissimmee, FL					230		3,854				230		3,854		164		2004		1972
LaBelle, FL					60		4,946				60		4,946		228		2004		1986
Lake Placid, FL					150		12,850				150		12,850		533		2004		1984
Lakeland, FL					696		4,843				696		4,843		1,535		1998		1984
Lee, MA					290		18,135		926		290		19,061		1,916		2002		1998
Littleton, MA					1,240		2,910				1,240		2,910		340		1996		1975
Longview, TX					293		1,707				293		1,707		35		2005		1971
Longwood, FL					480		7,520				480		7,520		311		2004		1980
Louisville, KY					490		10,010				490		10,010		177		2005		1978
Louisville, KY					430		7,135		163		430		7,298		859		2002		1974
Louisville, KY					350		4,675		109		350		4,784		575		2002		1975
Lowell, MA					370		7,450				370		7,450		215		2004		1977
Lufkin, TX					416		1,184				416		1,184		35		2005		1919
Manchester, NH					340		4,360				340		4,360		62		2005		1984
McComb, MS					120		5,786				120		5,786		423		2003		1973
Memphis, TN					970		4,246				970		4,246		361		2003		1981
Memphis, TN					480		5,656				480		5,656		445		2003		1982
Memphis, TN					940		5,963				940		5,963		347		2004		1951
Merrillville, IN					643		7,084		2,276		643		9,360		2,517		1997		1999
Mesa, AZ					940		2,579				940		2,579				2005		1984
Midwest City, OK					470		5,673				470		5,673		1,535		1998		1958
Midwest City, OK					484		5,516				484		5,516		85		2005		1987
Millbury, MA					930		4,570				930		4,570		258		2004		1972
Mobile, AL					440		3,625				440		3,625		312		2003		1982
Monteagle, TN					310		3,318				310		3,318		251		2003		1980
Monterey, TN							4,195						4,195		489		2004		1977
Monticello, FL					140		4,471				140		4,471		212		2004		1986
Morgantown, KY					380		3,705				380		3,705		265		2003		1965
Moss Point, MS					120		7,280				120		7,280		307		2004		1933
Mountain City, TN					220		5,896		660		220		6,556		1,210		2001		1976


