Edgar Filing: HEALTH CARE REIT INC /DE/

Health Care REIT, Inc. 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended March 31, 2006


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

For the transition period from to

Commission File number 1-8923

HEALTH CARE REIT, INC.

(Exact name of registrant as specified in its charter)


Delaware		34-1096634

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

One SeaGate, Suite 1500, Toledo, Ohio		43604

(Address of principal executive office)		(Zip Code)

(419) 247-2800

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

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

Yes o No þ

As of April 30, 2006, the registrant had 62,116,551 shares of common stock outstanding.

TABLE OF CONTENTS


		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets — March 31, 2006 and December 31, 2005		3

	Consolidated Statements of Income — Three months ended March 31, 2006 and 2005		4

	Consolidated Statements of Stockholders’ Equity — Three months ended March 31, 2006 and 2005		5

	Consolidated Statements of Cash Flows — Three months ended March 31, 2006 and 2005		6

	Notes to Unaudited Consolidated Financial Statements		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		30

Item 4.	Controls and Procedures		30

PART II.	OTHER INFORMATION

Item 1A.	Risk Factors		31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		31

Item 6.	Exhibits		31

Signatures			31
EX-10.01
EX-12 Statement Regarding Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
EX-31.1 Certification 302 - CEO
EX-31.2 Certification 302 - CFO
EX-32.1 Certification 906 - CEO
EX-32.2 Certification 906 - CFO

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS
HEALTH CARE REIT, INC. AND SUBSIDIARIES


	March 31			December 31
	2006			2005
	(Unaudited)			(Note)
	(In thousands)
Assets
Real estate investments:
Real property owned
Land	$	267,824		$	261,236
Buildings & improvements		2,712,511			2,659,746
Real property held for sale, net of accumulated depreciation		15,898			11,912
Construction in progress		36,115			3,906

		3,032,348			2,936,800
Less accumulated depreciation		(293,738	)		(274,875	)

Total real property owned		2,738,610			2,661,925
Loans receivable		177,704			194,054
Less allowance for losses on loans receivable		(6,711	)		(6,461	)

		170,993			187,593

Net real estate investments		2,909,603			2,849,518
Other assets:
Equity investments		2,970			2,970
Deferred loan expenses		12,042			12,228
Cash and cash equivalents		25,758			36,237
Receivables and other assets		62,267			71,211

		103,037			122,646

Total assets	$	3,012,640		$	2,972,164


Liabilities and stockholders’ equity
Liabilities:
Borrowings under unsecured lines of credit arrangements	$	201,000		$	195,000
Senior unsecured notes		1,195,378			1,198,278
Secured debt		131,946			107,540
Accrued expenses and other liabilities		49,399			40,590

Total liabilities		1,577,723			1,541,408

Stockholders’ equity:
Preferred stock, $1.00 par value:		276,875			276,875
Authorized — 25,000,000 shares
Issued and outstanding — 11,074,989 shares at March 31, 2006 and 11,074,989 shares at December 31, 2005 at liquidation preference
Common stock, $1.00 par value:		58,685			58,050
Authorized — 125,000,000 shares
Issued — 58,856,110 shares at March 31, 2006 and 58,182,592 shares at December 31, 2005
Outstanding — 58,779,874 shares at March 31, 2006 and 58,124,657 shares at December 31, 2005
Capital in excess of par value		1,326,341			1,306,471
Treasury stock		(2,714	)		(2,054	)
Cumulative net income		855,081			830,103
Cumulative dividends		(1,080,688	)		(1,039,032	)
Accumulated other comprehensive income		0			0
Other equity		1,337			343

Total stockholders’ equity		1,434,917			1,430,756

Total liabilities and stockholders’ equity	$	3,012,640		$	2,972,164

NOTE: The consolidated balance sheet at December 31, 2005 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

See notes to unaudited consolidated financial statements

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


	Three Months Ended
	March 31
	2006		2005
	(In thousands, except per share data)
Revenues:
Rental income	$	72,785	$	58,793
Interest income		4,262		4,983
Transaction fees and other income		366		1,422

		77,413		65,198

Expenses:
Interest expense		24,043		18,697
Provision for depreciation		23,053		18,580
General and administrative		6,201		4,017
Loan expense		711		863
Provision for loan losses		250		300

		54,258		42,457


Income from continuing operations		23,155		22,741

Discontinued operations:
Net gain (loss) on sales of properties		1,553		(110	)
Income from discontinued operations, net		270		608

		1,823		498

Net income		24,978		23,239

Preferred stock dividends		5,333		5,436


Net income available to common stockholders	$	19,645	$	17,803


Average number of common shares outstanding:
Basic		58,178		52,963
Diluted		58,535		53,454

Earnings per share:
Basic:
Income from continuing operations available to common stockholders	$	0.31	$	0.33
Discontinued operations, net		0.03		0.01

Net income available to common stockholders	$	0.34	$	0.34

Diluted:
Income from continuing operations available to common stockholders	$	0.31	$	0.32
Discontinued operations, net		0.03		0.01

Net income available to common stockholders	$	0.34	$	0.33

Dividends declared and paid per common share	$	0.62	$	0.60

See notes to unaudited consolidated financial statements

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


	Three Months Ended March 31, 2006
																Accumulated
					Capital in											Other
	Preferred		Common		Excess of			Treasury			Cumulative		Cumulative			Comprehensive		Other
	Stock		Stock		Par Value			Stock			Net Income		Dividends			Income		Equity			Total

											(In thousands)
Balances at beginning of period	$	276,875	$	58,050	$	1,306,471		$	(2,054	)	$	830,103	$	(1,039,032	)	$	0	$	343		$	1,430,756
Comprehensive income:
Net income												24,978										24,978
Other comprehensive income:
Unrealized gain (loss) on equity investments																						0

Total comprehensive income																						24,978

Proceeds from issuance of common shares from dividend reinvestment and stock incentive plans, net of forfeitures				635		20,391			(660	)									(18	)		20,348
SFAS123(R) reclassification						(521	)												521			0
Compensation expense related to stock options																			491			491
Cash dividends paid:
Common stock-$0.62 per share														(36,323	)							(36,323	)
Preferred stock, Series D-$0.492 per share														(1,969	)							(1,969	)
Preferred stock, Series E-$0.375 per share														(28	)							(28	)
Preferred stock, Series F-$0.477 per share														(3,336	)							(3,336	)

Balances at end of period	$	276,875	$	58,685	$	1,326,341		$	(2,714	)	$	855,081	$	(1,080,688	)	$	0	$	1,337		$	1,434,917


	Three Months Ended March 31, 2005
															Accumulated
					Capital In										Other
	Preferred		Common		Excess of		Treasury			Cumulative		Cumulative			Comprehensive		Other
	Stock		Stock		Par Value		Stock			Net Income		Dividends			Income		Equity			Total

										(In thousands)
Balances at beginning of period	$	283,751	$	52,860	$	1,139,723	$	(1,286	)	$	745,817	$	(884,890	)	$	1	$	(697	)	$	1,335,279
Comprehensive income:
Net income											23,239										23,239
Other comprehensive income:
Unrealized gain (loss) on equity investments																					0

