UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2006

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

For the transition period from                      to                     

HEALTH CARE REIT, INC.

 

(Exact name of registrant as specified in its charter)

Delaware		34-1096634
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
One SeaGate, Suite 1500, Toledo, Ohio		43604
(Address of principal executive office)		(Zip Code)

(419) 247-2800

(Registrant’s telephone number, including area code)

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

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

Yes þ            No o

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

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

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

Yes o            No þ

     As of July 21, 2006, the registrant had 62,683,909 shares of common stock outstanding.

 

 

TABLE OF CONTENTS

				Page
PART I.		FINANCIAL INFORMATION
Item 1.		Financial Statements (Unaudited)
		Consolidated Balance Sheets — June 30, 2006 and December 31, 2005			3
		Consolidated Statements of Income — Three and six months ended June 30, 2006 and 2005			4
		Consolidated Statements of Stockholders’ Equity — Six months ended June 30, 2006 and 2005			5
		Consolidated Statements of Cash Flows — Six months ended June 30, 2006 and 2005			6
		Notes to Unaudited Consolidated Financial Statements			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			30
Item 4.		Controls and Procedures			30
PART II.		OTHER INFORMATION
Item 1A.		Risk Factors			31
Item 4.		Submission of Matters to a Vote of Security Holders			31
Item 5.		Other Information			31
Item 6.		Exhibits			32
Signatures					32

PART I. FINANCIAL INFORMATION

Item 1.		Financial Statements

CONSOLIDATED BALANCE SHEETS
HEALTH CARE REIT, INC. AND SUBSIDIARIES

		June 30				December 31
		2006				2005
		(Unaudited)				(Note)
		(In thousands)
Assets
Real estate investments:
Real property owned
Land		$	270,810			$	261,236
Buildings & improvements			2,758,358				2,659,746
Real property held for sale, net of accumulated depreciation			0				11,912
Construction in progress			75,822				3,906
			3,104,990				2,936,800
Less accumulated depreciation			(317,869	)			(274,875	)
Total real property owned			2,787,121				2,661,925
Loans receivable			178,282				194,054
Less allowance for losses on loans receivable			(6,961	)			(6,461	)
			171,321				187,593
Net real estate investments			2,958,442				2,849,518
Other assets:
Equity investments			5,070				2,970
Deferred loan expenses			11,523				12,228
Cash and cash equivalents			15,200				36,237
Receivables and other assets			71,877				71,211
			103,670				122,646
Total assets		$	3,062,112			$	2,972,164
Liabilities and stockholders’ equity
Liabilities:
Borrowings under unsecured lines of credit arrangements		$	146,000			$	195,000
Senior unsecured notes			1,193,355				1,198,278
Secured debt			131,178				107,540
Accrued expenses and other liabilities			45,641				40,590
Total liabilities			1,516,174				1,541,408
Stockholders’ equity:
Preferred stock, $1.00 par value:			276,875				276,875
Authorized - 25,000,000 shares
Issued and outstanding - 11,074,989 shares at June 30, 2006 and 11,074,989 shares at December 31, 2005 at liquidation preference
Common stock, $1.00 par value:			62,446				58,050
Authorized - 125,000,000 shares
Issued - 62,597,399 shares at June 30, 2006 and 58,182,592 shares at December 31, 2005
Outstanding - 62,521,163 shares at June 30, 2006 and 58,124,657 shares at December 31, 2005
Capital in excess of par value			1,450,531				1,306,471
Treasury stock			(2,714	)			(2,054	)
Cumulative net income			883,082				830,103
Cumulative dividends			(1,125,810	)			(1,039,032	)
Accumulated other comprehensive income			0				0
Other equity			1,528				343
Total stockholders’ equity			1,545,938				1,430,756
Total liabilities and stockholders’ equity		$	3,062,112			$	2,972,164

