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

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

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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, 2003
COMMISSION FILE NO. 1-8923

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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:

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. [ ]

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
$1,241,737,000.

As of March 11, 2004, there were 51,098,962 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 6, 2004, are incorporated by reference into
Part III.
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HEALTH CARE REIT, INC.
2003 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

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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, 2003, 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, 2003, we had $2,003,466,000 of net real estate
investments, inclusive of credit enhancements, in 328 facilities located in 33
states and managed by 47 different operators. At that date, the portfolio
included 219 assisted living facilities, 101 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 loans for, qualified health care
operators. Capital for future investments may be provided by borrowing under our
lines of credit, 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 summarizes our portfolio as of December 31, 2003:

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(1) Investments include real estate investments and credit enhancements which
amounted to $2,000,271,000 and $3,195,000, respectively.

(2) Investment per Bed/Unit was computed by using the total investment amount of
$2,018,967,000 which includes real estate investments, credit enhancements
and unfunded construction commitments for which initial funding has
commenced which amounted to $2,000,271,000, $3,195,000 and $15,501,000,
respectively.

(3) We have investments in properties located in 33 states and managed by 47
different operators.

ASSISTED LIVING FACILITIES

An assisted living facility is a special combination of housing,
personalized supportive services and health care services designed to meet the
needs -- both scheduled and unscheduled -- of those who need help with
activities of daily living. Certain of our assisted living facilities include
other care levels, including independent living, dementia care, and nursing
services. More intensive medical needs of the resident within assisted living

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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.

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.

INVESTMENTS

We invest in 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 tenant's or borrower's 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 real property leased to operators under
operating leases and mortgage loans. Construction financing is provided, but
only as part of a long-term operating lease or mortgage loan. We typically
invest in or finance up to 90% of the stabilized appraised value of a property.
Economic terms normally include annual rate increases and fair market value
based purchase options in operating leases. Depending upon market conditions, we
believe that appropriate new investments will be available in the future with
spreads over our cost of capital that will generate appropriate returns to our
stockholders. 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 us and the operator and its affiliates.

At December 31, 2003, 80% 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 master
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

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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 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, 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, and in so doing, support both the collectibility
of revenue and the value of our investment.

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 seven to 15 years and contain
one or more five to 15-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
$1,726,836,000 at December 31, 2003. Operating lease income generally includes
base rent payments plus fixed annual rent increases, which are generally
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. In some instances (representing approximately 21% of real property),
the leases provide for additional payment of rent if the gross operating
revenues from the property exceed a predetermined threshold. Revenues are not
recognized until these thresholds have been met. Rents, as recognized using the
straight-line method where applicable, on the original lease basis of our
completed leased properties are approximately 11.5% per annum on average at
December 31, 2003. Our rental yield from leases depends upon a number of
factors, including the initial rent charged, up-front fees, any rental
adjustments and, in some cases, facility-level revenue. The base rents for the
renewal periods are generally fixed rents set at the greater of a minimum agreed
upon rate of return or a spread above the Treasury yield for the corresponding
period, generally with a floor of the prior year's rate of return plus the
annual increaser.

We currently provide for the construction of facilities for the tenants as
part of long-term operating leases. 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 balance 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 transaction 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 advance funds to
the operator in accordance with agreed upon terms and conditions which require,
among other things, a site visit by a Company representative prior to the
advancement of funds. 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, 2003, we had outstanding
construction

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financings of $14,865,000 ($14,701,000 for leased properties and $164,000 for
construction loans) and were committed to providing additional financing of
approximately $15,501,000 to complete construction.

MORTGAGE LOANS

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

At December 31, 2003, the interest rates averaged approximately 11.1% 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 and any interest rate
adjustments.

The mortgage loans made through December 31, 2003, are generally subject to
three to 20-year terms with principal amortization schedules and/or balloon
payment of the outstanding principal balance at the end of the term. Generally,
the mortgage loans provide three to eight years of prepayment protection.

WORKING CAPITAL LOANS

Working capital loans are short-term loans made to operators of facilities
and are typically either secured and/or guaranteed. These instruments have terms
ranging from three months to ten years. At December 31, 2003, the average
interest rates (excluding any loans on non-accrual) were approximately 10.7% per
annum on our outstanding working capital loan balances. At December 31, 2003, we
had provided working capital loans to nine operators.

SUBDEBT INVESTMENTS

Subdebt investments are loans made to operators of facilities and are
generally secured by the operator's leasehold rights and corporate guaranties.
Generally, these instruments are for four to seven-year terms. At December 31,
2003, the average interest rates were approximately 12.0% per annum on our
outstanding subdebt investment balances. At December 31, 2003, we had provided
subdebt financing to five operators.

EQUITY INVESTMENTS

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

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

BORROWING POLICIES

We may incur long-term indebtedness through public offerings or private
placements. 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

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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
concentrations as of December 31, 2003 (dollars in thousands):

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(1) Investments include real estate investments and credit enhancements which
amounted to $2,000,271,000 and $3,195,000, respectively.

(2) Investments with our top five operators comprised 45% of total investments
at December 31, 2002.

(3) Revenues include gross revenues and revenues from discontinued operations
for the year ended December 31, 2003.

(4) Revenues from our top five operators were 43% and 40% for the years ended
December 31, 2002 and 2001, 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. We compete for
investments based on a number of factors including rates, financings offered,
underwriting criterion and reputation. 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.

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EMPLOYEES

As of December 31, 2003, we employed 34 full-time employees.

CERTAIN GOVERNMENT REGULATIONS

HEALTH LAW MATTERS -- GENERALLY

We invest in assisted living, skilled nursing and specialty care
facilities, which represent approximately 60%, 32% and 8%, respectively, of our
investments at December 31, 2003.

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 regulate the type and
quality of the medical and/or nursing care provided, ancillary services (e.g.,
respiratory, occupational, physical and infusion therapies), 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 AND CERTIFICATION

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 relating to a facility's physical plant
and operations including, but not limited to, admission and discharge standards
and staffing and training. 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. These facilities are
subject to audits and surveys by 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 or
serious survey deficiencies 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 reimbursement 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, terms under any existing plan of correction
and possibly sanctions and penalties. If a successor operator chooses to apply
for a new Medicare and/or Medicaid provider agreement, the successor operator
may experience interruptions and delays in reimbursement during the processing
of its application for a new provider agreement or its application may not be
approved. This may result in payment 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. Approximately 57% of our revenues for the year
ended December 31, 2003, were attributable to assisted living facilities. The
majority of the revenues received by the operators of our assisted living
facilities are from private pay sources. The remaining revenue source is
primarily Medicaid waiver programs. Forty-one states currently have such
programs, which allow Medicaid recipients to use benefits for alternatives to
skilled nursing such as assisted living and home health. The National Academy
for State Health Policy reports that Medicaid waiver programs serve about
102,000 residents in assisted living or residential care settings. At December
31, 2003, 12 of our 31 assisted living operators utilized Medicaid

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waivers. For the year ended December 31, 2003, approximately 5% of the revenues
at our assisted living facilities were from Medicaid reimbursement.

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 private pay resident than for a Medicaid
beneficiary who requires a comparable level of care. The level of Medicaid
reimbursement varies from state to state, but rarely includes reimbursement for
room and board. Thus, the revenues generated by operators of our assisted living
facilities may be adversely affected by payor mix, acuity level and changes in
Medicaid eligibility and reimbursement levels. Changes in revenues could in turn
have a material adverse effect on an operator's ability to meet its obligation
to us.

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. Changes in federal or state
reimbursement policies, including changes in payment rates as a result of
federal or state regulatory action, or payment delays by fiscal intermediaries
may also adversely affect an operator's ability to cover its expenses, including
our rent or debt service. 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 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 may limit or reduce 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 year ended
December 31, 2003, approximately 28% of the revenues at our skilled nursing
facilities (which comprised 37% of our revenues for the year ended December 31,
2003) were from Medicare reimbursement. In an effort to reduce federal spending
on health care, the Balanced Budget Act of 1997 ("BBA") contained extensive
changes to the Medicare and Medicaid programs intended to reduce the projected
payments under these programs. The BBA 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
resource utilization group categories ("RUGs"). 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 per diem reimbursement for
skilled nursing facility services to decrease. The reductions in Medicare
payments resulted in immediate financial difficulties for skilled nursing
facilities and caused a number of operators to seek bankruptcy protection.

Since the BBA's passage in 1997, the federal government has passed
legislation to lessen the negative financial impact from the prospective payment
system. For example, under the Balanced Budget Refinement Act of 1999 ("BBRA")
and the Benefits Improvement and Patient Protection Act of 2000 ("BIPA"), some
of the mandatory reductions in Medicare payment increases were reversed or
delayed, and skilled nursing facilities received temporary payment increases.
BBRA included two key provisions: [i] a 20% increase for 15 of the RUGs and [ii]
a 4% across-the-board increase to the federal per diem rate. The 20% increase
was implemented in April 2000 and will remain in effect until the implementation
of refinements in the current RUG case-mix classification system. The 4%
increase was implemented in April 2000 and expired on September 30, 2002. BIPA
also included two key provisions: [i] a 16.66% increase in the nursing component
of the federal per diem rate and [ii] a 6.7% increase in the 14 RUG payments for
rehabilitation therapy services. The 16.66% increase was implemented in April of
2001 and expired on September 30, 2002. The 6.7% increase is an adjustment to
the 20% increase granted in BBRA and spreads the funds directed at three
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of those 15 RUGs to an additional 11 rehabilitation RUGs. This increase was
implemented in April 2001 and will remain in effect until the implementation of
refinements in the current RUG case-mix classification system. The 4% and 16.66%
increases that expired on September 30, 2002 decreased annual reimbursement by
roughly $1.8 billion. Although the Centers for Medicare and Medicaid Services
("CMS") did not implement RUG refinements for fiscal year 2004, annual
reimbursement will be reduced by roughly $1.0 billion if the new case-mix system
is implemented in the future. There is no assurance that the new case-mix
classification will account for this reduction so that nursing facilities are
not adversely affected.

Skilled nursing facilities received a 2.6% inflation basket increase in
Medicare payments for federal fiscal year 2003, which resulted in roughly $400
million in additional reimbursement. In addition, CMS did not refine the
existing RUG classification system for fiscal year 2003 or fiscal year 2004,
resulting in roughly $1.0 billion of additional annual reimbursement remaining
in place. For fiscal year 2004, Congress approved a 3.0% market basket increase
and CMS approved a 3.26% increase to the Medicare market basket update to
correct for historical errors in the inflation formula. The result of the two
separate inflationary updates is an addition of over $850 million to Medicare
reimbursement in fiscal year 2004. The Medicare Prescription Drug, Improvement,
and Modernization Act of 2003 imposed a moratorium on the therapy caps for Part
B outpatient rehabilitation services through December 31, 2005. The therapy caps
were mandated by the BBA. If ever imposed, the annual payment cap would apply
twice. A $1,590 cap per patient applies to occupational therapy and a second
$1,590 cap applies to physical and speech therapy combined. Patients exceeding
the cap would need to use private funds to pay for the cost of additional
therapy.