Total comprehensive income																					23,239

Proceeds from issuance of common shares from dividend reinvestment and stock incentive plans, net of forfeitures				454		12,947		(480	)												12,921
Restricted stock amortization																		184			184
Compensation expense related to stock options																		133			133
Cash dividends paid:
Common stock-$0.60 per share													(31,915	)							(31,915	)
Preferred stock, Series D-$0.492 per share													(1,969	)							(1,969	)
Preferred stock, Series E-$0.375 per share													(131	)							(131	)
Preferred stock, Series F-$0.477 per share													(3,336	)							(3,336	)

Balances at end of period	$	283,751	$	53,314	$	1,152,670	$	(1,766	)	$	769,056	$	(922,241	)	$	1	$	(380	)	$	1,334,405

See notes to unaudited consolidated financial statements

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


	Three Months Ended
	March 31
	2006			2005
	(In thousands)
Operating activities
Net income	$	24,978		$	23,239
Adjustments to reconcile net income to net cash provided from operating activities:
Provision for depreciation		23,262			20,396
Amortization		3,207			1,042
Provision for loan losses		250			300
Rental income less than (in excess of) cash received		7,910			(2,855	)
(Gain) loss on sales of properties		(1,553	)		110
Increase (decrease) in accrued expenses and other liabilities		8,809			(7,871	)
Decrease (increase) in receivables and other assets		(2,310	)		(1,901	)

Net cash provided from (used in) operating activities		64,553			32,460

Investing activities
Investment in real property		(89,994	)		(35,382	)
Investment in loans receivable		(5,324	)		(14,113	)
Principal collected on loans receivable		24,094			23,412
Proceeds from sales of properties		14,527			9,188
Other		(496	)		60

Net cash provided from (used in) investing activities		(57,193	)		(16,835	)

Financing activities
Net increase (decrease) under unsecured lines of credit arrangements		6,000			12,500
Principal payments on secured debt		(643	)		(6,323	)
Net proceeds from the issuance of common stock		18,985			13,401
Decrease (increase) in deferred loan expense		(525	)		(186	)
Cash distributions to stockholders		(41,656	)		(37,351	)

Net cash provided from (used in) financing activities		(17,839	)		(17,959	)

Increase (decrease) in cash and cash equivalents		(10,479	)		(2,334	)
Cash and cash equivalents at beginning of period		36,237			19,763

Cash and cash equivalents at end of period	$	25,758		$	17,429


Supplemental cash flow information-interest paid	$	17,477		$	26,817

See notes to unaudited consolidated financial statements

HEALTH CARE REIT, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE A – Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered for a fair presentation have been included. Operating results for the three months ended March 31, 2006 are not necessarily an indication of the results that may be expected for the year ending December 31, 2006. For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2005.

NOTE B – Real Estate Investments

During the three months ended March 31, 2006, we invested $89,994,000 of cash in real property (including $31,912,000 of advances for construction in progress) and provided cash loan financings of $5,324,000. In addition, real property acquisitions included the assumption of debt totaling $25,049,000. As of March 31, 2006, we had approximately $167,454,000 of unfunded construction commitments relating to existing construction in progress projects. Also during the three months ended March 31, 2006, we sold real property generating $14,527,000 of net cash proceeds and collected $24,094,000 of cash as repayment of principal on loans receivable.

NOTE C – Equity Investments

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

NOTE D – Distributions Paid to Common Stockholders

On February 21, 2006, we paid a dividend of $0.62 per share to stockholders of record on January 31, 2006. This dividend related to the period from October 1, 2005 through December 31, 2005.

NOTE E – Derivative Instruments

We are exposed to various market risks, including the potential loss arising from adverse changes in interest rates. We may elect to use financial derivative instruments to hedge interest rate exposure. These decisions are principally based on our policy to match our variable rate investments with comparable borrowings, but are also based on the general trend in interest rates at the applicable dates and our perception of the future volatility of interest rates.

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

On May 6, 2004, we entered into two interest rate swap agreements (the “Swaps”) for a total notional amount of $100,000,000 to hedge changes in fair value attributable to changes in the LIBOR swap rate of $100,000,000 of fixed rate debt with a maturity date of November 15, 2013. The Swaps are treated as fair-value hedges for accounting purposes and we utilize the short-cut method in accordance with Statement No. 133, as amended. The Swaps are with highly rated counterparties in which we receive a fixed rate of 6.0% and pay a variable rate based on six-month LIBOR plus a spread. At March 31, 2006, the Swaps were reported at their fair value as a $651,000 other liability ($2,211,000 other asset at December 31, 2005). For the three months ended March 31, 2006, we incurred $15,000 of losses related to the Swaps that was recorded as an addition to interest expense. For the three months ended March 31, 2005, we generated $410,000 of savings related to the Swaps that was recorded as a reduction in interest expense.

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

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

NOTE F – Discontinued Operations

Three assisted living facilities and one skilled nursing facility were held for sale as of March 31, 2006. We did not recognize an impairment loss on these assets as the fair value less estimated costs to sell exceeded our carrying values. During the three months ended March 31, 2006, we sold one assisted living facility, one skilled nursing facility and one parcel of land with carrying values of $15,393,000 for a net gain of $1,553,000. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we have reclassified the income and expenses attributable to all properties sold and attributable to the properties held for sale at March 31, 2006 to discontinued operations. Expenses include an allocation of interest expense based on property carrying values and our weighted average cost of debt. The following illustrates the reclassification impact of Statement No. 144 as a result of classifying properties as discontinued operations for the periods presented (in thousands):


	Three Months Ended
	March 31
	2006		2005
Revenues:
Rental income	$	674	$	3,372

Expenses:
Interest expense		195		948
Provision for depreciation		209		1,816


Income from discontinued operations, net	$	270	$	608

NOTE G – Contingent Liabilities

We have an outstanding letter of credit issued for the benefit of certain insurance companies that provide workers’ compensation insurance to one of our tenants. Our obligation under the letter of credit matures in 2009. At March 31, 2006, our obligation under the letter of credit was $2,450,000.

As of March 31, 2006, we had approximately $167,454,000 of unfunded construction commitments.

NOTE H – Accumulated Other Comprehensive Income

Accumulated other comprehensive income includes unrealized gains or losses on our equity investments. This item is included as a component of stockholders’ equity. We did not recognize any comprehensive income other than the recorded net income for the three months ended March 31, 2006 or 2005.

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

NOTE I – Earnings Per Share

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


	Three Months Ended
	March 31
	2006		2005
Numerator for basic and diluted earnings per share — net income available to common stockholders	$	19,645	$	17,803


Denominator for basic earnings per share — weighted average shares		58,178		52,963
Effect of dilutive securities:
Employee stock options		97		260
Non-vested restricted shares		260		221

Dilutive potential common shares		357		481

Denominator for diluted earnings per share — adjusted weighted average shares		58,535		53,444


Basic earnings per share	$	0.34	$	0.34

Diluted earnings per share	$	0.34	$	0.33

The diluted earnings per share calculation excludes the dilutive effect of 257,000 options for the three months ended March 31, 2006 because the exercise prices were greater than the average market price. The diluted earnings per share calculation excludes the dilutive effect of 173,000 options for the three months ended March 31, 2005 because the exercise prices were greater than the average market price. The Series E Cumulative Convertible and Redeemable Preferred Stock was not included in these calculations as the effect of the conversion into common stock was anti-dilutive for the periods presented.