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

See notes to unaudited consolidated financial statements

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

		Three Months Ended								Six Months Ended
		June 30								June 30
		2006				2005				2006				2005
		(In thousands, except per share data)
Revenues:
Rental income		$	74,031			$	59,577			$	146,817			$	118,371
Interest income			4,480				5,269				8,742				10,252
Transaction fees and other income			1,665				547				2,030				1,970
			80,176				65,393				157,589				130,593
Expenses:
Interest expense			23,058				19,073				47,101				37,770
Provision for depreciation			24,131				19,309				47,183				37,890
General and administrative			5,089				4,337				11,291				8,355
Loan expense			707				673				1,418				1,535
Loss on extinguishment of debt			0				18,448				0				18,448
Provision for loan losses			250				300				500				600
			53,235				62,140				107,493				104,598
Income from continuing operations			26,941				3,253				50,096				25,995
Discontinued operations:
Net gain (loss) on sales of properties			929				(24	)			2,482				(134	)
Income from discontinued operations, net			131				601				401				1,209
			1,060				577				2,883				1,075
Net income			28,001				3,830				52,979				27,070
Preferred stock dividends			5,333				5,436				10,666				10,872
Net income (loss) available to common stockholders		$	22,668			$	(1,606	)		$	42,313			$	16,198
Average number of common shares outstanding:
Basic			61,548				53,429				59,871				53,207
Diluted			61,868				53,429				60,201				53,616
Earnings per share:
Basic:
Income (loss) from continuing operations available to common stockholders		$	0.35			$	(0.04	)		$	0.66			$	0.28
Discontinued operations, net			0.02				0.01				0.05				0.02
Net income (loss) available to common stockholders		$	0.37			$	(0.03	)		$	0.71			$	0.30
Diluted:
Income (loss) from continuing operations available to common stockholders		$	0.35			$	(0.04	)		$	0.65			$	0.28
Discontinued operations, net			0.02				0.01				0.05				0.02
Net income (loss) available to common stockholders		$	0.37			$	(0.03	)		$	0.70			$	0.30
Dividends declared and paid per common share		$	0.64			$	0.62			$	1.26			$	1.22

See notes to unaudited consolidated financial statements

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

		Six Months Ended June 30, 2006
																										Accumulated
										Capital in																Other
		Preferred				Common				Excess of				Treasury				Cumulative				Cumulative				Comprehensive				Other
		Stock				Stock				Par Value				Stock				Net Income				Dividends				Income				Equity				Total
		(In thousands)
Balances at beginning of period		$	276,875			$	58,050			$	1,306,471			$	(2,054	)		$	830,103			$	(1,039,032	)		$	0			$	343			$	1,430,756
Comprehensive income:
Net income																			52,979																52,979
Other comprehensive income:
Unrealized gain (loss) on equity investments																																			0
Total comprehensive income																																			52,979
Proceeds from issuance of common shares from dividend reinvestment and stock incentive plans, net of forfeitures							1,173				38,027				(660	)															(19	)			38,521
Proceeds from issuance of common shares							3,223				106,554																								109,777
SFAS123(R) reclassification											(521	)																			521				0
Compensation expense related to stock options																															683				683
Cash dividends paid:
Common stock-$1.26 per share																							(76,112	)											(76,112	)
Preferred stock, Series D-$0.984 per share																							(3,938	)											(3,938	)
Preferred stock, Series E-$0.75 per share																							(56	)											(56	)
Preferred stock, Series F-$0.953 per share																							(6,672	)											(6,672	)
Balances at end of period		$	276,875			$	62,446			$	1,450,531			$	(2,714	)		$	883,082			$	(1,125,810	)		$	0			$	1,528			$	1,545,938

		Six Months Ended June 30, 2005
																										Accumulated
										Capital In																Other
		Preferred				Common				Excess of				Treasury				Cumulative				Cumulative				Comprehensive				Other
		Stock				Stock				Par Value				Stock				Net Income				Dividends				Income				Equity				Total
														(In thousands)
Balances at beginning of period		$	283,751			$	52,860			$	1,139,723			$	(1,286	)		$	745,817			$	(884,890	)		$	1			$	(697	)		$	1,335,279
Comprehensive income:
Net income																			27,070																27,070
Other comprehensive income:
Unrealized gain (loss) on equity investments																																			0
Total comprehensive income																																			27,070
Proceeds from issuance of common shares from dividend reinvestment and stock incentive plans, net of forfeitures							912				26,511				(480	)																			26,943
Restricted stock amortization																															368				368
Compensation expense related to stock options																															265				265
Cash dividends paid:
Common stock-$1.22 per share																							(65,088	)											(65,088	)
Preferred stock, Series D-$0.984 per share																							(3,937	)											(3,937	)
Preferred stock, Series E-$0.75 per share																							(263	)											(263	)
Preferred stock, Series F-$0.953 per share																							(6,672	)											(6,672	)
Balances at end of period		$	283,751			$	53,772			$	1,166,234			$	(1,766	)		$	772,887			$	(960,850	)		$	1			$	(64	)		$	1,313,965