									Gross Amount at Which
			Initial Cost to Company				Cost Capitalized		Carried at Close of Period
(Dollars in thousands)					Buildings &		Subsequent to				Buildings &		Accumulated		Year		Year
Description	Encumbrances		Land		Improvements		Acquisition		Land		Improvements		Depreciation		Acquired		Built
Naples, FL	$	0	$	550	$	5,450	$	0	$	550	$	5,450	$	182		2004		1968
Natchitoches, LA				190		4,096				190		4,096		12		2005		1965
Needham, MA				1,610		13,715		366		1,610		14,081		1,534		2002		1994
New Haven, IN				176		3,524				176		3,524		140		2004		1981
New Port Richey, FL				624		7,307				624		7,307		2,272		1998		1984
North Easton, MA				1,600		1,900				1,600		1,900		56		2004		1970
North Miami, FL				430		3,918				430		3,918		227		2004		1968
North Miami, FL				440		4,830				440		4,830		229		2004		1963
Norwalk, CT				410		2,118		1,411		410		3,529		96		2004		1971
Ormond Beach, FL						2,739		73				2,812		510		2002		1983
Overland Park, KS				1,120		8,360				1,120		8,360				2005		1970
Owensboro, KY				240		6,760				240		6,760		148		2005		1966
Owensboro, KY				225		13,275				225		13,275		194		2005		1964
Owenton, KY				100		2,400				100		2,400		43		2005		1979
Panama City, FL				300		9,200				300		9,200		383		2004		1992
Payson, AZ				180		3,988				180		3,988		1,011		1998		1985
Pigeon Forge, TN				320		4,180		117		320		4,297		552		2001		1986
Plano, TX				1,305		9,095				1,305		9,095		137		2005		1977
Pleasant Grove, AL				480		4,429				480		4,429		378		2003		1964
Plymouth, MA				440		6,220				440		6,220		188		2004		1968
Port St. Joe, FL				370		2,055				370		2,055		173		2004		1982
Prospect, CT				820		1,441		809		820		2,250		62		2004		1970
Pueblo, CO				370		6,051				370		6,051		1,502		1998		1989
Pueblo, CO				250		9,391				250		9,391				2005		1986
Quincy, FL				200		5,333				200		5,333		255		2004		1983
Quitman, MS				60		10,340				60		10,340		411		2004		1976
Rochdale, MA				675		11,847		1,899		675		13,746		1,157		2002		1995
Richmond, VA				1,211		2,889				1,211		2,889		318		2003		1995
Ridgely, TN				300		5,700		97		300		5,797		686		2001		1990
Ringgold, LA				30		4,174				30		4,174		12		2005		1984
Rockledge, FL				360		4,117				360		4,117		671		2001		1970
Rockwood, TN				500		7,116		741		500		7,857		985		2001		1979
Rogersville, TN				350		3,278				350		3,278		249		2003		1980
Royal Palm Beach, FL				980		8,320				980		8,320		354		2004		1984
Ruleville, MS						50						50		13		2003		1978
Ruston, LA				130		9,403				130		9,403		23		2005		1988
San Antonio, TX				560		7,315				560		7,315		716		2002		2000
Sandwich, MA				1,140		11,190				1,140		11,190		329		2004		1987
Santa Rosa, CA				1,460		3,880		62		1,460		3,942		1,534		1998		1968
Sarasota, FL				560		8,474				560		8,474		1,431		1999		2000
Sarasota, FL				600		3,400				600		3,400		127		2004		1982
Scituate, MA				1,740		10,640				1,740		10,640				2005		1976
Seville, OH				230		1,770				230		1,770		35		2005		1981
Shelby, MS				60		5,340				60		5,340		219		2004		1979
Shelbyville, KY				630		3,870				630		3,870		57		2005		1965
South Boston, MA				385		2,002		5,218		385		7,220		1,452		1995		1961
South Pittsburg, TN				430		5,628				430		5,628		309		2004		1979
Southbridge, MA				890		8,110				890		8,110		431		2004		1976
Spring City, TN				420		6,085		2,579		420		8,664		995		2001		1987
St. Louis, MO				750		6,030				750		6,030		566		1995		1994
Starke, FL				120		10,180				120		10,180		420		2004		1990
Stuart, FL				390		8,110				390		8,110		332		2004		1985
Swanton, OH				330		6,370				330		6,370		202		2004		1950
Tampa, FL				830		6,370				830		6,370		325		2004		1968
Torrington, CT				360		1,261		602		360		1,863		54		2004		1966
Troy, OH				470		16,730				470		16,730		510		2004		1971
Tucson, AZ				930		13,399				930		13,399				2005		1985
Tupelo, MS				740		4,092				740		4,092		341		2003		1980
Venice, FL				500		6,000				500		6,000		197		2004		1987
Vero Beach, FL				660		9,040		1,461		660		10,501		3,099		1998		1984
Wareham, MA				875		10,311		1,699		875		12,010		1,083		2002		1989
Warren, OH				240		3,810				240		3,810		60		2005		1973
Webster, MA				234		3,580		712		500		4,026		1,381		1995		1986
Webster, MA				70		5,917				70		5,917		1,866		1995		1982
Webster, TX				360		5,940				360		5,940		579		2002		2000
West Haven, CT				580		1,620		540		580		2,160		64		2004		1971
West Palm Beach, FL				696		8,037				696		8,037		2,768		1998		1984
Westlake, OH				1,320		17,936				1,330		17,926		2,026		2001		1985
Westlake, OH				571		5,411				571		5,411		1,293		1998		1957
Westmoreland, TN				330		1,822		2,634		330		4,456		532		2001		1994
White Hall, IL				50		5,550		670		50		6,220		1,181		2002		1971
Whitemarsh, PA				2,310		6,190				2,310		6,190		109		2005		1967
Williamstown, KY				70		6,430				70		6,430		95		2005		1987
Winnfield, LA				31		6,480				31		6,480		17		2005		1964
Woodbridge, VA				680		4,422				680		4,422		452		2002		1977
Worcester, MA				1,053		2,265		268		1,053		2,533		1,074		1997		1961
Worcester, MA				1,100		5,400		1,127		1,100		6,527		302		2004		1962

Total Skilled Nursing Facilities:		0		100,878		1,152,659		43,349		101,154		1,195,732		115,360


