10-K 1 l05635ae10vk.txt HEALTH CARE REIT, INC. 10-K/FYE 12-31-03 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 COMMISSION FILE NO. 1-8923 --------------------- HEALTH CARE REIT, INC. (Exact name of registrant as specified in its charter) DELAWARE 34-1096634 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) ONE SEAGATE, SUITE 1500, TOLEDO, OHIO 43604 (Address of principal executive office) (Zip Code) (419) 247-2800 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Stock, $1.00 par value New York Stock Exchange 7.875% Series D Cumulative New York Stock Exchange Redeemable Preferred Stock, $1.00 par value

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. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- HEALTH CARE REIT, INC. 2003 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS

PAGE ---- PART I Item 1. Business.................................................... 3 Item 2. Properties.................................................. 24 Item 3. Legal Proceedings........................................... 25 Item 4. Submission of Matters to a Vote of Security Holders......... 26 PART II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities.................................................. 26 Item 6. Selected Financial Data..................................... 27 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 29 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................................ 42 Item 8. Financial Statements and Supplementary Data................. 43 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 65 Item 9A. Controls and Procedures..................................... 65 PART III Item 10. Directors and Executive Officers of the Registrant.......... 65 Item 11. Executive Compensation...................................... 65 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.................. 65 Item 13. Certain Relationships and Related Transactions.............. 65 Item 14. Principal Accountant Fees and Services...................... 65 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 66

2 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:

INVESTMENTS(1) PERCENTAGE OF NUMBER OF NUMBER OF INVESTMENT PER NUMBER OF NUMBER OF TYPE OF FACILITY (IN THOUSANDS) PORTFOLIO FACILITIES BEDS/UNITS BED/UNIT(2) OPERATORS(3) STATES(3) ---------------- --------------- ------------- ---------- ---------- -------------- ------------ --------- Assisted Living Facilities.............. $1,196,450 60% 219 14,193 $ 85,391 31 31 Skilled Nursing Facilities.............. 648,354 32% 101 14,256 45,479 18 20 Specialty Care Facilities.............. 158,662 8% 8 1,204 131,779 6 5 ---------- ---- --- ------ Totals.................... $2,003,466 100% 328 29,653 ========== ==== === ======

--------------- (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 3 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 4 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 5 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 6 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):

NUMBER OF TOTAL PERCENT OF FACILITIES INVESTMENT(1) INVESTMENT(2) ---------- ------------- ------------- Concentration by investment: Emeritus Corporation..................................... 30 $ 232,018 12% Southern Assisted Living, Inc............................ 46 211,633 11% Commonwealth Communities L.L.C........................... 14 200,127 10% Home Quality Management, Inc............................. 25 143,113 7% Life Care Centers of America, Inc........................ 17 120,810 6% Remaining Operators (42)................................. 196 1,095,765 54% --- ---------- ---- Totals................................................... 328 $2,003,466 100% === ========== ====

NUMBER OF TOTAL PERCENT OF FACILITIES REVENUES(3) REVENUE(4) ---------- ----------- ---------- Concentration by revenue: Commonwealth Communities L.L.C........................... 14 $ 26,592 13% Home Quality Management, Inc............................. 25 14,886 7% Life Care Centers of America, Inc........................ 17 14,525 7% Merrill Gardens L.L.C.................................... 12 14,397 7% Alterra Healthcare Corporation........................... 45 14,293 7% Remaining Operators (42)................................. 215 122,221 59% --- -------- ---- Totals................................................... 328 $206,914 100% === ======== ====

--------------- (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. 7 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 8 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 9 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 10 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. 11 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. 12 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. 13 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; 14 (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:

NAME OF SUBSIDIARY STATE OF ORGANIZATION AND TYPE OF ENTITY DATE OF ORGANIZATION ------------------ ---------------------------------------- -------------------- HCRI Pennsylvania Properties, Inc. Pennsylvania corporation November 1, 1993 HCRI Overlook Green, Inc. Pennsylvania corporation July 9, 1996 HCRI Texas Properties, Inc. Delaware corporation December 27, 1996 HCRI Texas Properties, Ltd. Texas limited partnership December 30, 1996 HCRI Friendship, LLC Virginia limited liability company February 21, 1997 HCRI St. Charles, LLC Virginia limited liability company February 21, 1997 HCRI Satyr Hill, LLC Virginia limited liability company November 24, 1997 Health Care REIT International, Inc. Delaware corporation February 11, 1998 HCN Atlantic GP, Inc. Delaware corporation February 20, 1998 HCN Atlantic LP, Inc. Delaware corporation February 20, 1998 HCRI Nevada Properties, Inc. Nevada corporation March 27, 1998 HCRI Southern Investments I, Inc. Delaware corporation June 11, 1998 HCRI Louisiana Properties, L.P. Delaware limited partnership June 11, 1998 HCN BCC Holdings, Inc. Delaware corporation September 25, 1998 HCRI Tennessee Properties, Inc. Delaware corporation September 25, 1998 HCRI Limited Holdings, Inc. Delaware corporation September 25, 1998 Pennsylvania BCC Properties, Inc. Pennsylvania corporation September 25, 1998 HCRI North Carolina Properties, LLC Delaware limited liability company December 10, 1999 HCRI Massachusetts Properties, Inc. Delaware corporation March 17, 2000 HCRI Massachusetts Properties Trust Massachusetts trust March 30, 2000 HCRI Indiana Properties, Inc. Delaware corporation June 15, 2000 HCRI Indiana Properties, LLC Indiana limited liability company June 16, 2000 HCRI Holdings Trust Massachusetts trust September 9, 2000 HCRI Maryland Properties, LLC Maryland limited liability company July 19, 2001 HCRI Massachusetts Properties Trust II Massachusetts trust September 26, 2001 HCRI Beachwood, Inc. Ohio corporation October 11, 2001 HCRI Broadview, Inc. Ohio corporation October 11, 2001 HCRI Westlake, Inc. Ohio corporation October 11, 2001 HCRI Westmoreland, Inc. Delaware corporation October 16, 2001 HCRI Wisconsin Properties, LLC Wisconsin limited liability company December 11, 2001 HCRI North Carolina Properties I, Inc. North Carolina corporation January 1, 2002 HCRI North Carolina Properties II, Inc. North Carolina corporation January 1, 2002 HCRI North Carolina Properties III, North Carolina limited partnership January 1, 2002 Limited Partnership HCRI Kentucky Properties, LLC Kentucky limited liability company January 7, 2002 HCRI Laurel, LLC Maryland limited liability company January 17, 2002 HCRI Mississippi Properties, Inc. Mississippi corporation March 28, 2002 HCRI Illinois Properties, LLC Delaware limited liability company August 21, 2002 HCRI Missouri Properties, LLC Delaware limited liability company August 21, 2002 HCRI Surgical Properties, LLC Ohio limited liability company September 30, 2002 HCRI Tucson Properties, Inc. Delaware corporation November 14, 2002 HCRI Stonecreek Properties, LLC Delaware limited liability company June 25, 2003 HCRI Cold Spring Properties, LLC Delaware limited liability company June 25, 2003 HCRI Eddy Pond Properties Trust Massachusetts trust June 26, 2003

22

NAME OF SUBSIDIARY STATE OF ORGANIZATION AND TYPE OF ENTITY DATE OF ORGANIZATION ------------------ ---------------------------------------- -------------------- HCRI Investments, Inc. Delaware corporation July 30, 2003 HCRI Forest City Holdings, Inc. North Carolina corporation August 19, 2003 HCRI Asheboro Holdings, Inc. North Carolina corporation August 19, 2003 HCRI Smithfield Holdings, Inc. North Carolina corporation August 19, 2003 HCRI Greenville Holdings, Inc. North Carolina corporation August 19, 2003 HCRI Forest City Properties, LP North Carolina limited partnership August 19, 2003 HCRI Asheboro Properties, LP North Carolina limited partnership August 19, 2003 HCRI Smithfield Properties, LP North Carolina limited partnership August 19, 2003 HCRI Greenville Properties, LP North Carolina limited partnership August 19, 2003 HCRI Kirkland Properties, LLC Delaware limited liability company August 22, 2003 HCRI Ridgeland Pointe Properties, LLC Delaware limited liability company August 22, 2003 HCRI Drum Hill Properties, LLC Delaware limited liability company August 22, 2003 HCRI Fairmont Properties, LLC Delaware limited liability company August 22, 2003 HCRI Abingdon Holdings, Inc. North Carolina corporation September 10, 2003 HCRI Gaston Place Holdings, Inc. North Carolina corporation September 10, 2003 HCRI Gaston Manor Holdings, Inc. North Carolina corporation September 10, 2003 HCRI Eden Holdings, Inc. North Carolina corporation September 10, 2003 HCRI Weddington Park Holdings, Inc. North Carolina corporation September 10, 2003 HCRI Union Park Holdings, Inc. North Carolina corporation September 10, 2003 HCRI Concord Place Holdings, Inc. North Carolina corporation September 10, 2003 HCRI Salisbury Holdings, Inc. North Carolina corporation September 10, 2003 HCRI Burlington Manor Holdings, Inc. North Carolina corporation September 10, 2003 HCRI Skeet Club Manor Holdings, Inc. North Carolina corporation September 10, 2003 HCRI High Point Manor Holdings, Inc. North Carolina corporation September 10, 2003 HCRI Hickory Manor Holdings, Inc. North Carolina corporation September 10, 2003 HCRI Statesville Place Holdings I, Inc. North Carolina corporation September 10, 2003 HCRI Statesville Place Holdings II, North Carolina corporation September 10, 2003 Inc. HCRI Abingdon Properties, LP North Carolina limited partnership September 10, 2003 HCRI Gaston Place Properties, LP North Carolina limited partnership September 10, 2003 HCRI Gaston Manor Properties, LP North Carolina limited partnership September 10, 2003 HCRI Eden Properties, LP North Carolina limited partnership September 10, 2003 HCRI Weddington Park Properties, LP North Carolina limited partnership September 10, 2003 HCRI Union Park Properties, LP North Carolina limited partnership September 10, 2003 HCRI Concord Place Properties, LP North Carolina limited partnership September 10, 2003 HCRI Salisbury Properties, LP North Carolina limited partnership September 10, 2003 HCRI Burlington Manor Properties, LP North Carolina limited partnership September 10, 2003 HCRI Skeet Club Manor Properties, LP North Carolina limited partnership September 10, 2003 HCRI High Point Manor Properties, LP North Carolina limited partnership September 10, 2003 HCRI Hickory Manor Properties, LP North Carolina limited partnership September 10, 2003 HCRI Statesville Place Properties I, LP North Carolina limited partnership September 10, 2003 HCRI Statesville Place Properties II, North Carolina limited partnership September 10, 2003 LP HCRI Chicago Properties, Inc. Delaware corporation November 18, 2003

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:

(IN THOUSANDS) --------------------------- NUMBER OF NUMBER OF TOTAL ANNUALIZED FACILITY LOCATION FACILITIES BEDS/UNITS INVESTMENT(1) INCOME(2) ----------------- ---------- ---------- -------------- ---------- ASSISTED LIVING FACILITIES: Arizona...................................... 6 623 $ 47,949 $ 3,878 California................................... 8 550 64,687 8,175 Colorado..................................... 1 46 4,477 587 Connecticut.................................. 5 474 49,696 5,716 Florida...................................... 20 1,570 102,387 12,440 Georgia...................................... 6 402 41,311 4,617 Idaho........................................ 4 488 33,131 3,983 Illinois..................................... 2 248 11,666 1,026 Indiana...................................... 14 799 60,739 7,285 Kentucky..................................... 1 80 9,194 1,099 Louisiana.................................... 1 124 12,906 1,865 Maryland..................................... 7 593 67,720 8,097 Massachusetts................................ 5 388 57,585 7,160 Mississippi.................................. 2 158 15,133 1,823 Montana...................................... 2 104 9,700 1,068 Nevada....................................... 3 274 28,428 3,668 New Jersey................................... 3 176 18,644 2,278 New Mexico................................... 1 77 4,404 416 New York..................................... 4 232 28,134 3,522 North Carolina............................... 44 2,113 205,511 20,093 Ohio......................................... 8 563 37,073 4,793 Oklahoma..................................... 16 549 21,230 3,234 Oregon....................................... 4 168 17,589 2,376 Pennsylvania................................. 4 235 18,484 2,248 South Carolina............................... 10 661 49,122 5,255 Tennessee.................................... 6 306 18,434 2,431 Texas........................................ 19 1,396 83,956 10,261 Utah......................................... 1 57 7,502 964 Virginia..................................... 5 289 31,513 3,600 Washington................................... 6 422 33,929 4,092 Wisconsin.................................... 1 28 4,216 556 --- ------ ---------- -------- Total Assisted Living Facilities.......... 219 14,193 1,196,450 138,606