Medicare Reimbursement and Specialty Care Facilities. For the year ended
December 31, 2003, approximately 42% of the revenues at our specialty care
facilities (which comprised 6% of our revenues for the year ended December 31,
2003) were from Medicare. Our specialty care facilities generally are reimbursed
by Medicare under either the diagnosis related group/outpatient prospective
payment system reimbursement methodology for regular hospitals, or the new
prospective payment system for inpatient rehabilitation facilities. Our acute
care hospitals provide a wide range of inpatient and outpatient services
including, but not limited to, surgery, rehabilitation, therapy and clinical
laboratories. Our 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. Some of our other specialty care hospitals provide specialized
inpatient and outpatient services for specific illnesses or diseases including,
among others, orthopedic, neurosurgical and behavioral care services.

With respect to Medicare's diagnosis related group/outpatient prospective
payment system methodology for regular hospitals, reimbursement for inpatient
services is on the basis of a fixed, prospective rate based on the principal
diagnosis of the patient. Diagnoses are grouped into more than 500 diagnosis
related groups. In some cases, a hospital might be able to qualify for an
outlier payment if the hospital's charges exceed a threshold. CMS has revised
its outlier methodology in response to allegations that some hospitals increased
their outlier reimbursement by substantially increasing charges. Under the
revisions, outlier reimbursement for all hospitals is expected to decline. In
addition, the government is evaluating the past practices of hospitals relating
to outlier payments. 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.

Congress has limited increases in diagnosis related groups or outpatient
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 BBA, as amended by BBRA and BIPA, also authorized the development of a
prospective payment system for inpatient rehabilitation facilities, including
freestanding rehabilitation hospitals and rehabilitation units of acute care
hospitals. The inpatient rehabilitation facility prospective payment system
methodology replaces the reasonable cost-based payment system.

Under the final regulations that implemented the inpatient rehabilitation
facility prospective payment systems, rehabilitation hospitals are required to
complete a patient assessment instrument upon admission and
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discharge for all Medicare Part A fee-for-service patients who are already
inpatients or who are admitted or discharged on or after January 1, 2002. Based
on the data received from the inpatient rehabilitation facility patient
assessment instrument, each patient is placed into a case-mix group. Each
case-mix group is a functional-related group determined by distinguishing
classes of inpatient rehabilitation facility patient discharges 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 case mix 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. Payment rates are calculated using relative weights to account for
variations in resource needs in case mix groups.

Pursuant to the BBA, as amended by BBRA and BIPA, payments during fiscal
years 2001 and 2002 were budget neutral with payments for fiscal year 2001
equaling 98% of the amount of payments that would have been paid if the
inpatient rehabilitation facility prospective payment system had not been
enacted and 100% for fiscal year 2002. For cost reporting periods beginning on
or after October 1, 2002, payment is based solely on the adjusted federal
prospective payment.

The ability of our operators to adjust to the shift from reasonable cost
reimbursement to an inpatient rehabilitation facility 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 is a major payor source for residents in
our skilled nursing and specialty care facilities. For the year ended December
31, 2003, approximately 54% of the revenues of our skilled nursing facilities
and 38% 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 Medical
Assistance Percentage ("FMAP"), varies between 50% and 77% by state based on
relative per capita income. Medicaid is typically the second largest item in
state budgets after elementary and secondary education. On average, the
Congressional Budget Office reports that Medicaid long-term care expenditures
represent about three-eighths of total Medicaid expenditures. However, the
percentage of Medicaid dollars used for long-term care varies dramatically from
state to state due to different ratios of elderly population and eligibility
requirements. States have a wide range of discretion to determine specific
reimbursement methodologies. Currently, some 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.
Reasonable costs typically include allowances for administrative and general
costs and costs of property and equipment (e.g., depreciation and fair rental).
Many Medicaid programs compute a per diem rate of reimbursement that is applied
prospectively. Certain states provide for efficiency incentives, subject to cost
ceilings. Many of these programs are subject to retrospective adjustment under
which a facility operator might be required to refund payments that exceed
incurred costs.

In most states, Medicaid does not fully reimburse the cost of providing
skilled nursing services. The shortfall is due in part to the BBA, which
repealed the Boren Amendment. The Boren Amendment required states to fund
Medicaid expenditures in an amount that was sufficient to cover the reasonable
costs of an efficient provider. Consequently, Medicaid funding is vulnerable to
state balanced budget requirements. Due to declining tax revenues, some states
are attempting to slow the rate of growth in Medicaid expenditures by freezing
rates or restricting eligibility and benefits. States will benefit from a
temporary increase in the FMAP from July 1, 2003 through September 30, 2004. The
Jobs and Growth Tax Relief Reconciliation Act of 2003 included a $10 billion
increase in the FMAP for Medicaid. States in which we have skilled nursing
facility investments increased their per diem Medicaid rates 4% on average for
fiscal year 2004. Despite the temporary federal funding relief and the budgeted
rate increases, rates for specific services and eligibility may decline if
revenues are not sufficient to fund budgeted expenditures.

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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. The impact of any such change, 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
these 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. Prosecutions, investigations or
qui tam 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 the foregoing 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. It 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.

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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 the care false on the
theory that inadequate care was provided. The costs for an operator of a health
care facility associated with both defending such 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.

TAXATION

FEDERAL INCOME TAX CONSIDERATIONS

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 you to
the extent that you hold our stock as a capital asset. This discussion does not
deal with special tax situations such as those relating 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 U.S. state
or local income or foreign income 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 our stock.

General

We elected to be taxed as a real estate investment trust (or REIT)
commencing with our first taxable year. We intend to continue to operate in such
a manner as to qualify as a REIT, but there is no guaranty 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 income, assets,
distribution level and diversity of share ownership and discussed below under
"-- Qualification as a REIT." There can be no assurance, however, that we will
be owned or organized in a manner so as to qualify or remain qualified 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 upon 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 such gain.

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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 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 such
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 such year, (2) 95% of our REIT capital gain
net income for such 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 such
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 "-- Qualification as a
REIT -- 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 such assets
during the 10-year period beginning on the date on which such assets were
acquired by us, then to the extent of such assets' "built-in gain" (i.e., the
excess of the fair market value of such asset over the adjusted tax basis in
such asset, in each case determined as of the beginning of the 10-year period),
we will be subject to tax on such 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
such built-in gain assets were subject to a conversion transaction where a "C"
corporation elected REIT status or a REIT acquired such assets from a "C"
corporation, were not treated as sold to an unrelated party and that no gain was
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;

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(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,
Article VI of our Amended and Restated By-Laws provides 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 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 were 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 such 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; and

15

- 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:

- 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 such 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 such personal
property will not qualify as "rents from real property;" and

- 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 such 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 such year if we are
eligible for relief. These relief provisions will be generally available if:

- our failure to meet such 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.

16

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 such
entity as a "taxable REIT subsidiary."

Several of our subsidiaries have elected to be treated as taxable REIT
subsidiaries. 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 subsidiaries will attempt to minimize the
amount of such 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 subsidiaries are required to pay federal, state or local taxes, the
cash available for distribution of dividends to us from our taxable REIT
subsidiaries will be reduced.

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 such restrictions.

The Internal Revenue Service may reallocate costs between a REIT and its
taxable REIT subsidiary where there is a lack of arm's 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. In order to avoid being taxed as a
regular corporation, we are 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.
Such 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
such year and if paid on or before the first regular distribution payment after
such 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

17

to meet certain other distribution requirements. We intend to make timely
distributions sufficient to satisfy these annual distribution requirements.

It is possible that, from time to time, we may not have sufficient cash or
other liquid assets to meet the 90% distribution requirement, or to distribute
such 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 such
income and deduction of such 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 such 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 such 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 such 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 thereof 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
thereto (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. 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

18

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 such net long-term capital gain. You would also receive a refundable tax
credit for your proportionate share of the tax paid by us on such 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 such 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 such distributions do not
exceed the adjusted tax 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 such
distributions until such basis has been reduced to zero, after which such
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 such 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 such sale or
exchange and your adjusted tax basis in such shares of our stock. Such gain will
be capital gain if you held such 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 15%. 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 its 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

19

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 the person required to withhold with your taxpayer
identification number ("TIN");

- furnish an incorrect TIN;

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

- under certain circumstances, fail to certify, under penalty or 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 such 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 such
stockholder's United States federal income tax liability and may entitle such
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 such 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 such 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 such 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 such 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.

20

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 such 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 such 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 such 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 such 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 U.S. 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 penalties 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
the stockholder 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.

Potential Legislation or Other Actions Affecting Tax Consequences

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 such
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. Current and prospective investors should also consult their
own tax advisors regarding the effect of state, local and foreign tax laws on an
investment in us.

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.

21

SUBSIDIARIES AND AFFILIATES

We have formed subsidiaries in connection with our real estate
transactions. As of March 11, 2004, our wholly-owned subsidiaries consisted of
the following entities:

23

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, 2003:

- ---------------

(1) Investments include real estate investments and credit enhancements which
amounted to $2,000,271,000 and $3,195,000, respectively.

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

ITEM 3. LEGAL PROCEEDINGS

On November 20, 2002, Doctors Community Health Care Corporation and five
subsidiaries ("Doctors") filed for Chapter 11 bankruptcy protection in the
United States Bankruptcy Court for the District of Columbia. Doctors stated that
its bankruptcy filing was due to the bankruptcy of National Century Financial
Enterprises and affiliates, which halted payments to health care providers,
including Doctors. We have provided mortgage financing to Doctors in the form of
a loan secured by the Pacifica Hospital of the Valley in Sun Valley, CA, and the
other assets of the Pacifica of the Valley Corporation, one of the debtor
subsidiaries. The outstanding principal balance of the loan was approximately
$18,797,000 on December 31, 2003.

25

Pursuant to procedures approved by the bankruptcy court, the assets of Doctors
were the subject of an auction held on December 10 through December 16, 2003. At
the conclusion of that auction, the debtors' independent director declared
certain members of Doctors' management the winning bidder. Their bid
contemplates a reorganization of Doctors and its subsidiaries with new equity
and debt capitalization. The results of this auction are subject to bankruptcy
court approval, which the debtors have stated they intend to seek in connection
with a hearing on the confirmation of the debtors' proposed plan of
reorganization. Doctors anticipates that this hearing should occur in March or
April 2004. Doctors did not make an interest payment for the twelve months ended
December 31, 2003. We will not recognize any interest on the loan until payment
is received.