NOTE J – Other Equity

Other equity consists of the following (in thousands):


	March 31		December 31
	2006		2005
Accumulated compensation expense related to stock options	$	1,337	$	864
Unamortized restricted stock		0		(521	)

	$	1,337	$	343

Unamortized restricted stock at December 31, 2005 represents the unamortized value of restricted stock granted to key employees and directors prior to January 1, 2003. Pursuant to the provisions of Statement No. 123(R) adopted on January 1, 2006, the unamortized restricted stock balance of $521,000 was reclassified to capital in excess of par value. Expense, which is recognized as the restricted shares vest based on the market value at the date of the award, totaled $2,022,000 for the three months ended March 31, 2006 and $592,000 for the three months ended March 31, 2005. See Note K for further discussion.

Accumulated option compensation expense represents the amount of amortized compensation costs related to stock options awarded to employees and directors subsequent to January 1, 2003. Expense, which is recognized as the options vest based on the market value at the date of the award, totaled $491,000 for the three months ended March 31, 2006, and $133,000 for the same period in 2005.

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

NOTE K – 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. 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.

Impact of the Adoption of Statement No. 123(R)

We adopted the fair value-based method of accounting for share-based payments effective January 1, 2003 using the prospective method described in Statement of Financial Accounting Standards 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. Because we adopted Statement No. 123 using the prospective transition method (which applied only to awards granted, modified or settled after the adoption date of Statement No. 123), compensation cost for some previously granted awards that were not recognized under Statement No. 123 will now be recognized effective with the adoption of Statement No. 123(R) on January 1, 2006. In addition, we previously amortized compensation cost for share based payments to the date that the awards became fully vested or to the expected retirement date, if sooner. Effective with the adoption of Statement No. 123(R), we began recognizing compensation cost to the date the awards become fully vested or to the retirement eligible date, if sooner, which totaled $1,690,000 for the three months ended March 31, 2006. We expect that the adoption of Statement No. 123(R) will increase compensation cost by approximately $1,287,000 for the full year 2006 as a result of amortizing share based awards to the retirement eligible date.

Valuation Assumptions

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:


	Three Months Ended			Three Months Ended
	March 31, 2006			March 31, 2005
Dividend yield (1)		0.00% - 6.79	%		0.00	%
Expected volatility		20.3	%		22.8	%
Risk-free interest rate		4.35	%		4.25	%
Expected life (in years)		5			7
Weighted-average fair value (1)		$5.26		$	12.48


(1)		Certain of the options granted to employees in 2006 include dividend equivalent rights. The fair value of these options are calculated based on the above assumptions and then adjusted for the present value of estimated dividend payments over the expected life of the options. Options granted to employees in 2005 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.

The dividend yield represented the dividend yield of our common stock on the dates of grant. Our computation of expected volatility was based on historical volatility. The risk-free interest rates used were the 10-year U.S. Treasury Notes yield on the dates of grant. The expected life was based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations regarding future employee behavior.

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

Option Award Activity

The following table summarizes information about stock option activity for the three months ended March 31, 2006 (in thousands, except per share amounts):


	Number			Weighted		Weighted Average		Aggregate
	of			Average		Remaining		Intrinsic
Stock Options	Shares			Exercise Price		Contract Life		Value
Options at beginning of year		685		$	26.87		6.3
Options granted		155			36.50
Options exercised		(117	)		20.54
Options terminated		0

Options at end of period		723		$	29.96		7.3	$	5,883


Options exercisable at end of period		195		$	25.18		5.2	$	2,520
Weighted average fair value of options granted during the period				$	5.26

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the quoted price of our common stock for the options that were in-the-money at March 31, 2006. During the three months ended March 31, 2006 and 2005, the aggregate intrinsic value of options exercised under our stock incentive plans was $1,825,000 and $1,890,000, respectively, determined as of the date of option exercise. Cash received from option exercises under our stock incentive plans for the three months ended March 31, 2006 and 2005 was $2,232,000 and $3,235,000, respectively.

As of March 31, 2006, there was approximately $2,857,000 of total unrecognized compensation cost related to unvested stock options granted under our stock incentive plans. That cost is expected to be recognized over a weighted average period of four years. As of March 31, 2006, there was approximately $6,833,000 of total unrecognized compensation cost related to unvested restricted stock granted under our stock incentive plans. That cost is expected to be recognized over a weighted average period of three years.

The following table summarizes information about non-vested stock incentive awards as of March 31, 2006 and changes for the three months ended March 31, 2006:


	Stock Options					Restricted Stock
				Weighted Average					Weighted Average
	Number of			Grant Date		Number of			Grant Date
	Shares			Fair Value		Shares			Fair Value
Non-vested at December 31, 2005		428		$	5.36		222		$	31.56
Vested		(105	)		5.23		(58	)		30.72
Granted		155			5.26		96			36.55
Terminated		0					0

Non-vested at March 31, 2006		478		$	5.35		260		$	33.59

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

Pro forma Information for Periods Prior to the Adoption of Statement No. 123(R)

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


	Three Months Ended
	March 31, 2005
Numerator:
Net income available to common stockholders — as reported	$	17,803
Deduct: Additional stock-based employee compensation expense determined under fair value based method for all awards		45

Net income available to common stockholders — pro forma	$	17,758


Denominator:
Basic weighted average shares — as reported and pro forma		52,963
Effect of dilutive securities:
Employee stock options — pro forma		260
Non-vested restricted shares		221

Dilutive potential common shares		481

Diluted weighted average shares — pro forma		53,444


Net income available to common stockholders per share — as reported
Basic	$	0.34

Diluted	$	0.33


Net income available to common stockholders per share — pro forma
Basic	$	0.34

Diluted	$	0.33

NOTE L – Significant Changes and Events

On April 12, 2006, we completed a public offering of 3,000,000 shares of common stock with net proceeds to the company of approximately $102,450,000. On April 28, 2006, we issued an additional 222,800 shares of common stock pursuant to the over-allotment exercise, which generated net proceeds of approximately $7,620,000.

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

The following discussion and analysis is based primarily on the consolidated financial statements of Health Care REIT, Inc. for the periods presented and should be read together with the notes thereto contained in this Quarterly Report on Form 10-Q. Other important factors are identified in our Annual Report on Form 10-K for the year ended December 31, 2005, including factors identified under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Executive Overview

Business

Health Care REIT, Inc. is a self-administered, equity real estate investment trust that invests 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 March 31, 2006:


	Investments(1)		Percentage of			Revenues(2)		Percentage of			Number of		Number of		Investment per		Number of		Number of
Type of Facility	(in thousands)		Investments			(in thousands)		Revenues			Facilities		Beds/Units		Bed/Unit(3)		Operators(4)		States(4)
Independent living/CCRCs	$	426,653		15	%	$	9,300		12	%		32		4,494	$	104,855		13		16

Assisted living facilities		974,154		33	%		28,483		36	%		201		12,343		88,182		23		33

Skilled nursing facilities		1,323,447		45	%		35,613		46	%		211		28,632		46,523		24		29

Specialty care facilities		194,510		7	%		4,691		6	%		13		1,312		148,255		6		7


Totals	$	2,918,764		100	%	$	78,087		100	%		457		46,781


(1)		Investments include gross real estate investments and credit enhancements which amounted to $2,916,314,000 and $2,450,000, respectively.