24

(IN THOUSANDS) --------------------------- NUMBER OF NUMBER OF TOTAL ANNUALIZED FACILITY LOCATION FACILITIES BEDS/UNITS INVESTMENT(1) INCOME(2) ----------------- ---------- ---------- -------------- ---------- vSKILLED NURSING FACILITIES: Alabama...................................... 7 1,091 $ 41,684 $ 4,789 Arizona...................................... 1 163 3,426 474 California................................... 1 122 4,356 654 Colorado..................................... 1 180 5,318 731 Florida...................................... 11 1,240 71,215 9,063 Georgia...................................... 2 375 11,909 1,368 Idaho........................................ 3 393 19,186 2,582 Illinois..................................... 4 406 23,141 2,611 Kentucky..................................... 4 591 23,924 2,914 Maryland..................................... 1 110 4,279 524 Massachusetts................................ 15 2,121 139,338 18,714 Mississippi.................................. 8 1,127 31,760 3,669 Missouri..................................... 3 407 24,810 2,796 Ohio......................................... 5 911 61,878 6,929 Oklahoma..................................... 2 575 17,366 2,222 Oregon....................................... 1 111 4,680 639 Pennsylvania................................. 5 556 23,473 3,384 Tennessee.................................... 15 2,122 93,284 11,573 Texas........................................ 10 1,339 34,385 4,046 Virginia..................................... 2 316 8,942 1,194 --- ------ ---------- -------- Total Skilled Nursing Facilities.......... 101 14,256 648,354 80,876 SPECIALTY CARE FACILITIES: California................................... 1 242 18,797 2,412 Florida...................................... 1 100 5,334 457 Illinois..................................... 1 72 31,683 4,343 Massachusetts................................ 4 735 72,506 8,555 Ohio......................................... 1 55 30,342 3,902 --- ------ ---------- -------- Total Specialty Care Facilities........... 8 1,204 158,662 19,669 --- ------ ---------- -------- TOTAL ALL FACILITIES........................... 328 29,653 $2,003,466 $239,151 === ====== ========== ========

--------------- (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.

SALES PRICE --------------- DIVIDENDS HIGH LOW PAID ------ ------ --------- 2003 First Quarter................................... $27.92 $24.84 $0.585 Second Quarter.................................. 30.73 26.10 0.585 Third Quarter................................... 31.82 29.25 0.585 Fourth Quarter.................................. 36.10 30.68 0.585 2002 First Quarter................................... $28.30 $24.08 $0.585 Second Quarter.................................. 31.82 27.41 0.585 Third Quarter................................... 29.94 24.26 0.585 Fourth Quarter.................................. 28.65 24.27 0.585

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).

YEAR ENDED DECEMBER 31 -------------------------------------------------------------- 1999 2000 2001 2002 2003 ---------- ---------- ---------- ---------- ---------- OPERATING DATA Revenues(1)...................... $ 115,989 $ 121,513 $ 121,061 $ 154,928 $ 201,031 Expenses: Interest expense(1)............ 23,343 30,756 28,410 39,432 54,144 Provision for depreciation(1)............. 13,869 18,263 25,805 36,384 51,078 Other operating expenses(2).... 8,868 9,570 10,853 13,038 17,274 Impairment of assets........... 2,298 2,792 Loss on extinguishment of debt(3)..................... 213 403 Loss on investment............. 2,000 ---------- ---------- ---------- ---------- ---------- Total expenses................... 46,080 60,589 65,281 91,555 125,288 ---------- ---------- ---------- ---------- ---------- Income from continuing operations..................... 69,909 60,924 55,780 63,373 75,743 Income from discontinued operations, net(1)............. 5,729 7,132 4,769 4,286 6,997 ---------- ---------- ---------- ---------- ---------- Net income....................... 75,638 68,056 60,549 67,659 82,740 Preferred stock dividends........ 12,814 13,490 13,505 12,468 9,218 Preferred stock redemption charge......................... 2,790 ---------- ---------- ---------- ---------- ---------- Net income available to common stockholders................... $ 62,824 $ 54,566 $ 47,044 $ 55,191 $ 70,732 ========== ========== ========== ========== ========== OTHER DATA Average number of common shares outstanding: Basic.......................... 28,128 28,418 30,534 36,702 43,572 Diluted........................ 28,384 28,643 31,027 37,301 44,201 PER SHARE DATA Basic: Income from continuing operations available to common stockholders................... $ 2.03 $ 1.67 $ 1.38 $ 1.38 $ 1.46 Discontinued operations, net..... 0.20 0.25 0.16 0.12 0.16 ---------- ---------- ---------- ---------- ---------- Net income available to common stockholders................... 2.23 1.92 1.54 1.50 1.62 Diluted: Income from continuing operations available to common stockholders................... $ 2.01 $ 1.66 $ 1.37 $ 1.37 $ 1.44 Discontinued operations, net..... 0.20 0.25 0.15 0.11 0.16 ---------- ---------- ---------- ---------- ---------- Net income available to common stockholders................... 2.21 1.91 1.52 1.48 1.60 Cash distributions per common share.......................... $ 2.27 $ 2.335 $ 2.34 $ 2.34 $ 2.34

27

YEAR ENDED DECEMBER 31 -------------------------------------------------------------- 1999 2000 2001 2002 2003 ---------- ---------- ---------- ---------- ---------- BALANCE SHEET DATA Net real estate investments...... $1,241,722 $1,121,419 $1,213,564 $1,524,457 $1,992,446 Total assets..................... 1,271,171 1,156,904 1,269,843 1,594,110 2,182,731 Total debt....................... 538,842 439,752 491,216 676,331 1,013,184 Total liabilities................ 564,175 458,297 511,973 696,878 1,033,052 Total stockholders' equity....... 706,996 698,607 757,870 897,232 1,149,679

--------------- (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):

GROSS NET DATE SECURITY TYPE PROCEEDS PROCEEDS ---- ---------------------- ----------------- -------- -------- March 2003...... Senior unsecured notes Public issuance $104,036 $103,286 July 2003....... Common stock Private placement 48,000 48,000 July 2003....... Preferred stock Public issuance 100,000 96,850 September 2003.......... Common stock Public issuance 111,320 105,763 September 2003.......... Preferred stock Private placement 26,500 26,500 November 2003... Senior unsecured notes Public issuance 250,000 248,163 Various......... Common stock DRIP 68,860 68,860 -------- -------- Totals.......... $708,716 $697,422 ======== ========

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):

PAYMENTS DUE BY PERIOD ---------------------------------------------------------------- LESS THAN MORE THAN CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS ----------------------- ------------- ---------- ---------- ---------- --------- Unsecured lines of credit obligations(1).......... $ 340,000 $ 30,000 $310,000 $ 0 $ 0 Secured line of credit obligation(1).............. 60,000 60,000 Senior unsecured notes............................ 865,000 40,000 50,000 275,000 500,000 Secured debt...................................... 148,184 5,828 5,225 24,588 112,543 Contractual interest obligations.................. 488,016 68,938 132,091 106,891 180,096 Capital lease obligations......................... Operating lease obligations....................... 10,758 1,373 2,236 1,178 5,971 Purchase obligations.............................. 77,944 17,730 45,412 6,000 8,802 Other long-term liabilities....................... ---------- -------- -------- -------- -------- Total contractual obligations..................... $1,989,902 $223,869 $544,964 $413,657 $807,412 ========== ======== ======== ======== ========

--------------- (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):

YEAR ENDED CHANGE ----------------------------- --------------- DEC. 31, 2003 DEC. 31, 2002 $ % ------------- ------------- ------- ----- Rental income............................. $176,504 $125,601 $50,903 41 % Interest income........................... 20,768 26,525 (5,757) (22)% Transaction fees and other income......... 3,759 2,802 957 34 % -------- -------- ------- ----- Totals.................................... $201,031 $154,928 $46,103 30 % ======== ======== ======= =====

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):

YEAR ENDED CHANGE ----------------------------- -------------- DEC. 31, 2003 DEC. 31, 2002 $ % ------------- ------------- ------- ---- Interest expense........................... $ 54,144 $39,432 $14,712 37% Provision for depreciation................. 51,078 36,384 14,694 40% General and administrative................. 11,483 9,665 1,818 19% Loan expense............................... 2,921 2,373 548 23% Impairment of assets....................... 2,792 2,298 494 21% Loss on extinguishment of debt............. 403 (403) n/a Provision for loan losses.................. 2,870 1,000 1,870 187% -------- ------- ------- ---- Totals..................................... $125,288 $91,555 $33,733 37% ======== ======= ======= ====

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):

YEAR ENDED CHANGE ----------------------------- ---------------- DEC. 31, 2003 DEC. 31, 2002 $ % ------------- ------------- ------- ------ Gain (loss) on sales of properties....... $ 4,139 $ (1,032) $ 5,171 (501)% Discontinued operations, net............. 2,858 5,318 (2,460) (46)% Preferred dividends...................... (9,218) (12,468) 3,250 (26)% Preferred stock redemption charge........ (2,790) (2,790) n/a ------- -------- ------- ------ Totals................................... $(5,011) $ (8,182) $ 3,171 (39)% ======= ======== ======= ======

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):

YEAR ENDED CHANGE ----------------------------- --------------- DEC. 31, 2002 DEC. 31, 2001 $ % ------------- ------------- ------- ----- Rental income............................. $125,601 $ 84,929 $40,672 48 % Interest income........................... 26,525 31,294 (4,769) (15)% Transaction fees and other income......... 2,802 3,848 (1,046) (27)% Prepayment fees........................... 990 (990) n/a -------- -------- ------- ----- Totals.................................... $154,928 $121,061 $33,867 28 % ======== ======== ======= =====

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):

YEAR ENDED CHANGE ----------------------------- ------------- DEC. 31, 2002 DEC. 31, 2001 $ % ------------- ------------- ------- --- Interest expense............................ $39,432 $28,410 $11,022 39% Provision for depreciation.................. 36,384 25,805 10,579 41% General and administrative.................. 9,665 8,078 1,587 20% Loan expense................................ 2,373 1,775 598 34% Impairment of assets........................ 2,298 2,298 n/a Loss on extinguishment of debt.............. 403 213 190 89% Provision for loan losses................... 1,000 1,000 0 0% ------- ------- ------- --- Totals...................................... $91,555 $65,281 $26,274 40% ======= ======= ======= ===

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):

YEAR ENDED CHANGE ----------------------------- -------------- DEC. 31, 2002 DEC. 31, 2001 $ % ------------- ------------- ------ ----- Gain (loss) on sales of properties......... $ (1,032) $ (1,250) $ 218 (17)% Discontinued operations, net............... 5,318 6,019 (701) (12)% Preferred dividends........................ (12,468) (13,505) 1,037 (8)% -------- -------- ------ ----- Totals..................................... $ (8,182) $ (8,736) $ 554 (6)% ======== ======== ====== =====