Alterra Healthcare Corporation ("Alterra") 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 $103,293,000 at December 31, 2003. A
joint venture between Fortress Investment Group LLC and Emeritus Corporation was
the winning bidder at a bankruptcy auction held on July 17, 2003. The bankruptcy
court confirmed Alterra's plan of reorganization on November 26, 2003. In
connection with confirmation of Alterra's plan, our master lease was assumed and
the acquisition of Alterra by the Fortress-Emeritus joint venture was approved.
This transaction has closed. Alterra remained current on rental payments
throughout the bankruptcy process.

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, RELATED STOCKHOLDER MATTERS AND
ISSUER REPURCHASES OF EQUITY SECURITIES

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 5,592 stockholders of
record as of March 11, 2004.

Our Board of Directors approved a new quarterly dividend rate of $0.60 per
share of common stock per quarter, commencing with the May 2004 dividend. Our
dividend policy is reviewed annually by the Board of Directors. The declaration
and payment of quarterly dividends remains subject to the review and approval of
the Board of Directors.
26

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data for the five years ended December 31,
2003, are derived from our audited consolidated financial statements (in
thousands, except per share data).

- ---------------

(1) In accordance with FASB Statement No. 144, we have reclassified the income
and expenses attributable to the properties sold subsequent to January 1,
2002 to discontinued operations. See Note 16 to our audited consolidated
financial statements.

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

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

28

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

EXECUTIVE SUMMARY

Health Care REIT, Inc. is a self-administered, equity REIT that invests in
health care facilities, primarily skilled nursing and assisted living
facilities. We also invest in specialty care facilities. As of December 31,
2003, 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 REIT to invest exclusively in health care
facilities.

As of December 31, 2003, we had $2,003,466,000 of net real estate
investments, inclusive of credit enhancements, in 328 facilities located in 33
states and managed by 47 different operators. At that date, the portfolio
included 219 assisted living facilities, 101 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.

Depending upon the availability and cost of external capital, we anticipate
making additional investments in health care related facilities. New investments
are generally funded from temporary borrowings under our lines of credit
arrangements, internally generated cash and the proceeds derived from asset
sales. Permanent financing for future investments, which replaces funds drawn
under the lines of credit arrangements, is expected to be provided through a
combination of public and private offerings of debt and equity securities and
the incurrence of secured debt. We believe our liquidity and various sources of
available capital are sufficient to fund operations, meet debt service and
dividend requirements and finance future investments.

LIQUIDITY AND CAPITAL RESOURCES

On July 23, 2003, Moody's Investors Service upgraded its rating on our
senior unsecured notes from Ba1 to Baa3. The credit strengths noted by Moody's
included moderate financial leverage, negligible secured debt, strong portfolio
management and underwriting skills and improved portfolio fundamentals in our
skilled nursing and assisted living facilities.

In August and September 2003, we solicited the consents of registered
holders of our senior unsecured notes to the adoption of certain amendments to
the Indenture, dated as of April 17, 1997 (as amended and supplemented) (the
"1997 Indenture"), with Fifth Third Bank, as trustee (the "Trustee"), and the
Indenture, dated as of September 6, 2002 (as amended and supplemented) (the
"2002 Indenture"), with the Trustee. After receiving the requisite number of
consents, we entered into Supplemental Indenture No. 5 to the 1997 Indenture
with the Trustee and Supplemental Indenture No. 2 to the 2002 Indenture with the
Trustee. As amended, the supplemental indentures modify the indentures to
require us to (a) limit the use of secured debt to 40% of undepreciated assets,
(b) limit total debt to 60% of undepreciated total assets, and (c) maintain
total unencumbered assets at 150% of total secured debt. These amendments to all
of our then outstanding $615,000,000 of senior unsecured notes are intended to
modernize the covenant package and make it consistent with other
investment-grade REITs. The $250,000,000 in senior unsecured notes issued in
November 2003 have the same covenant package.

29

The following table summarizes our capital activity during the year ended
December 31, 2003 (in thousands):

During the year ended December 31, 2003, the holder of our Series C
Cumulative Convertible Preferred Stock converted 2,100,000 shares into 2,049,000
shares of common stock. At December 31, 2003, all of the shares of Series C
Cumulative Convertible Preferred Stock had been converted into common stock.

In July 2003, we instituted our enhanced dividend reinvestment and stock
purchase plan ("DRIP"). Existing stockholders, in addition to reinvesting
dividends, may now purchase up to $5,000 of common stock per month at a
discount. Investors who are not stockholders of the Company may now make an
initial investment in the Company through the DRIP with a minimum of a $1,000
purchase. In some instances, we may permit investments in excess of $5,000 per
month if we approve a request for a waiver. During the year ended December 31,
2003, we issued 1,452,000 shares of common stock under the standard provisions
of our DRIP, which generated net proceeds of approximately $43,615,000.
Additionally, we issued 825,000 shares of common stock under our DRIP waiver
program, which generated net proceeds of approximately $25,245,000. As of
December 11, 2003 we had an effective registration statement on file with the
Securities and Exchange Commission under which we may issue up to 6,314,213
shares of common stock pursuant to the DRIP. As of March 11, 2004, 5,735,402
shares of common stock remained available for issuance under this registration
statement.

On July 9, 2003, we closed a public offering of 4,000,000 shares of 7.875%
Series D Cumulative Redeemable Preferred Stock, which generated net proceeds of
approximately $96,850,000. The shares have a liquidation value of $25.00 per
share. The preferred stock, which has no stated maturity, may be redeemed by us
at par on or after July 9, 2008. A portion of the proceeds from this offering
were used to redeem all 3,000,000 shares of our 8.875% Series B Cumulative
Redeemable Preferred Stock on July 15, 2003, at a redemption price of $25.00 per
share plus accrued and unpaid dividends.

On September 29, 2003, we issued 1,060,000 shares of 6% Series E Cumulative
Convertible and Redeemable Preferred Stock as partial consideration for an
acquisition of assets by the Company, with the shares valued at $26,500,000 for
such purposes. The shares were issued to Southern Assisted Living, Inc. and
certain of its stockholders without registration in reliance upon the federal
statutory exemption of Section 4(2) of the Securities Act of 1933, as amended.
The shares have a liquidation value of $25.00 per share. The preferred stock,
which has no stated maturity, may be redeemed by us at par on or after August
15, 2008. The preferred shares are convertible into common stock at a conversion
price of $32.66 per share at any time. During the year ended December 31, 2003,
certain holders of our Series E Cumulative Convertible and Redeemable Preferred
Stock converted 229,600 shares into 175,700 shares of common stock. At December
31, 2003, we had 830,400 shares of Series E Cumulative Convertible and
Redeemable Preferred Stock outstanding.

During 2003, we invested $378,342,000 in real property, provided permanent
mortgage and loan financings of $78,245,000, made construction advances of
$32,071,000 and funded $27,410,000 of subdebt investments. As of December 31,
2003, we had approximately $15,501,000 in unfunded construction commitments.
Also during 2003, we sold real property generating $65,455,000 of net proceeds
and collected

30

$55,847,000 and $1,234,000 as repayment of principal on loans receivable and
subdebt investments, respectively.

As of December 31, 2003, we had stockholders' equity of $1,149,679,000 and
a total outstanding debt balance of $1,013,184,000, which represents a debt to
total capitalization ratio of 0.47 to 1.0.

In May 2003, we announced the amendment and extension of our primary
unsecured revolving line of credit. The line of credit was expanded to
$225,000,000, expires in May 2006 (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 August
2003, we further amended the line of credit to modify certain financial
covenants that will enhance our financial flexibility and align our covenant
package with other investment grade REITs. Finally, in December 2003 and January
2004, we expanded this line of credit to $310,000,000.

Also in May 2003, we repaid our $4,000,000 secured note and terminated the
corresponding agreement. At the same time, we increased our $25,000,000
unsecured line of credit to $30,000,000. This line of credit bears interest at
the lender's prime rate or 2.0% plus LIBOR, at our option, and expires in May
2004. Also, at December 31, 2003, 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% that expired in February 2004. We do not
intend to replace this secured facility. At December 31, 2003, we had no
borrowings outstanding under the unsecured or secured lines of credit
arrangements.

As of March 11, 2004, we had an effective shelf registration on file with
the Securities and Exchange Commission under which we may issue up to
$581,794,619 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 lines of credit arrangements.

OFF-BALANCE SHEET ARRANGEMENTS

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 arrangement. This guaranty expires upon the repayment
of the industrial revenue bonds which currently mature in 2009. At December 31,
2003, we were contingently liable for $3,195,000 under this guaranty.

31

CONTRACTUAL OBLIGATIONS

The following table summarizes our payment requirements under contractual
obligations as of December 31, 2003 (in thousands):

- ---------------

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

We have an unsecured credit arrangement with a consortium of eight banks
providing for a revolving line of credit ("revolving credit") in the amount of
$310,000,000, which expires on May 15, 2006. The agreement specifies that
borrowings under the revolving 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 (2.43% at December 31, 2003). In
addition, we pay a commitment fee based on an annual rate of 0.325% and an
annual agent's fee of $50,000. Principal is due upon expiration of the
agreement. We have another unsecured line of credit arrangement with a bank for
a total of $30,000,000, which expires May 31, 2004. Borrowings under this line
of credit are subject to interest at either the bank's prime rate of interest or
2.00% over LIBOR interest rate, at our option (4.00% at December 31, 2003) and
are due on demand. We had a $60,000,000 secured line of credit with interest at
the lender's prime rate or 2.0% over LIBOR, at our option, with a floor of 7.0%
(7.0% at December 31, 2003) that expired in February 2004. We do not intend to
replace this secured facility. At December 31, 2003, we had no borrowings
outstanding under the unsecured or secured lines of credit arrangements. As
such, we had no contractual interest obligations related to unsecured or secured
lines of credit at December 31, 2003.

We have $865,000,000 of senior unsecured notes with fixed annual interest
rates ranging from 6.00% to 8.17%, payable semi-annually. Contractual interest
obligations on senior unsecured notes totaled $428,644,000 at December 31, 2003.
Additionally, we have 30 mortgage loans totaling $148,184,000, collateralized by
health care facilities, with fixed annual interest rates ranging from 6.18% to
12.00%, payable monthly. The carrying values of the health care properties
securing the mortgage loans totaled $219,575,000 at December 31, 2003.
Contractual interest obligations on mortgage loans totaled $59,372,000 at
December 31, 2003.

At December 31, 2003, we had operating lease obligations of $10,758,000
relating to Company office space and six assisted living facilities.

Purchase obligations are comprised of unfunded construction commitments and
contingent purchase obligations. At December 31, 2003, we had outstanding
construction financings of $14,865,000 ($14,701,000 for leased properties and
$164,000 for construction loans) and were committed to providing additional
financing of approximately $15,501,000 to complete construction. At December 31,
2003, we had contingent purchase obligations totaling $62,443,000. These
contingent purchase obligations primarily relate to deferred acquisition
fundings. Deferred acquisition fundings are contingent upon an operator
satisfying certain

32

conditions such as payment coverage and value tests. Rents due from the tenant
are increased to reflect the additional investment in the property.