(2)		Revenues include gross revenues and revenues from discontinued operations for the three months ended March 31, 2006.

(3)		Investment per Bed/Unit was computed by using the total investment amount of $3,086,218,000 which includes gross real estate investments, credit enhancements and unfunded construction commitments for which initial funding has commenced which amounted to $2,916,314,000, $2,450,000 and $167,454,000, respectively.

(4)		We have investments in properties located in 37 states and managed by 55 different operators.

Our primary objectives are to protect stockholders’ capital and enhance stockholder value. We seek to pay consistent cash dividends to stockholders and create opportunities to increase dividend payments to stockholders as a result of annual increases in rental and interest income and portfolio growth. To meet these objectives, we invest 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 rental income 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 and 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 March 31, 2006, 88% of our real property was subject to master leases.

For the three months ended March 31, 2006, rental income and interest income represented 94% and 5%, respectively, of total gross revenues (including revenues from discontinued operations). Our 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. 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. During the three months ended March 31, 2006, we completed $123,083,000 of gross new investments and had $36,633,000 of investment payoffs, resulting in net investments of $86,450,000. We expect to complete gross new investments of $450,000,000 to $550,000,000 during 2006, including acquisitions of approximately $300,000,000 and funded new development of approximately $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 March 31, 2006, we had $25,758,000 of cash and cash equivalents and $339,000,000 of available borrowing capacity under our unsecured lines of credit arrangements.

Key Transactions in 2006

We have completed the following key transactions to date in 2006:

	•		our Board of Directors increased our quarterly dividend to $0.64 per share, which represents a two cent increase from the quarterly dividend of $0.62 paid for 2005. The dividend declared for the quarter ended March 31, 2006 represents the 140^th consecutive dividend payment;

	•		we completed $123,083,000 of gross investments and had $36,633,000 of investment payoffs during the three months ended March 31, 2006; and

	•		on April 12, 2006, we completed a public offering of 3,000,000 shares of common stock with net proceeds to the company of approximately $102,450,000. On April 28, 2006, we issued an additional 222,800 shares of common stock pursuant to the over-allotment exercise, which generated net proceeds of approximately $7,620,000.

Key Performance Indicators, Trends and Uncertainties

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

Operating Performance. We believe that net income available to common stockholders (“NICS”) is the most appropriate earnings measure. Other useful supplemental measures of our operating performance include funds from operations (“FFO”) and funds available for distribution (“FAD”); however, these supplemental measures are not defined by U.S. generally accepted accounting principles (“U.S. GAAP”). Please refer to the section entitled “Non-GAAP Financial Measures” for further discussion of FFO and FAD and for reconciliations of FFO and FAD to NICS. These earnings 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 for the periods presented (in thousands, except per share data):


	Three Months Ended
	March 31		June 30			September 30		December 31		March 31
	2005		2005			2005		2005		2006

Net income (loss) available to common stockholders	$	17,803	$	(1,606	)	$	19,908	$	26,587	$	19,645
Funds from operations		38,309		19,427			41,975		44,581		41,354
Funds available for distribution		35,454		18,251			41,857		49,457		49,264

Per share data (fully diluted):
Net income (loss) available to common stockholders	$	0.33	$	(0.03	)	$	0.37	$	0.47	$	0.34
Funds from operations		0.72		0.36			0.77		0.79		0.71
Funds available for distribution		0.66		0.34			0.77		0.88		0.84

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. Geographic mix measures the portion of our investments that relate to our top five states. The following table reflects our recent historical trends of concentration risk for the periods presented:


	March 31			June 30			September 30			December 31			March 31
	2005			2005			2005			2005			2006

Asset mix:
Real property		90	%		91	%		91	%		93	%		94	%
Loans receivable		10	%		9	%		9	%		7	%		6	%

Investment mix:
Independent living/CCRCs (1)											15	%		15	%
Assisted living facilities		55	%		51	%		50	%		34	%		33	%
Skilled nursing facilities		39	%		42	%		42	%		44	%		45	%
Specialty care facilities		6	%		7	%		8	%		7	%		7	%

Operator mix:
Emeritus Corporation		15	%		14	%		14	%		13	%		12	%
Brookdale Senior Living Inc. (2)														10	%
Merrill Gardens L.L.C.											7	%		7	%
Life Care Centers of America, Inc.											7	%		7	%
Delta Health Group, Inc.		7	%		7	%		7	%					6	%
Southern Assisted Living, Inc. (2)		8	%		8	%		8	%		7	%
Commonwealth Communities Holdings LLC		8	%		7	%		7	%		7	%
Home Quality Management, Inc.		7	%		7	%		6	%
Remaining operators		55	%		57	%		58	%		59	%		58	%

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


(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.

(2)		In September 2005, Alterra Healthcare Corporation, one of our tenants, became an indirect wholly-owned subsidiary of Brookdale as a result of Brookdale’s merger with FEBC-ALT Investors LLC. In April 2006, Brookdale completed the acquisition of Southern Assisted Living, Inc.

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. 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 for the periods presented:


	Three Months Ended
		March 31		June 30		September 30		December 31		March 31
		2005		2005		2005		2005		2006

Debt to book capitalization ratio		48	%	51	%	51	%	51	%	52	%
Debt to market capitalization ratio		38	%	37	%	37	%	40	%	38	%

Interest coverage ratio		3.23	x	2.32	x	3.23	x	3.52	x	3.10	x
Fixed charge coverage ratio		2.54	x	1.83	x	2.59	x	2.82	x	2.54	x

We evaluate our key performance indicators in conjunction with current expectations to determine if historical trends are indicative of future results. Our expected results may not be achieved and actual results may differ materially from our expectations. Factors that may cause actual results to differ from expected results are described in more detail in “Forward-Looking Statements and Risk Factors” and other sections of this Quarterly Report on Form 10-Q. Management regularly monitors economic and other factors to develop strategic and tactical plans designed to improve performance and maximize our competitive position. Our ability to achieve our financial objectives is dependent upon our ability to effectively execute these plans and to appropriately respond to emerging economic and company-specific trends. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2005, under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of these risk factors.

Portfolio Update

Payment coverages in our portfolio continue to improve. Our overall payment coverage is at 1.94 times and represents an increase of 10 basis points from the prior year. The table below 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.

December 31, 2004

December 31, 2005

CBMF

CAMF

CBMF

CAMF

Independent living/CCRCs (1)

1.45x

1.23x

Assisted living facilities

1.47x

1.25x

1.52x

1.30x

Skilled nursing facilities

2.15x

1.64x

2.21x

1.63x

Specialty care facilities

3.00x

2.37x

3.19x

2.60x

Weighted averages

1.84x

1.48x

1.94x

1.54x


(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.

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 Senior 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 investments (including construction advances), 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):


	Three Months Ended						Change
	Mar. 31, 2006			Mar. 31, 2005			$			%
Cash and cash equivalents at beginning of period	$	36,237		$	19,763		$	16,474			83	%
Cash provided from (used in) operating activities		64,553			32,460			32,093			99	%
Cash provided from (used in) investing activities		(57,193	)		(16,835	)		(40,358	)		240	%
Cash provided from (used in) financing activities		(17,839	)		(17,959	)		120			-1	%

Cash and cash equivalents at end of period	$	25,758		$	17,429		$	8,329			48	%

Operating Activities. The change in net cash provided from operating activities is primarily attributable to increases in net income, excluding the provision for depreciation and net straight-line rental income, and changes in accrued expenses and other liabilities. 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. The change in accrued expenses and other liabilities is primarily attributable to the timing of cash disbursements for our contractual interest obligations.