See notes to unaudited consolidated financial statements

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

		Six Months Ended
		June 30
		2006				2005
		(In thousands)
Operating activities
Net income		$	52,979			$	27,070
Adjustments to reconcile net income to net cash provided from operating activities:
Provision for depreciation			47,392				41,405
Amortization			1,418				2,724
Provision for loan losses			500				600
Stock-based compensation expense			3,351				632
Rental income less than (in excess of) cash received			8,404				(4,032	)
(Gain) loss on sales of properties			(2,482	)			134
Increase (decrease) in accrued expenses and other liabilities			4,972				(3,267	)
Decrease (increase) in receivables and other assets			(15,571	)			904
Net cash provided from (used in) operating activities			100,963				66,170
Investing activities
Investment in real property			(177,584	)			(215,907	)
Investment in loans receivable			(13,360	)			(23,076	)
Investment in equity securities			(2,100	)			0
Principal collected on loans receivable			31,551				31,723
Proceeds from sales of properties			31,478				9,900
Other			(374	)			177
Net cash provided from (used in) investing activities			(130,389	)			(197,183	)
Financing activities
Net increase (decrease) under unsecured lines of credit arrangements			(49,000	)			167,000
Proceeds from issuance of senior notes			0				250,000
Principal payments on senior notes			0				(230,170	)
Principal payments on secured debt			(1,411	)			(7,039	)
Net proceeds from the issuance of common stock			146,290				27,423
Decrease (increase) in deferred loan expense			(712	)			(4,937	)
Cash distributions to stockholders			(86,778	)			(75,960	)
Net cash provided from (used in) financing activities			8,389				126,317
Increase (decrease) in cash and cash equivalents			(21,037	)			(4,696	)
Cash and cash equivalents at beginning of period			36,237				19,763
Cash and cash equivalents at end of period		$	15,200			$	15,067
Supplemental cash flow information-interest paid		$	46,945			$	42,787

See notes to unaudited consolidated financial statements

HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE A — Basis of Presentation

     The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered for a fair presentation have been included. Operating results for the six months ended June 30, 2006 are not necessarily an indication of the results that may be expected for the year ending December 31, 2006. For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2005.

NOTE B — Real Estate Investments

     During the six months ended June 30, 2006, we invested $177,584,000 of cash in real property (including $70,296,000 of advances for construction in progress) and provided cash loan financings of $13,360,000. In addition, real property acquisitions included the assumption of debt totaling $25,049,000. As of June 30, 2006, we had $260,139,000 of unfunded construction commitments relating to existing construction in progress projects. Also during the six months ended June 30, 2006, we sold real property generating $31,478,000 of net cash proceeds and collected $31,551,000 of cash as repayment of principal on loans receivable.

NOTE C — Equity Investments

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

NOTE D — Distributions Paid to Common Stockholders

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

     On May 19, 2006, we paid a dividend of $0.64 per share to stockholders of record on April 28, 2006. This dividend related to the period from January 1, 2006 through March 31, 2006.

NOTE E — Derivative Instruments

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

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

     On May 6, 2004, we entered into two interest rate swap agreements (the “Swaps”) for a total notional amount of $100,000,000 to hedge changes in fair value attributable to changes in the LIBOR swap rate of $100,000,000 of fixed rate debt with a maturity date of November 15, 2013. The Swaps are treated as fair-value hedges for accounting purposes and we utilize the short-cut method in accordance with Statement No. 133, as amended. The Swaps are with highly rated counterparties in which we receive a fixed rate of 6.0% and pay a variable rate based on six-month LIBOR plus a spread. At June 30, 2006, the Swaps were reported at their fair value as a $2,635,000 other liability ($2,211,000 other asset at December 31, 2005). For the three and six months ended June 30, 2006, we incurred $56,000 and $71,000, respectively, of losses related to the Swaps that was recorded as an addition to interest expense. For the three and six months ended June 30, 2005, we generated $367,000 and $777,000, respectively, of savings related to the Swaps that was recorded as a reduction in interest expense.