RESULTS OF OPERATIONS DECEMBER 31, 2003 VS. DECEMBER 31, 2002

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

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 lower average yields on our loans receivable and
non-recognition of interest income related to our mortgage loan with Doctors
Community Health Care Corporation. Transaction fees and other income increased
primarily as a result of the gain from the sale of our investment in Atlantic
Healthcare Finance L.P.

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

The increase in interest expense from 2002 to 2003 was primarily due to
higher average borrowings during the year. This was partially offset by lower
average interest rates and an increase 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 balance 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, 2003, totaled $1,535,000, as compared with $170,000 for the same
period in 2002.

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, 2003,
were 5.39% as compared with 5.83% for the same period in 2002.

The increase in loan expense was primarily due to the additional
amortization of costs related to the unsecured lines of credit amendments and
costs related to obtaining consents to modify the covenant packages of our
senior unsecured notes.

33

During the year ended December 31, 2003, it was determined that the
projected undiscounted cash flows from a property did not exceed its related net
book value and an impairment charge of $2,792,000 was recorded to reduce the
property to its estimated fair market value. The estimated fair market value of
the property was determined by an independent appraisal. During the year ended
December 31, 2002, it was determined that the projected undiscounted cash flows
from three properties 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.

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

Due to increased collectibility concerns related to portions of our loan
portfolio, we increased our allowance for losses on loans receivable by an
additional $1,870,000 for the year ended December 31, 2003.

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

During the years ended December 31, 2003 and 2002, we sold properties with
carrying values of $61,316,000 and $53,311,000 for net gains of $4,139,000 and
net losses of $1,032,000, 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 subsequent to January 1, 2002 to
discontinued operations. These properties generated $2,858,000 and $5,318,000 of
income after deducting depreciation and interest expense from rental revenue for
the years ended December 31, 2003 and 2002, respectively.

The decrease in preferred dividends is primarily due to the reduction in
average outstanding preferred shares. During the year ended December 31, 2003,
the holder of our Series C Cumulative Convertible Preferred Stock converted
2,100,000 shares into 2,049,000 shares of common stock, leaving no shares
outstanding at December 31, 2003 as compared to 2,100,000 at December 31, 2002.

In September 2003, we issued 1,060,000 shares of 6% Series E Cumulative
Convertible and Redeemable Preferred Stock. During the three months ended
December 31, 2003, certain holders of our Series E Cumulative Convertible and
Redeemable Preferred Stock converted 229,600 shares into 175,700 shares of
common stock, leaving 830,400 outstanding at December 31, 2003.

In July 2003, we closed a public offering of 4,000,000 shares of 7.875%
Series D Cumulative Redeemable Preferred Stock. A portion of the proceeds from
this offering were used to redeem all 3,000,000 shares of our 8.875% Series B
Cumulative Redeemable Preferred Stock on July 15, 2003. In accordance with EITF
Topic D-42, the costs to issue these securities were recorded as a non-cash,
non-recurring charge of $2,790,000, or $0.06 per diluted share, in the third
quarter of 2003 to reduce net income available to common stockholders.

As a result of the various factors mentioned above, net income available to
common stockholders was $70,732,000, or $1.60 per diluted share, for 2003 as
compared with $55,191,000, or $1.48 per diluted share, for 2002. Excluding the
impact of the unusual and non-recurring preferred stock redemption charge, net
income available to common stockholders was $73,522,000, or $1.66 per diluted
share, for 2003.

34

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

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

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. Transaction 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 (dollars in thousands):

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 balance 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, 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
senior unsecured notes issued in 2001 and 2002.

During the year ended December 31, 2002, it was determined that the
projected undiscounted cash flows from three properties did not exceed their
related net book values and impairment charges of $2,298,000 were

35

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.

In April 2002, we purchased $35,000,000 of our outstanding senior unsecured
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.

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

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 subsequent to January 1, 2002 to discontinued operations.
These properties generated $5,318,000 and $6,019,000 of income after deducting
depreciation and interest expense from rental revenue for the years ended
December 31, 2002 and 2001, respectively.

The decrease in preferred dividends is primarily due to the reduction in
average outstanding preferred shares. 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, as compared to 3,000,000 at December 31, 2001.

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.

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 the 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 Securities and Exchange Commission
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 subject to an evaluation of collectibility
risk. Operating lease income generally includes base rent payments plus fixed
annual rent increases, which are recognized on a straight-line basis over the
minimum lease period subject to an evaluation of collectibility risk. This lease
income is greater than the amount of cash received during the first half of the
lease term. In some instances, the leases provide for additional payment of

36

rent if the gross operating revenues from the property exceed a predetermined
threshold. Revenues are not recognized until those thresholds have been met.

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 and principal.
We evaluate the collectibility of our loans receivable based on a combination of
factors, including, but not limited to, delinquency status, historical loan
charge-offs, financial strength of the borrower and guarantors and value of the
underlying property. If such factors indicate that there is greater risk of loan
charge-offs, additional allowances or placement on non-accrual status may be
required. A loan is impaired when, based on current information and events, it
is probable that we will be unable to collect all amounts due as scheduled
according to the contractual terms of the original loan agreement. Consistent
with this definition, all loans on non-accrual are deemed impaired. To the
extent circumstances improve and the risk of collectibility is diminished, we
will return these loans to full accrual status.

DEPRECIATION AND USEFUL LIVES

We compute depreciation on our properties using the straight-line method
based on their estimated useful lives which range from 15 to 40 years for
buildings and five to 15 years for improvements. A significant portion of the
acquisition cost of each property is allocated to 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 carrying values of the properties 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 rates of return. These investments
are mainly financed with a combination of equity, senior unsecured notes and
borrowings under our lines of credit arrangements. During inflationary periods,
which generally are accompanied by rising interest rates, our ability to grow
may be adversely affected because the yield on new investments may increase at a
slower rate than new borrowing costs. Presuming the current inflation rate
remains moderate and long-term interest rates do not increase significantly, we
believe that inflation will not impact the availability of equity and debt
financing.

37

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:

- the possible expansion of our portfolio;

- the performance of our operators and properties;

- our ability to enter into agreements with new viable tenants for
properties which we take back from financially troubled tenants, if any;

- our ability to make distributions;

- our policies and plans regarding investments, financings and other
matters;

- our tax status as a real estate investment trust;

- our ability to appropriately balance the use of debt and equity; and

- 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:

- the status of the economy;

- the status of capital markets, including prevailing interest rates;

- changes in financing terms; and

- 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, Medicare and Medicaid reimbursement 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 may
continue, to come under pressure due to reimbursement 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.

38

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 such
events occur, our revenue and operating cash flow may be adversely affected.

On November 20, 2002, Doctors Community Health Care Corporation and five
subsidiaries ("Doctors") filed for Chapter 11 bankruptcy protection in the
United States Bankruptcy Court for the District of Columbia. Doctors stated that
its bankruptcy filing was due to the bankruptcy of National Century Financial
Enterprises and affiliates, which halted payments to health care providers,
including Doctors. We have provided mortgage financing to Doctors in the form of
a loan secured by the Pacifica Hospital of the Valley in Sun Valley, CA, and the
other assets of the Pacifica of the Valley Corporation, one of the debtor
subsidiaries. The outstanding principal balance of the loan was approximately
$18,797,000 on December 31, 2003. Pursuant to procedures approved by the
bankruptcy court, the assets of Doctors were the subject of an auction held on
December 10 through December 16, 2003. At the conclusion of that auction, the
debtors' independent director declared certain members of Doctors' management
the winning bidder. Their bid contemplates a reorganization of Doctors and its
subsidiaries with new equity and debt capitalization. The results of this
auction are subject to bankruptcy court approval, which the debtors have stated
they intend to seek in connection with a hearing on the confirmation of the
debtors' proposed plan of reorganization. Doctors anticipates that this hearing
should occur in March or April 2004. Doctors did not make an interest payment
for the twelve months ended December 31, 2003. We will not recognize any
interest on the loan until payment is received.

Alterra Healthcare Corporation ("Alterra") 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 $103,293,000 at December 31, 2003. A
joint venture between Fortress Investment Group LLC and Emeritus Corporation was
the winning bidder at a bankruptcy auction held on July 17, 2003. The bankruptcy
court confirmed Alterra's plan of reorganization on November 26, 2003. In
connection with confirmation of Alterra's plan, our master lease was assumed and
the acquisition of Alterra by the Fortress-Emeritus joint venture was approved.
This transaction has closed. Alterra remained current on rental payments
throughout the bankruptcy process.

RISK FACTORS RELATED TO GOVERNMENT REGULATIONS

Our operators' businesses are affected by government reimbursement and
private payor rates. To the extent that any skilled nursing or specialty care
facility receives a significant portion of its revenues from governmental
payors, primarily Medicare and Medicaid, such 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 such 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 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

39

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 tort damages.
Despite some of these reforms, the long-term care industry overall continues to
experience very high general and professional liability costs. Insurance
companies 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 any of the foregoing states or
any other states where the 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 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 ACQUISITIONS

We are exposed to the risk that our future acquisitions may not prove to be
successful. We could encounter unanticipated difficulties and expenditures
relating to any acquired properties, including contingent liabilities, and newly
acquired properties might require significant management attention that would
otherwise be devoted to our ongoing business. If we agree to provide
construction financing to an operator and the project is not completed, we may
need to take steps to ensure completion of the project or we could lose the
property. Moreover, if we issue equity securities or incur additional debt, or
both, to finance future acquisitions, it may reduce our per share financial
results. These costs may negatively affect our results of operations.

RISK FACTORS RELATED TO ENVIRONMENTAL LAWS

Under various federal and state laws, owners or operators of real estate
may be required to respond to the release of hazardous substances on the
property and may be held liable for property damage, personal injuries or
penalties that result from environmental contamination. These laws also expose
us to the possibility that we become liable to reimburse the government for
damages and costs it incurs in connection with the contamination. Generally,
such liability attaches to a person based on the person's relationship to the
property. Our lessees or borrowers are primarily responsible for the condition
of the property and since we are a passive landlord, we do not "participate in
the management" of any property in which we have an interest. Moreover, we
review environmental site assessments of the properties that we own or encumber
prior to taking an interest in them. Those assessments are designed to meet the
"all appropriate inquiry" standard, which qualifies us for the innocent
purchaser defense if environmental liabilities arise. Based upon such
assessments, we do not believe that any of our properties are subject to
material environmental contamination. However, environmental liabilities may be
present in our properties and we may incur costs to remediate contamination,
which could have a material adverse effect on our business or financial
condition.