									Gross Amount at Which
			Initial Cost to Company				Cost Capitalized		Carried at Close of Period
(Dollars in thousands)					Buildings &		Subsequent to				Buildings &		Accumulated		Year		Year
Description	Encumbrances		Land		Improvements		Acquisition		Land		Improvements		Depreciation		Acquired		Built
Independent Living /CCRC Facilities:
Amelia Island, FL	$	0	$	3,290	$	24,310	$	0	$	3,290	$	24,310	$	0		2005		1998
Anderson, SC				710		6,290				710		6,290		408		2003		1986
Atlanta, GA				2,059		14,914				2,059		14,914		4,119		1997		1999
Austin, TX				880		9,520				880		9,520		1,876		1999		1998
Columbia, SC				2,120		4,860		2,185		2,120		7,045		401		2003		2000
Douglasville, GA				90		217				90		217		18		2003		1985
Fremont, CA				3,400		25,300				3,400		25,300				2005		1988
Gardnerville, NV				1,143		10,831				1,143		10,831		3,612		1998		1999
Houston, TX				4,790		7,100				4,790		7,100		647		2003		1974
Lauderhill, FL				1,836		25,216				1,836		25,216		339		2005		1976
Manteca, CA				1,300		12,125				1,300		12,125				2005		1988
Marysville, WA				620		4,780				620		4,780		278		2003		1998
Mesa, AZ				950		9,087				950		9,087		1,323		1999		2000
Mount Airy, NC				270		6,430				270		6,430				2005		1998
Naples, FL				1,716		17,306				1,716		17,306		6,962		1997		1999
Ossining, NY				1,510		9,490				1,510		9,490		963		2002		1967
Pawleys Island, SC				1,010		32,590				1,010		32,590				2005		1998
Rohnert Park, CA				6,500		18,700				6,500		18,700				2005		1988
Roswell, GA				1,107		9,627				1,107		9,627		3,275		1997		1999
Sonoma, CA				1,100		18,400				1,100		18,400				2005		1988
Spartanburg, SC				3,350		15,750				3,350		15,750				2005		1998
Terre Haute, IN				175		3,499		3,806		175		7,305		1,480		1999		1999
Tucson, AZ						1,373		16,948		2,584		15,737		3,187		2002		2000
Twin Falls, ID				550		14,740				550		14,740		1,255		2002		1991
Urbana, IL				670		6,780				670		6,780		752		2002		1998
Vacaville, CA				900		17,100				900		17,100				2005		1988
Vallejo, CA				4,000		18,000				4,000		18,000				2005		1988
Winston-Salem, NC				2,850		13,550				2,850		13,550				2005		1997

Total Independent Living /CCRC Facilities:		0		48,896		357,885		22,939		51,480		378,240		30,895
Specialty Care Facilities:
Amarillo, TX				72		11,928				72		11,928		156		2005		1986
Braintree, MA				350		13,781				350		13,781		3,328		2005		1918
Chicago, IL				3,650		7,505		9,077		3,650		16,582		2,147		2002		1979
Corpus Christi, TX				77		3,923				77		3,923		60		2005		1968
El Paso, TX				112		15,887				112		15,887		205		2005		1994
Midwest City, OK				146		3,854				146		3,854		56		2005		1996
New Albany, OH				3,020		27,445				3,020		27,445		2,262		2002		2003
Plano, TX				195		14,805				195		14,805		191		2005		1995
Springfield, MA				2,100		22,914				2,100		22,914		5,516		2005		1952
Stoughton, MA				975		25,247				975		25,247		6,233		2005		1958

Total Specialty Care Facilities:		0		10,697		147,289		9,077		10,697		156,366		20,154

Construction in Progress:						3,906						3,906

Assets Held for Sale:
Hendersonville, NC				2,270		11,771		279		2,270		12,050		2,408		1998		1998

Total Investment in Real Property Owned:	$	107,540	$	260,647	$	2,562,546	$	116,015	$	263,506	$	2,675,702	$	277,283


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

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

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

(4)		In January 2005, one wholly-owned subsidiary of the Company completed the acquisition of one assisted living facility from Emeritus Corporation. The property was subject to existing mortgage debt of $7,875,000. The wholly-owned subsidiary is included in the Company’s consolidated financial statements. Notwithstanding consolidation for financial statement purposes, it is the Company’s intention that the subsidiary be a separate legal entity wherein the assets and liabilities are not available to pay other debts or obligations of the consolidated Company.

(5)		In September 2005, one wholly-owned subsidiary of the Company completed the acquisition of one assisted living facility from Emeritus Corporation. The property was subject to existing mortgage debt of $6,705,000. The wholly-owned subsidiary is included in the Company’s consolidated financial statements. Notwithstanding consolidation for financial statement purposes, it is the Company’s intention that the subsidiary be a separate legal entity wherein the assets and liabilities are not available to pay other debts or obligations of the consolidated Company.

HEALTH CARE REIT, INC.