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):


	Three Months Ended						Change
	Mar. 31, 2006			Mar. 31, 2005			$			%
Gross straight-line rental income	$	2,400		$	3,708		$	(1,308	)		-35	%
Cash receipts due to real property sales		(604	)		(352	)		(252	)		72	%
Prepaid rent receipts		(9,706	)		(501	)		(9,205	)		1,837	%

Cash receipts less than (in excess of) rental income	$	(7,910	)	$	2,855		$	(10,765	)		n/a

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. Our 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 is primarily attributable to cash received in connection with the acquisition of Commonwealth Communities Holdings LLC by Kindred Healthcare, Inc. in February 2006 as discussed in our Annual Report on Form 10-K for the year ended December 31, 2005.

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


	Three Months Ended
	Mar. 31, 2006					Mar. 31, 2005
	Facilities		Amount			Facilities		Amount
Real property acquisitions:
Assisted living facilities		2	$	6,150			3	$	39,620
Skilled nursing facilities		8		71,020			1		2,181
Land parcels				3,274

Total acquisitions		10		80,444			4		41,801
Less: Assumed debt				(25,049	)				(15,603	)

Cash disbursed for acquisitions				55,395					26,198
Construction in progress advances				31,912					1,236
Capital improvements to existing properties				2,687					7,948

Total cash invested in real property				89,994					35,382

Real property dispositions:
Assisted living facilities		1		13,396			1		8,348
Skilled nursing facilities		1		1,081
Land parcels				50					840

Proceeds from real property sales		2		14,527			1		9,188

Net cash investments in real property		8	$	75,467			3	$	26,194


Advances on loans receivable:
Investments in new loans			$	4,250				$	6,000
Draws on existing loans				1,074					8,113

Total investments in loans				5,324					14,113

Receipts on loans receivable:
Loan payoffs				21,240					19,466
Principal payments on loans				2,854					3,946

Total principal receipts on loans				24,094					23,412


Net cash advances (receipts) on loans receivable			$	(18,770	)			$	(9,299	)

Financing Activities. The changes in net cash provided from or used in financing activities are primarily attributable to changes related to our unsecured lines of credit arrangements, principal payments on secured debt, common stock issuances and cash distributions to stockholders.

For the three months ended March 31, 2006, we had a net increase of $6,000,000 on our unsecured lines of credit arrangements as compared to a net increase of $12,500,000 for the same period in 2005. The decrease in principal payments on secured debt is primarily due to the payoff of two mortgages totaling $5,695,000 in March 2005. Principal payments on secured debt for the same period in 2006 were only regularly scheduled mortgage amortization payments.

The increase in net proceeds from the issuance of common stock is primarily attributable to common stock issuances related to our dividend reinvestment and stock purchase plan (“DRIP”). During the three months ended March 31, 2006, we issued 474,000 shares of common stock pursuant to our DRIP, which generated net proceeds of approximately $16,841,000. During the three months ended March 31, 2005, we issued 292,000 shares of common stock pursuant to our DRIP, which generated net proceeds of approximately $9,893,000. The remaining difference in common stock issuances is primarily due to issuances pursuant to stock incentive plans.

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 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):


	Three Months Ended
	Mar. 31, 2006				Mar. 31, 2005
	Per Share		Amount		Per Share		Amount
Common Stock	$	0.620	$	36,323	$	0.600	$	31,915
Series D Preferred Stock		0.492		1,969		0.492		1,969
Series E Preferred Stock		0.375		28		0.375		131
Series F Preferred Stock		0.477		3,336		0.477		3,336

Totals			$	41,656			$	37,351

Off-Balance Sheet Arrangements

We are exposed to various market risks, including the potential loss arising from adverse changes in interest rates. We may or may not elect to use financial derivative instruments to hedge interest rate exposure. These decisions are principally based on 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 March 31, 2006, 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 March 31, 2006 (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		131,946		2,329		25,363		42,540		61,714
Contractual interest obligations		755,416		89,663		202,167		165,218		298,368
Capital lease obligations
Operating lease obligations		14,034		1,045		2,001		1,857		9,131
Purchase obligations		209,902		10,973		130,928		68,001
Other long-term liabilities

Total contractual obligations	$	2,846,128	$	144,010	$	955,289	$	277,616	$	1,469,213


(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 (5.775% at March 31, 2006). The applicable margin is based on our ratings with Moody’s Investors Service and Standard & Poor’s Ratings Services and was 0.9% at March 31, 2006. 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 March 31, 2006. 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 (7.75% at March 31, 2006) or 1.3% over LIBOR interest rate, at our option. Principal is due upon expiration of the agreement. At March 31, 2006, we had $201,000,000 outstanding under the unsecured lines of credit arrangements and estimated total contractual interest obligations of $24,161,000. Contractual interest obligations are estimated based on the assumption that the balance of $201,000,000 at March 31, 2006 is constant until maturity at interest rates in effect at March 31, 2006.

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 $631,520,000 at March 31, 2006.

Additionally, we have mortgage loans totaling $131,946,000, collateralized by owned properties, with fixed annual interest rates ranging from 5.3% to 8.5%, payable monthly. The carrying values of the properties securing the mortgage loans totaled $207,151,000 at March 31, 2006. Total contractual interest obligations on mortgage loans totaled $53,175,000 at March 31, 2006.

At March 31, 2006, we had operating lease obligations of $14,034,000 relating to our office space, one assisted living facility and seven skilled nursing facilities.

Purchase obligations are comprised of unfunded construction commitments and contingent purchase obligations. At March 31, 2006, we had outstanding construction financings of $36,115,000 for leased properties and were committed to providing additional financing of approximately $167,454,000 to complete construction. At March 31, 2006, we had contingent purchase obligations totaling $42,448,000. 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 March 31, 2006, we had stockholders’ equity of $1,434,917,000 and a total outstanding debt balance of $1,528,324,000, which represents a debt to total book capitalization ratio of 52%. Our ratio of debt to market capitalization was 38% at March 31, 2006. For the three months ended March 31, 2006, our interest coverage ratio was 3.10 to 1.00. For the three months ended March 31, 2006, our fixed charge coverage ratio was 2.54 to 1.00. Also, at March 31, 2006, we had $25,758,000 of cash and cash equivalents and $339,000,000 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 March 31, 2006, 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

Net income available to common stockholders for the three months ended March 31, 2006 totaled $19,645,000, or $0.34 per diluted share, as compared with $17,803,000, or $0.33 per diluted share, for the same period in 2005. Net income available to common stockholders increased from the prior year primarily due to an increase in rental income offset by increases in interest expense, provision for depreciation and general and administrative expenses. These items are discussed in further detail below.

FFO for the three months ended March 31, 2006 totaled $41,354,000, or $0.71 per diluted share, as compared with $38,309,000, or $0.72 per diluted share, for the same period in 2005. FAD for the three months ended March 31, 2006 totaled $49,264,000, or $0.84 per diluted share, as compared to $35,454,000, or $0.66 per diluted share, for the same period in 2005. The increase in FFO is due primarily to an increase in rental income offset by an increase in interest expense and general and administrative expenses. The increase in FAD is primarily due to the items noted above for FFO and the change in net straight-line rental income. 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.