RISK FACTORS RELATED TO REINVESTMENT OF SALE PROCEEDS

From time to time, we will have cash available from (1) the proceeds of
sales of shares of our securities, (2) principal payments on our loans
receivable and (3) the sale of properties, including non-elective dispositions,
under the terms of master leases or similar financial support arrangements. We
must re-invest these proceeds, on a timely basis, in health care investments or
in qualified short-term investments. We compete for real estate investments with
a broad variety of potential investors. This competition for attractive
40

investments may negatively affect our ability to make timely investments on
terms acceptable to us. Delays in acquiring properties may negatively impact
revenues and perhaps our ability to increase our distributions to stockholders.

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 REIT. We intend to operate as a
REIT under the Internal Revenue Code and believe we have and will continue to
operate in such a manner. 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, our Second Restated Certificate of Incorporation and Amended and
Restated By-Laws contain anti-takeover provisions (staggered board provisions,
restrictions on share ownership and transfer, and super majority stockholder
approval requirements for business combinations) 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. Further, we have a "poison pill"
rights plan that has anti-takeover effects. The rights plan, if triggered, would
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 would have a material adverse impact on our business.

41

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

A change in interest rates will not affect the interest expense associated
with our fixed rate debt. Interest rate changes, however, will affect the fair
value of such debt. A 1% increase in interest rates would result in a decrease
in fair value of our senior unsecured notes by approximately $31,473,000 at
December 31, 2003 ($15,145,000 at December 31, 2002). 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 lines of credit
arrangements, is reflected at fair value. At December 31, 2003, we did not have
any borrowings outstanding on our unsecured or secured lines of credit
arrangements. As such, a 1% increase in interest rates would have no effect on
our annual interest expense. However, as an example, if borrowings totaled
$50,000,000, a 1% increase in interest rates would result in increased annual
interest expense of $500,000. At December 31, 2002, we had $113,500,000
outstanding related to this variable rate debt and assuming no changes in
outstanding balances, a 1% increase in interest rates would result in increased
annual interest expense of $1,135,000.

We are subject to risks associated with debt financing, including the risk
that existing indebtedness may not be refinanced or that the terms of such
refinancing may not be as favorable as the terms of current indebtedness. The
majority of our borrowings were completed pursuant to 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. Such 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.

42

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY 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, 2003 and 2002, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 2003. 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, 2003 and 2002, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2003, 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 9 to the consolidated financial statements, in 2003
the Company adopted the provisions of Financial Accounting Standards Board
Statement No. 123, Accounting for Stock-Based Compensation. As discussed in Note
16 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 16, 2004

43

HEALTH CARE REIT, INC.

CONSOLIDATED BALANCE SHEETS

See accompanying notes
44

HEALTH CARE REIT, INC.

CONSOLIDATED STATEMENTS OF INCOME

See accompanying notes
45

HEALTH CARE REIT, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

See accompanying notes
46

HEALTH CARE REIT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes
47

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.

CASH AND CASH EQUIVALENTS

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

LOANS RECEIVABLE

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

Real property owned consists of land, buildings and improvements owned by
us. The allocation of the acquisition costs of properties is based on appraisals
commissioned from independent real estate appraisal firms. 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 15 to 40 years for buildings and five to
15 years for improvements. The net book value of long-lived assets is reviewed
quarterly on a property by property basis to determine if facts and
circumstances suggest that the assets may be impaired or that the depreciable
life may need to be changed. We consider external factors relating to each
asset. If these external factors and the projected undiscounted cash flows of
the asset over the remaining depreciation period indicate that the asset will
not be recoverable, the carrying value will be adjusted to the estimated fair
market value. The leases generally extend for a minimum seven-year period and
provide for payment of all taxes, insurance and maintenance by the tenants. 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 subject to an evaluation of collectibility risks. This income is
greater than the amount of cash received during the first half of the lease
term.

48

HEALTH CARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CAPITALIZATION OF CONSTRUCTION PERIOD INTEREST

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

We capitalized interest costs of $1,535,000, $170,000, and $841,000, during
2003, 2002 and 2001, respectively, related to construction of real property
owned by us. Our interest expense reflected in the consolidated statements of
income has been reduced by the amounts capitalized.

DEFERRED LOAN EXPENSES

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

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is maintained at a level believed adequate to
absorb potential losses in our loans receivable. The determination of the
allowance is based on a quarterly evaluation of these loans, including general
economic conditions and estimated collectibility of loan payments. We evaluate
the collectibility of our loans receivable based on a combination of factors,
including, but not limited to, delinquency status, historical loan charge-offs,
financial strength of the borrower and guarantors and value of the underlying
property. If such factors indicate that there is greater risk of loan
charge-offs, additional allowances or placement on non-accrual status may be
required. A loan is impaired when, based on current information and events, it
is probable that we will be unable to collect all amounts due as scheduled
according to the contractual terms of the original loan agreement. Consistent
with this definition, all loans on non-accrual are deemed impaired. At December
31, 2003, we had loans with outstanding balances of $30,523,000 on non-accrual
status ($15,311,000 at December 31, 2002). A significant portion of this balance
relates to our mortgage loan with Doctors Community Health Care Corporation. To
the extent circumstances improve and the risk of collectibility is diminished,
we will return these loans to full accrual status.

EQUITY INVESTMENTS

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

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

FOREIGN CURRENCY TRANSLATION

For our investment in Atlantic Healthcare Finance L.P., the functional
currency was the local currency. The income and expenses of the entity were
translated into U.S. dollars using the average exchange rates for
49

HEALTH CARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the reporting period to derive our equity earnings. Translation adjustments were
recorded in accumulated other comprehensive income, a separate component of
stockholders' equity.

TRANSACTION FEES

Transaction fees are earned by us for our agreement to provide direct and
standby financing to, and credit enhancement for, owners and operators of health
care facilities. We amortize transaction fees over the initial fixed term of the
lease, the loan or the construction period related to such 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 such for each taxable year. See Note 11.

NET INCOME PER SHARE

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

ACCUMULATED OTHER COMPREHENSIVE INCOME

Accumulated other comprehensive income includes unrealized gains or losses
on our equity investments ($1,000 and $12,000 at December 31, 2003 and 2002,
respectively) and foreign currency translation adjustments ($0 and ($182,000) at
December 31, 2003 and 2002, 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 62, Amendment of
FASB Statement No. 13, and Technical Corrections. Statement 145 requires gains
and losses on extinguishments of debt to be classified as income or loss from
continuing operations rather than as extraordinary items as previously required
under Statement 4. Extraordinary treatment will be required for certain
extinguishments as provided in APB Opinion No. 30. Statement 145 is effective
for fiscal years beginning after December 15, 2002. We adopted the standard
effective January 1, 2003.

Effective January 1, 2003, we commenced recognizing compensation expense
for employee stock options in accordance with Statement 123 on a prospective
basis. See Note 9.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51 (the Interpretation). The Interpretation requires the consolidation of
variable interest entities in which an enterprise absorbs a majority of the
entity's expected losses, receives a majority of the entity's expected residual
returns, or both, as a result of ownership, contractual or other financial
interests in the entity. Currently, entities are generally consolidated by an
enterprise that has a controlling financial interest through ownership of a
majority voting interest in the entity. The Interpretation is effective for
financial statements issued for the first period ending after March 15, 2004. We
are currently evaluating the effects, if any, of the issuance of the
Interpretation.

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HEALTH CARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In May 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity.
Statement 150 requires that certain financial instruments be classified as
liabilities (or assets in certain circumstances) rather than as equity.
Statement 150 is effective at the beginning of the first interim period
beginning after June 15, 2003. We adopted the standard effective July 1, 2003
and have determined that none of our financial instruments are impacted by
Statement 150.

Emerging Issues Task Force (EITF) Topic D-42, The Effect on the Calculation
of Earnings per Share for the Redemption or Induced Conversion of Preferred
Stock, provides, among other things, that any excess of (1) the fair value of
the consideration transferred to the holders of preferred stock redeemed over
(2) the carrying amount of the preferred stock should be subtracted from net
earnings to determine net income available to common stockholders in the
calculation of earnings per share. At the July 31, 2003 meeting of the EITF, the
Securities and Exchange Commission Observer clarified that for purposes of
applying EITF Topic D-42, the carrying amount of the preferred stock should be
reduced by the issuance costs of the preferred stock, regardless of where in the
stockholders' equity section those costs were initially classified upon
issuance. On July 15, 2003, we redeemed all 3,000,000 shares of our 8.875%
Series B Cumulative Redeemable Preferred Stock. The costs to issue these
securities were recorded as a reduction to paid-in capital, and to implement the
clarified accounting pronouncement, we recorded a non-cash, non-recurring charge
of $2,790,000, or $0.06 per diluted share, in the third quarter of 2003 to
reduce net income available to common stockholders.

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 $36,000, $59,000, and $108,000 for 2003, 2002 and 2001,
respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following is a summary of mortgage loans at December 31, 2003:

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HEALTH CARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. REAL PROPERTY OWNED

The following table summarizes certain information about our real property
owned as of December 31, 2003 (dollars in thousands):

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HEALTH CARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At December 31, 2003, future minimum lease payments receivable under
operating leases are as follows (in thousands):

2004........................................................ $ 188,459
2005........................................................ 193,010
2006........................................................ 197,716
2007........................................................ 202,742
2008........................................................ 207,804
Thereafter.................................................. 1,748,369
----------
Totals...................................................... $2,738,100
==========

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HEALTH CARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

We purchased $12,433,000, $33,972,000 and $13,683,000 of real property that
had previously been financed by the Company with loans in 2003, 2002 and 2001,
respectively. We converted $36,794,000 of completed construction projects into
operating lease properties in 2003. We acquired properties which included the
assumption of mortgages totaling $101,243,000 and $2,248,000 in 2003 and 2002,
respectively. These non-cash activities are appropriately not reflected in the
accompanying statements of cash flows.

During the year ended December 31, 2003, it was determined that the
projected undiscounted cash flows from a property did not exceed its related net
book value and an impairment charge of $2,792,000 was recorded to reduce the
property to its estimated fair market value. The estimated fair market value of
the property was determined by an independent appraisal. During the year ended
December 31, 2002, it was determined that the projected undiscounted cash flows
from three properties 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.

4. CONCENTRATION OF RISK

As of December 31, 2003, long-term care facilities, which include skilled
nursing and assisted living facilities, comprised 92% (92% at December 31, 2002)
of our real estate investments and were located in 33 states. Investments in
assisted living facilities comprised 60% (57% at December 31, 2002) of our real
estate investments. The following table summarizes certain information about our
operator concentration as of December 31, 2003 (dollars in thousands):

- ---------------

(1) Investments include real estate investments and credit enhancements which
amounted to $2,000,271,000 and $3,195,000, respectively.

(2) Investments with top five operators comprised 45% of total investments at
December 31, 2002.

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HEALTH CARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(3) Revenues include gross revenues and revenues from discontinued operations
for the year ended December 31, 2003.

(4) Revenues from top five operators were 43% and 40% for the years ended
December 31, 2002 and 2001, respectively.