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

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

NOTE F — Discontinued Operations

     During the six months ended June 30, 2006, we sold four assisted living facilities, two skilled nursing facilities and two parcels of land with carrying values of $31,664,000 for a net gain of $2,482,000. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we have reclassified the income and expenses attributable to all properties sold to discontinued operations. Expenses include an allocation of interest expense based on property carrying values and our weighted average cost of debt. The following illustrates the reclassification impact of Statement No. 144 as a result of classifying properties as discontinued operations for the periods presented (in thousands):

		Three Months Ended								Six Months Ended
		June 30								June 30
		2006				2005				2006				2005
Revenues:
Rental income		$	160			$	3,214			$	834			$	6,586
Expenses:
Interest expense			29				913				224				1,861
Provision for depreciation			0				1,700				209				3,516
Income from discontinued operations, net		$	131			$	601			$	401			$	1,209

NOTE G — Contingent Liabilities

     We have an outstanding letter of credit issued for the benefit of certain insurance companies that provide workers’ compensation insurance to one of our tenants. Our obligation under the letter of credit matures in 2009. At June 30, 2006, our obligation under the letter of credit was $2,450,000.

     As of June 30, 2006, we had $260,139,000 of unfunded construction commitments.

NOTE H — Accumulated Other Comprehensive Income

     Accumulated other comprehensive income includes unrealized gains or losses on our equity investments. This item is included as a component of stockholders’ equity. We did not recognize any comprehensive income other than the recorded net income for the three or six months ended June 30, 2006 or 2005.

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

NOTE I — Earnings Per Share

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

		Three Months Ended								Six Months Ended
		June 30								June 30
		2006				2005				2006				2005
Numerator for basic and diluted earnings per share — net income (loss) available to common stockholders		$	22,668			$	(1,606	)		$	42,313			$	16,198
Denominator for basic earnings per share — weighted average shares			61,548				53,429				59,871				53,207
Effect of dilutive securities:
Employee stock options			58				0				68				211
Non-vested restricted shares			262				0				262				198
Dilutive potential common shares			320				0				330				409
Denominator for diluted earnings per share — adjusted weighted average shares			61,868				53,429				60,201				53,616
Basic earnings (loss) per share		$	0.37			$	(0.03	)		$	0.71			$	0.30
Diluted earnings (loss) per share		$	0.37			$	(0.03	)		$	0.70			$	0.30

     The diluted earnings per share calculation excludes the dilutive effect of 267,000 stock options for both the three and six months ended June 30, 2006, because the exercise prices were greater than the average market price. The diluted earnings per share calculation excludes the dilutive effect of 138,000 stock options and 198,000 non-vested restricted shares for the three months ended June 30, 2005 because of the net loss to common stockholders. The diluted earnings per share calculation excludes the dilutive effect of 173,000 and 112,000 stock options for the three and six months ended June 30, 2005, respectively, because the exercise prices were greater than the average market price. The Series E Cumulative Convertible and Redeemable Preferred Stock was not included in these calculations as the effect of the conversion into common stock was anti-dilutive for the periods presented.

NOTE J — Other Equity

     Other equity consists of the following (in thousands):

		June 30				December 31
		2006				2005
Accumulated compensation expense related to stock options		$	1,528			$	864
Unamortized restricted stock			0				(521	)
		$	1,528			$	343

     Unamortized restricted stock at December 31, 2005 represents the unamortized value of restricted stock granted to key employees and directors prior to January 1, 2003. Pursuant to the provisions of Statement No. 123(R) adopted on January 1, 2006, the unamortized restricted stock balance of $521,000 was reclassified to capital in excess of par value. Expense, which is recognized as the restricted shares vest based on the market value at the date of the award, totaled $647,000 and $2,669,000 for the three and six months ended June 30, 2006, respectively, and $184,000 and $368,000 for the three and six months ended June 30, 2005, respectively. See Note K for further discussion.