	Year Ended December 31
	2005			2004			2003
	(In thousands)
Investment in real estate:
Balance at beginning of year	$	2,409,963		$	1,893,977		$	1,420,397
Additions:
Acquisitions		568,660			504,336			346,643
Improvements		31,422			33,538			64,878
Conversions from loans receivable		3,908			8,500			12,433
Issuance of preferred stock								26,500
Deferred acquisition payments		18,125
Assumed debt		22,309			14,555			101,243

Total additions		644,424			560,929			551,697
Deductions:
Cost of real estate sold		(115,179	)		(44,629	)		(75,325	)
Reclassification of accumulated depreciation for assets held for sale		(2,408	)
Impairment of assets					(314	)		(2,792	)

Total deductions		(117,587	)		(44,943	)		(78,117	)

Balance at end of year(1)	$	2,936,800		$	2,409,963		$	1,893,977

Accumulated depreciation:
Balance at beginning of year	$	219,536		$	152,440		$	113,579
Additions:
Depreciation expense		84,828			74,015			52,870
Deductions:
Sale of properties		(27,081	)		(6,919	)		(14,009	)
Reclassification of accumulated depreciation for assets held for sale		(2,408	)

Balance at end of year	$	274,875		$	219,536		$	152,440


(1)		The aggregate cost for tax purposes for real property equals $2,389,766,000, $2,411,323,000 and $1,896,472,000 at December 31, 2005, 2004 and 2003, respectively.

HEALTH CARE REIT, INC.

SCHEDULE IV — MORTGAGE LOANS ON REAL ESTATE
December 31, 2005


									(In thousands)
													Principal Amount
													of Loans Subject
				Final							Carrying		to Delinquent
	Interest			Maturity		Periodic Payment		Prior	Face Amount		Amount of		Principal or
Description	Rate			Date		Terms		Liens	of Mortgages		Mortgages		Interest
Washington DC (Specialty care facility)		9.63	%		05/01/09	Monthly Payments			$	17,800	$	17,175	None
Washington DC (Specialty care facility)							$147,455
Five assisted living facilities in Ohio, Pennsylvania, Connecticut and New Jersey		8.66	%		08/01/08	Monthly Payments $109,395				17,020		15,159	None
Lauderhill, FL (Skilled nursing facility)		11.275	%		09/01/12	Monthly Payments				12,700		12,564	None
Lauderhill, FL (Skilled nursing facility)							$126,969
Oklahoma City, OK (Skilled nursing facility)		10.68	%		07/01/06	Monthly Payments				12,204		11,204	None
Oklahoma City, OK (Skilled nursing facility)							$99,716
26 skilled nursing facilities and three assisted living facilities in Florida, Pennsylvania, South Carolina, Tennessee and Kentucky		13.18	%		03/31/10	Monthly Payments				11,143		11,143	None
							$122,383
Six skilled nursing facilities in Illinois and Missouri		5.75	%		06/30/18	Monthly Payments				11,000		11,000	None
Six skilled nursing facilities in Illinois and Missouri							$52,708
Chicago, IL (Specialty care facility)		17.15	%		12/31/06	Monthly Payments				12,400		10,968	None
Chicago, IL (Specialty care facility)							$160,377
Sun Valley, CA (Specialty care facility)		9.63	%		05/01/08	Monthly Payments				11,000		10,618	None
Sun Valley, CA (Specialty care facility)							$92,817
Bala, PA (Skilled nursing facility)		15.61	%		07/01/08	Monthly Payments				7,400		7,145	None
Bala, PA (Skilled nursing facility)							$68,470
Plymouth, MA (Independent living facility)		19.26	%		09/09/09	Monthly Payments				6,175		6,175	None
Plymouth, MA (Independent living facility)							$52,179
Six skilled nursing facilities in Texas		7.00	%		08/31/12	Monthly Payments				12,198		5,177	None
Six skilled nursing facilities in Texas							$73,954
Adrian, MI (Skilled nursing facility)		9.632	%		07/01/20	Monthly Payments				4,500		4,478	None
Adrian, MI (Skilled nursing facility)							$39,730
12 mortgage loans relating to 15 skilled nursing facilities, 11 assisted living facilities, 2 independent living facilities and 4 specialty care facilities	From			From		Monthly Payments
	1.98% to			01/31/06 to		from $415
		14.00	%		04/01/16	to $34,655				26,798		18,661	None

Totals									$	162,338	$	141,467	$	0


Delaware	1-8923	34-1096634
(State or other jurisdiction	(Commission	(IRS Employer
of incorporation)	File Number)	Identification No.)


One SeaGate, Suite 1500, Toledo, Ohio		43604
(Address of principal executive offices)		(Zip Code)


23		Consent of Ernst & Young LLP, independent registered public accounting firm

99.1		Selected Financial Data
		Management’s Discussion and Analysis of Financial Condition and Results of Operations
		Quantitative and Qualitative Disclosures About Market Risk
		Financial Statements and Supplementary Data
		Schedule III
		Schedule IV


(1)		Includes collection of negative principal amortization.

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