HEALTH CARE REIT INC /DE/ - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2002 Commission File No. 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 Number)

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

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

Securities registered pursuant to Section 12(b) of the Act:

Name of Each Exchange
Title of Each Class on Which Registered
----------------------- -----------------------
Common Stock, $1.00 par value New York Stock Exchange

8.875% Series B Cumulative New York Stock Exchange
Redeemable Preferred Stock

Securities registered pursuant to Section 12(g) of the Act:

None

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; and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
----- -----

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. X
-----

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
----- -----

The aggregate market value of the shares of voting common stock held by
non-affiliates of the Registrant, computed by reference to the closing sales
price of such shares on the New York Stock Exchange as of the last business day
of the Registrant's most recently completed second fiscal quarter was
$1,122,960,000. As of February 20, 2003, there were 40,294,976 shares of common
stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy Statement for the annual
stockholders' meeting to be held May 1, 2003, are incorporated by reference into
Part III.

HEALTH CARE REIT, INC.
2002 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

PART I

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PART I

ITEM 1. BUSINESS

GENERAL

Health Care REIT, Inc., a Delaware corporation, is a self-administered, equity
real estate investment trust that invests in health care facilities, primarily
skilled nursing and assisted living facilities. We also invest in specialty care
facilities. As of December 31, 2002, long-term care facilities, which include
skilled nursing and assisted living facilities, comprised approximately 92% of
our investment portfolio. Founded in 1970, we were the first real estate
investment trust to invest exclusively in health care facilities.

As of December 31, 2002, we had $1,537,257,000 of real estate investments,
inclusive of credit enhancements, in 244 facilities located in 33 states and
managed by 44 different operators. At that date, the portfolio included 160
assisted living facilities, 76 skilled nursing facilities and eight specialty
care facilities.

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 from annual increases in
rental and interest income and portfolio growth. To meet these objectives, we
invest primarily in long-term care facilities managed by experienced operators
and diversify our investment portfolio by operator and geographic location.

We anticipate investing in additional health care facilities through operating
lease arrangements with, and mortgage loans for, qualified health care
operators. Capital for future investments may be provided by borrowing under our
revolving credit facilities, public offerings or private placements of debt or
equity or the incurrence of secured indebtedness.

References herein to "we," "us," "our" or the "Company" refer to Health Care
REIT, Inc. and its subsidiaries unless specifically noted otherwise.

PORTFOLIO OF PROPERTIES

The following table shows our portfolio as of December 31, 2002:

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(1) Investments include real estate investments and credit enhancements
which amounted to $1,529,412,000 and $7,845,000, respectively.

(2) Investment Per Bed/Unit was computed by using the total investment
amount of $1,580,142,000 which includes real estate investments, credit
enhancements and unfunded commitments for which initial funding has
commenced which amounted to $1,529,412,000, $7,845,000 and $42,885,000,
respectively.

(3) We have investments in properties located in 33 states and managed by
44 different operators.

ASSISTED LIVING FACILITIES

An assisted living facility is a special combination of housing, personalized
supportive services and health care designed to meet the needs -- both scheduled
and unscheduled -- of those who need help with activities of daily living. More
intensive medical needs of the resident within assisted living facilities may be
provided by home health providers. Assisted living facilities represent less
costly and less institutional-like alternatives for the care of the elderly or
the frail.

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SKILLED NURSING FACILITIES

Skilled nursing facilities provide inpatient skilled nursing and personal care
services as well as rehabilitative, restorative and transitional medical
services. In some instances, skilled nursing facilities supplement hospital care
by providing specialized care for medically complex patients whose conditions
require intense medical and therapeutic services, but who are medically stable
enough to have these services provided in facilities that are less expensive
than acute care hospitals.

SPECIALTY CARE FACILITIES

Our specialty care facilities include acute care hospitals, long-term acute care
hospitals and other specialty care hospitals. Acute care hospitals provide a
wide range of inpatient and outpatient services including, but not limited to,
surgery, rehabilitation, therapy and clinical laboratories. Long-term acute care
hospitals provide inpatient services for patients with complex medical
conditions that require more intensive care, monitoring or emergency support
than that available in most skilled nursing facilities. Other specialty care
hospitals provide specialized inpatient and outpatient services for specific
illnesses or diseases including, among others, orthopedic, neurosurgical and
behavioral care services.

INVESTMENTS

We invest in income producing health care facilities with a primary focus on
long-term care facilities, which include skilled nursing and assisted living
facilities. We also invest in specialty care facilities. We diversify our
investment portfolio by operator and geographic location.

In determining whether to invest in a facility, we focus on the following: (a)
the experience of the management team; (b) the historical and projected
financial and operational performance of the facility; (c) the credit of the
tenant or borrower; (d) the security for the lease or loan; and (e) the capital
committed to the facility by the tenant or borrower. We conduct market research
and analysis for all potential investments. In addition, we review the value of
all facilities, the interest rates and debt service coverage requirements of any
debt to be assumed and the anticipated sources for repayment of any debt.

Our investments are primarily operating leases and mortgage loans. Construction
financing is provided, but only as a part of a long-term operating lease or
mortgage loan. Substantially all of our investments are designed with escalating
rate structures. Depending upon market conditions, we believe that appropriate
new investments will be available in the future with substantially the same
spreads over our costs of capital.

Operating leases and mortgage loans are normally credit enhanced by guaranties
and/or letters of credit. In addition, operating leases are typically structured
as master leases and mortgage loans are generally cross-defaulted and
cross-collateralized with other mortgage loans, operating leases or agreements
between the Company and the operator and its affiliates.

At December 31, 2002, 88% of our owned real property was subject to master
leases. A master lease is a lease of multiple facilities from us to one tenant
entity under a single lease agreement. From time to time, we may acquire
additional facilities that are then leased to the tenant under the master lease.
The tenant is required to make one monthly payment that represents rent on all
the properties that are subject to the master lease. Typically, the master lease
tenant can exercise its right to purchase the facilities or to renew the lease
only with respect to all leased facilities at the same time. This "bundling"
feature benefits us because the tenant cannot limit the purchase or renewal to
the better performing facilities and terminate the leasing arrangement with
respect to the poorer performing facilities. This spreads our risk among the
entire group of facilities within the master lease. The bundling feature may
provide a similar advantage if the master lease tenant is in bankruptcy. Subject
to certain restrictions, a debtor in bankruptcy has the right to assume or
reject each of its leases. It is our intent that a tenant who is in bankruptcy
would be required to assume or reject the master lease as a whole, rather than
making the decision on a facility by facility basis.

We typically invest in or finance up to 90% of the appraised value of a
property. Economic terms normally include annual rate increases and fair market
value based purchase options in operating leases.

We monitor our investments through a variety of methods determined by the type
of health care facility and operator. Our monitoring process includes review of
monthly financial statements for each facility, quarterly review of operator
credit, annual facility inspections and review of covenant compliance relating
to licensure, real estate taxes, letters of credit and other collateral. In
monitoring our portfolio, our personnel use a proprietary database to collect
and analyze facility-specific data. Additionally, we conduct extensive research
to ascertain industry trends and risks.

Through monitoring and research, we evaluate the operating environment in each
facility's market to determine whether payment risk is likely to increase. When
we identify unacceptable levels of payment risk, we seek to mitigate, eliminate
or transfer the risk. We typically categorize the risk as operator, facility or
market risk. For operator risk, we typically find a substitute operator to run
the facility. For facility risk, we usually work with the operator to institute
facility level management changes to address the risk. Finally, for market risk,

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we often encourage an operator to change its capital structure, including
refinancing or raising additional equity. Through these monitoring and research
efforts, we are typically able to intervene at an early stage and address
payment risk.

OPERATING LEASES

Each facility, which includes the land, buildings, improvements and related
rights, owned by us is leased to an operator pursuant to a long-term operating
lease. As discussed above, most of our leased properties are subject to master
leases. The leases generally have a fixed term of 10 to 15 years and contain one
or more five to 10-year renewal options. Each lease is a net lease requiring the
tenant to pay rent and all additional charges incurred in the operation of the
leased property. The tenants are required to repair, rebuild and maintain the
leased properties.

The net value of our completed leased properties aggregated approximately
$1,286,985,000 at December 31, 2002. The straight-line rents on the original
lease basis of our completed leased properties are approximately 11.9% per annum
on average at December 31, 2002. Our rental yield from leases depends upon a
number of factors, including the initial rent charged, up-front fees and any
rental adjustments. The base rents for the renewal periods are generally fixed
rents set at a spread above the Treasury yield for the corresponding period.

We currently provide for construction of a facility by the tenant as a part of a
long-term operating lease. 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. We also
typically charge a commitment fee at the commencement of construction. The
construction period commences upon funding and terminates upon the earlier of
the completion of the applicable facility or the end of a specified period,
generally 12 to 18 months. During the construction period, we purchase completed
construction from the operator in accordance with agreed upon terms and
conditions which require, among other things, a site visit by a Company
representative. During the construction period, we generally require additional
credit enhancement in the form of payment and performance bonds and/or
completion guaranties. At December 31, 2002, we had outstanding construction
financings of $19,833,000 for leased properties and were committed to providing
additional financing of approximately $42,885,000 to complete construction.

MORTGAGE LOANS

Our investments in mortgage loans are typically structured to provide us with
interest income, principal amortization and commitment fees and are generally
secured by a first mortgage lien.

At December 31, 2002, the average interest rate was approximately 11.9% per
annum on our outstanding mortgage loan balances. Our yield on mortgage loans
depends upon a number of factors, including the stated interest rate, average
principal amount outstanding during the term of the loan, the amount of the
commitment fee charged at the inception of the loan and any interest rate
adjustments.

The mortgage loans made through December 31, 2002 are generally subject to seven
to 10-year terms with 25-year amortization schedules that provide for a balloon
payment of the outstanding principal balance at the end of the term. Generally,
the mortgage loans provide five to seven years of prepayment protection.

SUBDEBT INVESTMENTS

Subdebt investments are unsecured loans made to operators of facilities.
Generally, these instruments are for five to seven-year terms. At December 31,
2002, the average interest rate was approximately 13.4% per annum on our
outstanding subdebt investment balances. At December 31, 2002, we had provided
subdebt financing to four operators.

EQUITY INVESTMENTS

We have an investment in Atlantic Healthcare Finance L.P., a property group that
specializes in the financing, through sale and leaseback transactions, of
nursing and care homes located in the United Kingdom. This investment is
accounted for under the equity method of accounting because we have the ability
to exercise significant influence, but not control, over the company due to our
31% ownership interest.

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

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BORROWING POLICIES

We may incur long-term indebtedness through public offerings or private
placements to institutional investors. For short-term purposes, we may, from
time to time, obtain lines of credit or other short-term borrowings from banks
or others.

When terms are deemed favorable, we may invest in properties subject to existing
mortgage indebtedness. In addition, we may obtain financing for unleveraged
properties in which we have invested or may refinance properties acquired on a
leveraged basis.

Under documents pertaining to existing indebtedness, we are subject to various
restrictions with respect to secured and unsecured indebtedness.

MAJOR OPERATORS

The following table summarizes certain information about our operator
concentration as of December 31, 2002 (dollars in thousands):

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(1) Investments include real estate investments and credit enhancements which
amounted to $1,529,412,000 and $7,845,000, respectively.

(2) Investments with our top five operators comprised 42% of total investments
at December 31, 2001.

(3) Revenues include gross revenues and revenues from discontinued operations
for the year ended December 31, 2002.

(4) Revenues from our top five operators were 40% and 38% for the years ended
December 31, 2001 and 2000, respectively.

COMPETITION

We compete with other real estate investment trusts, real estate partnerships,
banks, insurance companies, finance companies, government sponsored agencies,
tax and tax-exempt bond funds and other investors in the acquisition, leasing
and financing of health care facilities. The operators of our facilities compete
on a local and regional basis with operators of facilities that provide
comparable services. Operators compete for patients and residents based on a
number of factors including quality of care, reputation, physical appearance of
facilities, services offered, family preferences, physicians, staff and price.

EMPLOYEES

As of December 31, 2002, we employed 30 full-time employees.

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CERTAIN GOVERNMENT REGULATIONS

HEALTH LAW MATTERS - GENERALLY

We invest in assisted living, skilled nursing and specialty care facilities,
which represent approximately 57%, 35% and 8%, respectively, of our investments
at December 31, 2002.

Typically, operators of assisted living facilities do not receive significant
funding from governmental programs and are regulated by the states, not the
federal government. Operators of skilled nursing and specialty care facilities
are subject to federal and state laws that relate to the quality of the medical
and/or nursing care provided, ancillary services (e.g., respiratory,
occupational, physical and infusion therapy), qualifications of the
administrative personnel and nursing staff, the adequacy of the physical plant
and equipment, distribution of pharmaceuticals, reimbursement and rate setting
and operating policies. In addition, as described below, some of our facility
operators are subject to extensive laws and regulations pertaining to health
care fraud and abuse, including kickbacks, physician self-referrals and false
claims.

LICENSING

The primary regulations that affect assisted living facilities are the states'
licensing laws. In granting and renewing these licenses, the regulatory
authorities consider numerous factors that relate directly to a facility's
physical plant and operations, including, but not limited to, admission and
discharge standards and staffing and training in general. A decision to grant or
renew a license is also affected by a facility's record with respect to consumer
rights and medication guidelines and rules.

Generally, our skilled nursing and specialty care facilities are required to be
licensed on an annual or bi-annual basis and to be certified for participation
in the Medicare and Medicaid programs through various regulatory agencies that
determine compliance with federal, state and local laws. The failure of our
facility operators to maintain or renew any required license or regulatory
approval could prevent them from continuing operations at a property. In
addition, if a facility is found out of compliance with the conditions of
participation in Medicare, Medicaid or other health care programs, or if a
facility is otherwise excluded from those programs, the facility may be barred
from participation in government health insurance programs. Any of these
occurrences may impair the ability of our operators to meet their obligations to
us. If we have to replace a facility operator, our ability to replace the
operator may be affected by federal and state rules and policies governing
changes in control. Under current Medicare and Medicaid rules and regulations
and provider contracts, a successor operator that assumes an existing provider
agreement will typically be subject to certain liabilities of the previous
operator, including overpayments, underpayments, terms under any existing plan
of correction and possibly sanctions and penalties. If a successor operator
chooses to apply for a new Medicare provider agreement, the successor operator
may experience interruptions and delays in reimbursement during the processing
of its application for a new provider agreement. This may result in delays, an
inability to find a replacement operator, a significant working capital
commitment from us to a new operator or other difficulties.