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

DECEMBER 31 ----------------------- 2003 2002 ---------- ---------- (IN THOUSANDS) ASSETS Real estate investments: Real property owned Land................................................... $ 166,408 $ 112,044 Buildings & improvements............................... 1,712,868 1,288,520 Construction in progress............................... 14,701 19,833 ---------- ---------- 1,893,977 1,420,397 Less accumulated depreciation.......................... (152,440) (113,579) ---------- ---------- Total real property owned.............................. 1,741,537 1,306,818 Loans receivable Real property loans.................................... 213,480 208,016 Subdebt investments.................................... 45,254 14,578 ---------- ---------- 258,734 222,594 Less allowance for losses on loans receivable............. (7,825) (4,955) ---------- ---------- 250,909 217,639 ---------- ---------- Net real estate investments............................ 1,992,446 1,524,457 Other assets: Equity investments........................................ 3,299 7,494 Deferred loan expenses.................................... 10,331 9,291 Cash and cash equivalents................................. 124,496 9,550 Receivables and other assets.............................. 52,159 43,318 ---------- ---------- 190,285 69,653 ---------- ---------- Total assets................................................ $2,182,731 $1,594,110 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Borrowings under unsecured lines of credit obligations.... $ 0 $ 109,500 Senior unsecured notes.................................... 865,000 515,000 Secured debt.............................................. 148,184 51,831 Accrued expenses and other liabilities.................... 19,868 20,547 ---------- ---------- Total liabilities........................................... 1,033,052 696,878 Stockholders' equity: Preferred stock, $1.00 par value:......................... 120,761 127,500 Authorized -- 25,000,000 shares Issued and outstanding -- 4,830,444 shares in 2003 and 5,100,000 shares in 2002 at liquidation preference Common stock, $1.00 par value:............................ 50,298 40,086 Authorized -- 125,000,000 shares Issued -- 50,376,551 shares in 2003 and 40,085,827 shares in 2002 Outstanding -- 50,361,505 shares in 2003 and 40,085,827 shares in 2002 Capital in excess of par value............................ 1,069,887 790,838 Treasury stock............................................ (523) Cumulative net income..................................... 660,446 580,496 Cumulative dividends...................................... (749,166) (638,085) Accumulated other comprehensive income.................... 1 (170) Other equity.............................................. (2,025) (3,433) ---------- ---------- Total stockholders' equity.................................. 1,149,679 897,232 ---------- ---------- Total liabilities and stockholders' equity.................. $2,182,731 $1,594,110 ========== ==========

See accompanying notes 44 HEALTH CARE REIT, INC. CONSOLIDATED STATEMENTS OF INCOME

YEAR ENDED DECEMBER 31 -------------------------------------- 2003 2002 2001 ----------- ----------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Rental income............................................. $176,504 $125,601 $84,929 Interest income........................................... 20,768 26,525 31,294 Transaction fees and other income......................... 3,759 2,802 3,848 Prepayment fees........................................... 990 -------- -------- ------- 201,031 154,928 121,061 Expenses: Interest expense.......................................... 54,144 39,432 28,410 Provision for depreciation................................ 51,078 36,384 25,805 General and administrative................................ 11,483 9,665 8,078 Loan expense.............................................. 2,921 2,373 1,775 Impairment of assets...................................... 2,792 2,298 Loss on extinguishment of debt............................ 403 213 Provision for loan losses................................. 2,870 1,000 1,000 -------- -------- ------- 125,288 91,555 65,281 -------- -------- ------- Income from continuing operations........................... 75,743 63,373 55,780 Discontinued operations: Net gain (loss) on sales of properties.................... 4,139 (1,032) (1,250) Income from discontinued operations, net.................. 2,858 5,318 6,019 -------- -------- ------- 6,997 4,286 4,769 Net income.................................................. 82,740 67,659 60,549 Preferred stock dividends................................... 9,218 12,468 13,505 Preferred stock redemption charge........................... 2,790 -------- -------- ------- Net income available to common stockholders................. $ 70,732 $ 55,191 $47,044 ======== ======== ======= Average number of common shares outstanding: Basic..................................................... 43,572 36,702 30,534 Diluted................................................... 44,201 37,301 31,027 Earnings per share: Basic: Income from continuing operations available to common stockholders......................................... $ 1.46 $ 1.38 $ 1.38 Discontinued operations, net........................... 0.16 0.12 0.16 -------- -------- ------- Net income available to common stockholders............ $ 1.62 $ 1.50 $ 1.54 Diluted: Income from continuing operations and after preferred stock dividends...................................... $ 1.44 $ 1.37 $ 1.37 Discontinued operations, net........................... 0.16 0.11 0.15 -------- -------- ------- Net income available to common stockholders............ $ 1.60 $ 1.48 $ 1.52

See accompanying notes 45 HEALTH CARE REIT, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

CAPITAL IN CUMULATIVE PREFERRED COMMON EXCESS OF TREASURY NET STOCK STOCK PAR VALUE STOCK INCOME --------- ------- ---------- -------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Balances at January 1, 2001............... $150,000 $28,806 $ 528,138 $ 0 $452,288 Comprehensive income: Net income............................... 60,549 Other comprehensive income: Unrealized loss on equity investments.... Foreign currency translation adjustment............................. Total comprehensive income................ Proceeds from issuance of common stock from dividend reinvestment and stock incentive plans, net of forfeitures...... 484 10,070 Restricted stock amortization............. Net proceeds from sale of common stock.... 3,450 70,734 Cash dividends: Common stock-$2.335 per share............ Preferred stock, Series B-$2.22 per share.................................. Preferred stock, Series C-$2.27 per share.................................. -------- ------- ---------- ----- -------- Balances at December 31, 2001............. 150,000 32,740 608,942 0 512,837 Comprehensive income: Net income............................... 67,659 Other comprehensive income: Unrealized loss on equity investments.... Foreign currency translation adjustment............................. Total comprehensive income................ Proceeds from issuance of common stock from dividend reinvestment and stock incentive plans, net of forfeitures...... 1,182 25,373 Restricted stock amortization............. Net proceeds from sale of common stock.... 5,286 134,901 Conversion of preferred stock............. (22,500) 878 21,622 Cash dividends: Common stock-$2.34 per share............. Preferred stock, Series B-$2.22 per share.................................. Preferred stock, Series C-$2.28 per share.................................. -------- ------- ---------- ----- -------- Balances at December 31, 2002............. 127,500 40,086 790,838 0 580,496 Comprehensive income: Net income............................... 82,740 Other comprehensive income: Unrealized loss on equity investments.... Foreign currency translation adjustment............................. Total comprehensive income................ Proceeds from issuance of common stock from dividend reinvestment and stock incentive plans, net of forfeitures...... 2,725 75,649 (523) Restricted stock amortization............. Option compensation expense............... Proceeds from issuance of preferred stock.................................... 126,500 (3,150) Redemption of preferred stock............. (75,000) 2,790 (2,790) Net proceeds from sale of common stock.... 5,263 147,745 Conversion of preferred stock............. (58,239) 2,224 56,015 Cash dividends: Common stock-$2.34 per share............. Preferred stock, Series B-$2.22 per share.................................. Preferred stock, Series C-$2.25 per share.................................. Preferred stock, Series D-$1.97 per share.................................. Preferred stock, Series E-$1.50 per share.................................. -------- ------- ---------- ----- -------- Balances at December 31, 2003............. $120,761 $50,298 $1,069,887 $(523) $660,446 ======== ======= ========== ===== ========

ACCUMULATED OTHER CUMULATIVE COMPREHENSIVE OTHER DIVIDENDS INCOME EQUITY TOTAL ---------- ------------- ------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Balances at January 1, 2001............... $(455,676) $(744) $(4,205) $ 698,607 Comprehensive income: Net income............................... 60,549 Other comprehensive income: Unrealized loss on equity investments.... (52) (52) Foreign currency translation adjustment............................. (127) (127) ---------- Total comprehensive income................ 60,370 ---------- Proceeds from issuance of common stock from dividend reinvestment and stock incentive plans, net of forfeitures...... (1,739) 8,815 Restricted stock amortization............. 1,164 1,164 Net proceeds from sale of common stock.... 74,184 Cash dividends: Common stock-$2.335 per share............ (71,765) (71,765) Preferred stock, Series B-$2.22 per share.................................. (6,656) (6,656) Preferred stock, Series C-$2.27 per share.................................. (6,849) (6,849) --------- ----- ------- ---------- Balances at December 31, 2001............. (540,946) (923) (4,780) 757,870 Comprehensive income: Net income............................... 67,659 Other comprehensive income: Unrealized loss on equity investments.... (66) (66) Foreign currency translation adjustment............................. 819 819 ---------- Total comprehensive income................ 68,412 ---------- Proceeds from issuance of common stock from dividend reinvestment and stock incentive plans, net of forfeitures...... (208) 26,347 Restricted stock amortization............. 1,555 1,555 Net proceeds from sale of common stock.... 140,187 Conversion of preferred stock............. 0 Cash dividends: Common stock-$2.34 per share............. (84,671) (84,671) Preferred stock, Series B-$2.22 per share.................................. (6,656) (6,656) Preferred stock, Series C-$2.28 per share.................................. (5,812) (5,812) --------- ----- ------- ---------- Balances at December 31, 2002............. (638,085) (170) (3,433) 897,232 Comprehensive income: Net income............................... 82,740 Other comprehensive income: Unrealized loss on equity investments.... (11) (11) Foreign currency translation adjustment............................. 182 182 ---------- Total comprehensive income................ 82,911 ---------- Proceeds from issuance of common stock from dividend reinvestment and stock incentive plans, net of forfeitures...... 53 77,904 Restricted stock amortization............. 1,182 1,182 Option compensation expense............... 173 173 Proceeds from issuance of preferred stock.................................... 123,350 Redemption of preferred stock............. (75,000) Net proceeds from sale of common stock.... 153,008 Conversion of preferred stock............. 0 Cash dividends: Common stock-$2.34 per share............. (101,863) (101,863) Preferred stock, Series B-$2.22 per share.................................. (3,605) (3,605) Preferred stock, Series C-$2.25 per share.................................. (1,439) (1,439) Preferred stock, Series D-$1.97 per share.................................. (3,784) (3,784) Preferred stock, Series E-$1.50 per share.................................. (390) (390) --------- ----- ------- ---------- Balances at December 31, 2003............. $(749,166) $ 1 $(2,025) $1,149,679 ========= ===== ======= ==========

See accompanying notes 46 HEALTH CARE REIT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31 --------------------------------- 2003 2002 2001 --------- --------- --------- (IN THOUSANDS) OPERATING ACTIVITIES Net income................................................ $ 82,740 $ 67,659 $ 60,549 Adjustments to reconcile net income to net cash provided from operating activities: Provision for depreciation........................... 52,870 40,350 30,464 Amortization......................................... 3,957 3,928 2,977 Provision for loan losses............................ 2,870 1,000 1,000 Impairment of assets................................. 2,792 2,298 Transaction fees earned greater than cash received... (1,530) (1,039) Rental income in excess of cash received............. (14,928) (9,256) (6,614) Equity in (earnings) losses of affiliated companies.......................................... (270) (15) (332) (Gain) loss on sales of properties................... (4,139) 1,032 1,250 Increase (decrease) in accrued expenses and other liabilities........................................ (679) 1,320 3,249 Decrease (increase) in receivables and other assets............................................. 4,308 (1,419) (2,822) --------- --------- --------- Net cash provided from (used in) operating activities..... 129,521 105,367 88,682 INVESTING ACTIVITIES Investment in real property............................... (410,413) (409,706) (147,081) Investment in loans receivable and subdebt investments.... (105,655) (88,516) (48,284) Other investments, net of payments........................ 4,637 (228) (913) Principal collected on loans receivable and subdebt investments............................................. 57,081 92,970 94,337 Proceeds from sales of properties......................... 65,455 52,279 22,579 Other..................................................... 149 (229) (262) --------- --------- --------- Net cash provided from (used in) investing activities..... (388,746) (353,430) (79,624) FINANCING ACTIVITIES Net increase (decrease) under unsecured lines of credit arrangements............................................ (109,500) 109,500 (119,900) Proceeds from issuance of senior unsecured notes and secured debt............................................ 350,000 150,000 175,000 Principal payments on senior unsecured notes.............. (47,250) (17,750) Principal payments on secured debt........................ (4,891) (29,383) (31,090) Net proceeds from the issuance of common stock............ 231,435 166,534 82,999 Net proceeds from the issuance of preferred stock......... 96,850 Redemption of preferred stock............................. (75,000) Decrease (increase) in deferred loan expense.............. (3,642) (4,475) (6,065) Cash distributions to stockholders........................ (111,081) (97,139) (85,270) --------- --------- --------- Net cash provided from (used in) financing activities..... 374,171 247,787 (2,076) --------- --------- --------- Increase (decrease) in cash and cash equivalents.......... 114,946 (276) 6,982 Cash and cash equivalents at beginning of year............ 9,550 9,826 2,844 --------- --------- --------- Cash and cash equivalents at end of year.................. $ 124,496 $ 9,550 $ 9,826 ========= ========= ========= Supplemental cash flow information-interest paid.......... $ 50,698 $ 39,466 $ 29,014 ========= ========= =========

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. 50 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):

DECEMBER 31 ------------------- 2003 2002 -------- -------- Mortgage loans......................................... $163,869 $178,942 Mortgage loans to related parties...................... 270 819 Construction loans..................................... 164 Working capital loans.................................. 49,177 28,255 Subdebt investments.................................... 45,254 14,578 -------- -------- Totals................................................. $258,734 $222,594 ======== ========

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. 51 HEALTH CARE REIT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is a summary of mortgage loans at December 31, 2003:

FINAL NUMBER PRINCIPAL PAYMENT OF AMOUNT AT CARRYING DUE LOANS PAYMENT TERMS INCEPTION AMOUNT ------- ------ --------------------------------------------- --------- -------- (IN THOUSANDS) 2002 1 Monthly payments of $200,971, $ 21,500 $ 18,797 including interest of 12.83% 2005 6 Monthly payments from $19,396 to $63,548, 13,913 18,313 including interest from 10.50% to 13.04% 2006 11 Monthly payments from $1,355 to $250,000, 46,429 45,248 including interest from 1.98% to 12.93% 2007 3 Monthly payments from $50,899 to $130,182, 13,034 20,659 including interest from 10.78% to 15.21% 2008 2 Monthly payments from $2,385 to $95,917, 7,210 7,393 including interest from 11.50% to 15.61% 2009 7 Monthly payments from $1,466 to $37,487, 32,149 25,410 including interest from 6.50% to 10.90% 2012 1 Monthly payments of $114,565, 12,700 12,700 including interest of 10.825% 2013 1 Monthly payments of $17,352, 185 1,711 including interest of 12.17% 2015 1 Monthly payments of $2,061, 154 275 including interest of 9.00% 2016 2 Monthly payments from $6,573 to $28,761, 4,045 4,240 including interest of 10.00% 2017 1 Monthly payments of $23,269, 907 3,443 including interest of 8.11% 2018 1 Monthly payments of $55,077, 7,000 5,950 including interest of 10.65% -------- -------- Totals....................................... $159,226 $164,139 ======== ========

52 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):

NUMBER OF BUILDING & TOTAL ACCUMULATED FACILITIES LAND IMPROVEMENTS INVESTMENT DEPRECIATION ---------- -------- ------------ ---------- ------------ ASSISTED LIVING FACILITIES: Arizona.................... 6 $ 3,684 $ 41,900 $ 45,584 $ 2,243 California................. 8 8,420 53,553 61,973 3,131 Colorado................... 1 940 3,721 4,661 184 Connecticut................ 5 6,040 40,578 46,618 3,546 Florida.................... 18 8,103 86,352 94,455 13,232 Georgia.................... 5 4,336 28,446 32,782 4,853 Idaho...................... 4 1,675 29,615 31,290 524 Illinois................... 1 670 6,780 7,450 351 Indiana.................... 13 2,891 61,732 64,623 9,228 Kentucky................... 1 490 7,610 8,100 102 Louisiana.................. 1 1,100 10,161 11,261 1,948 Maryland................... 7 4,600 62,950 67,550 7,429 Massachusetts.............. 5 4,860 51,421 56,281 1,405 Mississippi................ 2 1,080 13,470 14,550 355 Montana.................... 2 910 7,282 8,192 802 Nevada..................... 3 2,086 26,235 28,321 4,386 New Jersey................. 3 2,040 16,841 18,881 2,118 New York................... 3 2,390 21,982 24,372 690 North Carolina............. 42 18,133 184,153 202,286 8,273 Ohio....................... 8 3,214 35,208 38,422 4,360 Oklahoma................... 16 1,928 24,346 26,274 5,044 Oregon..................... 4 1,767 16,249 18,016 1,422 Pennsylvania............... 4 1,951 17,313 19,264 2,258 South Carolina............. 8 4,972 37,919 42,891 2,179 Tennessee.................. 6 2,376 17,336 19,712 1,755 Texas...................... 16 9,046 61,664 70,710 8,993 Utah....................... 1 1,060 6,142 7,202 487 Virginia................... 5 2,624 27,378 30,002 745 Washington................. 6 5,000 27,676 32,676 844 Wisconsin.................. 1 420 4,006 4,426 210 Construction in progress... 2 14,701 --- -------- ---------- ---------- -------- Total Assisted Living Facilities............ 207 108,806 1,030,019 1,153,526 93,097

53 HEALTH CARE REIT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NUMBER OF BUILDING & TOTAL ACCUMULATED FACILITIES LAND IMPROVEMENTS INVESTMENT DEPRECIATION ---------- -------- ------------ ---------- ------------ SKILLED NURSING FACILITIES: Alabama.................... 7 $ 2,910 $ 37,909 $ 40,819 $ 583 Arizona.................... 1 180 3,989 4,169 743 California................. 1 1,460 3,942 5,402 1,046 Colorado................... 1 370 6,051 6,421 1,103 Florida.................... 9 4,382 59,034 63,416 10,002 Georgia.................... 2 2,190 9,392 11,582 156 Idaho...................... 3 2,010 20,662 22,672 3,486 Illinois................... 4 1,110 22,346 23,456 2,247 Kentucky................... 3 1,160 15,515 16,675 700 Maryland................... 1 390 4,010 4,400 121 Massachusetts.............. 15 11,438 126,568 138,006 12,257 Mississippi................ 8 1,385 29,691 31,076 612 Missouri................... 3 1,247 23,133 24,380 1,020 Ohio....................... 5 4,286 62,592 66,878 5,000 Oklahoma................... 1 470 5,673 6,143 981 Oregon..................... 1 300 5,316 5,616 935 Pennsylvania............... 4 869 19,174 20,043 3,906 Tennessee.................. 15 6,480 82,250 88,730 4,323 Texas...................... 4 2,000 25,948 27,948 951 Virginia................... 2 1,891 7,312 9,203 261 --- -------- ---------- ---------- -------- Total Skilled Nursing Facilities............ 90 46,528 570,507 617,035 50,433 SPECIALTY CARE FACILITIES: Florida.................... 1 979 979 Illinois................... 1 3,650 12,960 16,610 233 Massachusetts.............. 4 3,425 71,937 75,362 8,554 Ohio....................... 1 3,020 27,445 30,465 123 --- -------- ---------- ---------- -------- Total Specialty Care Facilities............ 7 11,074 112,342 123,416 8,910 --- -------- ---------- ---------- -------- Total Real Property Owned.................... 304 $166,408 $1,712,868 $1,893,977 $152,440 === ======== ========== ========== ========

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 ========== 54 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):

NUMBER OF TOTAL PERCENT OF FACILITIES INVESTMENT(1) INVESTMENT(2) ---------- ------------- ------------- Concentration by investment: Emeritus Corporation................................... 30 $ 232,018 12% Southern Assisted Living, Inc.......................... 46 211,633 11% Commonwealth Communities L.L.C......................... 14 200,127 10% Home Quality Management, Inc........................... 25 143,113 7% Life Care Centers of America, Inc...................... 17 120,810 6% Remaining Operators (42)............................... 196 1,095,765 54% --- ---------- ---- Totals................................................. 328 $2,003,466 100% === ========== ====

NUMBER OF TOTAL PERCENT OF FACILITIES REVENUES(3) REVENUE(4) ---------- ------------- ------------- Concentration by revenue: Commonwealth Communities L.L.C......................... 14 $ 26,592 13% Home Quality Management, Inc........................... 25 14,886 7% Life Care Centers of America, Inc...................... 17 14,525 7% Merrill Gardens L.L.C.................................. 12 14,397 7% Alterra Healthcare Corporation......................... 45 14,293 7% Remaining Operators (42)............................... 215 122,221 59% --- ---------- ---- Totals................................................. 328 $ 206,914 100% === ========== ====

--------------- (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. 55 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):

YEAR ENDED DECEMBER 31 ------------------------ 2003 2002 2001 ------ ------ ------ Balance at beginning of year...................... $4,955 $6,861 $5,861 Provision for loan losses......................... 2,870 1,000 1,000 Charge-offs....................................... (2,906) ------ ------ ------ Balance at end of year............................ $7,825 $4,955 $6,861 ====== ====== ======

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):

YEAR ENDED DECEMBER 31 ------------------------------ 2003 2002 2001 -------- -------- -------- Balance outstanding at December 31........... $ 0 $109,500 $ 0 Maximum amount outstanding at any month end........................................ 156,900 130,000 140,800 Average amount outstanding (total of daily principal balances divided by days in year)...................................... 64,420 69,180 66,217 Weighted average interest rate (actual interest expense divided by average borrowings outstanding).................... 4.46% 4.58% 7.67%

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. 56 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):

SENIOR SECURED LINE MORTGAGE UNSECURED NOTES OF CREDIT LOANS TOTALS --------------- ------------ -------- ---------- 2004............................... $ 40,000 $ 0 $ 5,828 $ 45,828 2005............................... 2,522 2,522 2006............................... 50,000 2,703 52,703 2007............................... 175,000 14,709 189,709 2008............................... 100,000 9,879 109,879 2009............................... 12,938 12,938 2010............................... 8,948 8,948 Thereafter......................... 500,000 90,657 590,657 -------- ------------ -------- ---------- Totals............................. $865,000 $ 0 $148,184 $1,013,184 ======== ============ ======== ==========

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):

YEAR ENDED DECEMBER 31 --------------------------------------------------------- 2003 2002 2001 ----------------- ----------------- ----------------- NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE OF EXERCISE OF EXERCISE OF EXERCISE STOCK OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE ------------- ------ -------- ------ -------- ------ -------- Options at beginning of year............. 1,606 $21.99 2,387 $21.23 2,003 $20.34 Options granted.......................... 340 25.82 40 27.17 515 23.89 Options exercised........................ (420) 20.95 (821) 20.54 (111) 18.63 Options terminated....................... (23) 22.35 (20) 17.73 ----- ------ ----- ------ ----- ------ Options at end of year................... 1,503 $23.15 1,606 $21.99 2,387 $21.23 ===== ====== ===== ====== ===== ====== Options exercisable at end of year....... 817 $22.69 838 $21.98 1,161 $21.27 Weighted average fair value of options granted during the year................ $ 1.74 $ 2.10 $ 1.43

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 57 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):

OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------- ---------------------- WEIGHTED WEIGHTED RANGE OF PER WEIGHTED AVERAGE AVERAGE SHARE EXERCISE NUMBER AVERAGE REMAINING NUMBER EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACT LIFE EXERCISABLE PRICE -------------- ----------- -------------- ------------- ----------- -------- $16-$20............................. 392 $17.60 6.8 265 $17.76 $20-$25............................. 585 24.26 7.2 320 24.13 $25-$30............................. 526 26.04 8.3 232 26.31 ----- ------ --- --- ------ Totals.............................. 1,503 $23.15 7.5 817 $22.69 ===== ====== === === ======

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):

DECEMBER 31 --------------------------- 2003 2002 2001 ------- ------- ------- Accumulated compensation expense related to stock options............................................... $ 173 $ 0 $ 0 Unamortized restricted stock............................ (2,198) (3,433) (4,780) ------- ------- ------- Totals.................................................. $(2,025) $(3,433) $(4,780) ======= ======= =======

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. 58 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):

YEAR ENDED DECEMBER 31 --------------------------- 2003 2002 2001 ------- ------- ------- Numerator: Net income available to common stockholders -- as reported........................................ $70,732 $55,191 $47,044 Deduct: Additional stock-based employee compensation expense determined under fair value based method for all awards..................... 405 539 465 ------- ------- ------- Net income available to common stockholders -- pro forma........................................... $70,327 $54,652 $46,579 ======= ======= ======= Denominator: Basic weighted average shares -- as reported and pro forma....................................... 43,572 36,702 30,534 Effect of dilutive securities: Employee stock options -- pro forma............. 388 394 178 Non-vested restricted shares.................... 202 162 255 ------- ------- ------- Dilutive potential common shares.................. 590 556 433 ------- ------- ------- Diluted weighted average shares -- pro forma...... 44,162 37,258 30,967 ======= ======= ======= Net income available to common stockholders per share -- as reported Basic........................................ $ 1.62 $ 1.50 $ 1.54 Diluted...................................... 1.60 1.48 1.52 Net income available to common stockholders per share -- pro forma Basic........................................ 1.61 1.49 1.53 Diluted...................................... 1.59 1.47 1.50

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:

2003 2002 2001 ----- ----- ----- Dividend yield.................................... 9.1% 8.0% 9.3% Expected volatility............................... 25.2% 24.3% 24.3% Risk-free interest rate........................... 3.73% 3.44% 3.44% Expected life (in years).......................... 7 7 7 Weighted-average fair value....................... $1.74 $2.10 $1.43

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 59 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:

YEAR ENDED DECEMBER 31 ------------------------ 2003 2002 2001 ------ ------ ------ Per Share: Ordinary income................................. $1.365 $1.655 $1.673 Return of capital............................... 0.896 0.671 0.648 Capital gains................................... 0.079 0.014 0.019 ------ ------ ------ Totals.......................................... $2.340 $2.340 $2.340 ====== ====== ======

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. 61 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):

YEAR ENDED DECEMBER 31 --------------------------- 2003 2002 2001 ------- ------- ------- Numerator for basic and diluted earnings per share -- net income available to common stockholders.................................... $70,732 $55,191 $47,044 ======= ======= ======= Denominator for basic earnings per share -- weighted average shares................ 43,572 36,702 30,534 Effect of dilutive securities: Employee stock options.......................... 427 437 238 Non-vested restricted shares.................... 202 162 255 ------- ------- ------- Dilutive potential common shares.................. 629 599 493 ------- ------- ------- Denominator for diluted earnings per share -- adjusted weighted average shares....... 44,201 37,301 31,027 ======= ======= ======= Basic earnings per share.......................... $ 1.62 $ 1.50 $ 1.54 ======= ======= ======= Diluted earnings per share........................ $ 1.60 $ 1.48 $ 1.52 ======= ======= =======

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. 62 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):

DECEMBER 31, 2003 December 31, 2002 --------------------- --------------------- CARRYING Carrying AMOUNT FAIR VALUE Amount Fair Value -------- ---------- -------- ---------- Financial Assets: Mortgage loans receivable....... $164,139 $ 167,610 $179,761 $192,037 Working capital loans........... 49,177 49,177 28,255 28,255 Construction loans.............. 164 164 Subdebt investments............. 45,254 45,254 14,578 14,578 Cash and cash equivalents....... 124,496 124,496 9,550 9,550 Equity investments.............. 1 1 12 12 Financial Liabilities: Borrowings under lines of credit arrangements................. $ 0 $ 0 $109,500 $109,500 Senior unsecured notes.......... 865,000 1,111,712 515,000 418,179 Secured debt.................... 0 0 4,000 4,000 Mortgage loans payable.......... 148,184 148,184 47,831 47,831

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):

YEAR ENDED DECEMBER 31 -------------------------- 2003 2002 2001 ------ ------- ------- Revenues: Operating lease rents........................... $5,883 $11,953 $14,059 Expenses: Interest expense............................. 1,233 2,669 3,618 Provision for depreciation................... 1,792 3,966 4,422 ------ ------- ------- Income from discontinued operation, net........... $2,858 $ 5,318 $ 6,019 ====== ======= =======

63 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):

YEAR ENDED DECEMBER 31, 2003 ----------------------------------------------------- 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER(2) ----------- ----------- ----------- ----------- Revenues -- as reported................................ $46,292 $47,856 $49,975 $61,240 Discontinued operations................................ (2,155) (2,164) (13) ------- ------- ------- ------- Revenues -- as adjusted(1)............................. 44,137 45,692 49,962 61,240 Net income available to common stockholders......................................... 16,451 16,744 20,601 16,935 Net income available to common stockholders per share: Basic............................................. 0.41 0.41 0.47 0.34 Diluted........................................... 0.41 0.41 0.46 0.34

Year Ended December 31, 2002 ----------------------------------------------------- 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter(3) ----------- ----------- ----------- ----------- Revenues -- as reported................................ $37,395 $40,638 $42,373 $45,424 Discontinued operations................................ (3,402) (3,219) (2,238) (2,044) ------- ------- ------- ------- Revenues -- as adjusted(1)............................. 33,993 37,419 40,135 43,380 Net income available to common stockholders......................................... 12,511 13,490 16,885 12,303 Net income available to common stockholders per share: Basic............................................. 0.38 0.38 0.44 0.31 Diluted........................................... 0.37 0.37 0.43 0.31

--------------- (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

GROSS AMOUNT AT WHICH CARRIED AT INITIAL COST TO COMPANY CLOSE OF PERIOD (DOLLARS IN THOUSANDS) ----------------------- COST CAPITALIZED -------------------------------------- BUILDINGS & SUBSEQUENT TO BUILDINGS & ACCUMULATED DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS DEPRECIATION ----------- ------------ -------- ------------ ---------------- -------- ------------ ------------ ASSISTED LIVING FACILITIES: Alhambra, CA............... $ 0 $ 420 $ 2,534 $ 0 $ 420 $ 2,534 $ 196 Anderson, SC............... 710 6,290 710 6,290 45 Asheboro, NC(3)............ 3,745 290 5,032 13 290 5,045 36 Asheville, NC.............. 204 3,489 204 3,489 486 Asheville, NC.............. 280 1,955 26 280 1,981 16 Atlanta, GA................ 2,059 14,914 2,059 14,914 2,518 Auburn, IN................. 145 3,511 1,855 145 5,366 850 Auburn, MA(1).............. 4,977 1,050 7,950 1,050 7,950 107 Austin, TX................. 880 9,520 880 9,520 1,330 Avon, IN................... 170 3,504 2,025 170 5,529 895 Azusa, CA.................. 570 3,141 570 3,141 254 Baltimore, MD.............. 510 4,515 510 4,515 97 Bartlesville, OK........... 100 1,380 100 1,380 313 Bellingham, WA............. 300 3,200 300 3,200 22 Bluffton, SC............... 700 5,598 3,066 700 8,664 521 Boonville, IN.............. 190 5,510 190 5,510 258 Bradenton, FL.............. 252 3,298 252 3,298 763 Bradenton, FL.............. 100 1,700 788 100 2,488 356 Brandon, FL................ 860 7,140 860 7,140 47 Brick, NJ.................. 1,300 9,394 1,300 9,394 1,731 Burlington, NC............. 280 4,297 21 280 4,318 30 Burlington, NC(3).......... 2,923 460 5,501 5 460 5,506 39 Butte, MT.................. 550 3,957 43 550 4,000 333 Canton, OH................. 300 2,098 300 2,098 305 Cape Coral, FL............. 530 3,281 530 3,281 161 Cary, NC................... 1,500 4,350 857 1,500 5,207 670 Cedar Hill, TX............. 171 1,490 171 1,490 303 Chapel Hill, NC............ 354 2,646 729 354 3,375 98 Chelmsford, MA(2).......... 9,695 1,040 10,960 1,040 10,960 73 Chickasha, OK.............. 85 1,395 85 1,395 309 Chubbuck, ID............... 125 5,375 125 5,375 38 Claremore, OK.............. 155 1,428 155 1,428 292 Clarksville, TN............ 330 2,292 330 2,292 330 Clermont, FL............... 350 5,232 449 350 5,681 915 Coeur D' Alene, ID......... 530 7,570 530 7,570 52 Columbia, SC............... 2,120 4,860 2,120 4,860 109 Columbia, TN............... 341 2,295 341 2,295 317 Columbus, IN............... 530 5,170 530 5,170 245 Concord, NC(3)............. 4,993 550 3,921 30 550 3,951 31 Corpus Christi, TX......... 155 2,935 155 2,935 566 Corpus Christi, TX......... 420 4,796 420 4,796 1,444 Danville, VA............... 410 3,954 12 410 3,966 29 Dayton, OH................. 690 2,970 690 2,970 Desoto, TX................. 205 1,383 205 1,383 274 Douglasville, GA........... 90 217 90 217 4 Duncan, OK................. 103 1,347 103 1,347 291 Durham, NC................. 1,476 10,659 765 1,476 11,424 2,439 Easley, SC................. 250 3,266 250 3,266 70 Eden, NC(3)................ 3,248 390 5,039 2 390 5,041 35 Edmond, OK................. 175 1,564 175 1,564 331 Elizabeth City, NC......... 200 2,760 1,971 200 4,731 405 Ellicott City, MD.......... 1,320 13,641 1,621 1,320 15,262 3,122 Encinitas, CA.............. 1,460 7,721 1,460 7,721 726 Enid, OK................... 90 1,390 90 1,390 315 Eugene, OR................. 600 5,150 600 5,150 247 Everett, WA................ 1,400 5,476 1,400 5,476 703 Fairfield, CA.............. 1,460 14,040 1,460 14,040 702 Fayetteville, NY........... 410 3,962 410 3,962 220

(DOLLARS IN THOUSANDS) YEAR YEAR DESCRIPTION ACQUIRED BUILT ----------- -------- ----- ASSISTED LIVING FACILITIES: Alhambra, CA............... 1999 1999 Anderson, SC............... 2003 1986 Asheboro, NC(3)............ 2003 1998 Asheville, NC.............. 1999 1999 Asheville, NC.............. 2003 1992 Atlanta, GA................ 1997 1999 Auburn, IN................. 1998 1999 Auburn, MA(1).............. 2003 1997 Austin, TX................. 1999 1998 Avon, IN................... 1998 1999 Azusa, CA.................. 1998 1988 Baltimore, MD.............. 2003 1999 Bartlesville, OK........... 1996 1995 Bellingham, WA............. 2003 1994 Bluffton, SC............... 1999 2000 Boonville, IN.............. 2002 2000 Bradenton, FL.............. 1996 1995 Bradenton, FL.............. 1999 1996 Brandon, FL................ 2003 1990 Brick, NJ.................. 1999 2000 Burlington, NC............. 2003 2000 Burlington, NC(3).......... 2003 1997 Butte, MT.................. 1998 1999 Canton, OH................. 1998 1998 Cape Coral, FL............. 2002 2000 Cary, NC................... 1998 1996 Cedar Hill, TX............. 1997 1996 Chapel Hill, NC............ 2002 1997 Chelmsford, MA(2).......... 2003 1997 Chickasha, OK.............. 1996 1996 Chubbuck, ID............... 2003 1996 Claremore, OK.............. 1996 1996 Clarksville, TN............ 1998 1998 Clermont, FL............... 1996 1997 Coeur D' Alene, ID......... 2003 1997 Columbia, SC............... 2003 2000 Columbia, TN............... 1999 1999 Columbus, IN............... 2002 2001 Concord, NC(3)............. 2003 1997 Corpus Christi, TX......... 1997 1996 Corpus Christi, TX......... 1996 1997 Danville, VA............... 2003 1998 Dayton, OH................. 2003 1994 Desoto, TX................. 1996 1996 Douglasville, GA........... 2003 1985 Duncan, OK................. 1995 1996 Durham, NC................. 1997 1999 Easley, SC................. 2003 1999 Eden, NC(3)................ 2003 1998 Edmond, OK................. 1995 1996 Elizabeth City, NC......... 1998 1999 Ellicott City, MD.......... 1997 1999 Encinitas, CA.............. 2000 2000 Enid, OK................... 1995 1995 Eugene, OR................. 2002 2000 Everett, WA................ 1999 1999 Fairfield, CA.............. 2002 1998 Fayetteville, NY........... 2001 1997

72 HEALTH CARE REIT, INC. SCHEDULE III -- (CONTINUED)

GROSS AMOUNT AT WHICH CARRIED AT INITIAL COST TO COMPANY CLOSE OF PERIOD (DOLLARS IN THOUSANDS) ----------------------- COST CAPITALIZED -------------------------------------- BUILDINGS & SUBSEQUENT TO BUILDINGS & ACCUMULATED DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS DEPRECIATION ----------- ------------ -------- ------------ ---------------- -------- ------------ ------------ Federal Way, WA............ $ 0 $ 540 $ 3,960 $ 0 $ 540 $ 3,960 $ 27 Findlay, OH................ 200 1,800 200 1,800 338 Flagstaff, AZ.............. 540 4,460 540 4,460 31 Florence, NJ............... 300 2,978 300 2,978 145 Forest City, NC(3)......... 3,317 320 4,576 3 320 4,579 33 Fort Myers, FL............. 440 2,560 440 2,560 18 Fort Worth, TX............. 210 3,790 (146) 64 3,790 845 Gaffney, SC................ 200 1,892 200 1,892 46 Gardnerville, NV........... 1,326 12,549 1,326 12,549 2,788 Gastonia, NC(3)............ 4,414 470 6,129 470 6,129 43 Gastonia, NC(3)............ 2,039 310 3,096 310 3,096 23 Gastonia, NC(3)............ 4,044 400 5,029 400 5,029 36 Georgetown, TX............. 200 2,100 200 2,100 383 Greensboro, NC............. 330 2,970 5 330 2,975 22 Greensboro, NC............. 560 5,507 560 5,507 41 Greenville, NC(3).......... 3,841 290 4,393 2 290 4,395 31 Hagerstown, MD............. 360 4,640 360 4,640 34 Haines City, FL............ 80 1,937 162 80 2,099 345 Hamden, CT................. 1,470 4,530 1,470 4,530 233 Hamilton, NJ............... 440 4,469 440 4,469 242 Hanover, MD................ 3,000 4,768 7,768 713 Harlingen, TX.............. 92 2,057 92 2,057 394 Hattiesburg, MS............ 560 5,790 560 5,790 303 Henderson, NV.............. 380 9,220 65 380 9,285 1,237 Henderson, NV.............. 380 4,360 41 380 4,401 361 Hendersonville, NC......... 2,270 11,771 279 2,270 12,050 1,761 Hickory, NC................ 290 987 290 987 11 High Point, NC............. 560 4,443 1 560 4,444 33 High Point, NC............. 370 2,185 370 2,185 17 High Point, NC(3).......... 2,822 330 3,395 2 330 3,397 25 High Point, NC(3).......... 3,184 430 4,147 2 430 4,149 30 Highlands Ranch, CO........ 940 3,721 940 3,721 184 Hilton Head Island, SC..... 510 6,037 2,327 510 8,364 747 Houston, TX................ 550 10,751 550 10,751 2,295 Houston, TX................ 360 2,640 360 2,640 80 Houston, TX................ 360 2,640 360 2,640 79 Houston, TX................ 4,790 7,100 4,790 7,100 92 Jackson, TN................ 540 1,633 46 540 1,679 42 Jonesboro, GA.............. 460 1,304 460 1,304 19 Kalispell, MT.............. 360 3,282 360 3,282 469 Kenner, LA................. 1,100 10,036 125 1,100 10,161 1,948 Kirkland, WA(2)............ 5,307 1,880 4,320 1,880 4,320 30 Knoxville, TN.............. 314 2,756 131 315 2,886 79 Kokomo, IN................. 195 3,709 1,251 195 4,960 853 Lake Havasu City, AZ....... 450 4,223 450 4,223 523 Lake Havasu City, AZ....... 110 2,244 136 110 2,380 330 Lake Wales, FL............. 80 1,939 167 80 2,106 345 Lakeland, FL............... 520 4,580 520 4,580 32 Lakewood, NY............... 470 8,530 470 8,530 57 LaPorte, IN................ 165 3,674 1,244 165 4,918 846 Laurel, MD................. 1,060 8,045 2 1,060 8,047 808 Lawton, OK................. 144 1,456 144 1,456 311 Lebanon, PA................ 400 3,799 34 400 3,833 474 Lee, MA.................... 290 18,135 606 290 18,741 872 Leesburg, FL............... 70 1,170 227 70 1,397 270 Leesburg, VA............... 950 7,553 49 950 7,602 607 Lenoir, NC................. 190 3,748 190 3,748 27 Lexington, NC.............. 200 3,900 927 200 4,827 138 Litchfield, CT............. 660 9,652 106 660 9,758 2,357 Louisville, KY(1).......... 3,700 490 7,610 490 7,610 102 Lubbock, TX................ 280 6,220 280 6,220 42

(DOLLARS IN THOUSANDS) YEAR YEAR DESCRIPTION ACQUIRED BUILT ----------- -------- ----- Federal Way, WA............ 2003 1978 Findlay, OH................ 1997 1997 Flagstaff, AZ.............. 2003 1999 Florence, NJ............... 2002 1999 Forest City, NC(3)......... 2003 1999 Fort Myers, FL............. 2003 1980 Fort Worth, TX............. 1996 1984 Gaffney, SC................ 2003 1999 Gardnerville, NV........... 1998 1999 Gastonia, NC(3)............ 2003 1998 Gastonia, NC(3)............ 2003 1994 Gastonia, NC(3)............ 2003 1996 Georgetown, TX............. 1997 1997 Greensboro, NC............. 2003 1996 Greensboro, NC............. 2003 1997 Greenville, NC(3).......... 2003 1998 Hagerstown, MD............. 2003 1999 Haines City, FL............ 1999 1999 Hamden, CT................. 2002 1998 Hamilton, NJ............... 2001 1998 Hanover, MD................ 2001 1998 Harlingen, TX.............. 1997 1989 Hattiesburg, MS............ 2002 1998 Henderson, NV.............. 1998 1998 Henderson, NV.............. 1999 2000 Hendersonville, NC......... 1998 1998 Hickory, NC................ 2003 1994 High Point, NC............. 2003 2000 High Point, NC............. 2003 1999 High Point, NC(3).......... 2003 1994 High Point, NC(3).......... 2003 1998 Highlands Ranch, CO........ 2002 1999 Hilton Head Island, SC..... 1998 1999 Houston, TX................ 1999 1999 Houston, TX................ 2002 1999 Houston, TX................ 2002 1999 Houston, TX................ 2003 1974 Jackson, TN................ 2003 1998 Jonesboro, GA.............. 2003 1992 Kalispell, MT.............. 1998 1998 Kenner, LA................. 1998 2000 Kirkland, WA(2)............ 2003 1996 Knoxville, TN.............. 2002 1998 Kokomo, IN................. 1997 1999 Lake Havasu City, AZ....... 1998 1999 Lake Havasu City, AZ....... 1998 1994 Lake Wales, FL............. 1999 1999 Lakeland, FL............... 2003 1991 Lakewood, NY............... 2003 1999 LaPorte, IN................ 1998 1999 Laurel, MD................. 2002 1996 Lawton, OK................. 1995 1996 Lebanon, PA................ 1998 1999 Lee, MA.................... 2002 1998 Leesburg, FL............... 1999 1954 Leesburg, VA............... 2002 1993 Lenoir, NC................. 2003 1998 Lexington, NC.............. 2002 1997 Litchfield, CT............. 1997 1998 Louisville, KY(1).......... 2003 1997 Lubbock, TX................ 2003 1996

73 HEALTH CARE REIT, INC. SCHEDULE III -- (CONTINUED)

GROSS AMOUNT AT WHICH CARRIED AT INITIAL COST TO COMPANY CLOSE OF PERIOD (DOLLARS IN THOUSANDS) ----------------------- COST CAPITALIZED -------------------------------------- BUILDINGS & SUBSEQUENT TO BUILDINGS & ACCUMULATED DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS DEPRECIATION ----------- ------------ -------- ------------ ---------------- -------- ------------ ------------ Manassas, VA(2)............ $ 4,039 $ 750 $ 7,450 $ 0 $ 750 $ 7,450 $ 50 Margate, FL................ 500 7,303 2,459 500 9,762 2,173 Marion, IN................. 175 3,504 898 175 4,402 852 Martinsville, NC........... 349 349 Marysville, CA............. 450 4,172 44 450 4,216 353 Marysville, WA............. 620 4,780 620 4,780 21 Matthews, NC(3)............ 4,060 560 4,869 560 4,869 35 Merrillville, IN........... 643 7,084 476 643 7,560 1,667 Mesa, AZ................... 950 9,087 950 9,087 802 Middleton, WI.............. 420 4,006 420 4,006 210 Midwest City, OK........... 95 1,385 95 1,385 314 Monroe, NC................. 470 3,681 7 470 3,688 28 Monroe, NC................. 310 4,799 5 310 4,804 34 Monroe, NC(3).............. 3,466 450 4,021 11 450 4,032 30 Morehead City, NC.......... 200 3,104 1,602 200 4,706 391 Morristown, TN............. 400 3,808 155 400 3,963 480 Moses Lake, WA............. 260 5,940 260 5,940 41 Naples, FL................. 1,716 17,306 1,716 17,306 4,563 Newark, OH................. 410 5,711 410 5,711 923 Newburyport, MA............ 960 8,290 960 8,290 317 Norman, OK................. 55 1,484 55 1,484 380 North Augusta, SC.......... 332 2,558 332 2,558 348 North Miami Beach, FL...... 300 5,709 2,006 300 7,715 1,589 North Oklahoma City, OK.... 87 1,508 87 1,508 303 Oak Ridge, TN.............. 450 4,066 155 450 4,221 507 Oklahoma City, OK.......... 130 1,350 130 1,350 297 Oklahoma City, OK.......... 220 2,943 220 2,943 324 Ontario, OR................ 90 2,110 90 2,110 14 Orange City, FL............ 80 2,239 265 80 2,504 454 Ossining, NY............... 1,510 9,490 1,510 9,490 413 Owasso, OK................. 215 1,380 215 1,380 280 Palestine, TX.............. 173 1,410 173 1,410 289 Parkville, MD.............. 730 8,770 2,809 730 11,579 1,360 Paso Robles, CA............ 1,770 8,630 1,770 8,630 429 Phoenix, AZ................ 1,000 6,500 1,000 6,500 46 Pinehurst, NC.............. 290 2,690 290 2,690 21 Piqua, OH.................. 204 1,885 204 1,885 304 Pocatello, ID.............. 470 1,930 470 1,930 15 Ponca City, OK............. 114 1,536 114 1,536 352 Portland, OR............... 628 3,585 232 628 3,817 467 Reidsville, NC............. 170 3,830 805 170 4,635 136 Ridgeland, MS(2)........... 5,130 520 7,680 520 7,680 52 Rocky Hill, CT............. 1,460 7,040 1,460 7,040 328 Rocky Hill, CT(1).......... 5,101 1,090 6,710 1,090 6,710 91 Roswell, GA................ 1,107 9,627 1,107 9,627 2,209 Roswell, GA................ 620 2,200 184 620 2,384 103 Sagamore Hills, OH......... 470 7,881 68 470 7,949 716 Salem, OR.................. 449 5,172 449 5,172 694 Salisbury, NC(3)........... 3,755 370 5,697 27 370 5,724 40 Salt Lake City, UT......... 1,060 6,142 1,060 6,142 487 San Juan Capistrano, CA.... 1,390 6,942 1,390 6,942 409 Sarasota, FL............... 475 3,175 475 3,175 735 Sarasota, FL............... 1,190 4,810 1,190 4,810 35 Saxonburg, PA.............. 677 4,669 44 677 4,713 664 Seven Fields, PA........... 484 4,663 484 4,663 634 Shawnee, OK................ 80 1,400 80 1,400 315 Shelbyville, IN............ 165 3,497 1,139 165 4,636 947 Smithfield, NC(3).......... 3,777 290 5,777 290 5,777 40 Statesville, NC............ 150 1,447 150 1,447 11 Statesville, NC(3)......... 3,037 310 6,183 310 6,183 42 Statesville, NC(3)......... 2,657 140 3,798 20 140 3,818 26

(DOLLARS IN THOUSANDS) YEAR YEAR DESCRIPTION ACQUIRED BUILT ----------- -------- ----- Manassas, VA(2)............ 2003 1996 Margate, FL................ 1998 1972 Marion, IN................. 1999 1999 Martinsville, NC........... 2003 Marysville, CA............. 1998 1999 Marysville, WA............. 2003 1998 Matthews, NC(3)............ 2003 1998 Merrillville, IN........... 1997 1999 Mesa, AZ................... 1999 2000 Middleton, WI.............. 2001 1991 Midwest City, OK........... 1996 1995 Monroe, NC................. 2003 2001 Monroe, NC................. 2003 2000 Monroe, NC(3).............. 2003 1997 Morehead City, NC.......... 1999 1999 Morristown, TN............. 1998 1999 Moses Lake, WA............. 2003 1986 Naples, FL................. 1997 1999 Newark, OH................. 1998 1987 Newburyport, MA............ 2002 1999 Norman, OK................. 1995 1995 North Augusta, SC.......... 1999 1998 North Miami Beach, FL...... 1998 1987 North Oklahoma City, OK.... 1996 1996 Oak Ridge, TN.............. 1998 1999 Oklahoma City, OK.......... 1995 1996 Oklahoma City, OK.......... 1999 1999 Ontario, OR................ 2003 1985 Orange City, FL............ 1999 1998 Ossining, NY............... 2002 1967 Owasso, OK................. 1996 1996 Palestine, TX.............. 1996 1996 Parkville, MD.............. 1997 1999 Paso Robles, CA............ 2002 1998 Phoenix, AZ................ 2003 1999 Pinehurst, NC.............. 2003 1998 Piqua, OH.................. 1997 1997 Pocatello, ID.............. 2003 1991 Ponca City, OK............. 1995 1995 Portland, OR............... 1998 1999 Reidsville, NC............. 2002 1998 Ridgeland, MS(2)........... 2003 1997 Rocky Hill, CT............. 2002 1998 Rocky Hill, CT(1).......... 2003 1996 Roswell, GA................ 1997 1999 Roswell, GA................ 2002 1997 Sagamore Hills, OH......... 1998 2000 Salem, OR.................. 1999 1998 Salisbury, NC(3)........... 2003 1997 Salt Lake City, UT......... 1999 1986 San Juan Capistrano, CA.... 2000 2001 Sarasota, FL............... 1996 1995 Sarasota, FL............... 2003 1988 Saxonburg, PA.............. 1999 1994 Seven Fields, PA........... 1999 1999 Shawnee, OK................ 1996 1995 Shelbyville, IN............ 1998 1999 Smithfield, NC(3).......... 2003 1998 Statesville, NC............ 2003 1990 Statesville, NC(3)......... 2003 1996 Statesville, NC(3)......... 2003 1999

74 HEALTH CARE REIT, INC. SCHEDULE III -- (CONTINUED)

GROSS AMOUNT AT WHICH CARRIED AT INITIAL COST TO COMPANY CLOSE OF PERIOD (DOLLARS IN THOUSANDS) ----------------------- COST CAPITALIZED -------------------------------------- BUILDINGS & SUBSEQUENT TO BUILDINGS & ACCUMULATED DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS DEPRECIATION ----------- ------------ -------- ------------ ---------------- -------- ------------ ------------ Staunton, VA............... $ 0 $ 140 $ 8,360 $ 0 $ 140 $ 8,360 $ 59 Stillwater, OK............. 80 1,400 80 1,400 317 Terre Haute, IN............ 175 3,499 1,096 175 4,595 862 Tewksbury, MA.............. 1,520 5,480 1,520 5,480 36 Texarkana, TX.............. 192 1,403 192 1,403 285 Troy, OH................... 200 2,000 200 2,000 367 Tucson, AZ................. 3,500 1,373 14,511 634 15,250 511 Twin Falls, ID............. 550 14,740 550 14,740 419 Urbana, IL................. 670 6,780 670 6,780 351 Vacaville, CA.............. 900 6,329 900 6,329 62 Valparaiso, IN............. 112 2,558 112 2,558 174 Valparaiso, IN............. 108 2,962 108 2,962 198 Vero Beach, FL............. 263 3,187 263 3,187 212 Vero Beach, FL............. 297 3,263 297 3,263 219 Vincennes, IN.............. 118 2,893 673 118 3,566 581 Wake Forest, NC............ 200 3,003 1,703 200 4,706 467 Waldorf, MD................ 620 8,380 2,759 620 11,139 1,295 Walterboro, SC............. 150 1,838 187 150 2,025 293 Waterford, CT.............. 1,360 12,540 1,360 12,540 537 Waxahachie, TX............. 154 1,429 154 1,429 292 Westerville, OH............ 740 8,287 2,508 740 10,795 1,407 Williamsburg, VA........... 374 374 Williamsport, PA........... 390 4,068 36 390 4,104 486 Wilmington, NC............. 210 2,991 210 2,991 397 Winston-Salem, NC.......... 360 2,514 4 360 2,518 19 -------- -------- ---------- -------- -------- ---------- -------- TOTAL ASSISTED LIVING FACILITIES............... 100,771 108,027 967,070 63,728 108,806 1,030,019 93,097 SKILLED NURSING FACILITIES: Agawam, MA................. 880 16,112 1,901 880 18,013 509 Baytown, TX................ 450 6,150 450 6,150 230 Beachwood, OH.............. 19,602 1,260 23,478 1,260 23,478 1,306 Birmingham, AL............. 390 4,902 390 4,902 77 Birmingham, AL............. 340 5,734 340 5,734 59 Bloomsburg, PA............. 3,918 32 3,950 470 Boise, ID.................. 810 5,401 810 5,401 1,000 Boise, ID.................. 600 7,383 600 7,383 1,209 Braintree, MA.............. 170 7,157 1,109 170 8,266 2,181 Braintree, MA.............. 80 4,849 669 80 5,518 1,289 Brandon, MS................ 115 9,549 115 9,549 143 Broadview Heights, OH...... 9,239 920 12,400 920 12,400 691 Canton, MA................. 820 8,201 160 820 8,361 306 Cheswick, PA............... 384 6,041 1,293 384 7,334 1,174 Cleveland, MS.............. 1,850 1,850 62 Cleveland, TN.............. 350 5,000 350 5,000 311 Coeur d'Alene, ID.......... 600 7,878 600 7,878 1,277 Columbia, TN............... 590 3,787 590 3,787 24 Dedham, MA................. 1,790 12,936 1,790 12,936 623 Denton, MD................. 390 4,010 390 4,010 121 Douglasville, GA........... 1,350 7,471 1,350 7,471 119 Easton, PA................. 285 6,315 285 6,315 2,262 Eight Mile, AL............. 410 6,110 410 6,110 101 Elizabethton, TN........... 310 4,604 40 310 4,644 364 Erin, TN................... 440 8,060 440 8,060 480 Eugene, OR................. 300 5,316 300 5,316 935 Fairfield, AL.............. 530 9,134 530 9,134 137 Fall River, MA............. 620 5,829 4,836 620 10,665 1,432 Falmouth, MA............... 670 3,145 97 670 3,242 726 Florence, AL............... 320 3,975 320 3,975 71 Fort Myers, FL............. 636 6,026 636 6,026 1,260 Granite City, IL........... 610 7,143 610 7,143 1,099 Granite City, IL........... 400 4,303 400 4,303 615

(DOLLARS IN THOUSANDS) YEAR YEAR DESCRIPTION ACQUIRED BUILT ----------- -------- ----- Staunton, VA............... 2003 1999 Stillwater, OK............. 1995 1995 Terre Haute, IN............ 1999 1999 Tewksbury, MA.............. 2003 1989 Texarkana, TX.............. 1996 1996 Troy, OH................... 1997 1997 Tucson, AZ................. 2002 2001 Twin Falls, ID............. 2002 1991 Urbana, IL................. 2002 1998 Vacaville, CA.............. 2002 2001 Valparaiso, IN............. 2001 1998 Valparaiso, IN............. 2001 1999 Vero Beach, FL............. 2001 1999 Vero Beach, FL............. 2001 1996 Vincennes, IN.............. 1998 1985 Wake Forest, NC............ 1998 1999 Waldorf, MD................ 1997 1998 Walterboro, SC............. 1999 1992 Waterford, CT.............. 2002 2000 Waxahachie, TX............. 1996 1996 Westerville, OH............ 1998 2001 Williamsburg, VA........... 2003 Williamsport, PA........... 1998 1999 Wilmington, NC............. 1999 1999 Winston-Salem, NC.......... 2003 1996 TOTAL ASSISTED LIVING FACILITIES............... SKILLED NURSING FACILITIES: Agawam, MA................. 2002 1993 Baytown, TX................ 2002 2000 Beachwood, OH.............. 2001 1990 Birmingham, AL............. 2003 1977 Birmingham, AL............. 2003 1974 Bloomsburg, PA............. 1999 1996 Boise, ID.................. 1998 1966 Boise, ID.................. 1998 1997 Braintree, MA.............. 1997 1968 Braintree, MA.............. 1997 1973 Brandon, MS................ 2003 1963 Broadview Heights, OH...... 2001 1984 Canton, MA................. 2002 1993 Cheswick, PA............... 1998 1933 Cleveland, MS.............. 2003 1977 Cleveland, TN.............. 2001 1987 Coeur d'Alene, ID.......... 1998 1996 Columbia, TN............... 2003 1974 Dedham, MA................. 2002 1996 Denton, MD................. 2003 1982 Douglasville, GA........... 2003 1975 Easton, PA................. 1993 1959 Eight Mile, AL............. 2003 1973 Elizabethton, TN........... 2001 1980 Erin, TN................... 2001 1981 Eugene, OR................. 1998 1972 Fairfield, AL.............. 2003 1965 Fall River, MA............. 1996 1973 Falmouth, MA............... 1999 1966 Florence, AL............... 2003 1972 Fort Myers, FL............. 1998 1984 Granite City, IL........... 1998 1973 Granite City, IL........... 1999 1964

75 HEALTH CARE REIT, INC. SCHEDULE III -- (CONTINUED)

GROSS AMOUNT AT WHICH CARRIED AT INITIAL COST TO COMPANY CLOSE OF PERIOD (DOLLARS IN THOUSANDS) ----------------------- COST CAPITALIZED -------------------------------------- BUILDINGS & SUBSEQUENT TO BUILDINGS & ACCUMULATED DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS DEPRECIATION ----------- ------------ -------- ------------ ---------------- -------- ------------ ------------ Hardin, IL................. $ 0 $ 50 $ 5,350 $ 0 $ 50 $ 5,350 $ 259 Harriman, TN............... 590 8,060 590 8,060 512 Herculaneum, MO............ 127 10,373 127 10,373 487 Hilliard, FL............... 150 6,990 150 6,990 1,026 Houston, TX................ 630 5,970 573 630 6,543 223 Jackson, MS................ 410 1,814 410 1,814 33 Jackson, MS................ 4,400 4,400 147 Jackson, MS................ 2,150 2,150 72 Jefferson City, MO......... 370 6,730 370 6,730 315 Jonesboro, GA.............. 840 1,921 840 1,921 37 Kent, OH................... 215 3,367 215 3,367 1,040 Lakeland, FL............... 696 4,843 696 4,843 1,024 Littleton, MA.............. 1,240 2,910 1,240 2,910 131 Louisville, KY............. 430 7,135 430 7,135 407 Louisville, KY............. 350 4,675 350 4,675 273 McComb, MS................. 120 5,786 120 5,786 85 Memphis, TN................ 970 4,246 970 4,246 72 Memphis, TN................ 480 5,656 480 5,656 89 Midwest City, OK........... 470 5,673 470 5,673 981 Mobile, AL................. 440 3,625 440 3,625 62 Monteagle, TN.............. 310 3,318 310 3,318 19 Morgantown, KY............. 380 3,705 380 3,705 20 Mountain City, TN.......... 220 5,896 317 220 6,213 474 Needham, MA................ 1,610 13,715 1,610 13,715 670 New Port Richey, FL........ 624 7,307 624 7,307 1,515 Ormond Beach, FL........... 2,739 2,739 230 Payson, AZ................. 180 3,989 180 3,989 743 Pigeon Forge, TN........... 320 4,180 320 4,180 279 Pleasant Grove, AL......... 480 4,429 480 4,429 76 Pueblo, CO................. 370 6,051 370 6,051 1,103 Rheems, PA................. 200 1,575 200 1,575 Richmond, VA............... 1,211 2,889 1,211 2,889 87 Ridgely, TN................ 300 5,700 300 5,700 348 Rochdale, MA............... 675 11,847 33 675 11,880 400 Rockledge, FL.............. 360 4,117 360 4,117 383 Rockwood, TN............... 500 7,116 410 500 7,526 549 Rogersville, TN............ 350 3,278 350 3,278 19 Ruleville, MS.............. 50 50 2 San Antonio, TX............ 560 7,315 560 7,315 275 Santa Rosa, CA............. 1,460 3,880 62 1,460 3,942 1,046 Sarasota, FL............... 560 8,474 560 8,474 922 South Boston, MA........... 385 2,002 5,137 385 7,139 1,023 Spring City, TN............ 420 6,085 2,170 420 8,255 524 St. Louis, MO.............. 750 6,030 750 6,030 218 Tupelo, MS................. 740 4,092 740 4,092 68 Vero Beach, FL............. 660 9,040 1,461 660 10,501 1,982 Wareham, MA................ 875 10,313 1,134 875 11,447 354 Webster, MA................ 234 3,580 441 234 4,021 830 Webster, MA................ 336 5,922 336 5,922 1,201 Webster, TX................ 360 5,940 360 5,940 223 West Palm Beach, FL........ 696 8,037 696 8,037 1,660 Westlake, OH............... 15,731 1,320 17,936 1,320 17,936 1,013 Westlake, OH............... 571 5,411 571 5,411 950 Westmoreland, TN........... 2,217 330 1,822 2,505 330 4,327 259 White Hall, IL............. 50 5,550 50 5,550 274 Woodbridge, VA............. 680 4,423 680 4,423 174 Worcester, MA.............. 1,053 2,265 268 1,053 2,533 582 -------- -------- ---------- -------- -------- ---------- -------- TOTAL SKILLED NURSING FACILITIES............... 46,789 46,528 545,859 24,648 46,528 570,507 50,433

(DOLLARS IN THOUSANDS) YEAR YEAR DESCRIPTION ACQUIRED BUILT ----------- -------- ----- Hardin, IL................. 2002 1996 Harriman, TN............... 2001 1987 Herculaneum, MO............ 2002 1984 Hilliard, FL............... 1999 1990 Houston, TX................ 2002 1995 Jackson, MS................ 2003 1968 Jackson, MS................ 2003 1980 Jackson, MS................ 2003 1970 Jefferson City, MO......... 2002 1982 Jonesboro, GA.............. 2003 1992 Kent, OH................... 1989 1983 Lakeland, FL............... 1998 1984 Littleton, MA.............. 1996 1975 Louisville, KY............. 2002 1974 Louisville, KY............. 2002 1975 McComb, MS................. 2003 1973 Memphis, TN................ 2003 1981 Memphis, TN................ 2003 1982 Midwest City, OK........... 1998 1958 Mobile, AL................. 2003 1982 Monteagle, TN.............. 2003 1980 Morgantown, KY............. 2003 1965 Mountain City, TN.......... 2001 1976 Needham, MA................ 2002 1994 New Port Richey, FL........ 1998 1984 Ormond Beach, FL........... 2002 1983 Payson, AZ................. 1998 1985 Pigeon Forge, TN........... 2001 1986 Pleasant Grove, AL......... 2003 1964 Pueblo, CO................. 1998 1989 Rheems, PA................. 2003 1996 Richmond, VA............... 2003 1995 Ridgely, TN................ 2001 1990 Rochdale, MA............... 2002 1995 Rockledge, FL.............. 2001 1970 Rockwood, TN............... 2001 1979 Rogersville, TN............ 2003 1979 Ruleville, MS.............. 2003 1978 San Antonio, TX............ 2002 2000 Santa Rosa, CA............. 1998 1968 Sarasota, FL............... 1999 2000 South Boston, MA........... 1995 1961 Spring City, TN............ 2001 1987 St. Louis, MO.............. 1995 1994 Tupelo, MS................. 2003 1980 Vero Beach, FL............. 1998 1984 Wareham, MA................ 2002 1989 Webster, MA................ 1995 1986 Webster, MA................ 1995 1982 Webster, TX................ 2002 2000 West Palm Beach, FL........ 1998 1984 Westlake, OH............... 2001 1985 Westlake, OH............... 1998 1957 Westmoreland, TN........... 2001 1994 White Hall, IL............. 2002 1971 Woodbridge, VA............. 2002 1977 Worcester, MA.............. 1997 1961 TOTAL SKILLED NURSING FACILITIES...............

76 HEALTH CARE REIT, INC. SCHEDULE III -- (CONTINUED)

GROSS AMOUNT AT WHICH CARRIED AT INITIAL COST TO COMPANY CLOSE OF PERIOD (DOLLARS IN THOUSANDS) ----------------------- COST CAPITALIZED -------------------------------------- BUILDINGS & SUBSEQUENT TO BUILDINGS & ACCUMULATED DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS DEPRECIATION ----------- ------------ -------- ------------ ---------------- -------- ------------ ------------ SPECIALTY CARE FACILITIES: Braintree, MA.............. $ 0 $ 350 $ 9,304 $ 3,949 $ 350 $ 13,253 $ 1,795 Chicago, IL................ 3,650 7,505 5,455 3,650 12,960 233 Clearwater, FL............. 950 29 979 New Albany, OH............. 3,020 27,445 3,020 27,445 123 Springfield, MA............ 2,100 14,978 7,709 2,100 22,687 2,180 Stoughton, MA.............. 975 20,021 3,430 975 23,451 2,738 Waltham, MA................ 9,339 3,207 12,546 1,841 -------- -------- ---------- -------- -------- ---------- -------- TOTAL SPECIALTY CARE FACILITIES............... 0 11,045 88,592 23,779 11,074 112,342 8,910 CONSTRUCTION IN PROGRESS... 14,701 14,701 -------- -------- ---------- -------- -------- ---------- -------- TOTAL INVESTMENT IN REAL PROPERTY OWNED........... $147,560 $165,600 $1,616,222 $112,155 $166,408 $1,727,569 $152,440 ======== ======== ========== ======== ======== ========== ========

(DOLLARS IN THOUSANDS) YEAR YEAR DESCRIPTION ACQUIRED BUILT ----------- -------- ----- SPECIALTY CARE FACILITIES: Braintree, MA.............. 1998 1918 Chicago, IL................ 2002 1979 Clearwater, FL............. 1997 1975 New Albany, OH............. 2002 2003 Springfield, MA............ 1996 1952 Stoughton, MA.............. 1996 1958 Waltham, MA................ 1998 1932 TOTAL SPECIALTY CARE FACILITIES............... CONSTRUCTION IN PROGRESS... TOTAL INVESTMENT IN REAL PROPERTY OWNED...........

--------------- (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)

YEAR ENDED DECEMBER 31 ---------------------------------------- 2003 2002 2001 ---------- -------------- ---------- (IN THOUSANDS) Investment in real estate: Balance at beginning of year......................... $1,420,397 $1,037,395 $ 856,955 Additions: Acquisitions...................................... 385,942 294,627 181,420 Improvements...................................... 52,079 115,079 10,863 Conversions from loans receivable................. 12,433 33,972 13,683 Other(1).......................................... 101,243 2,248 954 ---------- ---------- ---------- Total additions...................................... 551,697 445,926 206,920 Deductions: Cost of real estate sold.......................... (75,325) (60,626) (26,480) Impairment of assets.............................. (2,792) (2,298) ---------- ---------- ---------- Total deductions..................................... (78,117) (62,924) (26,480) ---------- ---------- ---------- Balance at end of year(2)............................ $1,893,977 $1,420,397 $1,037,395 ========== ========== ========== Accumulated depreciation: Balance at beginning of year......................... $ 113,579 $ 80,544 $ 52,968 Additions: Depreciation expense.............................. 52,870 40,350 30,227 Deductions: Sale of properties................................ (14,009) (7,315) (2,651) ---------- ---------- ---------- Balance at end of year............................... $ 152,440 $ 113,579 $ 80,544 ========== ========== ==========

--------------- (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

(IN THOUSANDS) ------------------------------------------- PRINCIPAL AMOUNT OF LOANS SUBJECT FINAL CARRYING TO DELINQUENT INTEREST MATURITY PERIODIC PAYMENT PRIOR FACE AMOUNT AMOUNT OF PRINCIPAL OR DESCRIPTION RATE DATE TERMS LIENS OF MORTGAGES MORTGAGES INTEREST ----------- --------- ----------- ---------------- -------- ------------ --------- ---------------- Sun Valley, CA 12.830% 12/31/02 Monthly Payments $ 21,500 $ 18,797 $18,797 (Specialty care facility) $200,971 Chicago, IL 15.210% 01/01/07 Monthly Payments 15,900 15,306 None (Specialty care facility) $130,182 Lauderhill, FL 10.825% 09/01/12 Monthly Payments 12,700 12,700 None (Skilled nursing facility) $114,565 Oklahoma City, OK 10.280% 07/01/06 Monthly Payments 12,204 12,204 None (Skilled nursing facility) $104,548 Charlotte, NC 5.000% 10/01/06 Monthly Payments 10,390 10,390 None (Assisted living facility) $43,291 Five skilled nursing 10.780% 03/31/07 Monthly Payments 12,198 7,388 None facilities in Texas $115,355 Bala, PA 15.610% 07/01/08 Monthly Payments 7,400 7,145 None (Skilled nursing facility) $62,516 Home Quality Management, Inc. 12.930% 08/01/06 Monthly Payments 8,702 6,534 None (8 skilled nursing $250,000 facilities and 3 assisted living facilities) Owensboro, KY 10.650% 08/01/18 Monthly Payments 7,000 5,950 None (Skilled nursing facility) $55,077 Morningside Holdings, L.L.C. 11.410% 07/01/07 Monthly Payments 5,000 5,353 None (6 assisted living $50,900 facilities) Lecanto, FL 12.080% 08/01/05 Monthly Payments 5,410 5,048 None (Skilled nursing facility) $56,918 Carrollton, GA 9.000% 09/01/09 Monthly Payments 4,998 4,998 None (Assisted living facility) $37,487 25 mortgage loans relating to From From Monthly Payments 61,717 52,326 None 37 skilled nursing 1.980% to 01/01/05 to from $1,355 facilities, 43 assisted 13.040% 01/01/17 to $116,982 living facilities and 2 specialty care facilities -------- -------- ------- Totals................... $185,119 $164,139 $18,797 ======== ======== =======

79 HEALTH CARE REIT, INC. SCHEDULE IV -- (CONTINUED)

YEAR ENDED DECEMBER 31 ------------------------------ 2003 2002 2001 -------- -------- -------- (IN THOUSANDS) Reconciliation of mortgage loans: Balance at beginning of year.............................. $179,761 $212,543 $280,601 Additions: New mortgage loans..................................... 48,117 85,006 17,791 -------- -------- -------- 227,878 297,549 298,392 Deductions: Collections of principal(1)............................ 47,971 70,104 72,166 Conversions to real property........................... 10,133 33,972 13,683 Charge-offs............................................ 2,554 Other(2)............................................... 5,635 11,158 -------- -------- -------- Balance at end of year.................................... $164,139 $179,761 $212,543 ======== ======== ========

--------------- (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. 82 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).* 83 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. 84