     Accumulated option compensation expense represents the amount of amortized compensation costs related to stock options awarded to employees and directors subsequent to January 1, 2003. Expense, which is recognized as the options vest based on the market value at the date of the award, totaled $192,000 and $683,000 for the three and six months ended June 30, 2006, respectively, and $132,000 and $265,000 for the same periods in 2005.

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

NOTE K — Stock Incentive Plans

     Our 2005 Long-Term Incentive Plan authorizes up to 2,200,000 shares of common stock to be issued at the discretion of the Compensation Committee of the Board of Directors. The 2005 Plan replaced the 1995 Stock Incentive Plan and the Stock Plan for Non-Employee Directors. The options granted to officers and key employees under the 1995 Plan continue to vest through 2010 and expire ten years from the date of grant. Our non-employee directors, officers and key employees are eligible to participate in the 2005 Plan. The 2005 Plan allows for the issuance of, among other things, stock options, restricted stock, deferred stock units and dividend equivalent rights. Vesting periods for options and restricted shares range from three years for directors to five years for officers and key employees. Options expire ten years from the date of grant.

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

     We adopted the fair value-based method of accounting for share-based payments effective January 1, 2003 using the prospective method described in Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. Currently, we use the Black-Scholes-Merton option pricing model to estimate the value of stock option grants and expect to continue to use this acceptable option valuation model. Because we adopted Statement No. 123 using the prospective transition method (which applied only to awards granted, modified or settled after the adoption date of Statement No. 123), compensation cost for some previously granted awards that were not recognized under Statement No. 123 will now be recognized effective with the adoption of Statement No. 123(R) on January 1, 2006. In addition, we previously amortized compensation cost for share based payments to the date that the awards became fully vested or to the expected retirement date, if sooner. Effective with the adoption of Statement No. 123(R), we began recognizing compensation cost to the date the awards become fully vested or to the retirement eligible date, if sooner, which totaled $1,690,000 for the six months ended June 30, 2006. We expect that the adoption of Statement No. 123(R) will increase compensation cost by approximately $1,287,000 for the full year 2006 as a result of amortizing share based awards to the retirement eligible date.

Valuation Assumptions

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

		Six Months Ended				Six Months Ended
		June 30, 2006				June 30, 2005
Dividend yield (1)			0.00% - 6.79	%			0.00	%
Expected volatility			20.3	%			22.8	%
Risk-free interest rate			4.35	%			4.25	%
Expected life (in years)			5				7
Weighted-average fair value (1)			$5.26			$	12.48

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

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

Option Award Activity

     The following table summarizes information about stock option activity for the six months ended June 30, 2006:

		Number of				Weighted				Weighted Average				Aggregate
		Shares				Average				Remaining Contract				Intrinsic
Stock Options		(000’s)				Exercise Price				Life (years)				Value ($000's)
Options at beginning of year			685			$	26.87				6.3
Options granted			155				36.50
Options exercised			(148	)			21.51
Options terminated			0
Options at end of period			692			$	30.18				7.5			$	3,322
Options exercisable at end of period			183			$	25.11				5.5			$	1,805
Weighted average fair value of options granted during the period						$	5.26

     The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the quoted price of our common stock for the options that were in-the-money at June 30, 2006. During the three and six months ended June 30, 2006 the aggregate intrinsic value of options exercised under our stock incentive plans was $286,000 and $2,111,000, respectively, determined as of the date of option exercise. During the three and six months ended June 30, 2005, the aggregate intrinsic value of options exercised under our stock incentive plans was $1,591,000 and $3,481,000, respectively, determined as of the date of option exercise. Cash received from option exercises under our stock incentive plans for the three and six months ended June 30, 2006 was $958,000 and $3,190,000, respectively. Cash received from option exercises under our stock incentive plans for the three and six months ended June 30, 2005 was $2,611,000 and $5,846,000, respectively.

     As of June 30, 2006, there was approximately $2,646,000 of total unrecognized compensation cost related to unvested stock options granted under our stock incentive plans. That cost is expected to be recognized over a weighted average period of four years. As of June 30, 2006, there was approximately $6,267,000 of total unrecognized compensation cost related to unvested restricted stock granted under our stock incentive plans. That cost is expected to be recognized over a weighted average period of three years.