FFO decreased on a per share basis primarily due to higher common shares outstanding. On a fully diluted basis, average common shares increase 9.5% from 53,454,000 for the three months ended March 31, 2005 to 58,535,000 for the same period in 2006. The increase from 2005 is primarily due to the issuance of 3,000,000 shares of common stock in November 2005 and common stock issuances pursuant to our DRIP subsequent to March 31, 2005.

EBITDA for the three months ended March 31, 2006 totaled $75,685,000, as compared with $64,322,000 for the same period in 2005. Our interest coverage ratio was 3.10 times for the three months ended March 31, 2006 as compared with 3.23 times for the same period in 2005. Our fixed charge coverage ratio was 2.54 times for the three months ended March 31, 2006 consistent with 2.54 times for the same period in 2005. The increase in EBITDA is primarily due to the increase in rental income offset by an increase in general and administrative expenses. The decrease in our interest coverage ratio is primarily due to the increase in interest expense. These items are discussed in further detail below. Please refer to the discussion of “Non-GAAP Financial Measures” below for further information regarding EBITDA and a reconciliation of EBITDA to net income.

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


	Three Months Ended				Change
	Mar. 31, 2006		Mar. 31, 2005		$			%
Rental income	$	72,785	$	58,793	$	13,992			24	%
Interest income		4,262		4,983		(721	)		-14	%
Transaction fees and other income		366		1,422		(1,056	)		-74	%

Totals	$	77,413	$	65,198	$	12,215			19	%

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, our 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. 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 March 31, 2006, we had no leases scheduled to expire before March 2009, except for the assets held for sale referenced in Note F to our unaudited consolidated financial statements.

Interest income decreased from 2005 primarily due to a decrease in the balance of outstanding loans. Transaction fees and other income decreased primarily due to a $750,000 assignment consent fee received in the first quarter of 2005 relating to a payoff which did not occur. There was no such fee in the current year.

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


	Three Months Ended				Change
	Mar. 31, 2006		Mar. 31, 2005		$			%
Interest expense	$	24,043	$	18,697	$	5,346			29	%
Provision for depreciation		23,053		18,580		4,473			24	%
General and administrative		6,201		4,017		2,184			54	%
Loan expense		711		863		(152	)		-18	%
Provision for loan losses		250		300		(50	)		-17	%

Totals	$	54,258	$	42,457	$	11,801			28	%

The increase in total expenses is primarily attributable to increases in interest expense and the provision for depreciation. The increase in interest expense is primarily due to higher average borrowings offset by lower average borrowing costs.

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


	Three Months Ended						Change
	Mar. 31, 2006			Mar. 31, 2005			$			%
Senior unsecured notes	$	19,574		$	15,572		$	4,002			26	%
Secured debt		1,978			3,098			(1,120	)		-36	%
Unsecured lines of credit		2,873			1,650			1,223			74	%
Capitalized interest		(202	)		(265	)		63			-24	%
SWAP losses (savings)		15			(410	)		425			n/a
Discontinued operations		(195	)		(948	)		753			-79	%


Totals	$	24,043		$	18,697		$	5,346			29	%

The increase in interest expense on senior unsecured notes is due to higher average borrowings offset by lower average interest rates. For the three months ended March 31, 2006, we had $1,194,830,000 of senior unsecured notes principal outstanding with a weighted average interest rate of 6.566% compared to $875,000,000 and 7.181% for the prior year.

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):


	Three Months Ended						Three Months Ended
	March 31, 2006						March 31, 2005
				Weighted Average						Weighted Average
	Amount			Interest Rate			Amount			Interest Rate
Beginning balance	$	107,540			7.328	%	$	160,225			7.508	%
Debt assumed		25,049			6.315	%		15,603			6.888	%
Debt extinguished								(5,695	)		6.367	%
Principal payments		(643	)		7.389	%		(627	)		7.694	%

Ending balance	$	131,946			7.135	%	$	169,506			7.489	%


Monthly averages	$	113,482			7.272	%	$	166,256			7.487	%

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


	Three Months Ended March 31
	2006			2005
Balance outstanding at March 31	$	201,000		$	163,500
Maximum amount outstanding at any month end	$	201,000		$	163,500
Average amount outstanding (total of daily principal balances divided by days in period)	$	184,367		$	140,544
Weighted average interest rate (actual interest expense divided by average borrowings outstanding)		6.23	%		4.70	%

We capitalize certain interest costs associated with funds used to finance the construction of properties owned directly by us. The amount capitalized is based upon the borrowings outstanding during the construction period using the rate of interest that approximates our cost of financing. Our interest expense is reduced by the amount capitalized. Capitalized interest for the three months ended March 31, 2006 totaled $202,000 as compared with $265,000 for the same period in 2005.

On May 6, 2004, we entered into two interest rate swap agreements (the “Swaps”) for a total notional amount of $100,000,000 to hedge changes in fair value attributable to changes in the LIBOR swap rate of $100,000,000 of fixed rate debt with a maturity date of November 15, 2013. The Swaps are treated as fair-value hedges for accounting purposes and we utilize the short-cut method in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. The Swaps are with highly rated counterparties in which we receive a fixed rate of 6.0% and pay a variable rate based on six-month LIBOR plus a spread. For the three months ended March 31, 2006, we incurred $15,000 of losses related to our Swaps that was recorded as an addition to interest expense. For the three months ended March 31, 2005, we generated $410,000 of savings related to our Swaps that was recorded as a reduction of interest expense.

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 additional details. To the extent that we acquire or dispose of additional properties in the future, our provision for depreciation will change accordingly.

General and administrative expenses as a percentage of revenues (including revenues from discontinued operations) for the three months ended March 31, 2006, were 7.94% as compared with 5.87% for the same period in 2005. Approximately $1,690,000 of the increase from 2005 to 2006 relates directly to the adoption of Statement of Financial Accounting Standards No. 123(R), Accounting for Stock-Based Compensation, on January 1, 2006. Effective with the adoption of Statement No. 123(R), we began recognizing stock-based compensation cost to the date the awards become fully vested or to the retirement eligible date, if sooner. We expect that the adoption of Statement No. 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. See Note K to our unaudited consolidated financial statements for additional information. The remaining increase from 2005 is primarily related to costs associated with our initiatives to attract and retain appropriate personnel to achieve our business objectives.

Loan expense represents the amortization of deferred loan costs incurred in connection with the issuance and amendments of debt. The change in loan expense is primarily due to the net effect of issuances and redemptions of senior unsecured notes subsequent to March 31, 2005. In April 2005, we issued $250,000,000 of 5.875% senior unsecured notes due May 2015. 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. In November 2005, we issued $300,000,000 of 6.2% senior unsecured notes due June 2016.