5. ALLOWANCE FOR LOAN LOSSES

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

6. BORROWINGS UNDER LINES OF CREDIT ARRANGEMENTS AND RELATED ITEMS

We have an unsecured credit arrangement with a consortium of eight banks
providing for a revolving line of credit ("revolving credit") in the amount of
$310,000,000, which expires on May 15, 2006. The agreement specifies that
borrowings under the revolving 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 (2.43% at December 31, 2003). In
addition, we pay a commitment fee based on an annual rate of 0.325% and an
annual agent's fee of $50,000. Principal is due upon expiration of the
agreement. We have another unsecured line of credit arrangement with a bank for
a total of $30,000,000, which expires May 31, 2004. Borrowings under this line
of credit are subject to interest at either the bank's prime rate of interest or
2.00% over LIBOR interest rate, at our option (4.00% at December 31, 2003) and
are due on demand.

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

7. SENIOR UNSECURED NOTES AND SECURED DEBT

We have $865,000,000 of senior unsecured notes with annual interest rates
ranging from 6.00% to 8.17%.

We have 30 mortgage loans totaling $148,184,000, collateralized by health
care facilities with annual interest rates ranging from 6.18% to 12.00%. The
carrying values of the health care properties securing the mortgage loans
totaled $219,575,000 at December 31, 2003.

We had a $60,000,000 secured line of credit with interest at the lender's
prime rate or 2.0% over LIBOR, at our option, with a floor of 7.0% (7.0% at
December 31, 2003) that expired in February 2004. We do not intend to replace
this secured facility.

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HEALTH CARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, 2003, 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 4,024,673 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
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 432,000 shares to be issued.

The following summarizes the activity in the plans for the years ended
December 31 (shares in thousands):

Vesting periods for options and restricted shares range from six months for
directors to five years for officers and key salaried employees. Options expire
ten years from the date of grant. We granted 110,000, 8,000, and 75,750
restricted shares during 2003, 2002 and 2001, respectively, including 12,000,
8,000, and

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HEALTH CARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8,000 shares for directors in 2003, 2002 and 2001, respectively. Expense, which
is recognized as the shares vest based on the market value at the date of the
award, totaled $1,984,000, $1,555,000 and $1,164,000, in 2003, 2002 and 2001,
respectively.

The following table summarizes information about stock options outstanding
at December 31, 2003 (shares in thousands):

We have a 401(k) Profit Sharing Plan and Money Purchase Pension Plan ("the
Plans") covering all eligible employees. Under the Plans, eligible employees may
make contributions, and we may make matching contributions and a profit sharing
contribution. Our contributions to these Plans totaled $206,000, $184,000 and
$175,000 in 2003, 2002 and 2001, 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 $412,000 at December 31, 2003 ($206,000 at December
31, 2002).

9. OTHER EQUITY

Other equity consists of the following (in thousands):

Unamortized restricted stock represents the unamortized value of restricted
stock granted to employees and directors. Expense, which is recognized as the
shares vest based on the market value at the date of the award, totaled
$1,182,000, $1,555,000 and $1,164,000 for the years ended December 31, 2003,
2002 and 2001, respectively.

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

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HEALTH CARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

10. PREFERRED STOCK

In January 1999, we sold 3,000,000 shares of Series C Cumulative
Convertible Preferred Stock. These shares had a liquidation value of $25.00 per
share and paid 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 were convertible into common stock at a conversion
price of $25.625 per share. We had the right to redeem the preferred shares
after five years. During the year ended December 31, 2003, the holder of our
Series C Cumulative Convertible

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HEALTH CARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Preferred Stock converted 2,100,000 shares into 2,049,000 shares of common
stock. At December 31, 2003, the Series C Cumulative Convertible Preferred Stock
has been fully converted into common stock.

In July 2003, we closed a public offering of 4,000,000 shares of 7.875%
Series D Cumulative Redeemable Preferred Stock. These shares have a liquidation
value of $25.00 per share. Dividends are payable quarterly in arrears. The
preferred stock, which has no stated maturity, may be redeemed by us at par plus
accrued and unpaid dividends thereon to the redemption date on or after July 9,
2008. A portion of the proceeds from this offering were used to redeem all
3,000,000 shares of our 8.875% Series B Cumulative Redeemable Preferred Stock on
July 15, 2003, at a redemption price of $25.00 per share plus accrued and unpaid
dividends.

In September 2003, we issued 1,060,000 shares of 6% Series E Cumulative
Convertible and Redeemable Preferred Stock as partial consideration for an
acquisition of assets by the Company, with the shares valued at $26,500,000 for
such purposes. The shares were issued to Southern Assisted Living, Inc. and
certain of its stockholders without registration in reliance upon the federal
statutory exemption of Section 4(2) of the Securities Act of 1933, as amended.
The shares have a liquidation value of $25.00 per share. Dividends are payable
quarterly in arrears. The preferred stock, which has no stated maturity, may be
redeemed by us at par plus accrued and unpaid dividends thereon to the
redemption date on or after August 15, 2008. The preferred shares are
convertible into common stock at a conversion price of $32.66 per share at any
time. During the three months ended December 31, 2003, certain holders of our
Series E Cumulative Convertible and Redeemable Preferred Stock converted 229,600
shares into 175,700 shares of common stock, leaving 830,400 outstanding at
December 31, 2003.

11. INCOME TAXES AND DISTRIBUTIONS

To qualify as a real estate investment trust for federal income tax
purposes, 90% of taxable income (including 100% of capital gains) must be
distributed to stockholders. Real estate investment trusts that do not
distribute a certain amount of current year taxable income in the current year
are also subject to a 4% federal excise tax. The principal 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 loan losses for reporting purposes versus bad
debt expense for tax purposes. Cash distributions paid to common stockholders,
for federal income tax purposes, are as follows:

12. 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 arrangement. This guaranty expires upon the repayment
of the industrial revenue bonds which currently mature in 2009. At December 31,
2003, we were contingently liable for $3,195,000 under this guaranty.

At December 31, 2003, we had operating lease obligations of $10,758,000
relating to Company office space and six assisted living facilities.

60

HEALTH CARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At December 31, 2003, we had outstanding construction financings of
$14,865,000 ($14,701,000 for leased properties and $164,000 for construction
loans) and were committed to providing additional financing of approximately
$15,501,000 to complete construction. At December 31, 2003, we had contingent
purchase obligations totaling $62,443,000. These contingent purchase obligations
primarily relate to deferred acquisition fundings. Deferred acquisition fundings
are contingent upon an operator satisfying certain conditions such as payment
coverage and value tests. Rents received from the tenant are increased to
reflect the additional investment in the property.

On November 20, 2002, Doctors Community Health Care Corporation and five
subsidiaries ("Doctors") filed for Chapter 11 bankruptcy protection in the
United States Bankruptcy Court for the District of Columbia. Doctors stated that
its bankruptcy filing was due to the bankruptcy of National Century Financial
Enterprises and affiliates, which halted payments to health care providers,
including Doctors. We have provided mortgage financing to Doctors in the form of
a loan secured by the Pacifica Hospital of the Valley in Sun Valley, CA, and the
other assets of the Pacifica of the Valley Corporation, one of the debtor
subsidiaries. The outstanding principal balance of the loan was approximately
$18,797,000 on December 31, 2003. Pursuant to procedures approved by the
bankruptcy court, the assets of Doctors were the subject of an auction held on
December 10 through December 16, 2003. At the conclusion of that auction, the
debtors' independent director declared certain members of Doctors' management
the winning bidder. Their bid contemplates a reorganization of Doctors and its
subsidiaries with new equity and debt capitalization. The results of this
auction are subject to bankruptcy court approval, which the debtors have stated
they intend to seek in connection with a hearing on the confirmation of the
debtors' proposed plan of reorganization. Doctors anticipates that this hearing
should occur in March or April 2004. Doctors did not make an interest payment
for the twelve months ended December 31, 2003. We will not recognize any
interest on the loan until payment is received.

Alterra Healthcare Corporation ("Alterra") 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 $103,293,000 at December 31, 2003. A
joint venture between Fortress Investment Group LLC and Emeritus Corporation was
the winning bidder at a bankruptcy auction held on July 17, 2003. The bankruptcy
court confirmed Alterra's plan of reorganization on November 26, 2003. In
connection with confirmation of Alterra's plan, our master lease was assumed and
the acquisition of Alterra by the Fortress-Emeritus joint venture was approved.
This transaction has closed. Alterra remained current on rental payments
throughout the bankruptcy process.

13. 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.

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HEALTH CARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. 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
0, 10,000 and 1,301,000 options for 2003, 2002 and 2001, respectively, because
the exercise price was greater than the average market price. The Series C
Cumulative Convertible Preferred Stock and Series E Cumulative Convertible and
Redeemable Preferred Stock were not included in this calculation as the effect
of the conversions were anti-dilutive.

15. 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 Receivable -- The fair value of all mortgage loans
receivable 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, Construction 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 Lines of Credit Arrangements and Secured Debt -- The
carrying amount of the lines of credit arrangements 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 the Company for similar debt.

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

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HEALTH CARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

16. 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, 2003, we sold properties with carrying
values of $61,316,000 for net gains of $4,139,000. 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):

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HEALTH CARE REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

17. SUBSEQUENT EVENTS

During December 2003 and January 2004, we expanded our unsecured revolving
line of credit from $225,000,000 to $310,000,000. The existing bank group, in
conjunction with two new participants, First Tennessee Bank, N.A. and LaSalle
Bank National Association, provided the additional capacity. See Note 6 for
additional information regarding this arrangement.

18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of our unaudited quarterly results of operations
for the years ended December 31, 2003 and 2002 (in thousands, except per share
data):

- ---------------

(1) In accordance with FASB Statement No. 144, we have reclassified the income
attributable to the properties sold subsequent to January 1, 2002 to
discontinued operations. See Note 16.

(2) The decrease in net income and amounts per share is primarily attributable
to impairment of assets recorded in fourth quarter 2003 and a common stock
issuance completed in third quarter 2003.

(3) 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.

64

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

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

An evaluation was carried out under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the disclosure controls and
procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934,
as amended) as of the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the disclosure controls and procedures were effective as of the end of the
period covered by this report. No change in our internal control over financial
reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934,
as amended) occurred during the fourth quarter of the one-year period covered by
this report that materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.

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 headings "Election of Three Directors," "Executive
Officers of the Company" and "Board and Committees" in our definitive proxy
statement, which will be filed with the Commission prior to April 16, 2004.

We have adopted a Code of Business Conduct & Ethics that applies to our
directors, officers and employees. The code is posted on our Internet Web site
at www.hcreit.com and is available from the Company upon written request to the
Vice President and Corporate Secretary, Health Care REIT, Inc., One SeaGate,
Suite 1500, P.O. Box 1475, Toledo, Ohio 43603-1475. Any amendments to, or
waivers from, the code that relate to any officer or director of the Company
will be promptly disclosed on our Internet Web site at www.hcreit.com.