     The following table summarizes information about non-vested stock incentive awards as of June 30, 2006 and changes for the six months ended June 30, 2006:

		Stock Options								Restricted Stock
		Number of				Weighted Average				Number of				Weighted Average
		Shares				Grant Date				Shares				Grant Date
		(000’s)				Fair Value				(000’s)				Fair Value
Non-vested at December 31, 2005			428			$	5.36				222			$	31.56
Vested			(105	)			5.23				(58	)			30.72
Granted			155				5.26				98				36.51
Terminated			0								0
Non-vested at June 30, 2006			478			$	5.35				262			$	33.59

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

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

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

		Three Months Ended				Six Months Ended
		June 30, 2005				June 30, 2005
Numerator:
Net income (loss) available to common stockholders — as reported		$	(1,606	)		$	16,198
Deduct: Additional stock-based employee compensation expense determined under fair value based method for all awards			45				91
Net income (loss) available to common stockholders — pro forma		$	(1,651	)		$	16,107
Denominator:
Basic weighted average shares — as reported and pro forma			53,429				53,207
Effect of dilutive securities:
Employee stock options — pro forma			0				357
Non-vested restricted shares			0				198
Dilutive potential common shares			0				555
Diluted weighted average shares — pro forma			53,429				53,762
Net income (loss) available to common stockholders per share — as reported
Basic		$	(0.03	)		$	0.30
Diluted		$	(0.03	)		$	0.30
Net income (loss) available to common stockholders per share — pro forma
Basic		$	(0.03	)		$	0.30
Diluted		$	(0.03	)		$	0.30

NOTE L — Subsequent Events

     We closed on a $700,000,000 unsecured revolving credit facility to replace our $500,000,000 facility which was scheduled to mature in June 2008. Among other things, the new facility provides us with additional financial flexibility and borrowing capacity, extends our agreement to July 2009 and adds two new lenders to the bank group in addition to commitment increases by eight of the ten existing lenders.

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

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

Executive Overview

Business

     Health Care REIT, Inc. is a self-administered, equity real estate investment trust that invests in health care and senior housing properties. Founded in 1970, we were the first REIT to invest exclusively in health care facilities. The following table summarizes our portfolio as of June 30, 2006:

		Investments(1)				Percentage of				Revenues(2)				Percentage of				Number of				Number of				Investment per				Number of				Number of
Type of Facility		(in thousands)				Investments				(in thousands)				Revenues				Facilities				Beds/Units				Bed/Unit(3)				Operators(4)				States(4)
Independent living/CCRCs		$	447,825				15	%		$	18,695				12	%			35				4,961			$	111,945				15				17
Assisted living facilities			984,600				33	%			58,119				37	%			203				12,597				88,795				24				33
Skilled nursing facilities			1,340,106				45	%			72,540				46	%			213				28,876				47,055				23				29
Specialty care facilities			195,322				7	%			9,069				5	%			13				1,248				156,508				6				7
Totals		$	2,967,853				100	%		$	158,423				100	%			464				47,682

     Our primary objectives are to protect stockholders’ capital and enhance stockholder value. We seek to pay consistent cash dividends to stockholders and create opportunities to increase dividend payments to stockholders as a result of annual increases in rental and interest income and portfolio growth. To meet these objectives, we invest in properties managed by experienced operators and diversify our investment portfolio by operator and geographic location.

     Substantially all of our revenues and sources of cash flows from operations are derived from operating lease rental income and interest earned on outstanding loans receivable. These items represent our primary source of liquidity to fund distributions and are dependent upon our operators’ continued ability to make contractual rent and interest payments to us. To the extent that our operators experience operating difficulties and are unable to generate sufficient cash to make payments to us, there could be a material adverse impact on our consolidated results of operations, liquidity and/or financial condition. To mitigate this risk, we monitor our investments through a variety of methods determined by the type of facility and operator. Our asset management process includes review of monthly financial statements for each facility, periodic review of operator credit, periodic facility inspections and review of covenant compliance relating to licensure, real estate taxes, letters of credit and other collateral. In monitoring our portfolio, our personnel use a proprietary database to collect and analyze facility-specific data. Additionally, we conduct extensive research to ascertain industry trends and risks. Through these asset management and research efforts, we are typically able to intervene at an early stage and address payment risk, and in so doing, support both the collectibility of revenue and the value of our investment.