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

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


	Three Months Ended						Change
	Mar. 31, 2006			Mar. 31, 2005			$			%
Gain (loss) on sales of properties	$	1,553		$	(110	)	$	1,663			n/a
Discontinued operations, net		270			608			(338	)		-56	%
Preferred dividends		(5,333	)		(5,436	)		103			-2	%

Totals	$	(3,510	)	$	(4,938	)	$	1,428			-29	%

Three assisted living facilities and one skilled nursing facility were held for sale as of March 31, 2006. We did not recognize an impairment loss on these assets as the fair value less estimated costs to sell exceeded our carrying values. During the three months ended March 31, 2006, we sold one assisted living facility, one skilled nursing facility and one parcel of land with carrying values of $15,393,000 for a net gain of $1,553,000. These properties generated $270,000 of income after deducting depreciation and interest expense from rental revenue for the three months ended March 31, 2006. All properties sold subsequent to January 1, 2005 and held for sale at March 31, 2006 generated $608,000 of income after deducting depreciation and interest expense from rental revenue for the three months ended March 31, 2005. Please refer to Note F of our unaudited consolidated financial statements for further discussion.

The decrease in preferred stock dividends is due to a decrease in average outstanding preferred shares as a result of conversions of Series E Cumulative Convertible and Redeemable Preferred Stock into common stock subsequent to March 31, 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.

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 losses on extinguishment of debt of $18,448,000, or $0.34 per diluted share, and $3,036,000, or $0.05 per diluted share, for the three months ended June 30, 2005 and December 31, 2005, respectively. These charges have not been added back for the calculations of FFO, FAD or EBITDA.

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

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

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


	Three Months Ended
	March 31		June 30			September 30		December 31			March 31
	2005		2005			2005		2005			2006

FFO Reconciliation:
Net income (loss) available to common stockholders	$	17,803	$	(1,606	)	$	19,908	$	26,587		$	19,645
Provision for depreciation		20,396		21,009			22,067		21,355			23,262
Loss (gain) on sales of properties		110		24					(3,361	)		(1,553	)

Funds from operations	$	38,309	$	19,427		$	41,975	$	44,581		$	41,354

Average common shares outstanding:
Basic		52,963		53,429			54,038		55,992			58,178
Diluted — for net income (loss) purposes		53,454		53,429			54,359		56,368			58,535
Diluted — for FFO purposes		53,454		53,765			54,359		56,368			58,535

Per share data:
Net income (loss) available to common stockholders
Basic	$	0.34	$	(0.03	)	$	0.37	$	0.47		$	0.34
Diluted		0.33		(0.03	)		0.37		0.47			0.34

Funds from operations
Basic	$	0.72	$	0.36		$	0.78	$	0.80		$	0.71
Diluted		0.72		0.36			0.77		0.79			0.71

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


	Three Months Ended
	March 31			June 30			September 30			December 31			March 31
	2005			2005			2005			2005			2006

FAD Reconciliation:
Net income (loss) available to common stockholders	$	17,803		$	(1,606	)	$	19,908		$	26,587		$	19,645
Provision for depreciation		20,396			21,009			22,067			21,355			23,262
Loss (gain) on sales of properties		110			24						(3,361	)		(1,553	)
Gross straight-line rental income		(3,707	)		(3,536	)		(2,950	)		(2,949	)		(2,400	)
Prepaid/straight-line rent receipts		852			2,360			2,832			7,825			10,310

Funds available for distribution	$	35,454		$	18,251		$	41,857		$	49,457		$	49,264

Average common shares outstanding:
Basic		52,963			53,429			54,038			55,992			58,178
Diluted — for net income (loss) purposes		53,454			53,429			54,359			56,368			58,535
Diluted — for FAD purposes		53,454			53,765			54,359			56,368			58,535

Per share data:
Net income (loss) available to common stockholders
Basic	$	0.34		$	(0.03	)	$	0.37		$	0.47		$	0.34
Diluted		0.33			(0.03	)		0.37			0.47			0.34

Funds available for distribution
Basic	$	0.67		$	0.34		$	0.77		$	0.88		$	0.85
Diluted		0.66			0.34			0.77			0.88			0.84

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 represents the amount reflected on our consolidated statement of cash flows for non-cash expenses accounted for in accordance with U.S. GAAP and includes amortization of stock-based compensation, deferred loan expenses and other items. Dollars are in thousands.


	Three Months Ended
	March 31			June 30			September 30			December 31			March 31
	2005			2005			2005			2005			2006

EBITDA Reconciliation:
Net income	$	23,239		$	3,830		$	25,297		$	31,921		$	24,978
Interest expense		19,645			19,986			21,624			21,369			24,238
Provision for depreciation		20,396			21,009			22,067			21,355			23,262
Amortization		1,042			2,314			911			708			3,207

EBITDA	$	64,322		$	47,139		$	69,899		$	75,353		$	75,685

Interest Coverage Ratio:
Interest expense	$	19,645		$	19,986		$	21,624		$	21,369		$	24,238
Capitalized interest		265			348			12			39			202

Total interest		19,910			20,334			21,636			21,408			24,440
EBITDA	$	64,322		$	47,139		$	69,899		$	75,353		$	75,685

Interest coverage ratio		3.23	x		2.32	x		3.23	x		3.52	x		3.10	x

Fixed Charge Coverage Ratio:
Total interest	$	19,910		$	20,334		$	21,636		$	21,408		$	24,440
Preferred dividends		5,436			5,436			5,389			5,334			5,333

Total fixed charges		25,346			25,770			27,025			26,742			29,773
EBITDA	$	64,322		$	47,139		$	69,899		$	75,353		$	75,685

Fixed charge coverage ratio		2.54	x		1.83	x		2.59	x		2.82	x		2.54	x

Critical Accounting Policies

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

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

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

Management has discussed the development and selection of its critical accounting policies with the Audit Committee of the Board of Directors and the Audit Committee has reviewed the disclosure presented below relating to them. Management believes the current assumptions and other considerations used to estimate amounts reflected in our consolidated financial statements are appropriate and are not reasonably likely to change in the future. However, since these estimates require assumptions to be made that were uncertain at the time the estimate was made, they bear the risk of change. If actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our consolidated financial statements, the resulting changes could have a material adverse effect on our consolidated results of operations, liquidity and/or financial condition. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2005 for further information on significant accounting policies that impact us. There have been no material changes to these policies in 2006.

We adopted Statement of Financial Accounting Standards No. 123(R) on January 1, 2006. See Note K to our unaudited consolidated financial statements for additional information.

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


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

We maintain an allowance for loan losses in accordance with Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, as amended, and SEC Staff Accounting Bulletin No. 102, Selected Loan Loss Allowance Methodology and Documentation Issues. The allowance for loan losses is maintained at a level believed adequate to absorb potential losses in our loans receivable. The determination of the allowance is based on a quarterly evaluation of all outstanding loans. If this evaluation indicates that there is a greater risk of loan charge-offs, additional allowances or placement on non-accrual status may be required. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due as scheduled according to the contractual terms of the original loan agreement. Consistent with this definition, all loans on non-accrual are deemed impaired. To the extent circumstances improve and the risk of collectibility is diminished, we will return these loans to full accrual status.		The determination of the allowance is based on a quarterly evaluation of all outstanding loans, including general economic conditions and estimated collectibility of loan payments and principal. We evaluate the collectibility of our loans receivable based on a combination of factors, including, but not limited to, delinquency status, historical loan charge-offs, financial strength of the borrower and guarantors and value of the underlying property. For the three months ended March 31, 2006, we recorded $250,000 as provision for loan losses, resulting in an allowance for loan losses of $6,711,000 relating to loans with outstanding balances of $32,285,000 at March 31, 2006. Also at March 31, 2006, we had loans with outstanding balances of $15,659,000 on non-accrual status.