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 Commission prior to April 16, 2004.

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

The information required by this Item is incorporated herein by reference
to the information under the headings "Security Ownership of Directors and
Management," "Equity Compensation Plan Information" and "Employment Agreements"
in our definitive proxy statement, which will be filed with the Commission prior
to April 16, 2004.

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
Commission prior to April 16, 2004.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item is incorporated herein by reference
to the information under the heading "Ratification of the Appointment of
Independent Auditors" in our definitive proxy statement, which will be filed
with the Commission prior to April 16, 2004.

65

PART IV

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.............................. 43
Consolidated Balance Sheets -- December 31, 2003 and 2002... 44
Consolidated Statements of Income -- Years ended December
31, 2003, 2002 and 2001................................... 45
Consolidated Statements of Stockholders' Equity -- Years
ended December 31, 2003, 2002 and 2001.................... 46
Consolidated Statements of Cash Flows -- Years ended
December 31, 2003, 2002 and 2001.......................... 47
Notes to Consolidated Financial Statements.................. 48

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 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).
3.3 Certificate of Designations, Preferences and Rights of
Series C Cumulative Convertible Preferred Stock 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).
3.4 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).
3.5 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 8-K filed June 13, 2003,
and incorporated herein by reference thereto).
3.6 Certificate of Designation of 7 7/8% Series D Cumulative
Redeemable Preferred Stock of the Company (filed with the
Commission as Exhibit 2.5 to the Company's Form 8-A/A filed
July 8, 2003, and incorporated herein by reference thereto).
3.7 Certificate of Designation of 6% Series E Cumulative
Convertible and Redeemable Preferred Stock of the Company
(filed with the Commission as Exhibit 3.1 to the Company's
Form 8-K filed October 1, 2003, and incorporated herein by
reference thereto).
3.8 Amended and Restated By-Laws of the Company (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 that defines the rights of holders of
long-term debt of the Company and authorizes a total amount
of securities not in excess of 10% of the total assets of
the Company.

66

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 between the Company 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).
4.4 First Supplemental Indenture, dated as of April 17, 1997, to
Indenture dated as of April 17, 1997, between the Company
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,
to Indenture dated as of April 17, 1997, between the Company
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, to
Indenture dated as of April 17, 1997, between the Company
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,
to Indenture dated as of April 17, 1997, between the Company
and Fifth Third Bank (filed with the Commission as Exhibit
4.2 to the Company's Form 8-K filed August 9, 2001, and
incorporated herein by reference thereto).
4.8 Supplemental Indenture No. 5, dated September 10, 2003, to
Indenture dated as of April 17, 1997, between the Company
and Fifth Third Bank (filed with the Commission as Exhibit
4.1 to the Company's Form 8-K filed September 24, 2003, and
incorporated herein by reference thereto).
4.9 Amendment No. 1, dated September 16, 2003, to Supplemental
Indenture No. 5, dated September 10, 2003, to Indenture
dated as of April 17, 1997, between the Company and Fifth
Third Bank (filed with the Commission as Exhibit 4.3 to the
Company's Form 8-K filed September 24, 2003, and
incorporated herein by reference thereto).
4.10 Indenture for Senior Debt Securities, dated as of September
6, 2002, between the Company and Fifth Third Bank (filed
with the Commission as Exhibit 4.1 to the Company's Form 8-K
filed September 9, 2002, and incorporated herein by
reference thereto).
4.11 Supplemental Indenture No. 1, dated as of September 6, 2002,
to Indenture for Senior Debt Securities, dated as of
September 6, 2002, between the Company and Fifth Third Bank
(filed with the Commission as Exhibit 4.2 to the Company's
Form 8-K filed September 9, 2002, and incorporated herein by
reference thereto).
4.12 Amendment No. 1, dated March 12, 2003, to Supplemental
Indenture No. 1, dated as of September 6, 2002, to Indenture
for Senior Debt Securities, dated as of September 6, 2002,
between the Company and Fifth Third Bank (filed with the
Commission as Exhibit 4.1 to the Company's Form 8-K filed
March 14, 2003, and incorporated herein by reference
thereto).
4.13 Supplemental Indenture No. 2, dated as of September 10,
2003, to Indenture for Senior Debt Securities, dated as of
September 6, 2002, between the Company and Fifth Third Bank
(filed with the Commission as Exhibit 4.2 to the Company's
Form 8-K filed September 24, 2003, and incorporated herein
by reference thereto).
4.14 Amendment No. 1, dated September 16, 2003, to Supplemental
Indenture No. 2, dated as of September 10, 2003, to
Indenture for Senior Debt Securities, dated as of September
6, 2002, between the Company and Fifth Third Bank (filed
with the Commission as Exhibit 4.4 to the Company's Form 8-K
filed September 24, 2003, and incorporated herein by
reference thereto).

67

4.15 Supplemental Indenture No. 3, dated as of October 29, 2003,
to Indenture for Senior Debt Securities, dated as of
September 6, 2002, between the Company and Fifth Third Bank
(filed with the Commission as Exhibit 4.1 to the Company's
Form 8-K filed October 30, 2003, and incorporated herein by
reference thereto).
4.16 Form of Indenture for Senior Subordinated Debt Securities
(filed with the Commission as Exhibit 4.9 to the Company's
Form S-3 (File No. 333-73936) filed November 21, 2001, and
incorporated herein by reference thereto).
4.17 Form of Indenture for Junior Subordinated Debt Securities
(filed with the Commission as Exhibit 4.10 to the Company's
Form S-3 (File No. 333-73936) filed November 21, 2001, and
incorporated herein by reference thereto).
10.1 Amended and Restated Loan Agreement, dated August 23, 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 to the
Company's Form 8-K filed August 30, 2002, and incorporated
herein by reference thereto).
10.2 Amendment No. 1, dated May 15, 2003, to Amended and Restated
Loan Agreement, dated August 23, 2002, by and among Health
Care REIT, Inc. and certain of 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 to the
Company's Form 8-K filed June 13, 2003, and incorporated
herein by reference thereto).
10.3 Amendment No. 2, dated August 26, 2003, to Amended and
Restated Loan Agreement, dated August 23, 2002, by and among
Health Care REIT, Inc. and certain of its subsidiaries, the
banks signatory thereto, KeyBank National Association, as
administrative agent, Deutsche Bank Securities Inc., as
syndication agent, and UBS Securities LLC, as documentation
agent (filed with the Commission as Exhibit 10.1 to the
Company's Form 8-K filed September 24, 2003, and
incorporated herein by reference thereto).
10.4 Amendment No. 3, dated December 19, 2003, to Amended and
Restated Loan Agreement, dated August 23, 2002, by and among
Health Care REIT, Inc. and certain of its subsidiaries, the
banks signatory thereto, KeyBank National Association, as
administrative agent, Deutsche Bank Securities Inc., as
syndication agent, and UBS Securities LLC, as documentation
agent.
10.5 Supplement, dated January 30, 2004, to Amended and Restated
Loan Agreement, dated August 23, 2002, by and among Health
Care REIT, Inc. and certain of its subsidiaries, the banks
signatory thereto, KeyBank National Association, as
administrative agent, Deutsche Bank Securities Inc., as
syndication agent, and UBS Securities LLC, as documentation
agent.
10.6 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).
10.7 Amendment No. 1, dated April 5, 1999, to 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
10.10 to the Company's Form 10-K filed March 26, 2001, and
incorporated herein by reference thereto).
10.8 Credit Agreement by and between Health Care REIT, Inc. and
Fifth Third Bank, dated as of May 31, 2003 (filed with the
Commission as Exhibit 10.1 to the Company's Form 8-K filed
June 13, 2003, and incorporated herein by reference
thereto).
10.9 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).*

68

10.10 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).*
10.11 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).*
10.12 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).*
10.13 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).*
10.14 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).*
10.15 Third Amendment to the 1995 Stock Incentive Plan of Health Care REIT, Inc.*
10.16 Stock Plan for Non-Employee Directors of Health Care REIT, Inc. (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).*
10.17 Second Amended and Restated Employment Agreement, effective January 1, 2004, by and between
Health Care REIT, Inc. and George L. Chapman.*
10.18 Second Amended and Restated Employment Agreement, effective January 1, 2004, by and between
Health Care REIT, Inc. and Raymond W. Braun.*
10.19 Second Amended and Restated Employment Agreement, effective January 1, 2004, by and between
Health Care REIT, Inc. and Erin C. Ibele.*
10.20 Amended and Restated Employment Agreement, effective January 1, 2004, by and between Health
Care REIT, Inc. and Charles J. Herman, Jr.*
10.21 Employment Agreement, effective April 28, 2003, by and between Health Care REIT, Inc. and
Scott A. Estes.*
10.22 Health Care REIT, Inc. Supplemental Executive Retirement Plan, effective as of January 1, 2001
(filed with the Commission as Exhibit 10.19 to the Company's Form 10-K filed March 10, 2003,
and incorporated herein by reference thereto).*
10.23 Health Care REIT, Inc. Executive Loan Program, effective as of August 1999 (filed with the
Commission as Exhibit 10.20 to the Company's Form 10-K filed March 10, 2003, and incorporated
herein by reference thereto).*
14 Code of Business Conduct & Ethics.
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP, independent auditors.
24 Powers of Attorney.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.1 Certification pursuant to 18 U.S.C. Section 1350 by Chief Executive Officer.
32.2 Certification pursuant to 18 U.S.C. Section 1350 by Chief Financial Officer.

- ---------------

* Management Contract or Compensatory Plan or Arrangement.

69

(b) Reports on Form 8-K filed in the fourth quarter of 2003 and afterwards:

Form 8-K filed on October 1, 2003 to announce that the Company had filed
the Certificate of Designation for its 6% Series E Cumulative Convertible and
Redeemable Preferred Stock.

Form 8-K filed on October 22, 2003 to announce that the Company had filed a
press release announcing earnings results for the quarter ended September 30,
2003.

Form 8-K filed on October 30, 2003 to announce that the Company had entered
into an Underwriting Agreement for an offering of $250,000,000 in senior
unsecured notes.

Form 8-K filed on November 7, 2003 to announce that an executive officer
had entered into a second 10b5-1 trading plan effective November 3, 2003.

Form 8-K filed on November 14, 2003 to announce that an executive officer
had modified a 10b5-1 trading plan effective November 12, 2003 and another
executive officer had entered into a new 10b5-1 trading plan effective November
12, 2003.

Form 8-K filed on February 2, 2004 to announce that the Company had filed a
press release announcing earnings results for the quarter and year ended
December 31, 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
Securities Exchange Act of 1934.

(d) Financial Statement Schedules:

Financial statement schedules are included in pages 72 through 80.

70

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 12, 2004, by the following person on
behalf of the Company and in the capacities indicated.

/s/ WILLIAM C. BALLARD, JR.* /s/ BRUCE G. THOMPSON*
- ----------------------------------------------------- -----------------------------------------------------
William C. Ballard, Jr., Director Bruce G. Thompson, Director

/s/ PIER C. BORRA* /s/ R. SCOTT TRUMBULL*
- ----------------------------------------------------- -----------------------------------------------------
Pier C. Borra, Director R. Scott Trumbull, Director

/s/ THOMAS J. DEROSA* /s/ GEORGE L. CHAPMAN
- ----------------------------------------------------- -----------------------------------------------------
Thomas J. DeRosa, Director George L. Chapman, Chairman,
Chief Executive Officer and Director
(Principal Executive Officer)

/s/ JEFFREY H. DONAHUE* /s/ RAYMOND W. BRAUN*
- ----------------------------------------------------- -----------------------------------------------------
Jeffrey H. Donahue, Director Raymond W. Braun, President
and Chief Financial Officer
(Principal Financial Officer)

/s/ PETER J. GRUA* /s/ MICHAEL A. CRABTREE*
- ----------------------------------------------------- -----------------------------------------------------
Peter J. Grua, Director Michael A. Crabtree, Treasurer
(Principal Accounting Officer)

/s/ SHARON M. OSTER* *By: /s/ GEORGE L. CHAPMAN
- ----------------------------------------------------- -----------------------------------------------------
Sharon M. Oster, Director George L. Chapman, Attorney-in-Fact

71

HEALTH CARE REIT, INC.
SCHEDULE III

REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2003

72

HEALTH CARE REIT, INC.

SCHEDULE III -- (CONTINUED)

73

HEALTH CARE REIT, INC.

SCHEDULE III -- (CONTINUED)

74

HEALTH CARE REIT, INC.

SCHEDULE III -- (CONTINUED)

75

HEALTH CARE REIT, INC.

SCHEDULE III -- (CONTINUED)

76

HEALTH CARE REIT, INC.

SCHEDULE III -- (CONTINUED)

- ---------------

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

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

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

77

HEALTH CARE REIT, INC.

SCHEDULE III -- (CONTINUED)

- ---------------

(1) Represents assumed mortgages in 2003 and 2002 and land reclassified from
other assets in 2001.

(2) The aggregate cost for tax purposes for real property equals $1,896,472,000
at December 31, 2003.

78

HEALTH CARE REIT, INC.

SCHEDULE IV -- MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 2003

79

HEALTH CARE REIT, INC.

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.

80

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 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).
3.3 Certificate of Designations, Preferences and Rights of
Series C Cumulative Convertible Preferred Stock 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).
3.4 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).
3.5 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 8-K filed June 13, 2003,
and incorporated herein by reference thereto).
3.6 Certificate of Designation of 7 7/8% Series D Cumulative
Redeemable Preferred Stock of the Company (filed with the
Commission as Exhibit 2.5 to the Company's Form 8-A/A filed
July 8, 2003, and incorporated herein by reference thereto).
3.7 Certificate of Designation of 6% Series E Cumulative
Convertible and Redeemable Preferred Stock of the Company
(filed with the Commission as Exhibit 3.1 to the Company's
Form 8-K filed October 1, 2003, and incorporated herein by
reference thereto).
3.8 Amended and Restated By-Laws of the Company (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 that defines the rights of holders of
long-term debt of the Company and 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 between the Company 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).
4.4 First Supplemental Indenture, dated as of April 17, 1997, to
Indenture dated as of April 17, 1997, between the Company
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,
to Indenture dated as of April 17, 1997, between the Company
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, to
Indenture dated as of April 17, 1997, between the Company
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,
to Indenture dated as of April 17, 1997, between the Company
and Fifth Third Bank (filed with the Commission as Exhibit
4.2 to the Company's Form 8-K filed August 9, 2001, and
incorporated herein by reference thereto).
4.8 Supplemental Indenture No. 5, dated September 10, 2003, to
Indenture dated as of April 17, 1997, between the Company
and Fifth Third Bank (filed with the Commission as Exhibit
4.1 to the Company's Form 8-K filed September 24, 2003, and
incorporated herein by reference thereto).

81

4.9 Amendment No. 1, dated September 16, 2003, to Supplemental
Indenture No. 5, dated September 10, 2003, to Indenture
dated as of April 17, 1997, between the Company and Fifth
Third Bank (filed with the Commission as Exhibit 4.3 to the
Company's Form 8-K filed September 24, 2003, and
incorporated herein by reference thereto).
4.10 Indenture for Senior Debt Securities, dated as of September
6, 2002, between the Company and Fifth Third Bank (filed
with the Commission as Exhibit 4.1 to the Company's Form 8-K
filed September 9, 2002, and incorporated herein by
reference thereto).
4.11 Supplemental Indenture No. 1, dated as of September 6, 2002,
to Indenture for Senior Debt Securities, dated as of
September 6, 2002, between the Company and Fifth Third Bank
(filed with the Commission as Exhibit 4.2 to the Company's
Form 8-K filed September 9, 2002, and incorporated herein by
reference thereto).
4.12 Amendment No. 1, dated March 12, 2003, to Supplemental
Indenture No. 1, dated as of September 6, 2002, to Indenture
for Senior Debt Securities, dated as of September 6, 2002,
between the Company and Fifth Third Bank (filed with the
Commission as Exhibit 4.1 to the Company's Form 8-K filed
March 14, 2003, and incorporated herein by reference
thereto).
4.13 Supplemental Indenture No. 2, dated as of September 10,
2003, to Indenture for Senior Debt Securities, dated as of
September 6, 2002, between the Company and Fifth Third Bank
(filed with the Commission as Exhibit 4.2 to the Company's
Form 8-K filed September 24, 2003, and incorporated herein
by reference thereto).
4.14 Amendment No. 1, dated September 16, 2003, to Supplemental
Indenture No. 2, dated as of September 10, 2003, to
Indenture for Senior Debt Securities, dated as of September
6, 2002, between the Company and Fifth Third Bank (filed
with the Commission as Exhibit 4.4 to the Company's Form 8-K
filed September 24, 2003, and incorporated herein by
reference thereto).
4.15 Supplemental Indenture No. 3, dated as of October 29, 2003,
to Indenture for Senior Debt Securities, dated as of
September 6, 2002, between the Company and Fifth Third Bank
(filed with the Commission as Exhibit 4.1 to the Company's
Form 8-K filed October 30, 2003, and incorporated herein by
reference thereto).
4.16 Form of Indenture for Senior Subordinated Debt Securities
(filed with the Commission as Exhibit 4.9 to the Company's
Form S-3 (File No. 333-73936) filed November 21, 2001, and
incorporated herein by reference thereto).
4.17 Form of Indenture for Junior Subordinated Debt Securities
(filed with the Commission as Exhibit 4.10 to the Company's
Form S-3 (File No. 333-73936) filed November 21, 2001, and
incorporated herein by reference thereto).
10.1 Amended and Restated Loan Agreement, dated August 23, 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 to the
Company's Form 8-K filed August 30, 2002, and incorporated
herein by reference thereto).
10.2 Amendment No. 1, dated May 15, 2003, to Amended and Restated
Loan Agreement, dated August 23, 2002, by and among Health
Care REIT, Inc. and certain of 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 to the
Company's Form 8-K filed June 13, 2003, and incorporated
herein by reference thereto).
10.3 Amendment No. 2, dated August 26, 2003, to Amended and
Restated Loan Agreement, dated August 23, 2002, by and among
Health Care REIT, Inc. and certain of its subsidiaries, the
banks signatory thereto, KeyBank National Association, as
administrative agent, Deutsche Bank Securities Inc., as
syndication agent, and UBS Securities LLC, as documentation
agent (filed with the Commission as Exhibit 10.1 to the
Company's Form 8-K filed September 24, 2003, and
incorporated herein by reference thereto).
10.4 Amendment No. 3, dated December 19, 2003, to Amended and
Restated Loan Agreement, dated August 23, 2002, by and among
Health Care REIT, Inc. and certain of its subsidiaries, the
banks signatory thereto, KeyBank National Association, as
administrative agent, Deutsche Bank Securities Inc., as
syndication agent, and UBS Securities LLC, as documentation
agent.

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10.5 Supplement, dated January 30, 2004, to Amended and Restated
Loan Agreement, dated August 23, 2002, by and among Health
Care REIT, Inc. and certain of its subsidiaries, the banks
signatory thereto, KeyBank National Association, as
administrative agent, Deutsche Bank Securities Inc., as
syndication agent, and UBS Securities LLC, as documentation
agent.
10.6 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).
10.7 Amendment No. 1, dated April 5, 1999, to 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
10.10 to the Company's Form 10-K filed March 26, 2001, and
incorporated herein by reference thereto).
10.8 Credit Agreement by and between Health Care REIT, Inc. and
Fifth Third Bank, dated as of May 31, 2003 (filed with the
Commission as Exhibit 10.1 to the Company's Form 8-K filed
June 13, 2003, and incorporated herein by reference
thereto).
10.9 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).*
10.10 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).*
10.11 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).*
10.12 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).*
10.13 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).*
10.14 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).*
10.15 Third Amendment to the 1995 Stock Incentive Plan of Health
Care REIT, Inc.*
10.16 Stock Plan for Non-Employee Directors of Health Care REIT,
Inc. (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).*
10.17 Second Amended and Restated Employment Agreement, effective
January 1, 2004 by and between Health Care REIT, Inc. and
George L. Chapman.*
10.18 Second Amended and Restated Employment Agreement, effective
January 1, 2004, by and between Health Care REIT, Inc. and
Raymond W. Braun.*
10.19 Second Amended and Restated Employment Agreement, effective
January 1, 2004, by and between Health Care REIT, Inc. and
Erin C. Ibele.*
10.20 Amended and Restated Employment Agreement, effective January
1, 2004, by and between Health Care REIT, Inc. and Charles
J. Herman, Jr.*
10.21 Employment Agreement, effective April 28, 2003, by and
between Health Care REIT, Inc. and Scott A. Estes.*
10.22 Health Care REIT, Inc. Supplemental Executive Retirement
Plan, effective as of January 1, 2001 (filed with the
Commission as Exhibit 10.19 to the Company's Form 10-K filed
March 10, 2003, and incorporated herein by reference
thereto).*

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10.23 Health Care REIT, Inc. Executive Loan Program, effective as of August 1999 (filed with the Commission as
Exhibit 10.20 to the Company's Form 10-K filed March 10, 2003, and incorporated herein by reference
thereto).*
14 Code of Business Conduct & Ethics.
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP, independent auditors.
24 Powers of Attorney.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.1 Certification pursuant to 18 U.S.C. Section 1350 by Chief Executive Officer.
32.2 Certification pursuant to 18 U.S.C. Section 1350 by Chief Financial Officer.

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* Management Contract or Compensatory Plan or Arrangement.

84