     In addition to our asset management and research efforts, we also structure our investments to help mitigate payment risk. We typically limit our investments to no more than 90% of the appraised value of a property. Operating leases and loans are normally credit enhanced by guaranties and/or letters of credit. In addition, operating leases are typically structured as master leases and loans are generally cross-defaulted and cross-collateralized with other loans, operating leases or agreements between us and the operator and its affiliates. As of June 30, 2006, 88% of our real property was subject to master leases.

     For the six months ended June 30, 2006, rental income and interest income represented 93% and 6%, respectively, of total gross revenues (including revenues from discontinued operations). Our standard lease structure contains annual rental escalators that are contingent upon changes in the Consumer Price Index and/or changes in the gross operating revenues of the tenant’s properties. These escalators are not fixed, so no straight-line rent is recorded; however, rental income is recorded based on the contractual cash rental

payments due for the period. Our yield on loans receivable depends upon a number of factors, including the stated interest rate, the average principal amount outstanding during the term of the loan and any interest rate adjustments.

     Depending upon the availability and cost of external capital, we anticipate making investments in additional facilities. New investments are generally funded from temporary borrowings under our unsecured lines of credit arrangements, internally generated cash and the proceeds from sales of real property. Our investments generate internal cash from rent and interest receipts and principal payments on loans receivable. Permanent financing for future investments, which replaces funds drawn under the unsecured lines of credit arrangements, is expected to be provided through a combination of public and private offerings of debt and equity securities and the incurrence of secured debt. We believe our liquidity and various sources of available capital are sufficient to fund operations, meet debt service obligations (both principal and interest), make dividend distributions and finance future investments.

     Depending upon market conditions, we believe that new investments will be available in the future with spreads over our cost of capital that will generate appropriate returns to our stockholders. During the six months ended June 30, 2006, we completed $220,033,000 of gross new investments and had $52,905,000 of investment payoffs, resulting in net investments of $167,128,000. We increased our investment guidance to a range of $525,000,000 to $600,000,000 from $450,000,000 to $550,000,000. The increase is due to an increase in expected acquisitions and advances to existing assets to $350,000,000 from $300,000,000 and an increase in expected development fundings to a range of $175,000,000 to $250,000,000 from $150,000,000 to $250,000,000. We anticipate the sale of real property and the repayment of loans receivable totaling approximately $100,000,000 to $150,000,000 resulting in net new investments of $375,000,000 to $500,000,000 during 2006. It is possible that additional loan repayments or sales of real property may occur in the future. To the extent that loan repayments and real property sales exceed new investments, our revenues and cash flows from operations could be adversely affected. We expect to reinvest the proceeds from any loan repayments and real property sales in new investments. To the extent that new investment requirements exceed our available cash on hand, we expect to borrow under our unsecured lines of credit arrangements. At June 30, 2006, we had $15,200,000 of cash and cash equivalents and $394,000,000 of available borrowing capacity under our unsecured lines of credit arrangements.

Key Transactions in 2006

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

	•		our Board of Directors increased our quarterly dividend to $0.64 per share, which represents a two cent increase from the quarterly dividend of $0.62 paid for 2005. The dividend declared for the quarter ended June 30, 2006 represents the 141st consecutive dividend payment;
	•		we completed $220,033,000 of gross investments and had $52,905,000 of investment payoffs during the six months ended June 30, 2006;
	•		we completed a public offering of 3,222,800 shares of common stock with net proceeds to the company of approximately $109,777,000 in April 2006;
	•		we extended our $40,000,000 unsecured line of credit which matured in May 2006 to May 2007 and reduced pricing by 40 basis points; and
	•		we closed on a $700,000,000 unsecured revolving credit facility to replace our $500,000,000 facility which was scheduled to mature in June 2008. Among other things, the new facility provides us with additional financial flexibility and borrowing capacity, extends our agreement to July 2009 and adds two new lenders to the bank group in addition to commitment increases by eight of the ten existing lenders.