Nature of Critical		Assumptions/Approach
Accounting Estimate		Used
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 three months ended March 31, 2006, we recorded $18,914,000 and $4,348,000 as provision for depreciation relating to buildings and improvements, respectively. The average useful life of our buildings and improvements was 33.1 years and 10.3 years, respectively, for the three months ended March 31, 2006.
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 three months ended March 31, 2006.
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 March 31, 2006, we participated in two interest rate swap agreements related to our long-term debt. At March 31, 2006, the swaps were reported at their fair value as a $651,000 other liability. For the three months ended March 31, 2006, we incurred $15,000 of losses related to our swaps that was recorded as an addition to interest expense.


Nature of Critical		Assumptions/Approach
Accounting Estimate		Used
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. Our 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 three months ended March 31, 2006, we recognized $4,262,000 of interest income and $73,459,000 of rental income, including discontinued operations. Cash receipts on leases with deferred revenue provisions were $10,310,000 as compared to gross straight-line rental income recognized of $2,400,000 for the three months ended March 31, 2006. At March 31, 2006, our straight-line receivable balance was $56,440,000. Also at March 31, 2006, we had loans with outstanding balances of $15,659,000 on non-accrual status.

Forward-Looking Statements and Risk Factors

This Quarterly Report on Form 10-Q may contain “forward-looking” statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements concern and are based upon, among other things, the possible expansion of our portfolio; the performance of our operators and properties; our ability to enter into agreements with new viable tenants for properties that we take back from financially troubled tenants, if any; our ability to make distributions; our policies and plans regarding investments, financings and other matters; our tax status as a real estate investment trust; our ability to appropriately balance the use of debt and equity; our ability to access capital markets or other sources of funds; and our ability to meet our earnings guidance. When we use words such as “may,” “will,” “intend,” “should,” “believe,” “expect,” “anticipate,” “project,” “estimate” or similar expressions, we are making forward-looking statements. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Our expected results may not be achieved, and actual results may differ materially from expectations. This may be a result of various factors, including, but not limited to: the status of the economy; the status of capital markets, including prevailing interest rates; serious issues facing the health care industry, including compliance with and changes to regulations and payment policies and operators’ difficulty in obtaining and maintaining adequate liability and other insurance; changes in financing terms available to us; competition within the health care and senior housing industries; changes in federal, state and local legislation; negative developments in the operating results or financial condition of operators, including, but not limited to, their ability to pay rent and repay loans; our ability to transition or sell underperforming facilities with a profitable result; inaccuracies in any of our assumptions; operator bankruptcies; government regulations affecting Medicare and Medicaid reimbursement rates; liability claims and insurance costs for our operators; unanticipated difficulties and/or expenditures relating to future acquisitions; environmental laws affecting our properties; delays in reinvestment of sales proceeds; changes in rules or practices governing our financial reporting; and structure related factors, including REIT qualification, anti-takeover provisions and key management personnel. Other important factors are identified in our Annual Report on Form 10-K for the year ended December 31, 2005, including factors identified under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Finally, we assume no obligation to update or revise any forward-looking statements or to update the reasons why actual results could differ from those projected in any forward-looking statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to various market risks, including the potential loss arising from adverse changes in interest rates. We seek to mitigate the effects of fluctuations in interest rates by matching the terms of new investments with new long-term fixed rate borrowings to the extent possible. We may or may not elect to use financial derivative instruments to hedge interest rate exposure. These decisions are principally based on our policy to match our variable rate investments with comparable borrowings, but are also based on the general trend in interest rates at the applicable dates and our perception of the future volatility of interest rates. This section is presented to provide a discussion of the risks associated with potential fluctuations in interest rates.

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

A change in interest rates will not affect the interest expense associated with our fixed rate debt. Interest rate changes, however, will affect the fair value of our fixed rate debt. A 1% increase in interest rates would result in a decrease in fair value of our senior unsecured notes by approximately $35,175,000 at March 31, 2006 ($26,667,000 at March 31, 2005). Changes in the interest rate environment upon maturity of this fixed rate debt could have an effect on our future cash flows and earnings, depending on whether the debt is replaced with other fixed rate debt, variable rate debt, or equity or repaid by the sale of assets.

On May 6, 2004, we entered into two interest rate swap agreements (the “Swaps”) for a total notional amount of $100,000,000 to hedge changes in fair value attributable to changes in the LIBOR swap rate of $100,000,000 of fixed rate debt with a maturity date of November 15, 2013. The Swaps are treated as fair-value hedges for accounting purposes and we utilize the short-cut method in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. The Swaps are with highly rated counterparties in which we receive a fixed rate of 6.0% and pay a variable rate based on six-month LIBOR plus a spread. At March 31, 2006, the Swaps were reported at their fair value as a $651,000 other liability ($1,890,000 other asset at March 31, 2005). A 1% increase in interest rates would result in a decrease in fair value of our Swaps by approximately $6,328,000 at March 31, 2006 ($7,226,000 at March 31, 2005). Assuming no changes in the notional amount of $100,000,000 of our Swaps, a 1% increase in interest rates would result in increased annual interest expense of $1,000,000.

Our variable rate debt, including our unsecured lines of credit arrangements, is reflected at fair value. At March 31, 2006, we had $201,000,000 outstanding related to our variable rate debt and assuming no changes in outstanding balances, a 1% increase in interest rates would result in increased annual interest expense of $2,010,000. At March 31, 2005, we had $163,500,000 outstanding related to our variable rate debt and assuming no changes in outstanding balances, a 1% increase in interest rates would have resulted in increased annual interest expense of $1,635,000.

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

Item 4. Controls and Procedures

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

PART II. OTHER INFORMATION

Item 1A. Risk Factors

There have been no material changes from the risk factors identified under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2005.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

ISSUER PURCHASES OF EQUITY SECURITIES

Total Number

Maximum Number

of Shares Purchased

of Shares that May

Total Number

as Part of Publicly

Yet Be Purchased

of Shares

Average Price

Announced

Under the Plans or

Period

Purchased (1)

Paid Per Share

Plans or Programs (2)

Programs

January 1, 2006 through January 31, 2006

18,301

36.23

February 1, 2006 through February 28, 2006

March 1, 2006 through March 31, 2006

Totals

18,301

36.23


(1)		During the three months ended March 31, 2006, the only securities purchased by the Company were shares of common stock held by employees who tendered owned shares to satisfy the tax withholding on the lapse of certain restrictions on restricted stock.

(2)		No shares were purchased as part of publicly announced plans or programs.

Item 6. Exhibits

	10.1		Amended and Restated Employment Agreement, effective March 17, 2006, by and between Health Care REIT, Inc. and Scott A. Estes.

	12		Statement Regarding Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends.

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

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

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

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

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

HEALTH CARE REIT, INC.


Date: May 10, 2006	By:	/s/ George L. Chapman

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

Date: May 10, 2006	By:	/s/ Scott A. Estes

	Scott A. Estes,
	Senior Vice President and Chief Financial Officer
	(Principal Financial Officer)

Date: May 10, 2006	By:	/s/ Paul D. Nungester, Jr.

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

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