REIMBURSEMENT

Assisted Living Facilities. Almost all of the revenues received by the operators
of our assisted living facilities are from private pay sources (including Social
Security) with a small amount from Medicaid waiver programs. Approximately 63%
of our revenues for the year ended December 31, 2002, were attributable to
assisted living facilities. At December 31, 2002, only six of our 27 assisted
living operators utilized Medicaid waivers, and Medicaid residents are generally
a small percentage of total census at each of these facilities.

Rates paid by self-pay residents are set by the facilities and are largely
determined by local market conditions and operating costs. Generally, facilities
receive a higher payment per day for a self-pay or private insurance patient
than for a Medicaid beneficiary who requires a comparable level of care. Thus,
the revenues generated by operators of our assisted living facilities may be
adversely affected by the mix of the patients, their payment sources, the acuity
level of care required and reductions in reimbursement levels which could in
turn have a material adverse effect on an operators' ability to meet their
obligations to us.

Most states have Medicaid waiver programs that allow Medicaid recipients to use
benefits for alternatives to skilled nursing such as assisted living. The
National Academy for State Health Policy reports that Medicaid waiver programs
served about 102,000 residents in assisted living or residential care settings
in 2002. The level of reimbursement varies significantly from state to state,
but rarely includes reimbursement for the rental portion of the monthly rate. In
addition, some operators are hesitant to accept Medicaid residents because
participation in the waiver program often entails increased state oversight and
regulatory requirements.

Skilled Nursing Facilities and Specialty Care Facilities. Skilled nursing and
specialty care facilities typically receive most of their revenues from Medicare
and Medicaid, with the balance representing private pay, including private
insurance. Consequently, skilled nursing and specialty care facilities rely
heavily on government reimbursement of capital and operating expenses. Changes
in federal or state reimbursement policies, including changes in payment rates
as a result of federal or state regulatory action, or delays by fiscal
intermediaries may also adversely affect an operator's ability to cover its
expenses. Skilled nursing and specialty care facilities are subject to periodic
pre- and post-payment reviews and other audits by federal and state authorities.
A review or audit of claims against a

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facility operator could result in recoupments, denials or delays of payments in
the future, which could have a material adverse effect on the operator's ability
to meet its obligations to us. Due to the significant judgments and estimates
inherent in payor settlement accounting, no assurance can be given as to the
adequacy of any reserves maintained by our facility operators for potential
adjustments to reimbursements for payor settlements. Due to budgetary
constraints, governmental payors often limit payments to skilled nursing and
specialty care facilities. As a result of government reimbursement programs
being subject to such budgetary pressures and legislative and administrative
actions, an operator's ability to meet its obligations to us may be
significantly impaired.

Medicare Reimbursement and Skilled Nursing Facilities. For the third quarter
ended September 30, 2002, approximately 15% of the revenue sources from our
skilled nursing facilities (which comprised 33% of our revenues for the year
ended December 31, 2002) were directly attributable to Medicare reimbursement.
In an effort to reduce federal spending on health care, the federal government
enacted the Balanced Budget Act of 1997 which contained extensive changes to the
Medicare and Medicaid programs intended to reduce the projected payments under
these programs. The Balanced Budget Act of 1997 fundamentally altered Medicare
payment methodologies for skilled nursing facilities by mandating the
institution of the skilled nursing facility prospective payment system. This
system differs significantly from the prior cost based reimbursement system.
Among other things, it sets per diem rates based on 1995 cost reports as
adjusted by a variety of factors, including, but not limited to, costs
associated with 44 patient utilization group categories. The payments received
under the skilled nursing facility prospective payment system cover services for
Medicare patients, including all ancillary services (such as respiratory,
physical, and occupational therapy) and certain covered medications. The skilled
nursing facility prospective payment system caused Medicare spending for skilled
nursing facility services to decrease and those reductions in Medicare payments
resulted in immediate financial difficulties thereby causing a number of skilled
nursing facility operators to seek bankruptcy protection.

Since the Balanced Budget Act's passage in 1997, the federal government has
taken steps to ameliorate the financial impact on affected providers. For
example, under the Balanced Budget Refinement Act and the Benefits Improvement
and Patient Protection Act of 2000, some of the mandatory reductions in Medicare
payment increases were reversed or delayed, and skilled nursing facilities
received temporary per diem payment increases for certain high cost patients.
However, the relief prescribed by these laws, rules and regulations expired as
of September 30, 2002.

The Medicare program announced in July 2002 that skilled nursing facilities
would receive a 2.6% increase in Medicare payments for federal fiscal year 2003
(resulting in nearly $400 million more in overall reimbursement) and that no
refinements would be made to the existing case-mix classification system for
fiscal year 2003. The expectation that skilled nursing facilities will continue
to receive an estimated $1 billion in temporary add-on payments until federal
fiscal year 2004 will be offset, however, by the expiration of other temporary
add-on payments previously provided by the Balanced Budget Refinement Act and
the Benefits Improvement and Patient Protection Act of 2000. The loss of these
temporary add-on payments will result in an overall decrease in federal fiscal
year 2003 payments as compared to fiscal year 2002 payments. Additionally, it is
unclear how potential case-mix refinements, if eventually implemented, may
impact Medicare reimbursement to skilled nursing facility operators. Thus,
despite some temporary payment relief, the skilled nursing facility prospective
payment system has resulted, and will likely continue to result, in reduced
reimbursement for operators of skilled nursing facilities as compared to prior
years.

Medicare Reimbursement and Specialty Care Facilities. For the third quarter
ended September 30, 2002, approximately 33% of the revenue sources from our
specialty care facilities (which comprised 4% of our revenues for the year ended
December 31, 2002) were directly attributable to Medicare. Some of these
facilities are acute care hospitals that provide a wide range of inpatient and
outpatient services, including, but not limited to, surgery, rehabilitation,
therapy and clinical laboratories. Other of these facilities are long-term acute
care hospitals that provide inpatient services for patients with complex medical
conditions that require more intensive care, monitoring or emergency support
than that available in most skilled nursing facilities. Some of our other
specialty care facilities provide specialized inpatient and outpatient services
for specific illnesses or diseases, including, among others, orthopedic,
neurosurgical and behavioral care services.

Hospitals are reimbursed by Medicare under prospective payment system
reimbursement methodologies. Reimbursement for these facilities is determined on
the basis of fixed, prospective rates. In some cases, a hospital might be able
to qualify for an outlier payment if the hospital's charges exceed a threshold.
The Center for Medicare and Medicaid Services is re-evaluating its outlier
methodology in response to allegations that some hospitals increased their
outlier reimbursement by substantially increasing charges. If any of the
operators of our specialty care facilities were found to have substantially
increased charges in an attempt to increase outlier payments, there is a risk
that such operators could be investigated and required to refund a portion of
outlier payments received plus possible penalties.

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Congress has limited increases in prospective payment system payments. These
limited increases may not be sufficient to cover specialty care facilities'
increasing costs of providing care. Failure to increase reimbursement to cover
increased costs, or reductions or freezes in payment rates, will have an adverse
impact on operators of our specialty care facilities.

The inpatient rehabilitation facilities are in the midst of fundamental changes
in how they are reimbursed by Medicare. These facilities had been reimbursed on
the basis of reasonable costs. However these facilities are now being reimbursed
on the basis of a new prospective payment system for inpatient rehabilitation
facilities, including freestanding rehabilitation hospitals and rehabilitation
units of acute care hospitals. Under the inpatient rehabilitation facility
prospective payment system, rehabilitation hospitals beginning in January 2002
were required to complete a patient assessment instrument upon admission and
discharge for all Medicare Part A fee-for-service patients. Each patient is
placed into a functional-related group on the basis of impairment, age,
co-morbidities, functional capability of the patient and other factors the
Medicare program deems appropriate to improve the explanatory power of
functional independence measure function related groups. The group determines
the base payment rate for the Medicare-covered Part A services furnished by the
inpatient rehabilitation facility during the beneficiary's episode of care.
Inpatient rehabilitation facility prospective payment system rates encompass the
inpatient capital costs and operating costs, including routine and ancillary
costs, of furnishing covered rehabilitation services. Other indirect operating
costs (including, among other things, bad debts, approved educational activities
and non-physician anesthetist's services) are not included.

The ability of our operators of inpatient rehabilitation facilities to adjust to
the shift from reasonable cost reimbursement to the prospective payment system
will impact the cash flow of these facilities. Failure to control costs or
manage the care provided under the inpatient rehabilitation facility prospective
payment system would have an adverse impact on our operators' ability to meet
their obligations to us.

Medicaid Reimbursement. Medicaid, a cooperative federal/state program providing
health coverage for the indigent, is the primary payor source for residents in
our skilled nursing and specialty care facilities. For the third quarter ended
September 30, 2002, approximately 65% of the revenues of our skilled nursing
facilities and 53% of the revenues of our specialty care facilities were
attributable to Medicaid payments. The federal government and the states share
responsibility for financing Medicaid. The federal matching rate, known as the
federal Medicaid assistance percentage, varies by state based on changes in per
capita income. Currently, many state Medicaid programs use a cost-based
reimbursement system in which the rate that a facility receives may be based on
the costs it historically incurred in providing patient care. Many of these
programs compute a per diem rate of reimbursement that is applied prospectively.
Certain states provide for efficiency incentives, subject to cost ceilings.
Reasonable costs typically include allowances for administrative and general
costs and costs of property and equipment (e.g., depreciation and fair rental).
Many of these programs are subject to retrospective adjustment under which a
facility operator might be required to refund payments that exceed incurred
costs.

States are facing increasingly difficult fiscal conditions. Personal income and
corporate tax revenues are declining due to the downturn in the economy. The
weak economy also strains social service programs because Medicaid is
means-tested and more people qualify for assistance as incomes fall. Further,
the population continues to age regardless of economic conditions and health
care costs, particularly for prescription drugs, continue to increase above the
rate of inflation. Therefore, the demands under the Medicaid system are
increasing during a period when the pressure is mounting to cut state
expenditures in order to balance budgets. Medicaid is typically the second
largest item in state budgets after elementary and secondary education. In most
states, Medicaid does not fully reimburse the cost of providing skilled nursing
services. Furthermore, the Balanced Budget Act of 1997 repealed the Boren
Amendment which required states to fund Medicaid expenditures in an amount that
would allow operators to provide care in conformity with applicable laws and
safety standards. Consequently, Medicaid funding is vulnerable to state balanced
budget requirements. The federal Medicaid assistance percentage, although
designed to change in relation to changes in a state's per capita income, lags
the state's changing economic conditions. Consequently, states may be forced to
decrease Medicaid expenditures or slow the rate of growth by freezing rates or
restricting eligibility. Budget shortfall projections are inexact estimates that
are ultimately determined by actual tax collections. Nonetheless, the scale and
scope of the current shortfalls as reported by the National Conference of State
Legislatures make it clear that many states will be forced to reduce spending in
order to balance their budgets for fiscal year 2003.

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The reimbursement methodologies applied to health care facilities continue to
evolve. Federal and state authorities have considered and may seek to implement
new or modified reimbursement methodologies that may negatively impact health
care facility operations. These changes, if implemented, may result in a
material adverse effect on our skilled nursing and specialty care facility
operations. No assurance can be given that current revenue sources or levels
will be maintained. Accordingly, there can be no assurance that payments under a
government reimbursement program are currently or will, in the future, be
sufficient to fully reimburse the facility operators for their operating and
capital expenses. As a result, the operators' ability to meet their obligations
to us could be adversely impacted.

OTHER RELATED LAWS

Skilled nursing and specialty care facilities (and assisted living facilities
that receive Medicaid payments) are subject to federal, state and local laws and
regulations (including those laws and regulations prohibiting fraud and abuse),
which govern the operations and financial and other arrangements that may be
entered into by health care providers. Certain of these laws prohibit direct or
indirect payments of any kind for the purpose of inducing or encouraging the
referral of patients for medical products or services reimbursable by
governmental programs. Other laws require providers to furnish only medically
necessary services and submit to the government valid and accurate statements
for each service. Still other laws require providers to comply with a variety of
safety, health and other requirements relating to the condition of the licensed
facility and the quality of care provided. Sanctions for violation of these laws
and regulations may include, but are not limited to, criminal and/or civil
penalties and fines and a loss of licensure and immediate termination of
governmental payments. In certain circumstances, violation of certain rules
(such as those prohibiting abusive and fraudulent behavior) with respect to one
facility may subject other facilities under common control or ownership to
sanctions, including disqualification from participation in the Medicare and
Medicaid programs. In the ordinary course of its business, a facility operator
is regularly subjected to inquiries, investigations and audits by federal and
state agencies that oversee these laws and regulations.

Each skilled nursing and specialty care facility (and any assisted living
facility that receives Medicaid payments) is subject to the federal
anti-kickback statute which generally prohibits persons from offering,
providing, soliciting or receiving remuneration to induce either the referral of
an individual or the furnishing of a good or service, for which payment may be
made under a federal health care program such as the Medicare and Medicaid
programs. Skilled nursing and specialty care facilities are also subject to the
federal Ethics in Patient Referral Act of 1989, commonly referred to as the
Stark Law. The Stark Law generally prohibits the submission of claims to
Medicare for payment if the claim results from a physician referral for certain
designated services and the physician has a financial relationship with the
health service provider that does not qualify under one of the exceptions for a
financial relationship under the Stark Law. Similar prohibitions on physician
self-referrals and submission of claims apply to state Medicaid programs.
Further, skilled nursing and specialty care facilities (and assisted living
facilities that receive Medicaid payments) are subject to substantial financial
penalties under the Civil Monetary Penalties Act and the False Claims Act and,
in particular, actions under the False Claims Act's "whistleblower" provisions.
Private enforcement of health care fraud has increased due in large part to
amendments to the False Claims Act that encourage private individuals to sue on
behalf of the government. These whistleblower suits by private individuals,
known as qui tam actions, may be filed by almost anyone, including present and
former patients and nurses and other employees. These actions could have a
material adverse effect on a facility operator's liquidity, financial condition
and results of operations which could adversely affect the ability of the
operator to meet its obligations to us. Finally, various state false claim and
anti-kickback laws also may apply to each facility operator. Violation of any of
these statutes can result in criminal and/or civil penalties that could have a
material adverse effect on the ability of an operator to meet its obligations to
us.

The Health Insurance Portability and Accountability Act of 1996, which became
effective January 1, 1997, greatly expanded the definition of health care fraud
and related offenses and broadened its scope to include private health care
plans in addition to government payors. This law also greatly increased funding
for the Department of Justice, Federal Bureau of Investigation and the Office of
the Inspector General of the Department of Health and Human Services to audit,
investigate and prosecute suspected health care fraud. Additionally, the
administrative simplification provisions of this law provide for communication
of health information through standard electronic transaction formats and for
the privacy and security of health information. In order to comply with the
regulations, health care providers must undergo significant operational and
technical changes, and these modifications may represent significant costs for
our health care providers. These additional costs may, in turn, adversely affect
the ability of our operators to meet their obligations to us.

Finally, government investigation and enforcement of health care laws has
increased dramatically over the past several years and is expected to continue.
Some of these enforcement actions represent novel legal theories and expansions
in the application of false claims laws. For example, there have been a number
of complaints filed and settlements entered into by the United States Attorneys
Office in the Eastern District of Pennsylvania alleging that the failure to meet
certain conditions of participation renders claims for care false on the theory
that inadequate care was provided. The costs for an operator of a health care
facility associated with both defending enforcement actions and the undertakings
in settlement agreements can be substantial and could have a material adverse
effect on the ability of an operator to meet its obligations to us.

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TAXATION

FEDERAL INCOME TAX CONSEQUENCES

The following summary of the taxation of the Company and the material federal
tax consequences to the holders of our stock is for general information only and
is not tax advice. The tax treatment of our stockholders will depend on a
stockholder's particular situation, and this summary only applies to
stockholders that hold their stock as capital assets. This discussion does not
deal with special tax situations applicable to insurance companies, financial
institutions or broker-dealers.

This summary does not discuss all of the aspects of U.S. federal income taxation
that may be relevant to you in light of your particular investment or other
circumstances. In addition, this summary does not discuss any state or local
income taxation or foreign income taxation or other tax consequences. This
summary is based on current U.S. federal income tax law. Subsequent developments
in U.S. federal income tax law, including changes in law or differing
interpretations, which may be applied retroactively, could have a material
effect on the U.S. federal income tax consequences of purchasing, owning and
disposing of our stock as set forth in this summary. Before you purchase our
stock, you should consult your own tax advisor regarding the particular U.S.
federal, state, local, foreign and other tax consequences of acquiring, owning,
and selling of our stock.

General

We elected to be taxed as a real estate investment trust (or REIT) commencing
with our first fiscal year. We intend to remain qualified as a REIT, but there
is no guarantee that we will qualify or remain qualified as a REIT for
subsequent years. Qualification and taxation as a REIT depends upon our ability
to meet a variety of qualification tests imposed under federal income tax law
with respect to our income, assets, distribution level and diversity of share
ownership as discussed below under "--Qualification as a REIT."

In any year in which we qualify as a REIT, in general, we will not be subject to
federal income tax on that portion of our REIT taxable income or capital gain
that is distributed to stockholders. We may, however, be subject to tax at
normal corporate rates on any taxable income or capital gain not distributed. If
we elect to retain and pay income tax on our net long-term capital gain,
stockholders are required to include their proportionate share of our
undistributed long-term capital gain in income, but they will receive a
refundable credit for their share of any taxes paid by us on a gain.

Despite the REIT election, we may be subject to federal income and excise tax as
follows:

[ ] To the extent that we do not distribute all of our net capital gain or
distribute at least 90%, but less than 100%, of our "REIT taxable
income," as adjusted, we will be subject to tax on the undistributed
amount at regular corporate tax rates.

[ ] We may be subject to the "alternative minimum tax" on certain items of
tax preference to the extent that this tax exceeds our regular tax;

[ ] If we have net income from the sale or other disposition of
"foreclosure property" that is held primarily for sale to customers in
the ordinary course of business or other non-qualifying income from
foreclosure property, we will be subject to tax at the highest
corporate rate on this income;

[ ] Any net income from prohibited transactions (which are, in general,
sales or other dispositions of property held primarily for sale to
customers in the ordinary course of business, other than dispositions
of foreclosure property and dispositions of property due to an
involuntary conversion) will be subject to a 100% tax;

[ ] If we fail to satisfy either the 75% or 95% gross income tests (as
discussed below), but nonetheless maintain our qualification as a REIT
because certain other requirements are met, we will be subject to a
100% tax on an amount equal to (1) the gross income attributable to
the greater of the amounts by which we failed the 75% or 95% test,
multiplied by (2) a fraction intended to reflect our profitability;

[ ] If we fail to distribute during each year at least the sum of (1) 85%
of our REIT ordinary income for the year, (2) 95% of our REIT capital
gain net income for the year (other than capital gain that we elect to
retain and pay tax on) and (3) any undistributed taxable income from
preceding periods, we will be subject to a 4% excise tax on the excess
of the required distribution over amounts actually distributed; and

[ ] We will also be subject to a tax of 100% on the amount of any rents
from real property, deductions or excess interest paid to us by any of
our "taxable REIT subsidiaries" that would be reduced through
reapportionment under certain federal income tax principles in order
to more clearly reflect income of the taxable REIT subsidiary. See
"--Other Tax Considerations--Investments in Taxable REIT
Subsidiaries."

If we acquire any assets from a corporation which is or has been a "C"
corporation in a carryover basis transaction, we could be liable for specified
liabilities that are inherited from the "C" corporation. A "C" corporation is
generally defined as a corporation that is required to pay full corporate level
federal income tax. If we recognize gain on the disposition of the assets during
the 10-year period beginning on the date on which the assets were acquired by
us, then to the extent of the assets' "built-in gain" (i.e., the excess of the
fair market value of the asset over the adjusted basis in the asset, in each
case determined as of the beginning of the 10-year period), we will be subject
to tax on the gain at the highest regular corporate rate applicable. The results
described in this paragraph with respect to the recognition of built-in gain
assume that the built-in gain assets, at the time the built-in gain assets were
subject to a

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conversion transaction where a "C" corporation elected REIT status or a REIT
acquired the assets from a "C" corporation, were not treated as sold to an
unrelated party and gain recognized.

Qualification as a REIT

A REIT is defined as a corporation, trust or association:

(1) which is managed by one or more trustees or directors;

(2) the beneficial ownership of which is evidenced by transferable shares
or by transferable certificates of beneficial interest;

(3) which would be taxable as a domestic corporation but for the federal
income tax law relating to REITs;

(4) which is neither a financial institution nor an insurance company;

(5) the beneficial ownership of which is held by 100 or more persons in
each taxable year of the REIT except for its first taxable year;

(6) not more than 50% in value of the outstanding stock of which is owned
during the last half of each taxable year, excluding its first taxable
year, directly or indirectly, by or for five or fewer individuals
(which includes certain entities) (the "Five or Fewer Requirement");
and

(7) which meets certain income and asset tests described below.

Conditions (1) to (4), inclusive, must be met during the entire taxable year and
condition (5) must be met during at least 335 days of a taxable year of 12
months or during a proportionate part of a taxable year of less than 12 months.
For purposes of conditions (5) and (6), pension funds and certain other
tax-exempt entities are treated as individuals, subject to a "look-through"
exception in the case of condition (6).

Based on publicly available information, we believe we have satisfied the share
ownership requirements set forth in (5) and (6) above. In addition, our Amended
and Restated By-Laws provide for restrictions regarding ownership and transfer
of shares. These restrictions are intended to assist us in continuing to satisfy
the share ownership requirements described in (5) and (6) above. These ownership
and transfer restrictions are described in Article VI of our Amended and
Restated By-Laws. These restrictions, however, may not ensure that we will, in
all cases, be able to satisfy the share ownership requirements described in (5)
and (6) above.

We have complied with, and will continue to comply with, regulatory rules to
send annual letters to certain of our stockholders requesting information
regarding the actual ownership of our stock. If despite sending the annual
letters, we do not know, or after exercising reasonable diligence would not have
known, whether we failed to meet the Five or Fewer Requirement, we will be
treated as having met the Five or Fewer Requirement. If we fail to comply with
these regulatory rules, we will be subject to a monetary penalty. If our failure
to comply was due to intentional disregard of the requirement, the penalty would
be increased. However, if our failure to comply was due to reasonable cause and
not willful neglect, no penalty would be imposed.

We may own a number of properties through wholly owned subsidiaries. A
corporation will qualify as a "qualified REIT subsidiary" if 100% of its stock
is owned by a REIT and the REIT does not elect to treat the subsidiary as a
taxable REIT subsidiary. A "qualified REIT subsidiary" will not be treated as a
separate corporation, and all assets, liabilities and items of income,
deductions and credits of a "qualified REIT subsidiary" will be treated as
assets, liabilities and items (as the case may be) of the REIT. A "qualified
REIT subsidiary" is not subject to federal income tax, and our ownership of the
voting stock of a qualified REIT subsidiary will not violate the restrictions
against ownership of securities of any one issuer which constitute more than 10%
of the value or total voting power of the issuer or more than 5% of the value of
our total assets, as described below under "--Asset Tests."

If we invest in a partnership, a limited liability company or a trust taxed as a
partnership or as a disregarded entity, we will be deemed to own a proportionate
share of the partnership's, limited liability company's or trust's assets.
Likewise, we will be treated as receiving our share of the income and loss of
the partnership, limited liability company or trust, and the gross income will
retain the same character in our hands as it has in the hands of the
partnership, limited liability company or trust. These "look-through" rules
apply for purposes of the income tests and assets tests described below.

Income Tests. There are two separate percentage tests relating to our sources of
gross income that we must satisfy for each taxable year.

[ ] At least 75% of our gross income (excluding gross income from certain
sales of property held primarily for sale) must be directly or
indirectly derived each taxable year from "rents from real property,"
other income from investments relating to real property or mortgages
on real property or certain income from qualified temporary
investments.

[ ] At least 95% of our gross income (excluding gross income from certain
sales of property held primarily for sale) must be directly or
indirectly derived each taxable year from any of the sources
qualifying for the 75% test and from dividends (including dividends
from taxable REIT subsidiaries), interest, gain from the sale or
disposition of stock securities and payments to us under an interest
rate swap, cap agreement, option, futures contract, forward rate
agreement or any similar financial instrument entered into by us to
hedge indebtedness incurred or to be incurred.

Rents received by us will qualify as "rents from real property" for purposes of
satisfying the gross income tests for a REIT only if several conditions are met:

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[ ] The amount of rent must not be based in whole or in part on the income
or profits of any person, although rents generally will not be
excluded merely because they are based on a fixed percentage or
percentages of receipts or sales.

[ ] Rents received from a tenant will not qualify as rents from real
property if the REIT, or an owner of 10% or more of the REIT, also
directly or constructively owns 10% or more of the tenant, unless the
tenant is our taxable REIT subsidiary and certain other requirements
are met with respect to the real property being rented.

[ ] If rent attributable to personal property leased in connection with a
lease of real property is greater than 15% of the total rent received
under the lease, then the portion of rent attributable to the personal
property will not qualify as "rents from real property."

[ ] For rents to qualify as rents from real property, we generally must
not furnish or render services to tenants, other than through a
taxable REIT subsidiary or an "independent contractor" from whom we
derive no income, except that we may directly provide services that
are "usually or customarily rendered" in the geographic area in which
the property is located in connection with the rental of real property
for occupancy only, or are not otherwise considered "rendered to the
occupant for his convenience."

For taxable years beginning after August 5, 1997, a REIT has been permitted to
render a de minimis amount of impermissible services to tenants and still treat
amounts received with respect to that property as rent from real property. The
amount received or accrued by the REIT during the taxable year for the
impermissible services with respect to a property may not exceed 1% of all
amounts received or accrued by the REIT directly or indirectly from the
property. The amount received for any service or management operation for this
purpose shall be deemed to be not less than 150% of the direct cost of the REIT
in furnishing or rendering the service or providing the management or operation.
Furthermore, impermissible services may be furnished to tenants by a taxable
REIT subsidiary subject to certain conditions, and we may still treat rents
received with respect to the property as rent from real property.

The term "interest" generally does not include any amount if the determination
of the amount depends in whole or in part on the income or profits of any
person, although an amount generally will not be excluded from the term
"interest" solely by reason of being based on a fixed percentage of receipts or
sales.

If we fail to satisfy one or both of the 75% or 95% gross income tests for any
taxable year, we may nevertheless qualify as a REIT for the year if we are
eligible for relief. These relief provisions will be generally available if:

[ ] Our failure to meet the tests was due to reasonable cause and not due
to willful neglect,

[ ] We attach a schedule of the sources of our income to our return; and

[ ] Any incorrect information on the schedule was not due to fraud with
intent to evade tax.

It is not now possible to determine the circumstances under which we may be
entitled to the benefit of these relief provisions. If these relief provisions
apply, a 100% tax is imposed on an amount equal to (a) the gross income
attributable to the greater of the amount by which we failed the 75% or 95%
test, multiplied by (b) a fraction intended to reflect our profitability.

Asset Tests. At the close of each quarter of our taxable year, we must also
satisfy several tests relating to the nature and diversification of our assets
determined in accordance with generally accepted accounting principles. At least
75% of the value of our total assets must be represented by real estate assets,
cash, cash items (including receivables arising in the ordinary course of our
operation), government securities and qualified temporary investments. Although
the remaining 25% of our assets generally may be invested without restriction,
we are prohibited from owning securities representing more than 10% of either
the vote or value of the outstanding securities of any issuer other than a
qualified REIT subsidiary, another REIT or a taxable REIT subsidiary (the "10%
vote and value test"). Further, no more than 20% of the total assets may be
represented by securities of one or more taxable REIT subsidiaries and no more
than 5% of the value of our total assets may be represented by securities of any
non-governmental issuer other than a qualified REIT subsidiary, another REIT or
a taxable REIT subsidiary. Each of the 10% vote and value test and the 20% and
5% asset tests must be satisfied at the end of any quarter. There are special
rules which provide relief if the value related tests are not satisfied due to
changes in the value of the assets of a REIT.

Investments in Taxable REIT Subsidiaries

For taxable years beginning after December 31, 2000, REITs may own more than 10%
of the voting power and value of securities in taxable REIT subsidiaries. We and
any taxable corporate entity in which we own an interest are allowed to jointly
elect to treat the entity as a "taxable REIT subsidiary."

One of our subsidiaries has elected to be treated as a taxable REIT subsidiary.
Taxable REIT subsidiaries are subject to full corporate level federal taxation
on their earnings but are permitted to engage in certain types of activities
which cannot be performed directly by REITs without jeopardizing their REIT
status. Our taxable REIT subsidiary will attempt to minimize the amount of these
taxes, but there can be no assurance whether or the extent to which measures
taken to minimize taxes will be successful. To the extent our taxable REIT
subsidiary is required to pay federal, state or local taxes, the cash available
for distribution as dividends to us from our taxable REIT subsidiary will be
reduced.

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The amount of interest on related-party debt that a taxable REIT subsidiary may
deduct is limited. Further, a 100% tax applies to any interest payments by a
taxable REIT subsidiary to its affiliated REIT to the extent the interest rate
is not commercially reasonable. A taxable REIT subsidiary is permitted to deduct
interest payments to unrelated parties without any of these restrictions.

The Internal Revenue Service may reallocate costs between a REIT and its taxable
REIT subsidiary where there is a lack of arms'-length dealing between the
parties. Any deductible expenses allocated away from a taxable REIT subsidiary
would increase its tax liability. Further, any amount by which a REIT
understates its deductions and overstates those of its taxable REIT subsidiary
will, subject to certain exceptions, be subject to a 100% tax.

Additional taxable REIT subsidiary elections may be made in the future for
additional entities in which we own an interest.

Annual Distribution Requirements. We are, in order to avoid being taxed as a
regular corporation, required to make distributions (other than capital gain
distributions) to our stockholders which qualify for the dividends paid
deduction in an amount at least equal to (A) the sum of (i) 90% of our "REIT
taxable income" (computed without regard to the dividends paid deduction and our
net capital gain) and (ii) 90% of the after-tax net income, if any, from
foreclosure property, minus (B) a portion of certain items of non-cash income.
These distributions must be paid in the taxable year to which they relate, or in
the following taxable year if declared before we timely file our tax return for
that year and if paid on or before the first regular distribution payment after
the declaration. The amount distributed must not be preferential. This means
that every stockholder of the class of stock to which a distribution is made
must be treated the same as every other stockholder of that class, and no class
of stock may be treated otherwise than in accordance with its dividend rights as
a class. To the extent that we do not distribute all of our net capital gain or
distribute at least 90%, but less than 100%, of our "REIT taxable income," as
adjusted, we will be subject to tax on the undistributed amount at regular
corporate tax rates. Finally, as discussed above, we may be subject to an excise
tax if we fail to meet certain other distribution requirements. We intend to
make timely distributions sufficient to satisfy these annual distribution
requirements.

It is possible that we, from time to time, may not have sufficient cash or other
liquid assets to meet the 90% distribution requirement, or to distribute the
greater amount as may be necessary to avoid income and excise taxation, due to,
among other things, (a) timing differences between (i) the actual receipt of
income and actual payment of deductible expenses and (ii) the inclusion of
income and deduction of expenses in arriving at our taxable income, or (b) the
payment of severance benefits that may not be deductible to us. In the event
that timing differences occur, we may find it necessary to arrange for
borrowings or, if possible, pay dividends in the form of taxable stock dividends
in order to meet the distribution requirement.

Under certain circumstances, in the event of a deficiency determined by the
Internal Revenue Service, we may be able to rectify a resulting failure to meet
the distribution requirement for a year by paying "deficiency dividends" to
stockholders in a later year, which may be included in our deduction for
distributions paid for the earlier year. Thus, we may be able to avoid being
taxed on amounts distributed as deficiency distributions; however, we will be
required to pay applicable penalties and interest based upon the amount of any
deduction taken for deficiency distributions.

Failure to Qualify as a Real Estate Investment Trust

If we fail to qualify for taxation as a REIT in any taxable year, we will be
subject to federal income tax, including any applicable alternative minimum tax,
on our taxable income at regular corporate rates. Distributions to stockholders
in any year in which we fail to qualify as a REIT will not be deductible nor
will any particular amount of distributions be required to be made in any year.
All distributions to stockholders will be taxable as ordinary income to the
extent of current and accumulated earnings and profits allocable to these
distributions and, subject to certain limitations, will be eligible for the
dividends received deduction for corporate stockholders. Unless entitled to
relief under specific statutory provisions, we also will be disqualified from
taxation as a REIT for the four taxable years following the year during which
qualification was lost. It is not possible to state whether in all circumstances
we would be entitled to statutory relief. Failure to qualify for even one year
could result in our need to incur indebtedness or liquidate investments in order
to pay potentially significant resulting tax liabilities.

Federal Income Taxation of Stockholders

Treatment of Taxable U.S. Stockholders. The following summary applies to you
only if you are a "U.S. stockholder". A "U.S. stockholder" is a stockholder of
shares of stock who, for United States federal income tax purposes, is:

[ ] a citizen or resident of the United States;

[ ] a corporation, partnership or other entity created or organized in or
under the laws of the United States or of any state or in the District
of Columbia, unless, in the case of a partnership, Treasury
Regulations provide otherwise;

[ ] an estate the income of which is subject to United States federal
income taxation regardless of its source; or

[ ] a trust whose administration is subject to the primary supervision of
a United States court and which has one or more United States persons
who have the authority to control all substantial decisions of the
trust.

So long as we qualify for taxation as a REIT, distributions on shares of our
stock made out of the current or accumulated earnings and profits allocable to
these distributions (and not designated as capital gain dividends) will be
includable as ordinary income for federal income tax purposes. None of these
distributions will be eligible for the dividends received deduction for U.S.
corporate stockholders.

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Distributions that are designated as capital gain dividends will be taxed as
long-term capital gains (to the extent they do not exceed our actual net capital
gain for the taxable year), without regard to the period for which you held our
stock. However, if you are a corporation, you may be required to treat a portion
of some capital gain dividends as ordinary income.

If we elect to retain and pay income tax on any net long-term capital gain, you
would include in income, as long-term capital gain, your proportionate share of
this net long-term capital gain. You would also receive a refundable tax credit
for your proportionate share of the tax paid by us on these retained capital
gains and you would have an increase in the basis of your shares of our stock in
an amount equal to your includable capital gains less your share of the tax
deemed paid.

You may not include in your federal income tax return any of our net operating
losses or capital losses. Federal income tax rules may also require that certain
minimum tax adjustments and preferences be apportioned to you. In addition, any
distribution declared by us in October, November or December of any year on a
specified date in any such month shall be treated as both paid by us and
received by you on December 31 of that year, provided that the distribution is
actually paid by us no later than January 31 of the following year.

We will be treated as having sufficient earnings and profits to treat as a
dividend any distribution up to the amount required to be distributed in order
to avoid imposition of the 4% excise tax discussed under "--General" and
"--Qualification as a REIT - Annual Distribution Requirements" above. As a
result, you may be required to treat as taxable dividends certain distributions
that would otherwise result in a tax-free return of capital. Moreover, any
"deficiency dividend" will be treated as a dividend (an ordinary dividend or a
capital gain dividend, as the case may be), regardless of our earnings and
profits. Any other distributions in excess of current or accumulated earnings
and profits will not be taxable to you to the extent these distributions do not
exceed the adjusted basis of your shares of our stock. You will be required to
reduce the tax basis of your shares of our stock by the amount of these
distributions until the basis has been reduced to zero, after which these
distributions will be taxable as capital gain, if the shares of our stock are
held as a capital asset. The tax basis as so reduced will be used in computing
the capital gain or loss, if any, realized upon sale of the shares of our stock.
Any loss upon a sale or exchange of shares of our stock which were held for six
months or less (after application of certain holding period rules) will
generally be treated as a long-term capital loss to the extent you previously
received capital gain distributions with respect to these shares of our stock.

Upon the sale or exchange of any shares of our stock to or with a person other
than us or a sale or exchange of all shares of our stock (whether actually or
constructively owned) with us, you will generally recognize capital gain or loss
equal to the difference between the amount realized on the sale or exchange and
your adjusted tax basis in these shares of our stock. This gain will be capital
gain if you held these shares of our stock as a capital asset.

Gain from the sale or exchange of our shares held for more than one year is
taxed at a maximum long-term capital gain rate, which is currently 20%. Some
taxpayers may be eligible for a lower long-term capital gain rate if our shares
are acquired after December 31, 2000, and held for at least five years. Pursuant
to Internal Revenue Service guidance, we may classify portions of our capital
gain dividends as gains eligible for the long-term capital gains rate or as gain
taxable to individual stockholders at a maximum rate of 25%.

Treatment of Tax-Exempt U.S. Stockholders. Tax-exempt entities, including
qualified employee pension and profit sharing trusts and individual retirement
accounts ("Exempt Organizations"), generally are exempt from federal income
taxation. However, they are subject to taxation on their unrelated business
taxable income ("UBTI"). The Internal Revenue Service has issued a published
revenue ruling that dividend distributions from a REIT to an exempt employee
pension trust do not constitute UBTI, provided that the shares of the REIT are
not otherwise used in an unrelated trade or business of the exempt employee
pension trust. Based on this ruling, amounts distributed by us to Exempt
Organizations generally should not constitute UBTI. However, if an Exempt
Organization finances its acquisition of the shares of our stock with debt, a
portion of its income from us will constitute UBTI pursuant to the "debt
financed property" rules. Likewise, a portion of the Exempt Organization's
income from us would constitute UBTI if we held a residual interest in a real
estate mortgage investment conduit.

In addition, in certain circumstances, a pension trust that owns more than 10%
of our stock is required to treat a percentage of our dividends as UBTI. This
rule applies to a pension trust holding more than 10% of our stock only if (i)
the percentage of our income that is UBTI (determined as if we were a pension
trust) is at least 5%, (ii) we qualify as a REIT by reason of the modification
of the Five or Fewer Requirement that allows beneficiaries of the pension trust
to be treated as holding shares in proportion to their actuarial interests in
the pension trust, and (iii) either (a) one pension trust owns more than 25% of
the value of our stock or (b) a group of pension trusts individually holding
more than 10% of the value of our stock collectively own more than 50% of the
value of our stock.

Backup Withholding and Information Reporting. Under certain circumstances, you
may be subject to backup withholding at applicable rates on payments made with
respect to, or cash proceeds of a sale or exchange of, shares of our stock.
Backup withholding will apply only if you:

[ ] fail to furnish your taxpayer identification number ("TIN") to the
person required to withhold;

[ ] furnish an incorrect TIN;

[ ] are notified by the Internal Revenue Service that you have failed to
properly report payments of interest and dividends; or

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[ ] under certain circumstances, fail to certify, under penalty of
perjury, that you have furnished a correct TIN and have not been
notified by the Internal Revenue Service that you are subject to
backup withholding for failure to report interest and dividend
payments.

Backup withholding will not apply with respect to payments made to certain
exempt recipients, such as corporations and tax-exempt organizations. You should
consult with a tax advisor regarding qualification for exemption from backup
withholding, and the procedure for obtaining an exemption. Backup withholding is
not an additional tax. Rather, the amount of any backup withholding with respect
to payment to a stockholder will be allowed as a credit against the
stockholder's United States federal income tax liability and may entitle the
stockholder to a refund, provided that the required information is provided to
the Internal Revenue Service. In addition, withholding a portion of capital gain
distributions made to stockholders may be required for stockholders who fail to
certify their non-foreign status.

Taxation of Foreign Stockholders. The following summary applies to you only if
you are a foreign person. The federal taxation of foreign persons is a highly
complex matter that may be affected by many considerations.

Distributions to you of cash generated by our real estate operations, but not by
the sale or exchange of our capital assets, generally will be subject to U.S.
withholding tax at a rate of 30%, unless an applicable tax treaty reduces that
tax and you file with us the required form evidencing the lower rate.

In general, you will be subject to United States federal income tax on a
graduated rate basis rather than withholding with respect to your investment in
our stock if the investment is "effectively connected" with your conduct of a
trade or business in the United States. A corporate foreign stockholder that
receives income that is, or is treated as, effectively connected with a United
States trade or business may also be subject to the branch profits tax, which is
payable in addition to regular United States corporate income tax. The following
discussion will apply to foreign stockholders whose investment in us is not so
effectively connected. We expect to withhold United States income tax, as
described below, on the gross amount of any distributions paid to you unless (i)
you file an Internal Revenue Service Form W-8ECI with us claiming that the
distribution is "effectively connected" or (ii) certain other exceptions apply.

Distributions by us that are attributable to gain from the sale or exchange of a
United States real property interest will be taxed to you under the Foreign
Investment in Real Property Tax Act of 1980 ("FIRPTA") as if these distributions
were gains "effectively connected" with a United States trade or business.
Accordingly, you will be taxed at the normal capital gain rates applicable to a
U.S. stockholder on these amounts, subject to any applicable alternative minimum
tax and a special alternative minimum tax in the case of nonresident alien
individuals. Distributions subject to FIRPTA may also be subject to a branch
profits tax in the hands of a corporate foreign stockholder that is not entitled
to treaty exemption.

We will be required to withhold from distributions subject to FIRPTA, and remit
to the Internal Revenue Service, 35% of designated capital gain dividends, or,
if greater, 35% of the amount of any distributions that could be designated as
capital gain dividends. In addition, if we designate prior distributions as
capital gain dividends, subsequent distributions, up to the amount of the prior
distributions not withheld against, will be treated as capital gain dividends
for purposes of withholding.

Unless our shares constitute a "United States real property interest" within the
meaning of FIRPTA or are effectively connected with a U.S. trade or business, a
sale of our shares by you generally will not be subject to United States
taxation. Our shares will not constitute a United States real property interest
if we qualify as a "domestically controlled REIT." We do, and expect to continue
to, qualify as a domestically controlled REIT. A domestically controlled REIT is
a REIT in which at all times during a specified testing period less than 50% in
value of its shares is held directly or indirectly by foreign stockholders.
However, if you are a nonresident alien individual who is present in the United
States for 183 days or more during the taxable year and certain other conditions
apply, you will be subject to a 30% tax on capital gains. In any event, a
purchaser of our shares from you will not be required under FIRPTA to withhold
on the purchase price if the purchased shares are "regularly traded" on an
established securities market or if we are a domestically controlled REIT.
Otherwise, under FIRPTA, the purchaser may be required to withhold 10% of the
purchase price and remit that amount to the Internal Revenue Service.

Backup withholding tax and information reporting will generally not apply to
distributions paid to you outside the United States that are treated as (i)
dividends to which the 30% or lower treaty rate withholding tax discussed above
applies; (ii) capital gains dividends; or (iii) distributions attributable to
gain from the sale or exchange by us of United States real property interests.
Payment of the proceeds of a sale of stock within the United States or conducted
through certain U.S. related financial intermediaries is subject to both backup
withholding and information reporting unless the beneficial owner certifies
under penalty of perjury that he or she is not a U.S. person (and the payor does
not have actual knowledge that the beneficial owner is a U.S. person) or
otherwise established an exemption. You may obtain a refund of any amounts
withheld under the backup withholding rules by filing the appropriate claim for
refund with the Internal Revenue Service.

Recent Legislation and Potential Legislation or Other Actions Affecting Tax
Consequences

President Bush has proposed that dividends received by individuals from
corporations be excluded from income tax to the extent the corporation paid
federal income tax. This exclusion would generally not apply to REITs. The
proposal would permit most corporations to retain after-tax proceeds with its
stockholders receiving a basis increase in their shares as if a dividend had
been

-16-

distributed and reinvested. The National Association of Real Estate Investment
Trusts, the industry trade organization, believes that to the extent a REIT pays
corporate taxes (either through a taxable REIT subsidiary or by retaining 10% of
its taxable income), a REIT's stockholders will receive a basis increase.

Current and prospective stockholders should recognize that the present federal
income tax treatment of an investment in us may be modified by legislative,
judicial or administrative action at any time and that any action may affect
investments and commitments previously made. The rules dealing with federal
income taxation are constantly under review by persons involved in the
legislative process and by the Internal Revenue Service and the Treasury
Department, resulting in revisions of regulations and revised interpretations of
established concepts as well as statutory changes. Revisions in federal tax laws
and interpretations of these laws could adversely affect the tax consequences of
an investment in us.

-17-

INTERNET ACCESS TO OUR SEC FILINGS

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and amendments to those reports, as well as our proxy statements and
other materials that are filed with, or furnished to, the Securities and
Exchange Commission are made available, free of charge, on our Internet web site
at www.hcreit.com, as soon as reasonably practicable after they are filed with,
or furnished to, the Securities and Exchange Commission.

SUBSIDIARIES

We have formed subsidiaries in connection with our real estate transactions. As
of February 20, 2003, our wholly-owned subsidiaries consisted of the following
entities:

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ITEM 2. PROPERTIES

Our headquarters are currently located at One SeaGate, Suite 1500, Toledo, Ohio
43604. The following table sets forth certain information regarding the
facilities that comprise our investments as of December 31, 2002:

- ----------

(1) Investments include real estate investments and credit enhancements which
amounted to $1,529,412,000 and $7,845,000, respectively.

(2) Reflects contract rate of annual straight-line rent or interest recognized.

-19-

ITEM 3. LEGAL PROCEEDINGS

On November 20, 2002, Doctors Community Health Care Corporation and five
subsidiaries filed for Chapter 11 bankruptcy protection in the United States
Bankruptcy Court for the District of Columbia. Doctors has stated that the
bankruptcy filing was due to the bankruptcy of National Century Financial
Enterprises and affiliates, who halted payments to health care providers,
including Doctors. We have provided mortgage financing to Doctors in the form of
a loan secured by Pacifica Hospital of the Valley in Sun Valley, CA, a property
that is owned by one of the debtor subsidiaries. The outstanding principal
balance of the loan is approximately $18.8 million at December 31, 2002. Based
upon an appraisal and historical performance of Pacifica Hospital, we expect to
receive payment in full of the outstanding principal and accrued interest, which
we believe we are entitled to as an oversecured creditor. We do not currently
intend to recognize any interest on the loan if payment is not received.

Alterra Healthcare Corporation filed for Chapter 11 bankruptcy protection on
January 23, 2003, in the United States Bankruptcy Court for the District of
Delaware. We have a master lease with Alterra for 45 assisted living facilities
with a depreciated book value of $106 million at December 31, 2002. We expect
Alterra to remain current on rent payments and to assume the master lease at
current rental levels.

From time to time, there are other various legal proceedings pending to which we
are a party or to which some of our properties are subject arising in the normal
course of business. We do not believe that the ultimate resolution of these
proceedings will have a material adverse effect on our consolidated financial
position or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The following table sets forth, for the periods indicated, the high and low
prices of our common stock on the New York Stock Exchange, as reported on the
Composite Tape and dividends paid per share. There were 4,579 stockholders of
record as of February 20, 2003.

-20-

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data for the five years ended December 31,
2002, is derived from our audited consolidated financial statements.

- ----------

(1) In accordance with FASB Statement No. 144, we have reclassified the income
and expenses attributable to the properties sold during 2002 to
discontinued operations. See Note 15 to our audited consolidated financial
statements.

(2) General and administrative and other expenses include loan expense,
provision for loan losses and other operating expenses.

-21-

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2002, our net real estate investments totaled approximately
$1,524,457,000 and included 160 assisted living facilities, 76 skilled nursing
facilities and eight specialty care facilities. Depending upon the availability
and cost of external capital, we anticipate making additional investments in
health care related facilities. New investments are funded from temporary
borrowings under our line of credit arrangements, internally generated cash and
the proceeds derived from asset sales. Permanent financing for future
investments, which replaces funds drawn under the line 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 and dividend requirements and finance future
investments.

The following table summarizes our capital activity during the year ended
December 31, 2002 (in thousands):

During the year ended December 31, 2002, the holder of our Series C Cumulative
Convertible Preferred Stock converted 900,000 shares into 878,000 shares of
common stock.

During 2002, we invested $389,873,000 in real property, provided permanent
mortgage and loan financings of $85,006,000, made construction advances of
$19,833,000 and funded $3,510,000 of subdebt investments. As of December 31,
2002, we had approximately $42,885,000 in unfunded construction commitments.
Also during 2002, we sold real property generating $52,279,000 of net proceeds
and collected $80,590,000 and $12,380,000 as repayment of principal on loans
receivable and subdebt investments, respectively.

As of December 31, 2002, we had stockholders' equity of $897,232,000 and a total
outstanding debt balance of $676,331,000, which represents a debt to total
capitalization ratio of 0.43 to 1.0.

In August 2002, we announced the amendment and extension of our primary
unsecured revolving line of credit. The line of credit was expanded to
$175,000,000, expires in August 2005 (with the ability to extend for one year at
our discretion if we are in compliance with all covenants) and currently bears
interest at the lender's prime rate or LIBOR plus 1.3% at our option. In
addition, at December 31, 2002, we had an unsecured revolving line of credit in
the amount of $25,000,000, bearing interest at the lender's prime rate and which
expires in June 2003. Also, at December 31, 2002, we had a secured line of
credit in the amount of $60,000,000 bearing interest at the lender's prime rate
or LIBOR plus 2.0%, at our option, with a floor of 7.0% and which expires in
April 2004. Additionally, at December 31, 2002, we had a secured note in the
amount of $4,000,000 bearing interest at LIBOR plus 2.0% and which matures in
November 2004. At December 31, 2002, we had $109,500,000 in borrowings
outstanding under the unsecured line of credit arrangements and $4,000,000
outstanding on the secured note.

As of February 20, 2003, we had an effective shelf registration on file with the
Securities and Exchange Commission under which we may issue up to $385,600,000
of securities including debt securities, common and preferred stock and
warrants. Depending upon market conditions, we anticipate issuing securities
under our shelf registration to invest in additional health care facilities and
to repay borrowings under our line of credit arrangements.

The following table summarizes our principal payments under contractual
obligations as of December 31, 2002:

- ----------

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

-22-

The following table summarizes our commercial commitments as of December 31,
2002:

As of December 31, 2002, we had approximately $42,885,000 of unfunded
construction commitments.

We have guaranteed the payment of industrial revenue bonds for one assisted
living facility in the event that the present owner defaults upon its
obligations. In consideration for this guaranty, we receive and recognize fees
annually related to this agreement. This guaranty expires upon the repayment of
the industrial revenue bonds which currently mature in 2009. At December 31,
2002, we were contingently liable for $3,195,000 under this guaranty.

In addition, we have an outstanding letter of credit issued to a bank, which
bank provided additional financing for a project on which we have a first
mortgage. We have also partially guaranteed the payment of loans made by the
bank on this project. The letter of credit currently matures in 2003 and the
guaranties expire upon the repayment of the loans which currently mature in
2003. At December 31, 2002, obligations under these agreements for which we were
contingently liable aggregated approximately $4,650,000.

RESULTS OF OPERATIONS DECEMBER 31, 2002 VS. DECEMBER 31, 2001

Revenues were comprised of the following:

We generated increased rental income as a result of the acquisition of
properties for which we receive rent. This was partially offset by a reduction
in interest income due to the repayment of mortgage loans. Commitment fees and
other income decreased primarily as a result of the completion of construction
projects.

During 2001, we received payoffs on mortgages that had significant prepayment
fee requirements, generating $990,000 in that year. During 2002, we did not
receive any prepayment fees with respect to mortgage loan payoffs.

Expenses were comprised of the following:

The increase in interest expense from 2001 to 2002 was primarily due to higher
average borrowings during the year and a reduction in the amount of capitalized
interest offsetting interest expense.

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

-23-

financing. Our interest expense is reduced by the amount capitalized.
Capitalized interest for the year ended December 31, 2002, totaled $170,000, as
compared with $841,000 for the same period in 2001.

The provision for depreciation increased primarily as a result of additional
investments in properties owned directly by us.

General and administrative expenses as a percentage of revenues (including
revenues from discontinued operations) for the year ended December 31, 2002,
were 5.83% as compared with 6.03% for the same period in 2001.

The increase in loan expense was primarily due to the additional amortization of
costs related to the unsecured line of credit renewal and the unsecured senior
notes issued in 2001 and 2002.

During the year ended December 31, 2002, it was determined that the projected
undiscounted cash flows from a parcel of land, one assisted living facility and
one specialty care facility did not exceed their related net book values and
impairment charges of $2,298,000 were recorded to reduce the properties to their
estimated fair market values. The estimated fair market values of the properties
were determined by offers to purchase received from third parties or estimated
net sales proceeds.

During the years ended December 31, 2002 and 2001, we sold properties with
carrying values of $53,311,000 and $23,829,000 for net losses of $1,032,000 and
$1,250,000, respectively. In August 2001, the Financial Accounting Standards
Board issued Statement No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which is effective for fiscal years beginning after December
15, 2001. We adopted the standard effective January 1, 2002. In accordance with
Statement No. 144, we have reclassified the income and expenses attributable to
the properties sold during 2002 to discontinued operations. These properties
generated $1,708,000 and $2,580,000 of income after deducting depreciation and
interest expense from rental revenue for the years ended December 31, 2002 and
2001, respectively.

In April 2002, we purchased $35,000,000 of our outstanding unsecured senior
notes that were due in 2003 and recorded a charge of $403,000 in connection with
this early extinguishment. In September 2001, we purchased $7,750,000 of our
outstanding unsecured senior notes that were due in 2002 and recorded a charge
of $213,000 in connection with this early extinguishment.

As a result of the various factors mentioned above, net income available to
common stockholders was $55,191,000, or $1.48 per diluted share, for 2002 as
compared with $47,044,000, or $1.52 per diluted share, for 2001.

RESULTS OF OPERATIONS DECEMBER 31, 2001 VS. DECEMBER 31, 2000

Revenues were comprised of the following:

We generated increased rental income as a result of the completion of real
property construction projects for which we began receiving rent and the
purchase of properties previously financed by us. This offset a reduction in
interest income due to the repayment of mortgage loans and the purchase of
properties previously financed by us.

The reduction in commitment fees and other income is due primarily to the
significant reduction in construction activity.

-24-

During 2001, we received payoffs on mortgages that had significant prepayment
fee requirements, generating the large increase over the prior year.

Expenses were comprised of the following:

The decrease in interest expense from 2000 to 2001 was primarily due to lower
average borrowings during the year offset by a reduction in the amount of
capitalized interest offsetting interest expense.

We capitalize certain interest costs associated with funds used to finance the
construction of properties owned directly by us. The amount capitalized is based
upon the borrowings outstanding during the construction period using the rate of
interest that approximates our cost of financing. Our interest expense is
reduced by the amount capitalized. Capitalized interest for the year ended
December 31, 2001, totaled $841,000, as compared with $3,079,000 for the same
period in 2000.

The provision for depreciation increased primarily as a result of additional
investments in properties owned directly by us.

In 2000, we restructured our investments with Summerville Health Care. As part
of the restructuring agreement, Summerville agreed to permit us to re-lease 10
of its 11 facilities to new operators and repaid substantially all of our
subdebt investment. As part of Summerville's recapitalization, our $2,000,000
non-yielding preferred stock investment was substantially diluted. Accordingly,
we wrote off our investment in 2000, resulting in a $2,000,000 charge.

General and administrative expenses as a percentage of revenues (including
revenues from discontinued operations) for the year ended December 31, 2001,
were 6.03% as compared with 5.41% for the same period in 2000.

The increase in loan expense was primarily due to the additional amortization of
costs related to the unsecured senior notes issued in 2001.

During the years ended December 31, 2001 and 2000, we sold properties with
carrying values of $23,829,000 and $107,182,000, respectively, for a net loss of
$1,250,000 in 2001 and a net gain of $1,684,000 in 2000. In August 2001, the
Financial Accounting Standards Board issued Statement No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, which is effective for fiscal
years beginning after December 15, 2001. We adopted the standard effective
January 1, 2002. In accordance with Statement No. 144, we have reclassified the
income and expenses attributable to the properties sold during 2002 to
discontinued operations. These properties generated $2,580,000 and $2,500,000 of
income after deducting depreciation and interest expense from rental revenue for
the years ended December 31, 2001 and 2000, respectively.

In September 2001, we purchased $7,750,000 of our outstanding unsecured senior
notes that were due in 2002 and recorded a charge of $213,000 in connection with
this early extinguishment.

As a result of the various factors mentioned above, net income available to
common stockholders was $47,044,000, or $1.52 per diluted share, for 2001 as
compared with $54,566,000, or $1.91 per diluted share, for 2000.

-25-

CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States, which require us to make
estimates and assumptions (see Note 1 to our audited consolidated financial
statements). We believe that of our significant accounting policies, the
following critical accounting policies affect our more significant judgments and
estimates used in the preparation of our consolidated financial statements.

REVENUE RECOGNITION

Revenue is recorded in accordance with SEC Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements ("SAB 101"), as amended. SAB 101
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.
Operating lease income includes base rent payments plus fixed annual rent
increases, which are recognized on a straight-line basis over the minimum lease
period. This lease income is greater than the amount of cash received during the
first half of the lease term.

IMPAIRMENT OF LONG-LIVED ASSETS

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. If the undiscounted cash flows are
less than the net book value, an impairment loss would be recognized to the
extent that the net book value exceeds the current fair market 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. If the projections or
assumptions change in the future, we may be required to record an impairment
charge and reduce the net book value of the property owned.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is maintained at a level believed adequate to
absorb potential losses in our loans receivable. The determination of the
allowance is based on a quarterly evaluation of these loans, including general
economic conditions and estimated collectibility of loan payments. We regularly
evaluate the collectibility of our loans receivable based on a combination of
factors. These factors include delinquency status (as determined by frequency of
payments), historical loan charge-offs, financial strength of the borrower and
guarantors and value of the underlying property. If these factors indicate that
there is greater risk of loan charge-offs, additional allowances or placement on
non-accrual status may be required.

DEPRECIATION AND USEFUL LIVES

We compute depreciation on our properties using the straight-line method based
on their estimated useful lives which range from fifteen to forty years for
buildings and five to twelve years for improvements. A significant portion of
the acquisition cost of each property is allocated to the building (usually
approximately 90%). The allocation of the acquisition cost to building and the
determination of the useful life of a property are based on appraisals
commissioned from independent real estate appraisal firms. If we do not allocate
appropriately to the building or if we incorrectly estimate the useful life of
our properties, the computation of depreciation will not appropriately reflect
the allocation of our capital expenditures over future periods.

IMPACT OF INFLATION

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

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

We have made and incorporated by reference statements in this Form 10-K that
constitute "forward-looking statements" as that term is defined in the federal
securities laws. These forward-looking statements concern:

o The possible expansion of our portfolio;

o The performance of our operators and properties;

o Our ability to obtain new viable tenants for properties which we take back
from financially troubled tenants, if any;

o Our ability to make distributions;

o Our policies and plans regarding investments, financings and other matters;

o Our tax status as a real estate investment trust;

-26-

o Our ability to appropriately balance the use of debt and equity; and

o Our ability to access capital markets or other sources of funds.

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

o The status of the economy;

o The status of capital markets, including prevailing interest rates;

o Changes in financing terms; and

o The risks described below:

RISK FACTORS RELATED TO OUR OPERATORS' REVENUES AND EXPENSES

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

RISK FACTORS RELATED TO OPERATOR BANKRUPTCIES

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

The receipt of liquidation proceeds or the replacement of an operator that has
defaulted on its lease or loan could be delayed by the approval process of any
federal, state or local agency necessary for the transfer of the facility or the
replacement of the operator licensed to manage the facility. In addition, we may
be required to fund certain expenses (e.g., real estate taxes and maintenance)
to preserve the value of a facility, avoid the imposition of liens on a facility
and/or to transition a facility to a new operator. In some instances, we have
terminated our lease with an operator and relet the facility to another
operator. In some of those situations, we provided working capital loans to and
limited indemnification of the new operator. If we cannot transition a leased
facility to a new operator, we may take possession of that facility, which may
expose us to certain successor liabilities. Should these events occur, our
revenue and operating cash flow may be adversely affected.

On November 20, 2002, Doctors Community Health Care Corporation and five
subsidiaries filed for Chapter 11 bankruptcy protection. Doctors has stated that
the bankruptcy filing was due to the bankruptcy of National Century Financial
Enterprises and affiliates, who halted payments to health care providers,
including Doctors. We have provided mortgage financing to Doctors in the form of
a loan secured by Pacifica Hospital of the Valley in Sun Valley, CA, a property
that is owned by one of the debtor subsidiaries. The outstanding principal
balance of the loan is approximately $18.8 million at December 31, 2002. Based
upon an appraisal and historical performance of Pacifica Hospital, we expect to
receive payment in full of the outstanding principal and accrued interest, which
we believe we are entitled to as an oversecured creditor. We do not currently
intend to recognize any interest on the loan if payment is not received.

Alterra Healthcare Corporation filed for Chapter 11 bankruptcy protection on
January 23, 2003. We have a master lease with Alterra for 45 assisted living
facilities with a depreciated book value of $106 million at December 31, 2002.
We expect Alterra to remain current on rent payments and to assume the master
lease at current rental levels.

RISK FACTORS RELATED TO GOVERNMENT REGULATIONS

Our operators' businesses are affected by government and private payor
reimbursement rates. To the extent that any skilled nursing or specialty care
facility receives a significant portion of its revenues from governmental
payors, primarily Medicaid and Medicare, these revenues may be subject to
statutory and regulatory changes, retroactive rate adjustments, recovery of
program overpayments or set-offs, administrative rulings, policy
interpretations, payment or other delays by fiscal intermediaries, government
funding restrictions (at a program level or with respect to specific facilities)
and interruption or delays in payments due to any ongoing governmental
investigations and audits at the facility. In recent years, governmental payors
have frozen or reduced payments to health care providers due to budgetary
pressures. This trend in health care reimbursement will likely continue to be of
paramount importance to federal and state authorities. We cannot make any
assessment as to the ultimate timing or effect any future legislative reforms
may have on the financial condition of the skilled nursing industry, the
specialty care industry or on the health care industry in general. There can be
no

-27-

assurance that adequate reimbursement levels will continue to be available for
services provided by any facility operator, whether the facility receives
reimbursement from Medicare, Medicaid or private payors. Significant limits on
the scope of services reimbursed and on reimbursement rates and fees could have
a material adverse effect on an operator's liquidity, financial condition and
results of operations, which could adversely affect the ability of an operator
to meet its obligations to us. See "Item 1 - Business - Certain Government
Regulations - Reimbursement" above.

RISK FACTORS RELATED TO LIABILITY CLAIMS AND INSURANCE COSTS

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

RISK FACTORS RELATED TO OUR STRUCTURE

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

Second, the anti-takeover provisions in our Second Restated Certificate of
Incorporation and Amended and Restated By-laws contain provisions that could
make it more difficult for or even prevent a third party from acquiring us
without the approval of our incumbent Board of Directors. We have adopted a
"poison pill" rights plan that has anti-takeover effects. The rights plan, if
triggered, will cause substantial dilution to a person or group that attempts to
acquire us on terms not approved by the Board of Directors. Provisions and
agreements that inhibit or discourage takeover attempts could reduce the market
value of our common stock.

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

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ITEM 7A. 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. The following section is
presented to provide a discussion of the risks associated with potential
fluctuations in interest rates.

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

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 $15
million at December 31, 2002 ($16 million at December 31, 2001). 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, with variable rate debt, with equity or by
the sale of assets.

Our variable rate debt, including our unsecured and secured revolving credit
arrangements, is reflected at fair value. At December 31, 2002, a 1% increase in
interest rates related to this variable rate debt (assuming no changes in
outstanding balances) would result in increased annual interest expense of
$1,135,000 ($500,000 at December 31, 2001).

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.

We may or may not elect to use financial derivative instruments to hedge
variable 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.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

REPORT OF INDEPENDENT AUDITORS

Stockholders and Directors
Health Care REIT, Inc.

We have audited the accompanying consolidated balance sheets of Health Care
REIT, Inc. as of December 31, 2002 and 2001, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 2002. Our audits also included the
financial statement schedules listed in the Index at Item 15 (a). These
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Health Care REIT,
Inc. at December 31, 2002 and 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.

As discussed in Note 15 to the consolidated financial statements, in 2002 the
Company adopted the provisions of Financial Accounting Standards Board Statement
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

/s/ ERNST & YOUNG LLP

Toledo, Ohio
January 17, 2003

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HEALTH CARE REIT, INC.
CONSOLIDATED BALANCE SHEETS

See accompanying notes

-31-

HEALTH CARE REIT, INC.
CONSOLIDATED STATEMENTS OF INCOME

See accompanying notes

-32-

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

See accompanying notes

-33-

HEALTH CARE REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes

-34-

Health Care REIT, Inc.
Notes to Consolidated Financial Statements

1. ACCOUNTING POLICIES AND RELATED MATTERS

INDUSTRY

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

PRINCIPLES OF CONSOLIDATION

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

USE OF ESTIMATES

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

LOANS RECEIVABLE

Loans receivable consist of long-term mortgage loans, working capital loans and
subdebt investments. Interest income on loans is recognized as earned based upon
the principal amount outstanding. The mortgage loans are primarily
collateralized by a first mortgage on or an assignment of a partnership interest
in the related facilities, which consist of skilled nursing, assisted living and
specialty care facilities. The working capital loans are generally secured by
second mortgages or interests in receivables. Subdebt investments represent debt
instruments to operators of facilities that have been financed by us. These
obligations are generally secured by the operator's leasehold rights and
corporate guaranties.

REAL PROPERTY OWNED

Substantially all of the properties owned by us are leased under operating
leases and are recorded at cost. These properties are depreciated on a
straight-line basis over their estimated useful lives which range from fifteen
to forty years for buildings and five to twelve years for improvements. The net
book value of long-lived assets is reviewed quarterly on a property by property
basis to determine if facts and circumstances suggest that the assets may be
impaired or that the depreciable life may need to be changed. We consider
external factors relating to each asset. If these external factors and the
projected undiscounted cash flows of the asset over the remaining depreciation
period indicate that the asset will not be recoverable, the carrying value will
be adjusted to the estimated fair market value. The leases generally extend for
a minimum 10-year period and provide for payment of all taxes, insurance and
maintenance by the tenants. In general, operating lease income includes base
rent payments plus fixed annual rent increases, which are recognized on a
straight-line basis over the minimum lease period. This income is greater than
the amount of cash received during the first half of the lease term.

CAPITALIZATION OF CONSTRUCTION PERIOD INTEREST

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

We capitalized interest costs of $170,000, $841,000 and $3,079,000 during 2002,
2001 and 2000, respectively, related to construction of real property owned by
us. Our interest expense reflected in the consolidated statements of income has
been reduced by the amounts capitalized.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is maintained at a level believed adequate to
absorb potential losses in our loans receivable. The determination of the
allowance is based on a quarterly evaluation of these loans, including general
economic conditions and estimated collectibility of loan payments. We regularly
evaluate the collectibility of our loans receivable based on a combination of
factors. These factors include delinquency status (as determined by frequency of
payments), historical loan charge-offs, financial strength of the borrower and
guarantors and value of the underlying property. If these factors indicate that
there is greater risk of loan charge-offs, additional allowances or placement on
non-accrual status may be required. At December 31, 2002, we had loans with
outstanding balances of $15,311,000 on non-accrual status.

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1. ACCOUNTING POLICIES AND RELATED MATTERS (CONTINUED)

DEFERRED LOAN EXPENSES

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

CASH AND CASH EQUIVALENTS

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

EQUITY INVESTMENTS

We have an investment in Atlantic Healthcare Finance L.P., a property group that
specializes in the financing, through sale and leaseback transactions, of
nursing and care homes located in the United Kingdom. This investment is
accounted for under the equity method of accounting because we have the ability
to exercise significant influence, but not control, over the investee due to our
31% ownership interest.

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

FOREIGN CURRENCY TRANSLATION

For our investment in Atlantic Healthcare Finance L.P., the functional currency
is the local currency. The income and expenses of the entity are translated into
U.S. dollars using the average exchange rates for the reporting period to derive
our equity earnings. Translation adjustments are recorded in accumulated other
comprehensive income, a separate component of stockholders' equity.

COMMITMENT FEES

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

FEDERAL INCOME TAX

No provision has been made for federal income taxes since we have elected to be
treated as a real estate investment trust under the applicable provisions of the
Internal Revenue Code, and we believe that we have met the requirements for
qualification as a real estate investment trust for each taxable year. See Note
10.

STOCK-BASED COMPENSATION

We have elected to follow APB Opinion No. 25, Accounting for Stock Issued to
Employees, in accounting for our stock options as permitted under FASB Statement
No. 123 ("FASB 123"), Accounting for Stock-Based Compensation, and, accordingly,
recognize no compensation expense for the stock option grants when the market
price on the underlying stock on the date of the grant equals the exercise price
of the stock option. See Note 8 for more information about our stock-based
compensation plans.

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

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1. ACCOUNTING POLICIES AND RELATED MATTERS (CONTINUED)

The pro forma effect on net income available to common stockholders for 2002 is
not representative of the pro forma effect on net income available to common
stockholders in future years because of the number of options awarded.

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

NET INCOME PER SHARE

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

-37-

1. ACCOUNTING POLICIES AND RELATED MATTERS (CONTINUED)

ACCUMULATED OTHER COMPREHENSIVE INCOME

Accumulated other comprehensive income includes unrealized gains or losses on
our equity investments ($12,000 and $78,000 at December 31, 2002 and 2001,
respectively) and foreign currency translation adjustments (($182,000) and
($1,001,000) at December 31, 2002 and 2001, respectively). These items are
included as components of stockholders' equity.

NEW ACCOUNTING STANDARDS

In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of
FASB Statement No. 13, and Technical Corrections, that we are required to adopt
for fiscal years beginning after May 15, 2002, with transition provisions for
certain matters. This Statement rescinds FASB Statement No. 4, Reporting Gains
and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB
Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. This Statement also rescinds FASB Statement No. 44, Accounting for
Intangible Assets of Motor Carriers. This Statement amends FASB Statement No.
13, Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings or describe their applicability under changed conditions. We do not
expect the adoption of this Statement to have a material impact on the
consolidated financial statements, except that the extraordinary losses on
extinguishments of debt recorded in 2001 and 2002 will be reclassified to income
from continuing operations in the consolidated statements of income and any
future gains or losses on debt extinguishments will be similarly treated.

In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. This Interpretation will significantly change current
practice in the accounting for and disclosure of guarantees. Guarantees meeting
the characteristics described in the Interpretation are required to be initially
recorded at fair value, which is different from the general current practice of
recording a liability only when a loss is probable and reasonably estimable. The
Interpretation's initial recognition and initial measurement provisions are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The Interpretation also requires a guarantor to make
significant new disclosures for virtually all guarantees even if the likelihood
of the guarantor having to make payments under the guaranty is remote. The
Interpretation's disclosure requirements are effective for the current year's
financial statements. We have included appropriate disclosures of guarantees of
debt in Note 11.

In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, that we are required to adopt for
fiscal years beginning after December 15, 2002, with transition provisions for
certain matters. This Statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of Statement 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. We
have revised our disclosures in accordance with these rules and intend to record
the expense related to stock-based compensation under the fair value based
method of accounting on a prospective basis effective January 1, 2003. The
projected impact on 2003 diluted earnings per share is not expected to have a
material effect.

2. LOANS RECEIVABLE

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

Loans to related parties (an entity whose ownership includes one Company
director) included above are at rates comparable to other third-party borrowers
equal to or greater than our net interest cost on borrowings to support such
loans. The amount of interest income and commitment fees from related parties
amounted to $59,000, $108,000 and $152,000 for 2002, 2001 and 2000,
respectively.

-38-

2. LOANS RECEIVABLE (CONTINUED)

The following is a summary of mortgage loans at December 31, 2002:

-39-

3. REAL PROPERTY OWNED

The following table summarizes certain information about our real property owned
as of December 31, 2002 (dollars in thousands):

-40-

3. REAL PROPERTY OWNED (CONTINUED)

At December 31, 2002, future minimum lease payments receivable under operating
leases are as follows (in thousands):

2003 $ 141,252
2004 143,301
2005 146,762
2006 150,501
2007 154,132
Thereafter 1,299,821
-------------

TOTAL $ 2,035,769
=============

We converted $33,972,000, $13,683,000 and $60,648,000 of mortgage loans into
operating lease properties in 2002, 2001 and 2000, respectively. In 2002, we
acquired properties which included the assumption of mortgages totaling
$2,248,000. These noncash activities are appropriately not reflected in the
accompanying statements of cash flows.

During the year ended December 31, 2002, it was determined that the projected
undiscounted cash flows from one assisted living facility, one specialty care
facility and one parcel of land did not exceed their respective net book values
and impairment charges of $2,298,000 were recorded to reduce the properties to
their estimated fair market values. The estimated fair market values of the
properties were determined by offers to purchase received from third parties or
estimated net sales proceeds.

4. CONCENTRATION OF RISK

As of December 31, 2002, long-term care facilities, which include skilled
nursing and assisted living facilities, comprised 92% (93% at December 31, 2001)
of our real estate investments and were located in 33 states. Investments in
assisted living facilities comprised 57% (63% at December 31, 2001) of our real
estate investments. The following table summarizes certain information about our
operator concentration as of December 31, 2002 (dollars in thousands):

- ----------

(1) Investments include real estate investments and credit enhancements which
amounted to $1,529,412,000 and $7,845,000, respectively.

(2) Investments with top five operators comprised 42% of total investments at
December 31, 2001.

(3) Revenues include gross revenues and revenues from discontinued operations
for the year ended December 31, 2002.

(4) Revenues from top five operators were 40% and 38% for the years ended
December 31, 2001 and 2000, respectively.

-41-

5. ALLOWANCE FOR LOAN LOSSES

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

In addition, we recorded a $2,000,000 loss during 2000 related to an investment
in the preferred stock of a private corporation that became substantially
diluted as a result of a recapitalization of that corporation.

6. BORROWINGS UNDER LINE OF CREDIT ARRANGEMENTS AND RELATED ITEMS

We have an unsecured credit arrangement with a consortium of nine banks
providing for a revolving line of credit in the amount of $175,000,000, which
expires on August 31, 2005. The agreement specifies that borrowings under the
revolving line of credit are subject to interest payable in periods no longer
than three months on either the agent bank's prime rate of interest or 1.3% over
LIBOR interest rate (at our option). In addition, we pay a commitment fee
ranging from an annual rate of 0.20% to 0.375% and an annual agent's fee of
$50,000. Principal is due upon expiration of the agreement. We have another
unsecured line of credit with a bank for a total of $25,000,000, which expires
on June 30, 2003. Borrowings under this line of credit are subject to interest
at the bank's prime rate of interest (4.25% at December 31, 2002) and are due on
demand.

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

7. SENIOR NOTES AND OTHER LONG-TERM OBLIGATIONS

We have $515,000,000 of unsecured senior notes with annual interest rates
ranging from 7.50% to 8.17%.

During the year ended December 31, 2002, we repurchased $35,000,000 of unsecured
senior notes that were due in 2003. We incurred expenses of $403,000 related to
this repurchase, which was recorded as an extraordinary item. During the year
ended December 31, 2001, we repurchased $7,750,000 of our outstanding unsecured
senior notes that were due in 2002. We incurred expenses of $213,000 related to
this repurchase, which was recorded as an extraordinary item.

We have five mortgage notes payable, collateralized by health care facilities,
with annual interest rates ranging from 7.69% to 12.00%.

We have one secured note collateralized by one health care facility with an
annual interest rate of 2% over LIBOR (3.38% at December 31, 2002).

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7. SENIOR NOTES AND OTHER LONG-TERM OBLIGATIONS (CONTINUED)

We have a $60,000,000 secured line of credit, collateralized by 16 health care
facilities, with interest at the prime rate of interest or 2% over LIBOR (at our
option), with a floor of 7% (7% at December 31, 2002).

The carrying values of the health care properties securing the mortgages and
secured debt totaled $136,023,000 at December 31, 2002.

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.

At December 31, 2002, the annual principal payments on these long-term
obligations are as follows (in thousands):

8. STOCK INCENTIVE PLANS AND RETIREMENT ARRANGEMENTS

Our 1995 Stock Incentive Plan authorizes up to 3,768,000 shares of common stock
to be issued at the discretion of the Board of Directors. The 1995 Plan replaced
the 1985 Incentive Stock Option Plan. The options granted under the 1985 Plan
continue to vest through 2005 and expire ten years from the date of the grant.
Our officers and key salaried employees are eligible to participate in the 1995
Plan. The 1995 Plan allows for the issuance of stock options, restricted stock
grants and Dividend Equivalency Rights. There were no Dividend Equivalency
Rights outstanding under the 1995 Plan for any of the years presented. In
addition, we have a Stock Plan for Non-Employee Directors, which authorizes up
to 384,000 shares to be issued.

The following summarizes the stock option activity in these three plans (shares
in thousands):

Vesting periods for options and restricted shares range from six months to ten
years. Options expire ten years from the date of grant. We issued 8,000, 75,750
and 77,250 restricted shares during 2002, 2001 and 2000, respectively, including
8,000, 8,000 and 8,000 shares for directors in 2002, 2001 and 2000,
respectively. Expense, which is recognized as the restricted shares vest based
on the market value at the date of the award, totaled $1,555,000, $1,164,000 and
$1,090,000 in 2002, 2001 and 2000, respectively.

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8. STOCK INCENTIVE PLANS AND RETIREMENT ARRANGEMENTS (CONTINUED)

The following table summarizes information about stock options outstanding at
December 31, 2002 (shares in thousands):

We have a 401(k) Profit Sharing Plan and a Money Purchase Pension Plan (which
has been merged into the 401(k) Profit Sharing Plan effective September 30,
2002) covering all eligible employees. Under these plans, eligible employees may
make contributions, and we may make matching contributions and a profit sharing
contribution. Our contributions to these plans totaled $184,000, $175,000 and
$171,000 in 2002, 2001 and 2000, respectively.

We have a non-qualified senior executive retirement plan designed to provide
pension benefits for certain officers. Pension benefits are based on
compensation and length of service and the plan is unfunded. The accrued
liability for the plan was $206,000 at December 31, 2002 ($41,000 at December
31, 2001).

9. PREFERRED STOCK

In January 1999, we sold 3,000,000 shares of Series C Cumulative Convertible
Preferred Stock. These shares have a liquidation value of $25.00 per share and
will pay dividends equivalent to the greater of (i) the annual dividend rate of
$2.25 per share (a quarterly dividend rate of $0.5625 per share); or (ii) the
quarterly dividend then payable per common share on an as converted basis. The
preferred shares are convertible into common stock at a conversion price of
$25.625 per share. We have the right to redeem the preferred shares after five
years.

During the year ended December 31, 2002, the holder of our Series C Cumulative
Convertible Preferred Stock converted 900,000 shares into 878,000 shares of
common stock, leaving 2,100,000 shares outstanding at December 31, 2002.

We have 3,000,000 shares of 8.875% Series B Cumulative Redeemable Preferred
Stock outstanding with a liquidation preference of $25.00 per share. Dividends
are payable quarterly in arrears. On and after May 1, 2003, these preferred
shares may be redeemed for cash at our option, in whole or in part, at $25.00
per share, plus accrued and unpaid dividends on these shares to the redemption
date.

10. INCOME TAXES AND DISTRIBUTIONS

To qualify as a real estate investment trust for federal income tax purposes,
90% of taxable income must be distributed to stockholders. Real estate
investment trusts that do not distribute a certain amount of current year
taxable income in the current year are also subject to a 4% federal excise tax.
The principal reasons for the difference between undistributed net income for
federal income tax purposes and financial statement purposes are the recognition
of straight-line rent for reporting purposes, different useful lives and
depreciation methods for real property and the provision for losses for
reporting purposes versus bad debt expense for tax purposes. Cash distributions
paid to common stockholders, for federal income tax purposes, are as follows:

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11. COMMITMENTS AND CONTINGENCIES

We have guaranteed the payment of industrial revenue bonds for one assisted
living facility, in the event that the present owner defaults upon its
obligations. In consideration for this guaranty, we receive and recognize fees
annually related to this agreement. This guaranty expires upon the repayment of
the industrial revenue bonds which currently mature in 2009. At December 31,
2002, we were contingently liable for $3,195,000 under this guaranty.

In addition, we have an outstanding letter of credit issued to a bank, which
bank provided additional financing for a project on which we have a first
mortgage. We have also partially guaranteed the payment of loans made by the
bank on this project. The letter of credit currently matures in 2003 and the
guaranties expire upon the repayment of the loans, which currently mature in
2003. At December 31, 2002, obligations under these agreements for which we were
contingently liable aggregated approximately $4,650,000.

As of December 31, 2002, we had approximately $42,885,000 of unfunded
construction commitments.

On November 20, 2002, Doctors Community Health Care Corporation and five
subsidiaries filed for Chapter 11 bankruptcy protection. Doctors has stated that
the bankruptcy filing was due to the bankruptcy of National Century Financial
Enterprises and affiliates, who halted payments to health care providers,
including Doctors. We have provided mortgage financing to Doctors in the form of
a loan secured by Pacifica Hospital of the Valley in Sun Valley, CA, a property
that is owned by one of the debtor subsidiaries. The outstanding principal
balance of the loan is approximately $18.8 million at December 31, 2002. Based
upon an appraisal and historical performance of Pacifica Hospital, we expect to
receive payment in full of the outstanding principal and accrued interest, which
we believe we are entitled to as an oversecured creditor. We do not currently
intend to recognize any interest on the loan if payment is not received.

Alterra Healthcare Corporation filed for Chapter 11 bankruptcy protection on
January 23, 2003. We have a master lease with Alterra for 45 assisted living
facilities with a depreciated book value of $106 million at December 31, 2002.
We expect Alterra to remain current on rent payments and to assume the master
lease at current rental levels.

12. STOCKHOLDER RIGHTS PLAN

Under the terms of a Stockholder Rights Plan approved by our Board of Directors
in July 1994, a preferred share right is attached to and automatically trades
with each outstanding share of common stock.

The rights, which are redeemable, will become exercisable only in the event that
any person or group becomes a holder of 15% or more of our common stock, or
commences a tender or exchange offer, which, if consummated, would result in
that person or group owning at least 15% of our common stock. Once the rights
become exercisable, they entitle all other stockholders to purchase one
one-thousandth of a share of a new series of junior participating preferred
stock for an exercise price of $48.00. The rights will expire on August 5, 2004,
unless exchanged earlier or redeemed earlier by us for $0.01 per right at any
time before public disclosure that a 15% position has been acquired.

-45-

13. EARNINGS PER SHARE

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

The diluted earnings per share calculation excludes the dilutive effect of
10,000, 1,301,000 and 1,954,000 options for 2002, 2001 and 2000, respectively,
because the exercise price was greater than the average market price. The Series
C Cumulative Convertible Preferred Stock was not included in this calculation as
the effect of the conversion was anti-dilutive.

14. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

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

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

Borrowings Under Line of Credit Arrangements and Secured Debt -- The carrying
amount of the lines of credit and secured debt approximates fair value because
the borrowings are interest rate adjustable.

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

Mortgage Notes Payable -- Mortgage notes payable is a reasonable estimate of
fair value based on the interest rates paid, which approximates current market
rates.

-46-

14. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

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

15. DISCONTINUED OPERATIONS

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

During the year ended December 31, 2002, we sold eight assisted living
facilities, one specialty care facility and one parcel of land with carrying
values of $53,311,000 for a net loss of $1,032,000. In accordance with Statement
No. 144, we have reclassified the income and expenses attributable to these
properties to discontinued operations. Expenses include an allocation of
interest expense based on property carrying values and our weighted average cost
of debt. The following illustrates the reclassification impact of Statement No.
144 as a result of classifying the properties as discontinued operations (in
thousands):

-47-

16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of our unaudited quarterly results of operations for
the years ended December 31, 2002 and 2001 (in thousands, except per share
data):

- ----------

(1) The decrease in net income and amounts per share is primarily attributable
to impairment of assets, losses on sales of properties and a common stock
issuance recorded in fourth quarter 2002.

(2) The decrease in net income and amounts per share is primarily attributable
to losses on sales of properties recorded in fourth quarter 2001.

-48-

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item is incorporated herein by reference to the
information under the heading "Election of Three Directors" and "Executive
Officers of the Company" in our definitive proxy statement which will be filed
with the Securities and Exchange Commission prior to April 11, 2003.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated herein by reference to the
information under the heading "Remuneration" in our definitive proxy statement
which will be filed with the Securities and Exchange Commission prior to April
11, 2003.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDERS MATTERS

The information required by this Item is incorporated herein by reference to the
information under the headings "Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters" and "Equity Compensation Plan
Information" in our definitive proxy statement which will be filed with the
Securities and Exchange Commission prior to April 11, 2003.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is incorporated herein by reference to the
information under the heading "Certain Relationships and Related Transactions"
in our definitive proxy statement which will be filed with the Securities and
Exchange Commission prior to April 11, 2003.

ITEM 14. CONTROLS AND PROCEDURES

Within 90 days prior to the date of filing this Annual Report on Form 10-K, an
evaluation was performed under the supervision and with the participation of our
management, including the chief executive officer and chief financial officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures. Based on that evaluation, our chief executive officer and chief
financial officer concluded that our disclosure controls and procedures were
effective as of December 31, 2002, and the evaluation date. There have been no
significant changes in our internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our evaluation.

-49-

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1. Our Consolidated Financial Statements are included in Part II, Item 8:

Report of Independent Auditors...................................30
Consolidated Balance Sheets - December 31, 2002 and 2001.........31
Consolidated Statements of Income - Years ended December 31,
2002, 2001 and 2000.......................................32
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 2002, 2001 and 2000..........................33
Consolidated Statements of Cash Flows - Years ended
December 31, 2002, 2001 and 2000..........................34
Notes to Consolidated Financial Statements ......................35

2. The following Financial Statement Schedules are included in Item
15 (d):

III - Real Estate and Accumulated Depreciation
IV - Mortgage Loans on Real Estate

All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable and therefore have been omitted.

3. Exhibit Index:

3.1 Second Restated Certificate of Incorporation of the Company
(filed with the Commission as Exhibit 3.1 to the Company's
Form 10-K filed March 20, 2000, and incorporated herein by
reference thereto).

3.2 Certificate of Designation, Preferences and Rights of Junior
Participating Preferred Stock, Series A, of Health Care
REIT, Inc. (filed with the Commission as Exhibit 3.1 to the
Company's Form 10-K filed March 20, 2000, and incorporated
herein by reference thereto).

3.3 Certificate of Designation of 8 7/8% Series B Cumulative
Redeemable Preferred Stock of Health Care REIT, Inc. (filed
with the Commission as Exhibit 3.1 to the Company's Form
10-K filed March 20, 2000, and incorporated herein by
reference thereto).

3.4 Certificate of Designations, Preferences and Rights of
Series C Cumulative Convertible Preferred Stock of Health
Care REIT, Inc. (filed with the Commission as Exhibit 3.1 to
the Company's Form 10-K filed March 20, 2000, and
incorporated herein by reference thereto).

3.5 Certificate of Amendment of Second Restated Certificate of
Incorporation of the Company (filed with the Commission as
Exhibit 3.1 to the Company's Form 10-K filed March 20, 2000,
and incorporated herein by reference thereto).

3.6 Amended and Restated By-Laws of the Registrant (filed with
the Commission as Exhibit 3.1 to the Company's Form 8-K
filed October 24, 1997, and incorporated herein by reference
thereto).

4.1 The Company, by signing this Report, agrees to furnish the
Securities and Exchange Commission upon its request a copy
of any instrument which defines the rights of holders of
long-term debt of Company authorizes a total amount of
securities not in excess of 10% of the total assets of the
Company.

4.2 Series A Junior Participating Preferred Share Purchase
Rights Agreement, dated as of July 19, 1994 (filed with the
Commission as Exhibit 2 to the Company's Form 8-A filed
August 3, 1994 (File No. 1-8923)), and incorporated herein
by reference thereto).

4.3 Indenture dated as of April 17, 1997 by and between Health
Care REIT, Inc. and Fifth Third Bank (filed with the
Commission as Exhibit 4.1 to the Company's Form 8-K filed
April 21, 1997, and incorporated herein by reference
thereto).

-50-

4.4 First Supplemental Indenture dated as of April 17, 1997
by and between Health Care REIT, Inc. and Fifth Third
Bank (filed with the Commission as Exhibit 4.2 to the
Company's Form 8-K filed April 21, 1997, and
incorporated herein by reference thereto).

4.5 Second Supplemental Indenture dated as of March 13, 1998
between Health Care REIT, Inc. and Fifth Third Bank
(filed with the Commission as Exhibit 4.2 to the
Company's Form 8-K filed March 11, 1998, and
incorporated herein by reference thereto).

4.6 Third Supplemental Indenture dated as of March 18, 1999
between Health Care REIT, Inc. and Fifth Third Bank
(filed with the Commission as Exhibit 4.2 to the
Company's Form 8-K filed March 17, 1999, and
incorporated herein by reference thereto).

4.7 Fourth Supplemental Indenture dated as of August 10,
2001 between Health Care REIT, Inc. and Fifth Third Bank
(filed with the Commission as Exhibit 4.2 of the
Company's Form 8-K filed August 9, 2001, and
incorporated herein by reference thereto).

4.8 Form of Indenture for Senior Debt Securities (filed with
the Commission as Exhibit 4.8 to the Company's Form S-3
(File No. 333-73936) filed November 21, 2001, and
incorporated herein by reference thereto).

4.9 Form of Indenture for Senior Subordinated Debt
Securities (filed with the Commission as Exhibit 4.9 of
the Company's Form S-3 (File No. 333-73936) filed
November 21, 2001, and incorporated herein by reference
thereto).

4.10 Form of Indenture for Junior Subordinated Debt
Securities (filed with the Commission as Exhibit 4.10 of
the Company's Form S-3 (File No. 333-73936) filed
November 21, 2001, and incorporated herein by reference
thereto).

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

4.12 Supplemental Indenture No. 1, dated as of September 6,
2002, to Indenture for Senior Debt Securities, dated as
of September 6, 2002, by and between Health Care REIT,
Inc. and Fifth Third Bank (filed with the Commission as
Exhibit 4.2 of the Company's Form 8-K filed September 9,
2002, and incorporated herein by reference thereto).

10.1 Amended and Restated Loan Agreement dated the 23rd day
of August, 2002, by and among Health Care REIT, Inc. and
its subsidiaries, the banks signatory thereto, KeyBank
National Association, as administrative agent, Deutsche
Bank Securities Inc., as syndication agent, and UBS
Warburg LLC, as documentation agent (filed with the
Commission as Exhibit 10.1 of the Company's Form 8-K
filed August 30, 2002, and incorporated herein by
reference thereto).

10.2 Credit Agreement by and among Health Care REIT, Inc.,
and certain subsidiaries, Bank United and other lenders
party thereto, dated as of February 24, 1999 (filed with
the Commission as Exhibit 10.7 to the Company's Form
10-K filed March 26, 2001, and incorporated herein by
reference thereto).

10.3 Amendment No. 1 to Credit Agreement by and among Health
Care REIT, Inc. and certain subsidiaries, Bank United
and other lenders party thereto, dated as of April 5,
1999 (filed with the Commission as Exhibit 10.10 to the
Company's Form 10-K filed March 26, 2001, and
incorporated herein by reference thereto).

10.4 Credit Agreement by and between Health Care REIT, Inc.
and Fifth Third Bank, dated as of May 31, 2002 (filed
with the Commission as Exhibit 10.1 to the Company's
Form 10-Q filed August 14, 2002, and incorporated herein
by reference thereto).

-51-

10.5 Amended and Restated Note Purchase Agreement among
Health Care REIT, Inc. and each of the Purchasers a
Party Thereto dated as of March 28, 1997 (the
$52,000,000 Note Purchase Agreement) (filed with the
Commission as Exhibit 10.2 to Company's Form 8-K filed
April 8, 1997, and incorporated herein by reference
thereto).

10.6 Amended and Restated Note Purchase Agreement among
Health Care REIT, Inc. and each of the Purchasers a
Party Thereto dated as of March 28, 1997 (the
$30,000,000 Note Purchase Agreement) (filed with the
Commission as Exhibit 10.3 to Company's Form 8-K filed
April 8, 1997, and incorporated herein by reference
thereto).

10.7 The 1985 Incentive Stock Option Plan of Health Care
REIT, Inc., and the First Amendment to the 1985
Incentive Stock Option Plan (filed with the Commission
as Exhibit 4(b) to the Company's Form S-8 (File No.
33-46561) filed March 20, 1992, and incorporated herein
by reference thereto).*

10.8 Second Amendment to the 1985 Incentive Stock Option Plan
of Health Care REIT, Inc. (filed with the Commission as
Exhibit 4.3 to the Company's Form S-8 (File No.
333-01237) filed February 27, 1996, and incorporated
herein by reference thereto).*

10.9 Third Amendment to the 1985 Incentive Stock Option Plan
of Health Care REIT, Inc. (filed with the Commission as
Exhibit 4.4 to the Company's Form S-8 (File No.
333-01237) filed with the Commission February 27, 1996,
and incorporated herein by reference thereto).*

10.10 The 1995 Stock Incentive Plan of Health Care REIT, Inc.
(filed with the Commission as Appendix II to the
Company's Proxy Statement for the 1995 Annual Meeting of
Stockholders, filed September 29, 1995, and incorporated
herein by reference thereto).*

10.11 First Amendment to the 1995 Stock Incentive Plan of
Health Care REIT, Inc. (filed with the Commission as
Exhibit 4.2 to the Company's Form S-8 (File No.
333-40771) filed November 21, 1997, and incorporated
herein by reference thereto).*

10.12 Second Amendment to the 1995 Stock Incentive Plan of
Health Care REIT, Inc. (filed with the Commission as
Exhibit 4.3 to the Company's Form S-8 (File No.
333-73916) filed November 21, 2001, and incorporated
herein by reference thereto).*

10.13 Stock Plan for Non-Employee Directors of Health Care
REIT, Inc. (as filed with the Commission as Exhibit 10.5
to the Company's Form 10-Q filed May 13, 1997, and
incorporated herein by reference thereto).*

10.14 Amended and Restated Employment Agreement, effective
January 1, 2000, by and between Health Care REIT, Inc.
and George L. Chapman (filed with the Commission as
Exhibit 10.12 to the Company's Form 10-K filed March 25,
2002, and incorporated herein by reference thereto).*

10.15 Amended and Restated Employment Agreement, effective
January 1, 2000, by and between Health Care REIT, Inc.
and Raymond W. Braun (filed with the Commission as
Exhibit 10.13 to the Company's Form 10-K filed March 25,
2002, and incorporated herein by reference thereto).*

10.16 Amended and Restated Employment Agreement, effective
January 1, 2000, by and between Health Care REIT, Inc.
and Erin C. Ibele (filed with the Commission as Exhibit
10.14 to the Company's Form 10-K filed March 25, 2002,
and incorporated herein by reference thereto).*

-52-

10.17 Amended and Restated Employment Agreement, effective
January 1, 2000, by and between Health Care REIT, Inc.
and Michael A. Crabtree (filed with the Commission as
Exhibit 10.15 to the Company's Form 10-K filed March 25,
2002, and incorporated herein by reference thereto).*

10.18 Amended and Restated Employment Agreement, effective
January 1, 2000, by and between Health Care REIT, Inc.
and Charles J. Herman, Jr. (filed with the Commission as
Exhibit 10.16 to the Company's Form 10-K filed March 25,
2002, and incorporated herein by reference thereto).*

10.19 Health Care REIT, Inc. Supplemental Executive Retirement
Plan, effective as of January 1, 2001.*

10.20 Health Care REIT, Inc Executive Loan Program, effective
as of August 1999.*

21. Subsidiaries of the Company.

23. Consent of Ernst & Young LLP, independent auditors.

24. Powers of Attorney.

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

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

- ----------

* Management Contract or Compensatory Plan or Arrangement.

(b) Reports on Form 8-K filed in the fourth quarter of 2002 and afterwards:

Form 8-K filed on November 13, 2002, to report the sale of 930,000 shares
of common stock and to report the registrant's reclassification of its
operations for the year ended December 31, 2001, pursuant to SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets.

Form 8-K filed on February 6, 2003, to announce that three executive
officers entered into 10b5-1 trading plans effective February 5, 2003.

(c) Exhibits:

The exhibits listed in Item 15(a)(3) above are either filed with this Form
10-K or incorporated by reference in accordance with Rule 12b-32 of the
Exchange Act.

(d) Financial Statement Schedules:

Financial statement schedules are included in pages 57 through 65.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.

HEALTH CARE REIT, INC.

By: /S/ GEORGE L. CHAPMAN
----------------------------------
Chairman, Chief Executive Officer,
and Director

-53-

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on March 10, 2003, by the following persons on behalf of
the Company and in the capacities and on the dates indicated.

/S/ WILLIAM C. BALLARD, JR.* /S/ R. SCOTT TRUMBULL*
- -------------------------------------- ---------------------------------------------
William C. Ballard, Jr., Director R. Scott Trumbull, Director

/S/ PIER C. BORRA* /S/ RICHARD A. UNVERFERTH*
- -------------------------------------- ---------------------------------------------
Pier C. Borra, Director Richard A. Unverferth, Director

/S/ JEFFREY H. DONAHUE* /S/ GEORGE L. CHAPMAN
- -------------------------------------- ---------------------------------------------
Jeffrey H. Donahue, Director George L. Chapman, Chairman, Chief Executive
Officer, and Director (Principal Executive
Officer)

/S/ PETER J. GRUA* /S/ RAYMOND W. BRAUN*
- -------------------------------------- ---------------------------------------------
Peter J. Grua, Director
Raymond W. Braun, President, Chief Operating
Officer and Chief Financial Officer
(Principal Financial Officer)

/S/ SHARON M. OSTER* /S/ MICHAEL A. CRABTREE*
- -------------------------------------- ---------------------------------------------
Sharon M. Oster, Director Michael A. Crabtree, Treasurer
(Principal Accounting Officer)

/S/ BRUCE G. THOMPSON* *By: /S/ GEORGE L. CHAPMAN
- -------------------------------------- ---------------------------------------------
Bruce G. Thompson, Director George L. Chapman, Attorney-in-Fact

-54-

CERTIFICATE OF CHIEF EXECUTIVE OFFICER

I, GEORGE L. CHAPMAN, certify that:

1. I have reviewed this annual report on Form 10-K of Health Care REIT,
Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weakness in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

Dated: March 10, 2003
---------------

/S/ GEORGE L. CHAPMAN
-----------------------------------
George L. Chapman,
Chief Executive Officer

-55-

CERTIFICATE OF CHIEF FINANCIAL OFFICER

I, RAYMOND W. BRAUN, certify that:

1. I have reviewed this annual report on Form 10-K of Health Care REIT,
Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weakness in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

Dated: March 10, 2003
-----------------

/S/ RAYMOND W. BRAUN
-------------------------------------
Raymond W. Braun,
Chief Financial Officer

-56-

HEALTH CARE REIT, INC.
SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2002

-57-

SCHEDULE III - CONTINUED

-58-

SCHEDULE III - CONTINUED

-59-

SCHEDULE III - CONTINUED

-60-

SCHEDULE III - CONTINUED

-61-

SCHEDULE III - CONTINUED

-62-

SCHEDULE III - CONTINUED

(1) Represents assumed mortgages in 2002 and land reclassified from other
assets in 2001.

(2) The aggregate cost for tax purposes for real property equals $1,420,603,000
at December 31, 2002.

-63-

SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
HEALTH CARE REIT, INC.
DECEMBER 31, 2002

-64-

SCHEDULE IV - Continued

(1) Includes collection of negative principal amortization.

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

-65-