Key Performance Indicators, Trends and Uncertainties

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

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

		Three Months Ended
		March 31				June 30				September 30				December 31				March 31				June 30
		2005				2005				2005				2005				2006				2006
Net income (loss) available to common stockholders		$	17,803			$	(1,606	)		$	19,908			$	26,587			$	19,645			$	22,668
Funds from operations			38,309				19,427				41,975				44,581				41,354				45,870
Funds available for distribution			35,454				18,251				41,857				49,457				49,264				46,364
Per share data (fully diluted):
Net income (loss) available to common stockholders		$	0.33			$	(0.03	)		$	0.37			$	0.47			$	0.34			$	0.37
Funds from operations			0.72				0.36				0.77				0.79				0.71				0.74
Funds available for distribution			0.66				0.34				0.77				0.88				0.84				0.75

     Concentration Risk. We evaluate our concentration risk in terms of asset mix, investment mix, operator mix and geographic mix. Concentration risk is a valuable measure in understanding what portion of our investments could be at risk if certain sectors were to experience downturns. Asset mix measures the portion of our investments that are real property. In order to qualify as an equity REIT, at least 75% of our real estate investments must be real property whereby each property, which includes the land, buildings, improvements and related rights, is owned by us and leased to an operator pursuant to a long-term operating lease. Investment mix measures the portion of our investments that relate to our various facility types. Operator mix measures the portion of our investments that relate to our top five operators. Geographic mix measures the portion of our investments that relate to our top five states. The following table reflects our recent historical trends of concentration risk for the periods presented:

		March 31				June 30				September 30				December 31				March 31				June 30
		2005				2005				2005				2005				2006				2006
Asset mix:
Real property			90	%			91	%			91	%			93	%			94	%			94	%
Loans receivable			10	%			9	%			9	%			7	%			6	%			6	%
Investment mix:
Independent living/CCRCs (1)															15	%			15	%			15	%
Assisted living facilities			55	%			51	%			50	%			34	%			33	%			33	%
Skilled nursing facilities			39	%			42	%			42	%			44	%			45	%			45	%
Specialty care facilities			6	%			7	%			8	%			7	%			7	%			7	%
Operator mix:
Emeritus Corporation			15	%			14	%			14	%			13	%			12	%			12	%
Brookdale Senior Living Inc. (2)																			10	%			10	%
Life Care Centers of America, Inc.															7	%			7	%			8	%
Merrill Gardens L.L.C.															7	%			7	%			7	%
Tara Cares, LLC																							6	%
Delta Health Group, Inc.			7	%			7	%			7	%							6	%
Southern Assisted Living, Inc. (2)			8	%			8	%			8	%			7	%
Commonwealth Communities Holdings LLC			8	%			7	%			7	%			7	%
Home Quality Management, Inc.			7	%			7	%			6	%
Remaining operators			55	%			57	%			58	%			59	%			58	%			57	%
Geographic mix:
Florida			15	%			15	%			15	%			14	%			14	%			14	%
Massachusetts			15	%			14	%			13	%			13	%			12	%			11	%
Ohio			6	%			6	%			6	%							9	%			9	%
Texas							9	%			8	%			8	%			8	%			8	%
North Carolina			8	%			7	%			7	%			8	%			7	%			7	%
California															7	%
Tennessee			6	%
Remaining states			50	%			49	%			51	%			50	%			50	%			51	%

     Credit Strength. We measure our credit strength both in terms of leverage ratios and coverage ratios. Our leverage ratios include debt to book capitalization and debt to market capitalization. The leverage ratios indicate how much of our balance sheet capitalization is related to long-term debt. The coverage ratios indicate our ability to service interest and fixed charges (interest, secured debt principal amortization and preferred dividends). We expect to maintain capitalization ratios and coverage ratios sufficient to maintain investment grade ratings with Moody’s Investors Service, Standard & Poor’s Ratings Services and Fitch Ratings. The coverage ratios are based on earnings before interest, taxes, depreciation and amortization (“EBITDA”) which is discussed in further detail, and reconciled to net income, below in “Non-GAAP Financial Measures.” Leverage ratios and coverage ratios are widely used by investors, analysts and rating agencies in the valuation, comparison, investment recommendations and rating of companies. The following table reflects the recent historical trends for our credit strength measures for the periods presented: