HEALTH CARE REIT INC /DE/ (Form: 10-Q, Received: 08/06/2010 14:00:26)

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, 2010


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

For the transition period from to

Commission File number 1-8923

HEALTH CARE REIT, INC.

(Exact name of registrant as specified in its charter)


Delaware		34-1096634

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

One SeaGate, Suite 1500, Toledo, Ohio		43604

(Address of principal executive office)		(Zip Code)

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

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


Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

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 31, 2010, the registrant had 124,625,296 shares of common stock outstanding.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS
HEALTH CARE REIT, INC. AND SUBSIDIARIES


	June 30,			December 31,
	2010			2009
	(Unaudited)			(Note)
	(In thousands)
Assets
Real estate investments:
Real property owned:
Land and land improvements	$	571,501		$	521,055
Buildings and improvements		5,854,675			5,185,328
Acquired lease intangibles		147,861			127,390
Real property held for sale, net of accumulated depreciation		13,020			45,686
Construction in progress		255,883			456,832

Gross real property owned		6,842,940			6,336,291
Less accumulated depreciation and amortization		(766,630	)		(677,851	)

Net real property owned		6,076,310			5,658,440
Real estate loans receivable:
Real estate loans receivable		471,805			427,363
Less allowance for losses on loans receivable		(5,025	)		(5,183	)

Net real estate loans receivable		466,780			422,180

Net real estate investments		6,543,090			6,080,620
Other assets:
Equity investments		181,527			5,816
Deferred loan expenses		31,568			22,698
Cash and cash equivalents		55,423			35,476
Restricted cash		59,656			23,237
Receivables and other assets		208,067			199,339

Total other assets		536,241			286,566

Total assets	$	7,079,331		$	6,367,186


Liabilities and equity
Liabilities:
Borrowings under unsecured line of credit arrangement	$	206,000		$	140,000
Senior unsecured notes		2,135,422			1,653,027
Secured debt		813,341			620,995
Accrued expenses and other liabilities		187,443			145,713

Total liabilities		3,342,206			2,559,735
Equity:
Preferred stock		286,410			288,683
Common stock		124,520			123,385
Capital in excess of par value		3,937,485			3,900,666
Treasury stock		(11,315	)		(7,619	)
Cumulative net income		1,630,120			1,547,669
Cumulative dividends		(2,237,720	)		(2,057,658	)
Accumulated other comprehensive income		(8,526	)		(2,891	)
Other equity		5,755			4,804

Total Health Care REIT, Inc. stockholders’ equity		3,726,729			3,797,039
Noncontrolling interests		10,396			10,412

Total equity		3,737,125			3,807,451

Total liabilities and equity	$	7,079,331		$	6,367,186

NOTE: The consolidated balance sheet at December 31, 2009 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,
	2010			2009			2010			2009
	(In thousands, except per share data)
Revenues:
Rental income	$	151,146		$	127,644		$	293,860		$	255,053
Interest income		9,335			10,158			18,383			20,111
Other income		2,650			1,237			3,646			2,721

Total revenues		163,131			139,039			315,889			277,885
Expenses:
Interest expense		37,454			26,107			67,245			52,786
Property operating expenses		12,498			11,240			25,010			22,288
Depreciation and amortization		47,451			38,115			90,838			76,313
Transaction costs		752			—			8,466			—
General and administrative		11,878			11,062			28,700			28,424
Loss (gain) on extinguishment of debt		7,035			—			25,072			(1,678	)
Provision for loan losses		—			—			—			140

Total expenses		117,068			86,524			245,331			178,273

Income from continuing operations before income taxes and income from unconsolidated joint ventures		46,063			52,515			70,558			99,612
Income tax (expense) benefit		(188	)		(21	)		(273	)		(72	)
Income from unconsolidated joint ventures		1,828			—			2,596			—

Income from continuing operations		47,703			52,494			72,881			99,540
Discontinued operations:
Gain (loss) on sales of properties		3,314			10,677			10,033			27,713
Income (loss) from discontinued operations, net		47			1,588			(156	)		4,150

Discontinued operations, net		3,361			12,265			9,877			31,863

Net income		51,064			64,759			82,758			131,403
Less: Preferred stock dividends		5,484			5,516			10,993			11,039
Less: Net income (loss) attributable to noncontrolling interests		(66	)		3			307			5

Net income attributable to common stockholders	$	45,646		$	59,240		$	71,458		$	120,359


Average number of common shares outstanding:
Basic		123,808			110,864			123,541			109,548
Diluted		124,324			111,272			124,059			109,956

Earnings per share:
Basic:
Income from continuing operations attributable to common stockholders	$	0.34		$	0.42		$	0.50		$	0.81
Discontinued operations, net		0.03			0.11			0.08			0.29

Net income attributable to common stockholders*	$	0.37		$	0.53		$	0.58		$	1.10

Diluted:
Income from continuing operations attributable to common stockholders	$	0.34		$	0.42		$	0.50		$	0.80
Discontinued operations, net		0.03			0.11			0.08			0.29

Net income attributable to common stockholders*	$	0.37		$	0.53		$	0.58		$	1.09

Dividends declared and paid per common share	$	0.68		$	0.68		$	1.36		$	1.36


*		Amounts may not sum due to rounding

See notes to unaudited consolidated financial statements

CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

HEALTH CARE REIT, INC. AND SUBSIDIARIES

(in thousands)


	Six Months Ended June 30, 2010
																	Accumulated
						Capital in											Other
	Preferred			Common		Excess of			Treasury			Cumulative		Cumulative			Comprehensive			Other			Noncontrolling
	Stock			Stock		Par Value			Stock			Net Income		Dividends			Income			Equity			Interests			Total

Balances at beginning of period	$	288,683		$	123,385	$	3,900,666		$	(7,619	)	$	1,547,669	$	(2,057,658	)	$	(2,891	)	$	4,804		$	10,412		$	3,807,451
Comprehensive income:
Net income													82,451											307			82,758
Other comprehensive income:
Unrealized gain (loss) on equity investments																		(137	)								(137	)
Cash flow hedge activity																		(5,498	)								(5,498	)

Total comprehensive income																											77,123

Contributions by noncontrolling interests																								2,271			2,271

Distributions to noncontrolling interests																								(2,594	)		(2,594	)
Amounts related to issuance of common stock from dividend reinvestment and stock incentive plans, net of forfeitures					1,080		44,290			(3,696	)										(243	)					41,431
Equity component of convertible debt							(9,689	)																			(9,689	)
Conversion of preferred stock		(2,273	)		55		2,218																				—
Option compensation expense																					1,194						1,194
Cash dividends paid:
Common stock cash dividends															(169,069	)											(169,069	)
Preferred stock cash dividends															(10,993	)											(10,993	)

Balances at end of period	$	286,410		$	124,520	$	3,937,485		$	(11,315	)	$	1,630,120	$	(2,237,720	)	$	(8,526	)	$	5,755		$	10,396		$	3,737,125


	Six Months Ended June 30, 2009
																	Accumulated
						Capital in											Other
	Preferred			Common		Excess of			Treasury			Cumulative		Cumulative			Comprehensive			Other			Noncontrolling
	Stock			Stock		Par Value			Stock			Net Income		Dividends			Income			Equity			Interests			Total

Balances at beginning of period	$	289,929		$	104,635	$	3,204,690		$	(5,145	)	$	1,354,400	$	(1,723,819	)	$	(1,113	)	$	4,105		$	10,603		$	3,238,285
Comprehensive income:
Net income													131,398											5			131,403
Other comprehensive income:
Unrealized gain (loss) on equity investments																		178									178
Cash flow hedge activity																		(81	)								(81	)

Total comprehensive income																											131,500

Contributions by noncontrolling interests																								1,349			1,349
Distributions to noncontrolling interests																								(1,846	)		(1,846	)
Amounts related to issuance of common stock from dividend reinvestment and stock incentive plans, net of forfeitures					851		30,137			(2,442	)																28,546
Proceeds from issuance of common shares					6,217		218,386																				224,603
Conversion of preferred stock		(1,216	)		30		1,186																				—
Option compensation expense																					1,264						1,264
Cash dividends paid:
Common stock cash dividends															(151,725	)											(151,725	)
Preferred stock cash dividends															(11,039	)											(11,039	)

Balances at end of period	$	288,713		$	111,733	$	3,454,399		$	(7,587	)	$	1,485,798	$	(1,886,583	)	$	(1,016	)	$	5,369		$	10,111		$	3,460,937

See notes to unaudited consolidated financial statements

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

HEALTH CARE REIT, INC. AND SUBSIDIARIES


	Six Months Ended
	June 30,
	2010			2009
	(In thousands)
Operating activities
Net income	$	82,758		$	131,403
Adjustments to reconcile net income to net cash provided from (used in) operating activities:
Depreciation and amortization		91,032			82,057
Other amortization expenses		8,047			7,254
Provision for loan losses		—			140
Stock-based compensation expense		8,747			7,659
Loss (gain) on extinguishment of debt		25,072			(1,678	)
Income from unconsolidated joint ventures		(2,596	)		—
Rental income less than (in excess of) cash received		(4,530	)		5,217
Amortization related to above (below) market leases, net		(1,296	)		(724	)
Loss (gain) on sales of properties		(10,033	)		(27,713	)
Increase (decrease) in accrued expenses and other liabilities		5,552			(15,875	)
Decrease (increase) in receivables and other assets		(11,247	)		(3,407	)

Net cash provided from (used in) operating activities		191,506			184,333

Investing activities
Investment in real property		(389,873	)		(298,359	)
Capitalized interest		(12,352	)		(20,891	)
Investment in real estate loans receivable		(41,784	)		(37,046	)
Other investments, net of payments		(10,051	)		(2,556	)
Principal collected on real estate loans receivable		9,420			31,077
Contributions to unconsolidated joint ventures		(174,574	)		—
Decrease (increase) in restricted cash		(36,418	)		135,237
Proceeds from sales of real property		54,492			132,285

Net cash provided from (used in) investing activities		(601,140	)		(60,253	)

Financing activities
Net increase (decrease) under unsecured lines of credit arrangements		66,000			(228,000	)
Proceeds from issuance of senior unsecured notes		932,412			—
Payments to extinguish senior unsecured notes		(495,542	)		(19,796	)
Net proceeds from the issuance of secured debt		79,127			133,071
Payments on secured debt		(7,704	)		(35,791	)
Net proceeds from the issuance of common stock		37,560			249,196
Decrease (increase) in deferred loan expenses		(1,887	)		(3,364	)
Contributions by noncontrolling interests		2,271			1,349
Distributions to noncontrolling interests		(2,594	)		(1,846	)
Cash distributions to stockholders		(180,062	)		(162,764	)

Net cash provided from (used in) financing activities		429,581			(67,945	)

Increase (decrease) in cash and cash equivalents		19,947			56,135
Cash and cash equivalents at beginning of period		35,476			23,370

Cash and cash equivalents at end of period	$	55,423		$	79,505


Supplemental cash flow information:
Interest paid	$	71,027		$	71,188
Income taxes paid		149			384

See notes to unaudited consolidated financial statements

HEALTH CARE REIT, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Business

Health Care REIT, Inc., an S&P 500 company with headquarters in Toledo, Ohio, is an equity real estate investment trust (“REIT”) that invests in senior housing and health care real estate. Our full service platform also offers property management and development services to our customers. As of June 30, 2010, our broadly diversified portfolio consisted of 625 properties in 39 states. Founded in 1970, we were the first real estate investment trust to invest exclusively in health care facilities. More information is available on our website at www.hcreit.com.

2. Accounting Policies and Related Matters

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 necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2010 are not necessarily an indication of the results that may be expected for the year ending December 31, 2010. 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, 2009, as updated by our Current Report on Form 8-K filed May 10, 2010.

New Accounting Standards

In June 2009, the Financial Accounting Standards Board (“FASB”) amended the consolidation guidance for variable interest entities. The new guidance, to be applied on a continuous basis, requires enterprises to perform a qualitative approach to determining whether or not a variable interest entity will need to be consolidated. This evaluation is based on an enterprise’s ability to direct and influence the activities of a variable interest entity that most significantly impact its economic performance. This amendment was effective as of January 1, 2010. The adoption of this guidance did not have a material impact on our consolidated financial position or results of operations.

3. Real Property Acquisitions and Development

The following is a summary of our real property investment activity for the periods presented (in thousands):


	Six Months Ended
	June 30, 2010									June 30, 2009
	Senior Housing			Medical						Senior Housing			Medical
	and Care			Facilities			Totals			and Care			Facilities			Totals
Real property acquisitions:
Senior housing facilties	$	109,492		$	—		$	109,492		$	—		$	—		$	—
Medical office buildings		—			246,582			246,582			—			—			—

Total acquisitions		109,492			246,582			356,074			—			—			—
Less: Assumed debt		(9,648	)		(108,244	)		(117,892	)		—			—			—
Assumed other assets (liabilities), net		(642	)		(31,048	)		(31,690	)		—			—			—

Cash disbursed for acquisitions		99,202			107,290			206,492			—			—			—
Construction in progress additions:
Senior housing facilities		50,726			—			50,726			193,076			—			193,076
Skilled nursing facilities		—			—			—			15,935			—			15,935
Hospitals		—			69,646			69,646			—			51,855			51,855
Medical office buildings		—			59,922			59,922			—			45,749			45,749

Total construction in progress additions		50,726			129,568			180,294			209,011			97,604			306,615
Less: Capitalized interest		(5,275	)		(6,708	)		(11,983	)		(14,845	)		(6,046	)		(20,891	)
Accruals ⁽¹⁾		—			(5,775	)		(5,775	)		—			—			—

Cash disbursed for construction in progress		45,451			117,085			162,536			194,166			91,558			285,724
Capital improvements to existing properties		4,247			16,598			20,845			7,006			5,629			12,635

Total cash invested in real property	$	148,900		$	240,973		$	389,873		$	201,172		$	97,187		$	298,359


(1)		Represents non-cash accruals for amounts to be paid in future periods relating to properties that converted in the period noted above.

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

The following is a summary of the construction projects that were placed into service and began generating revenues during the periods presented:


	Six Months Ended
	June 30, 2010						June 30, 2009
	Senior Housing		Medical					Senior Housing		Medical
	and Care		Facilities		Totals			and Care		Facilities		Totals
Development projects:
Senior housing facilities	$	269,260	$	—	$	269,260		$	197,490	$	—	$	197,490
Skilled nursing facilities		—		—		—			14,561		—		14,561
Hospitals		—		96,829		96,829			—		—		—
Medical office buildings		—		13,652		13,652			—		—		—

Total development projects		269,260		110,481		379,741			212,051		—		212,051
Expansion projects		1,502		—		1,502			3,601		—		3,601

Total construction in progress conversions	$	270,762	$	110,481	$	381,243		$	215,652	$	—	$	215,652

Transaction costs for the six months ended June 30, 2010 primarily represent a $5,000,000 termination fee incurred in connection with the transfer of an entrance fee property to a new operator and costs incurred in connection with the new property acquisitions.

4. Real Estate Intangibles

The following is a summary of our real estate intangibles, excluding those classified as held for sale, as of the dates indicated (dollars in thousands):


	June 30, 2010			December 31, 2009
Assets:
In place lease intangibles	$	85,823		$	74,198
Above market tenant leases		16,363			10,232
Below market ground leases		41,874			39,806
Lease commissions		3,801			3,154

Gross historical cost		147,861			127,390
Accumulated amortization		(35,124	)		(29,698	)

Net book value	$	112,737		$	97,692

Weighted-average amortization period in years		27.7			30.0

Liabilities:
Below market tenant leases	$	54,009		$	22,961
Above market ground leases		4,084			4,084

Gross historical cost		58,093			27,045
Accumulated amortization		(13,090	)		(10,478	)

Net book value	$	45,003		$	16,567

Weighted-average amortization period in years		12.4			12.1

5. Dispositions, Assets Held for Sale and Discontinued Operations

During the year ended December 31, 2009, an impairment charge of $25,223,000 was recorded to reduce the carrying value of eight medical facilities to their estimated fair value less costs to sell. In determining the fair value of the properties, we used a combination of third party appraisals based on market comparable transactions, other market listings and asset quality as well as management calculations based on projected operating income and published capitalization rates. During the six months ended June 30, 2010, we sold nine properties. At June 30, 2010, we had five medical facilities that satisfied the requirements for held for sale treatment. We did not recognize any impairment loss on these properties in 2010 as the fair value less estimated costs to sell exceeded our carrying values. The following is a summary of our real property disposition activity for the periods presented (in thousands):

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


	Six Months Ended
	June 30, 2010								June 30, 2009
	Senior Housing		Medical						Senior Housing		Medical
	and Care		Facilities			Totals			and Care		Facilities		Totals
Real property dispositions:
Senior housing facilities	$	3,437	$	—		$	3,437		$	44,877	$	—	$	44,877
Skilled nursing facilities		34,924		—			34,924			18,854		—		18,854
Hospitals		—		—			—			—		40,841		40,841
Medical office buildings		—		7,568			7,568			—		—		—

Total dispositions		38,361		7,568			45,929			63,731		40,841		104,572
Add: Gain on sales of real property		8,368		1,665			10,033			13,358		14,355		27,713
Seller financing on sales of real property		—		(1,470	)		(1,470	)		—		—		—

Proceeds from real property sales	$	46,729	$	7,763		$	54,492		$	77,089	$	55,196	$	132,285

We have reclassified the income and expenses attributable to all properties sold and attributable to properties held for sale at June 30, 2010 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 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,
	2010		2009		2010			2009
Revenues:
Rental income	$	648	$	6,233	$	2,040		$	14,189
Expenses:
Interest expense		96		1,225		290			2,557
Property operating expenses		505		804		1,712			1,738
Provision for depreciation		—		2,616		194			5,744

Income (loss) from discontinued operations, net	$	47	$	1,588	$	(156	)	$	4,150

6. Real Estate Loans Receivable

The following is a summary of our real estate loan activity for the periods presented (in thousands):


	Six Months Ended
	June 30, 2010								June 30, 2009
	Senior Housing		Medical						Senior Housing		Medical
	and Care		Facilities			Totals			and Care		Facilities		Totals

Advances on real estate loans receivable:
Investments in new loans	$	8,617	$	15,799		$	24,416		$	1,921	$	—	$	1,921
Draws on existing loans		18,838		—			18,838			34,149		976		35,125

Sub-total		27,455		15,799			43,254			36,070		976		37,046
Less: Seller financing on property sales		—		(1,470	)		(1,470	)		—		—		—

Net cash advances on real estate loans		27,455		14,329			41,784			36,070		976		37,046
Receipts on real estate loans receivable:
Loan payoffs		1,599		—			1,599			18,440		—		18,440
Principal payments on loans		7,705		116			7,821			11,742		895		12,637

Total receipts on real estate loans		9,304		116			9,420			30,182		895		31,077

Net advances (receipts) on real estate loans	$	18,151	$	14,213		$	32,364		$	5,888	$	81	$	5,969

7. Investments in Unconsolidated Joint Ventures

During the six months ended June 30, 2010, we entered into a joint venture investment with Forest City Enterprises (NYSE:FCE.A

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

and FCE.B). We acquired a 49% interest in a seven-building life science campus with approximately 1.2 million square feet located in University Park in Cambridge, MA, which is immediately adjacent to the campus of the Massachusetts Institute of Technology. Six buildings closed on February 22, 2010 and the seventh closed on June 30, 2010. The portfolio is 100% leased and includes affiliates of investment grade pharmaceutical and research tenants such as Novartis, Genzyme, Millennium (a subsidiary of Takeda Pharmaceuticals), and Brigham and Women’s Hospital. Forest City Enterprises self-developed the portfolio and will continue to manage it on behalf of the joint venture. The life science campus is part of a mixed-use project that includes a 210-room hotel, 674 residential units, a grocery store, restaurants and retail.

In connection with these transactions, we invested $174,574,000 of cash which is recorded as an equity investment on the balance sheet. Our share of the non-recourse secured debt assumed by the joint venture was approximately $156,729,000 with weighted-average interest rates of 7.1%. The results of operations for these properties have been included in our consolidated results of operations from the date of acquisition by the joint venture and are reflected in our income statement as income from unconsolidated joint ventures. The aggregate remaining unamortized basis difference of our investment in this joint venture of $21,082,000 at June 30, 2010 is primarily attributable to real estate and related intangible assets and will be amortized over the life of the related properties and included in the reported amount of income from unconsolidated joint ventures.

8. Customer Concentration

The following table summarizes certain information about our customer concentration as of June 30, 2010 (dollars in thousands):


	Number of		Total		Percent of
	Properties		Investment ⁽²⁾		Investment ⁽³⁾

Concentration by investment: ⁽¹⁾
Senior Living Communities, LLC		11	$	533,432		8	%
Aurora Health Care, Inc.		18		308,338		5	%
Brookdale Senior Living, Inc.		86		305,928		4	%
Signature Healthcare LLC		32		264,005		4	%
Emeritus Corporation		20		234,827		3	%
Remaining portfolio		458		5,253,970		76	%

Totals		625	$	6,900,500		100	%


(1)		All of our top five customers, except for Aurora Health Care, Inc., are in our senior housing and care segment.

(2)		Includes our share of unconsolidated joint venture investment of $352,385,000. Please see Note 7 for additional information.

(3)		Investments with our top five customers comprised 24% of total investments at December 31, 2009.

9. Borrowings Under Line of Credit Arrangement and Related Items

At June 30, 2010, we had an unsecured line of credit arrangement with a consortium of sixteen banks in the amount of $1,150,000,000, which is scheduled to expire on August 5, 2011 (with the ability to extend for one year at our discretion if we are in compliance with all covenants). Borrowings under the agreement are subject to interest payable in periods no longer than three months at either the agent bank’s prime rate of interest or the applicable margin over LIBOR interest rate, at our option (0.95% at June 30, 2010). The applicable margin is based on certain of our debt ratings and was 0.6% at June 30, 2010. In addition, we pay a facility fee annually to each bank based on the bank’s commitment amount. The facility fee depends on certain of our debt ratings and was 0.15% at June 30, 2010. We also pay an annual agent’s fee of $50,000. Principal is due upon expiration of the agreement.

The following information relates to aggregate borrowings under the unsecured line of credit arrangement for the periods presented (dollars in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Balance outstanding at quarter end	$	206,000		$	342,000		$	206,000		$	342,000
Maximum amount outstanding at any month end	$	431,000		$	342,000		$	431,000		$	559,000
Average amount outstanding (total of daily principal balances divided by days in period)	$	293,505		$	273,242		$	288,337		$	344,724
Weighted average interest rate (actual interest expense divided by average borrowings outstanding)		1.63	%		1.77	%		1.55	%		1.68	%

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

10. Senior Unsecured Notes and Secured Debt

We have $2,135,422,000 of senior unsecured notes with annual stated interest rates ranging from 3.00% to 8.00%. The carrying amounts of the senior unsecured notes represent the par value of $2,164,930,000 adjusted for any unamortized premiums or discounts and other basis adjustments related to hedging the debt with derivative instruments. See Note 11 for further discussion regarding derivative instruments.

During the three months ended December 31, 2006, we issued $345,000,000 of 4.75% senior unsecured convertible notes due December 2026, generating net proceeds of $337,517,000. The notes are convertible, in certain circumstances, into cash and, if applicable, shares of common stock at an initial conversion rate of 20.8833 shares per $1,000 principal amount of notes, which represents an initial conversion price of approximately $47.89 per share. In general, upon conversion, the holder of each note would receive, in respect of the conversion value of such note, cash up to the principal amount of such note and common stock for the note’s conversion value in excess of such principal amount. In addition, on each of December 1, 2011, December 1, 2016 and December 1, 2021, holders may require us to purchase all or a portion of their notes at a purchase price in cash equal to 100% of the principal amount of the notes to be purchased, plus any accrued and unpaid interest. During the three months ended March 31, 2009, we extinguished $5,000,000 of these notes and recognized a gain of $446,000. During the six months ended June 30, 2010, we extinguished $214,412,000 of these notes, recognized a loss of $8,837,000 and paid $18,552,000 to reacquire the equity component of convertible debt. As of June 30, 2010, we had $125,588,000 of these notes outstanding.

In July 2007, we issued $400,000,000 of 4.75% senior unsecured convertible notes due July 2027, generating net proceeds of $388,943,000. The notes are convertible, in certain circumstances, into cash and, if applicable, shares of our common stock at an initial conversion rate of 20.0000 shares per $1,000 principal amount of notes, which represents an initial conversion price of approximately $50.00 per share. In general, upon conversion, the holder of each note would receive, in respect of the conversion value of such note, cash up to the principal amount of such note and common stock for the note’s conversion value in excess of such principal amount. In addition, on each of July 15, 2012, July 15, 2017 and July 15, 2022, holders may require us to purchase all or a portion of their notes at a purchase price in cash equal to 100% of the principal amount of the notes to be purchased, plus any accrued and unpaid interest. During the three months ended March 31, 2009, we extinguished $5,000,000 of these notes and recognized a gain of $594,000. During the six months ended June 30, 2010, we extinguished $226,914,000 of these notes, recognized a loss of $16,235,000 and paid $21,062,000 to reacquire the equity component of convertible debt. As of June 30, 2010, we had $168,086,000 of these notes outstanding.

During the six months ended June 30, 2010, we issued $494,403,000 of 3.00% senior unsecured convertible notes due December 2029, generating net proceeds of $486,084,000. The notes are convertible, in certain circumstances, into cash and, if applicable, shares of common stock at an initial conversion rate of 19.5064 shares per $1,000 principal amount of notes, which represents an initial conversion price of approximately $51.27 per share. In general, upon conversion, the holder of each note would receive, in respect of the conversion value of such note, cash up to the principal amount of such note and common stock for the note’s conversion value in excess of such principal amount. In addition, on each of December 1, 2014, December 1, 2019 and December 1, 2024, holders may require us to purchase all or a portion of their notes at a purchase price in cash equal to 100% of the principal amount of the notes to be purchased, plus any accrued and unpaid interest. In connection with this issuance, we recognized $29,925,000 of equity component of convertible debt.

During the three months ended June 30, 2010, we issued $450,000,000 of 6.125% senior unsecured notes due 2020 with net proceeds of $446,328,000. We have secured debt totaling $813,341,000, collateralized by owned properties, with annual stated interest rates ranging from 4.60% to 7.98%. The carrying amounts of the secured debt represent the par value of $813,749,000 adjusted for any unamortized fair value adjustments. The carrying values of the properties securing the debt totaled $1,176,865,000 at June 30, 2010. During the six months ended June 30, 2010, we assumed $106,140,000 of first mortgage loans with an average rate of 7.35% secured by 17 medical office buildings, assumed $10,289,000 of first mortgage loans with an average rate of 6.14% secured by two senior housing facilities and raised $81,977,000 of first mortgage loans with an average rate of 5.10% secured by eight skilled nursing facilities.

At June 30, 2010, the annual principal payments due on these debt obligations are as follows (in thousands):

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


	Senior		Secured
	Unsecured Notes ⁽¹⁾		Debt ⁽¹⁾		Totals
2010	$	—	$	8,957	$	8,957
2011		—		18,772		18,772
2012		76,853		25,313		102,166
2013		300,000		74,523		374,523
2014		—		144,343		144,343
Thereafter		1,788,077		541,841		2,329,918

Totals	$	2,164,930	$	813,749	$	2,978,679


(1)		Amounts represent principal amounts due and do not include unamortized premiums/discounts or other fair value adjustments as reflected on the balance sheet.

11. 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 manage the general trend in interest rates at the applicable dates and our perception of the future volatility of interest rates. Derivates are recorded at fair value on the balance sheet as assets or liabilities. The valuation of derivative instruments requires us to make estimates and judgments that affect the fair value of the instruments. Fair values of our derivatives are estimated by pricing models that consider the forward yield curves and discount rates. Such amounts and the recognition of such amounts are subject to significant estimates that may change in the future.

The following is a summary of the fair value of our derivative instruments (dollars in thousands):


	Balance Sheet	Fair Value
	Location	June 30, 2010		December 31, 2009
Cash flow hedge interest rate swaps	Other liabilities	$	7,799	$	2,381

Cash Flow Hedges

For instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (“OCI”), and reclassified into earnings in the same period, or periods, during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in earnings. Approximately $2,812,000 of losses, which are included in accumulated other comprehensive income (“AOCI”), are expected to be reclassified into earnings in the next 12 months.

The following presents the impact of derivative instruments on the statement of operations and OCI for the periods presented (dollars in thousands):


		Three Months Ended						Six Months Ended
	Location	June 30, 2010			June 30, 2009			June 30, 2010			June 30, 2009
Gain (loss) on interest rate swap recognized in OCI (effective portion)	n/a	$	(4,962	)	$	(40	)	$	(7,016	)	$	(80	)
Gain (loss) reclassified from AOCI into income (effective portion)	Interest expense		(794	)		—			(1,598	)		—
Gain (loss) recognized in income (ineffective portion and amount excluded from effectiveness testing)	Realized loss		—			—			—			—

On August 7, 2009, we entered into an interest rate swap (the “August 2009 Swap”) for a total notional amount of $52,198,000 to hedge seven years of interest payments associated with long-term LIBOR based borrowings. The August 2009 Swap has an effective date of August 12, 2009 and a maturity date of September 1, 2016. The August 2009 Swap has the economic effect of fixing $52,198,000 at 3.93% plus a credit spread for seven years. The August 2009 Swap has been designated as a cash flow hedge and we expect it to be

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

highly effective at offsetting changes in cash flows of interest payments on $52,198,000 of long-term debt due to changes in the LIBOR swap rate.

On September 28, 2009, we entered into an interest rate swap (the “September 2009 Swap”) for a total notional amount of $48,155,000 to hedge seven years of interest payments associated with long-term LIBOR based borrowings. The September 2009 Swap has an effective date of September 30, 2009 and a maturity date of October 1, 2016. The September 2009 Swap has the economic effect of fixing $48,155,000 at 3.2675% plus a credit spread for seven years. The September 2009 Swap has been designated as a cash flow hedge and we expect it to be highly effective at offsetting changes in cash flows of interest payments on $48,155,000 of long-term debt due to changes in the LIBOR swap rate.

Fair Value Hedges

For derivative instruments that are designated as a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged risk are recognized in current earnings. There were no outstanding fair value hedges at June 30, 2010 or December 31, 2009.

12. Commitments and Contingencies

We have two outstanding letters of credit issued for the benefit of certain insurance companies that provide workers’ compensation insurance to one of our tenants. Our obligation to provide the letters of credit terminates in 2013. At June 30, 2010, our obligation under the letters of credit was $4,200,000.

We have an outstanding letter of credit issued for the benefit of certain insurance companies that provide liability and property insurance to one of our tenants. Our obligation to provide the letter of credit terminates in 2013. At June 30, 2010, our obligation under the letter of credit was $1,000,000.

We have an outstanding letter of credit issued for the benefit of a village in Illinois that secures the completion and installation of certain public improvements by one of our tenants in connection with the development of a property. Our obligation to provide the letter of credit terminates in November 2010. At June 30, 2010, our obligation under the letter of credit was $129,057.

At June 30, 2010, we had outstanding construction financings of $255,883,000 for leased properties and were committed to providing additional financing of approximately $310,022,000 to complete construction. At June 30, 2010, we had contingent purchase obligations totaling $10,764,000. These contingent purchase obligations relate to unfunded capital improvement obligations. Rents due from the tenant are increased to reflect the additional investment in the property.

At June 30, 2010, we had operating lease obligations of $183,398,000 relating to certain ground leases and company office space. We incurred rental expense relating to our company office space of $303,000 and $635,000 for the three and six months ended June 30, 2010, respectively, as compared to $300,000 and $597,000 for the same periods in 2009. Regarding the ground leases, we have sublease agreements with certain of our operators that require the operators to reimburse us for our monthly operating lease obligations. At June 30, 2010, aggregate future minimum rentals to be received under these noncancelable subleases totaled $31,749,000.

At June 30, 2010, future minimum lease payments due under operating leases are as follows (in thousands):


2010	$	2,259
2011		4,611
2012		4,291
2013		4,295
2014		4,317
Thereafter		163,625

Totals	$	183,398

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

13. Stockholders’ Equity

The following is a summary of our stockholder’s equity capital accounts as of the dates indicated:


	June 30, 2010		December 31, 2009
Preferred Stock, $1.00 par value:
Authorized shares		50,000,000		50,000,000
Issued shares		11,397,252		11,474,093
Outstanding shares		11,397,252		11,474,093

Common Stock, $1.00 par value:
Authorized shares		225,000,000		225,000,000
Issued shares		124,781,646		123,583,242
Outstanding shares		124,498,970		123,385,317

Preferred Stock. During the six months ended June 30, 2009, certain holders of our Series G Cumulative Convertible Preferred Stock converted 40,600 shares into 29,056 shares of our common stock, leaving 400,713 of such shares outstanding at June 30, 2009. During the six months ended June 30, 2010, certain holders of our Series G Cumulative Convertible Preferred Stock converted 76,841 shares into 54,990 shares of our common stock, leaving 322,872 of such shares outstanding at June 30, 2010.

Common Stock. The following is a summary of our common stock issuances during the six months ended June 30, 2010 and 2009 (dollars in thousands, except per share amounts):


	Shares Issued		Average Price		Gross Proceeds		Net Proceeds
February 2009 public issuance		5,816,870	$	36.85	$	214,352	$	210,880
2009 Equity shelf plan issuances		400,000		36.05		14,420		13,723
2009 Dividend reinvestment plan issuances		741,282		33.18		24,593		24,593

2009 Totals		6,958,152			$	253,365	$	249,196

2010 Dividend reinvestment plan issuances		855,343	$	41.59	$	35,570	$	35,570
2010 Option exercises		51,313		38.78		1,990		1,990

2010 Totals		906,656			$	37,560	$	37,560

Dividends . The following is a summary of our dividend payments (dollars in thousands, except per share amounts):


	Six Months Ended
	June 30, 2010				June 30, 2009
	Per Share		Amount		Per Share		Amount
Common Stock	$	1.3600	$	169,069	$	1.3600	$	151,725
Series D Preferred Stock		0.9844		3,938		0.9844		3,938
Series E Preferred Stock		0.7500		56		0.7500		56
Series F Preferred Stock		0.9532		6,672		0.9532		6,672
Series G Preferred Stock		0.9376		327		0.9376		373

Totals			$	180,062			$	162,764

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

Comprehensive Income

The following is a summary of accumulated other comprehensive income/(loss) as of the dates indicated (in thousands):


	June 30, 2010			December 31, 2009
Unrecognized losses on cash flow hedges	$	(7,405	)	$	(1,907	)
Unrecognized losses on equity investments		(687	)		(550	)
Unrecognized actuarial losses		(434	)		(434	)

Totals	$	(8,526	)	$	(2,891	)

The following is a summary of comprehensive income/(loss) for the periods indicated (in thousands):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Unrecognized losses on cash flow hedges	$	(4,208	)	$	(41	)	$	(5,498	)	$	(81	)
Unrecognized gains (losses) on equity investments		(227	)		373			(137	)		178

Total other comprehensive income		(4,435	)		332			(5,635	)		97
Net income attributable to controlling interests		51,130			64,756			82,451			131,398

Comprehensive income attributable to controlling interests		46,695			65,088			76,816			131,495
Net and comprehensive income attributable to noncontrolling interests		(66	)		3			307			5

Total comprehensive income	$	46,629		$	65,091		$	77,123		$	131,500

Other Equity

Other equity consists of accumulated option compensation expense which represents the amount of amortized compensation costs related to stock options awarded to employees and directors. Expense, which is recognized as the options vest based on the market value at the date of the award, totaled $221,000 and $1,194,000 for the three and six months ended June 30, 2010, respectively, as compared to $182,000 and $1,264,000 for the same periods in 2009.

14. Stock Incentive Plans

Our Amended and Restated 2005 Long-Term Incentive Plan authorizes up to 6,200,000 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, deferred stock units and restricted shares generally range from three years for non-employee directors to five years for officers and key employees. Options expire ten years from the date of grant.

Valuation Assumptions

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


	Six Months Ended
	June 30, 2010			June 30, 2009
Dividend yield		6.28	%		7.35	%
Expected volatility		34.08	%		29.36	%
Risk-free interest rate		3.23	%		2.33	%
Expected life (in years)		7.0			7.0
Weighted-average fair value	$	7.82		$	4.38

The dividend yield represented the dividend yield of our common stock on the dates of grant. Our computation of expected

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

volatility was based on historical volatility. The risk-free interest rates used were the 7-year U.S. Treasury Notes yield on the date 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.

Option Award Activity

The following table summarizes information about stock option activity for the six months ended June 30, 2010:


	Number of			Weighted		Weighted Average		Aggregate
	Shares			Average		Remaining		Intrinsic
Stock Options	(000’s)			Exercise Price		Contract Life (years)		Value ($000’s)
Options at beginning of year		1,062		$	37.71		8.1
Options granted		280			43.29
Options exercised		(51	)		34.05
Options terminated		(3	)		38.32

Options at end of period		1,288		$	$39.07		7.8	$	4,620

Options exercisable at end of period		517		$	37.08		6.1	$	2,825
Weighted average fair value of options granted during the period				$	$7.82

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, 2010. During the six months ended June 30, 2010, the aggregate intrinsic value of options exercised under our stock incentive plans was $550,000 (determined as of the date of option exercise). There were no option exercises during the six months ended June 30, 2009. Cash received from option exercises under our stock incentive plans was $1,990,000 for the six months ended June 30, 2010.

As of June 30, 2010, there was approximately $3,155,000 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, 2010, there was approximately $9,360,000 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 four years.

The following table summarizes information about non-vested stock incentive awards as of June 30, 2010 and changes for the six months ended June 30, 2010:


	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, 2009		675		$	5.44		405		$	40.26
Vested		(181	)		5.91		(229	)		42.05
Granted		280			7.82		239			43.23
Terminated		(4	)		8.38		(1	)		38.55

Non-vested at June 30, 2010		770		$	6.18		414		$	41.00

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

15. 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,
	2010		2009		2010		2009
Numerator for basic and diluted earnings per share — net income attributable to common stockholders	$	45,646	$	59,240	$	71,458	$	120,359

Denominator for basic earnings per share — weighted average shares		123,808		110,864		123,541		109,548
Effect of dilutive securities:
Employee stock options		102		—		104		—
Non-vested restricted shares		414		408		414		408

Dilutive potential common shares		516		408		518		408

Denominator for diluted earnings per share — adjusted weighted average shares		124,324		111,272		124,059		109,956

Basic earnings per share	$	0.37	$	0.53	$	0.58	$	1.10

Diluted earnings per share	$	0.37	$	0.53	$	0.58	$	1.09

The diluted earnings per share calculations exclude the dilutive effect of 381,000 stock options for the three and six months ended June 30, 2010, as compared to 1,100,000 for the same periods in 2009, because the exercise prices were less than the average market price. The Series E Cumulative Convertible and Redeemable Preferred Stock, the Series G Cumulative Convertible Preferred Stock, and outstanding convertible senior unsecured notes were not included in these calculations as the effect of the conversions into common stock was anti-dilutive for the relevant periods presented.

16. 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 and Other Real Estate Loans Receivable — The fair value of mortgage loans and other real estate loans receivable is generally estimated by discounting the estimated 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.

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

Available-for-sale Equity Investments — Available-for-sale equity investments are recorded at their fair value.

Borrowings Under Unsecured Lines of Credit Arrangements — The carrying amount of the unsecured line of credit arrangement approximates fair value because the borrowings are interest rate adjustable.

Senior Unsecured Notes — The fair value of the senior unsecured notes payable was estimated based on publicly available trading prices.

Secured Debt — The fair value of fixed rate secured debt is estimated by discounting the estimated future cash flows using the current rates at which similar loans would be made with similar credit ratings and for the same remaining maturities. The carrying amount of variable rate secured debt approximates fair value because the borrowings are interest rate adjustable.

Interest Rate Swap Agreements — Interest rate swap agreements are recorded as assets or liabilities on the balance sheet at fair market value. Fair market value is estimated by utilizing pricing models that consider forward yield curves and discount rates.

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

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


	June 30, 2010				December 31, 2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial Assets:
Mortgage loans receivable	$	107,674	$	107,791	$	74,517	$	74,765
Other real estate loans receivable		364,131		360,595		352,846		354,429
Available-for-sale equity investments		913		913		1,050		1,050
Cash and cash equivalents		55,423		55,423		35,476		35,476

Financial Liabilities:
Borrowings under unsecured lines of credit arrangements	$	206,000	$	206,000	$	140,000	$	140,000
Senior unsecured notes		2,135,422		2,299,610		1,653,027		1,762,129
Secured debt		813,341		820,864		620,995		623,266
Interest rate swap agreements		7,799		7,799		2,381		2,381

U.S. GAAP provides authoritative guidance for measuring and disclosing fair value measurements of assets and liabilities. The guidance for financial assets and liabilities was previously adopted as the standard for those assets and liabilities as of January 1, 2008. Additional guidance for non-financial assets and liabilities is effective for fiscal years beginning after November 15, 2008, and was adopted as the standard for those assets and liabilities as of January 1, 2009. The impact of adoption was not significant. The guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Interest rate swap agreements are valued using models that assume a hypothetical transaction to sell the asset or transfer the liability in the principal market for the asset or liability based on market data derived from interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment timing, loss severities, credit risks and default rates.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The market approach is utilized to measure fair value for our financial assets and liabilities reported at fair value on a recurring basis. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.


	Fair Value Measurements as of June 30, 2010
	Total			Level 1		Level 2			Level 3
Available-for-sale equity investments ⁽¹⁾	$	913		$	913	$	—		$	—
Interest rate swap agreements ⁽²⁾		(7,799	)		—		(7,799	)		—

Totals	$	(6,886	)	$	913	$	(7,799	)	$	—


(1)		Unrealized gains or losses on equity investments are recorded in accumulated other comprehensive income (loss) at each measurement date.

(2)		Please see Note 11 for additional information.

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

17. Segment Reporting

We invest in senior housing and health care real estate. We evaluate our business and make resource allocations on our two business segments — senior housing and care and medical facilities. Our primary senior housing and care properties include skilled nursing facilities, assisted living facilities, independent living/continuing care retirement communities and combinations thereof. Under the senior housing and care segment, we invest in senior housing and health care real estate through acquisition and financing of primarily single tenant properties. Properties acquired are primarily leased under triple-net leases and we are not involved in the management of the property. Our primary medical facility properties include medical office buildings, hospitals and life science buildings. Our medical office buildings are typically leased to multiple tenants and generally require a certain level of property management. Our hospital investments are structured similar to our senior housing and care investments. Our life science investments are currently held in an unconsolidated joint venture (see Note 7 for additional information). The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 1 to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2009, as updated by our Current Report on Form 8-K filed May 10, 2010). There are no intersegment sales or transfers. We evaluate performance based upon net operating income of the combined properties in each segment. Non-segment revenue consists mainly of interest income on non-real estate investments and other income. Non-segment assets consist of corporate assets including cash, deferred loan expenses and corporate offices and equipment among others. Non-property specific revenues and expenses are not allocated to individual segments in determining net operating income.

During the six months ended June 30, 2010, we changed the names of our segments and reclassified certain assets and related revenues. All hospitals that were formerly classified as investment properties have been reclassified to medical facilities. Accordingly, we have reclassified the following prior period amounts to be consistent with the current year classification for the three and six months ended June 30, 2009, respectively: (i) rental income of $10,627,000 and $23,304,000; (ii) interest income of $1,248,000 and $2,478,000; (iii) other income of $70,000 and $172,000; and (iv) real estate depreciation/amortization of $3,155,000 and $6,823,000. Additionally, we have restated $97,000 and $194,000 of interest income from non-segment/corporate revenues to medical facilities to be consistent with the current year classification.

Summary information for the reportable segments during the three and six months ended June 30, 2010 and 2009 is as follows (in thousands):


									Property		Net		Real Estate
	Rental		Interest		Other		Total		Operating		Operating		Depreciation/		Interest		Total
	Income ⁽¹⁾		Income		Income		Revenues ⁽¹⁾		Expenses ⁽¹⁾		Income ⁽²⁾		Amortization ⁽¹⁾		Expense ⁽¹⁾		Assets
Three Months Ended June 30, 2010
Senior housing and care	$	97,254	$	8,830	$	1,536	$	107,620	$	—	$	107,620	$	28,553	$	5,022	$	4,234,307
Medical facilities ⁽³⁾		54,540		505		302		55,347		13,003		42,344		18,898		6,476		2,718,111
Non-segment/Corporate		—		—		812		812		—		812		—		26,052		126,913

	$	151,794	$	9,335	$	2,650	$	163,779	$	13,003	$	150,776	$	47,451	$	37,550	$	7,079,331


Three Months Ended June 30, 2009
Senior housing and care	$	90,657	$	8,910	$	570	$	100,137	$	—	$	100,137	$	25,663	$	2,913
Medical facilities		43,220		1,248		304		44,772		12,044		32,728		15,068		5,238
Non-segment/Corporate		—		—		363		363		—		363		—		19,181

	$	133,877	$	10,158	$	1,237	$	145,272	$	12,044	$	133,228	$	40,731	$	27,332


									Property		Net		Real Estate
	Rental		Interest		Other		Total		Operating		Operating		Depreciation/		Interest
	Income ⁽¹⁾		Income		Income		Revenues ⁽¹⁾		Expenses ⁽¹⁾		Income ⁽²⁾		Amortization ⁽¹⁾		Expense ⁽¹⁾
Six Months Ended June 30, 2010
Senior housing and care	$	190,490	$	17,405	$	2,028	$	209,923	$	—	$	209,923	$	54,954	$	9,693
Medical facilities ⁽³⁾		105,410		978		574		106,962		26,722		80,240		36,078		12,053
Non-segment/Corporate		—		—		1,044		1,044		—		1,044		—		45,789

	$	295,900	$	18,383	$	3,646	$	317,929	$	26,722	$	291,207	$	91,032	$	67,535


Six Months Ended June 30, 2009
Senior housing and care	$	180,092	$	17,633	$	1,362	$	199,087	$	—	$	199,087	$	51,279	$	4,558
Medical facilities		89,150		2,478		619		92,247		24,026		68,221		30,778		10,450
Non-segment/Corporate		—		—		740		740		—		740		—		40,335

	$	269,242	$	20,111	$	2,721	$	292,074	$	24,026	$	268,048	$	82,057	$	55,343


(1)		Includes amounts from discontinued operations.

(2)		Net operating income (“NOI”) is used to evaluate the operating performance of our properties. We define NOI as total revenues, including tenant reimbursements, less property level operating expenses, which exclude depreciation and amortization, general and administrative expenses, impairments and interest expense. We believe NOI provides investors relevant and useful information because it measures the operating performance of our properties at the property level on an unleveraged basis. We use NOI to make decisions about resource allocations and to assess the property level performance of our properties.

(3)		Excludes amounts related to our life science buildings held in an unconsolidated joint venture. Please see Note 7 for additional information.

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, 2009, as updated by our Current Report on Form 8-K filed May 10, 2010, including factors identified under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Executive Summary

Company Overview

Health Care REIT, Inc. is an equity real estate investment trust (“REIT”) that invests in senior housing and health care real estate. 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, 2010:


	Investments		Percentage of			Number of		# Beds/Units			Investment per
Type of Property	(in thousands)		Investments			Properties		or Sq. Ft.			metric ⁽¹⁾			States
Senior housing facilities	$	2,672,125		38.7	%		241		19,340	units	$	140,726	per unit		34
Skilled nursing facilities		1,434,269		20.8	%		204		27,442	beds		52,265	per bed		26
Hospitals		719,324		10.4	%		31		1,826	beds		442,424	per bed		13
Medical office buildings		1,722,397		25.0	%		142		7,587,088	sq. ft.		250	per sq. ft.		25
Life science buildings ⁽²⁾		352,385		5.1	%		7					n/a			1

Totals	$	6,900,500		100.0	%		625								39


(1)		Investment per metric was computed by using the total investment amount of $6,858,137,000, which includes net real estate investments and unfunded construction commitments for which initial funding has commenced which amounted to $6,548,115,000 and $310,022,000, respectively.

(2)		Includes our share of unconsolidated joint venture investments. Please see Note 7 to our unaudited financial statements for additional information.

Health Care Industry

The demand for health care services, and consequently health care properties, is projected to reach unprecedented levels in the near future. The Centers for Medicare and Medicaid Services projects that national health expenditures will rise to $3.4 trillion in 2015 or 17.7% of gross domestic product (“GDP”). This is up from $2 trillion or 15.7% of GDP in 2005. Health expenditures per capita are projected to rise approximately 4.7% per year from 2005 to 2015. While demographics are the primary driver of demand, economic conditions and availability of services contribute to health care service utilization rates. We believe the health care property market is less susceptible to fluctuations and economic downturns relative to other property sectors. Investor interest in the market remains strong, especially in specific sectors such as medical office buildings, regardless of the current stringent lending environment. As a REIT, we believe we are situated to benefit from any turbulence in the capital markets due to our access to capital.

The total U.S. population is projected to increase by 16.4% through 2030. The elderly are an important component of health care utilization, especially independent living services, assisted living services, skilled nursing services, inpatient and outpatient hospital services and physician ambulatory care. The elderly population aged 65 and over is projected to increase by 76.6% through 2030. Most health care services are provided within a health care facility such as a hospital, a physician’s office or a senior housing facility. Therefore, we believe there will be continued demand for companies such as ours with expertise in health care real estate.

The following chart illustrates the projected increase in the elderly population aged 65 and over:

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

Source: U.S. Census Bureau

Health care real estate investment opportunities tend to increase as demand for health care services increases. We recognize the need for health care real estate as it correlates to health care service demand. Health care providers require real estate to house their businesses and expand their services. We believe that investment opportunities in health care real estate will continue to be present due to the:

	•		Specialized nature of the industry which enhances the credibility and experience of our company;

	•		Projected population growth combined with stable or increasing health care utilization rates which ensures demand; and

	•		On-going merger and acquisition activity.

Economic Outlook

The serious economic recession affecting the national and global economy has continued to impact all sectors, including to a somewhat lesser degree health care. Continuing mixed economic signals have made it difficult to predict when there might be a return to more normal and stable growth rates, employment levels and overall economic performance.

Banks have remained cautious in their lending, but significant liquidity has been injected into the senior housing and care markets by various Government-Sponsored Enterprises. In addition, there is significant equity investment capital available for certain health care sectors, particularly medical office buildings. This has had the effect of keeping capitalization rates in these segments generally in line with or even below historic rates. Debt costs for REITs have generally come down over the past 12 months, and equity markets for health care REITs have remained open for the most part.

As a consequence, while liquidity remains an important consideration in 2010, we have been more aggressive in pursuing attractive investment opportunities that meet our strategic and underwriting criteria. We have also been more active in accessing capital markets during this time. We believe the markets in which we invest will continue to offer stable returns during the economic downturn and significant growth potential as and when the economy begins to rebound.

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

Business Strategy

Our primary objectives are to protect stockholder 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 across the full spectrum of senior housing and health care real estate and diversify our investment portfolio by property type, customer and geographic location.

Substantially all of our revenues and sources of cash flows from operations are derived from operating lease rentals and interest earned on outstanding loans receivable. These items represent our primary source of liquidity to fund distributions and are dependent upon our obligors’ continued ability to make contractual rent and interest payments to us. To the extent that our obligors 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 property and operator/tenant. Our asset management process includes review of monthly financial statements for each property, periodic review of obligor credit, periodic property 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 property-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 to address payment risk, and in so doing, support both the collectability 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. 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 obligor and its affiliates.

For the six months ended June 30, 2010, rental income and interest income represented 93% and 6% respectively, of total gross revenues (including revenues from discontinued operations). Substantially all of our operating leases are designed with either fixed or contingent escalating rent structures. Leases with fixed annual rental escalators are generally recognized on a straight-line basis over the initial lease period, subject to a collectability assessment. Rental income related to leases with contingent rental escalators is generally 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 believe our liquidity is sufficient to fund operations, meet debt service obligations (both principal and interest), make dividend distributions and complete construction projects in process. We also anticipate evaluating opportunities to finance future investments. New investments are generally funded from temporary borrowings under our unsecured line of credit arrangement, 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 line of credit arrangement, has historically been provided through a combination of public and private offerings of debt and equity securities and the incurrence or assumption of secured debt.

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. We expect to complete gross new investments of $1.8 billion to $2.2 billion in 2010, comprised of acquisitions/joint ventures totaling $1.5 billion to $1.8 billion and funded new development of $300 million to $400 million. We anticipate the sale of real property and the repayment of loans receivable totaling approximately $300 million during 2010. 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 line of credit arrangement. At June 30, 2010, we had $55,423,000 of cash and cash equivalents, $59,656,000 of restricted cash and $944,000,000 of available borrowing capacity under our unsecured line of credit arrangement.

Key Transactions in 2010

We have completed the following key transactions to date in 2010:

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

	•		our Board of Directors increased the quarterly cash dividend to $0.69 per common share, as compared to $0.68 per common share for 2009, beginning in August 2010. The dividend declared for the quarter ended June 30, 2010 represents the 157 ^th consecutive quarterly dividend payment;

	•		we completed $877,597,000 of gross investments and had $47,528,000 of investment payoffs during the six months ended June 30, 2010;

	•		we issued $494,403,000 of 3.00% convertible senior unsecured notes due 2029 and repurchased $441,326,000 of 4.75% convertible senior unsecured notes due 2026 and 2027 in March and June 2010;

	•		we issued $450,000,000 of 6.125% senior unsecured notes due 2020 with net proceeds of $446,328,000 in April and June 2010; and

	•		we raised $81,977,000 of HUD mortgage loans at an average rate of 5.10%.

Recent Events

On August 4, 2010, we announced we will form an $817 million partnership with Merrill Gardens, LLC. We will acquire an 80% interest in a 38-building senior housing portfolio with 4,388 units located primarily in California and Washington. Merrill Gardens will continue to manage the assets and own the remaining 20% interest. The partnership will consist of 13 facilities currently owned by us valued at $307 million and 25 additional facilities valued at $510 million. The entire portfolio is currently projected to generate 2011 NOI after management fees of approximately $60 to $63 million. The transaction is anticipated to close in September.

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 attributable to common stockholders (“NICS”) is the most appropriate earnings measure. Other useful supplemental measures of our operating performance include funds from operations (“FFO”) and net operating income (“NOI”); 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 and reconciliations of FFO and NOI. 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,
	2009		2009		2009		2009		2010		2010
Net income attributable to common stockholders	$	61,119	$	59,240	$	19,130	$	31,700	$	25,812	$	45,646
Funds from operations		85,322		89,207		60,933		56,290		63,087		92,214
Net operating income		134,819		133,228		133,964		145,667		143,055		157,415

Per share data (fully diluted):
Net income attributable to common stockholders	$	0.56	$	0.53	$	0.17	$	0.26	$	0.21	$	0.37
Funds from operations		0.79		0.80		0.53		0.46		0.51		0.74

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 compliance with our debt covenants. 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:

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


	Three Months Ended
	March 31,			June 30,			September 30,			December 31,			March 31,			June 30,
	2009			2009			2009			2009			2010			2010
Debt to book capitalization ratio		43	%		44	%		39	%		39	%		43	%		46	%
Debt to undepreciated book capitalization ratio		39	%		40	%		35	%		35	%		39	%		41	%
Debt to market capitalization ratio		41	%		40	%		31	%		30	%		32	%		36	%

Interest coverage ratio		3.88	x		3.74	x		2.63	x		3.21	x		3.08	x		3.48	x
Fixed charge coverage ratio		3.18	x		3.07	x		2.16	x		2.57	x		2.44	x		2.78	x

Concentration Risk . We evaluate our concentration risk in terms of asset mix, investment mix, customer 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, intangibles and related rights, is owned by us and leased to a tenant pursuant to a long-term operating lease. Investment mix measures the portion of our investments that relate to our various property types. Customer mix measures the portion of our investments that relate to our top five customers. 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,
	2009			2009			2009			2009			2010			2010
Asset mix:
Real property		92	%		92	%		92	%		93	%		93	%		93	%
Real estate loans receivable		8	%		8	%		8	%		7	%		7	%		7	%

Investment mix: ⁽¹⁾
Senior housing facilities		40	%		40	%		40	%		42	%		38	%		39	%
Skilled nursing facilities		27	%		26	%		26	%		25	%		22	%		21	%
Hospitals		10	%		10	%		11	%		10	%		10	%		10	%
Medical office buildings		23	%		24	%		23	%		23	%		25	%		25	%
Life science buildings		0	%		0	%		0	%		0	%		5	%		5	%

Customer mix: ⁽¹⁾
Senior Living Communities, LLC		6	%		6	%		7	%		7	%		8	%		8	%
Aurora Health Care, Inc.														5	%		5	%
Brookdale Senior Living Inc		5	%		5	%		5	%		5	%		5	%		4	%
Signature Healthcare LLC		5	%		5	%		5	%		5	%		4	%		4	%
Emeritus Corporation		4	%		4	%		4	%		4	%		4	%		3	%
Life Care Centers of America, Inc.		5	%		4	%		3	%		3	%
Remaining customers		75	%		76	%		76	%		76	%		74	%		76	%

Geographic mix: ⁽¹⁾
Florida		14	%		13	%		13	%		12	%		12	%		11	%
Massachusetts		7	%		7	%		7	%		7	%		11	%		11	%
Texas		11	%		11	%		11	%		11	%		10	%		10	%
California		8	%		8	%		8	%		9	%		9	%		9	%
Wisconsin														7	%		7	%
Ohio								5	%		6	%
Tennessee		5	%		5	%
Remaining states		55	%		56	%		56	%		55	%		51	%		52	%


(1)		Includes our share of unconsolidated joint venture investments.

We evaluate our key performance indicators in conjunction with current expectations to determine if historical trends are indicative

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

of future results. Our expected results may not be achieved and actual results may differ materially from our expectations. Factors that may cause actual results to differ from expected results are described in more detail in “Forward-Looking Statements and Risk Factors” and other sections of this Quarterly Report on Form 10-Q. Management regularly monitors economic and other factors to develop strategic and tactical plans designed to improve performance and maximize our competitive position. Our ability to achieve our financial objectives is dependent upon our ability to effectively execute these plans and to appropriately respond to emerging economic and company-specific trends. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2009, as updated by our Current Report on Form 8-K filed May 10, 2010, under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of these risk factors.

Portfolio Update

Net operating income . The primary performance measure for our properties is net operating income (“NOI”) as discussed below in “Non-GAAP Financial Measures.” The following table summarizes our net operating income for the periods indicated (in thousands):


	Three Months Ended
	March 31,		June 30,		September 30,		December 31,		March 31,		June 30,
	2009		2009		2009		2009		2010		2010
Net operating income:
Senior housing and care	$	98,950	$	100,137	$	99,252	$	101,024	$	102,307	$	107,620
Medical facilities ⁽¹⁾		35,493		32,728		34,512		44,411		40,517		48,983
Non-segment/corporate		376		363		200		232		231		812

Net operating income	$	134,819	$	133,228	$	133,964	$	145,667	$	143,055	$	157,415


(1)		Includes our share of net operating income from unconsolidated joint ventures.

Payment coverage . Payment coverage of our operators continues to remain strong. Our overall payment coverage is at 2.03 times. The table below reflects our recent historical trends of portfolio coverage. Coverage data reflects the 12 months ended for the periods presented. CBMF represents the ratio of our customers’ earnings before interest, taxes, depreciation, amortization, rent and management fees to contractual rent or interest due us. CAMF represents the ratio of our customers’ earnings before interest, taxes, depreciation, amortization and rent (but after imputed management fees) to contractual rent or interest due us.

March 31, 2008

March 31, 2009

March 31, 2010

CBMF

CAMF

CBMF

CAMF

CBMF

CAMF

Senior housing facilities

1.54x

1.31x

1.49x

1.27x

1.48x

1.27x

Skilled nursing facilities

2.28x

1.67x

2.20x

1.61x

2.34x

1.72x

Hospitals

2.52x

1.96x

2.33x

2.01x

2.56x

2.23x

Weighted averages

1.98x

1.54x

1.94x

1.51x

2.03x

1.60x

Corporate Governance

Maintaining investor confidence and trust has become increasingly important in today’s business environment. Our Board of Directors and management are strongly committed to policies and procedures that reflect the highest level of ethical business practices. Our corporate governance guidelines provide the framework for our business operations and emphasize our commitment to increase stockholder value while meeting all applicable legal requirements. These guidelines meet the listing standards adopted by the New York Stock Exchange and are available on our website at www.hcreit.com and from us upon written request sent to the Senior Vice President — Administration and Corporate Secretary, Health Care REIT, Inc., One SeaGate, Suite 1500, P.O. Box 1475, Toledo, Ohio 43603-1475.

Liquidity and Capital Resources

Sources and Uses of Cash

Our primary sources of cash include rent and interest receipts, borrowings under the unsecured line of credit arrangement, public and private offerings of debt and equity securities, proceeds from the sales of real property and principal payments on loans receivable. Our primary uses of cash include dividend distributions, debt service payments (including principal and interest), real property investments (including construction advances), loan advances and general and administrative expenses. These sources and uses of cash are reflected in our Consolidated Statements of Cash Flows and are discussed in further detail below.

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

The following is a summary of our sources and uses of cash flows (dollars in thousands):


	Six Months Ended						Change
	June 30, 2010			June 30, 2009			$			%

Cash and cash equivalents at beginning of period	$	35,476		$	23,370		$	12,106			52	%
Cash provided from operating activities		191,506			184,333			7,173			4	%
Cash used in investing activities		(601,140	)		(60,253	)		(540,887	)		898	%
Cash provided from (used in) financing activities		429,581			(67,945	)		497,526			n/a

Cash and cash equivalents at end of period	$	55,423		$	79,505		$	(24,082	)		-30	%

Operating Activities . The change in net cash provided from operating activities is primarily attributable to an increase in net income, excluding gains/losses on sales of properties, depreciation and amortization and debt extinguishment charges. These items are discussed below in “Results of Operations.” The following is a summary of our straight-line rent and above/below market lease amortization (dollars in thousands):


	Six Months Ended						Change
	June 30, 2010			June 30, 2009			$			%
Gross straight-line rental income	$	8,598		$	9,927		$	(1,329	)		-13	%
Cash receipts due to real property sales		(752	)		(3,452	)		2,700			-78	%
Prepaid rent receipts		(3,316	)		(11,692	)		8,376			-72	%
Amortization related to below (above) market leases, net		1,296			724			572			79	%

	$	5,826		$	(4,493	)	$	10,319			n/a

Gross straight-line rental income represents the non-cash difference between contractual cash rent due and the average rent recognized pursuant to U.S. GAAP for leases with fixed rental escalators, net of collectability reserves. This amount is positive in the first half of a lease term (but declining every year due to annual increases in cash rent due) and is negative in the second half of a lease term. The fluctuation in cash receipts due to real property sales is attributable to the lack of straight-line rent receivable balances on properties sold during the current year. The fluctuation in prepaid rent receipts is primarily due to changes in prepaid rent received at certain construction projects.

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

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


	Six Months Ended
	June 30, 2010					June 30, 2009
	Properties		Amount			Properties			Amount
Real property acquisitions:
Senior housing facilities		10	$	109,492			—		$	—
Medical office buildings		19		246,582			—			—

Total acquisitions		29		356,074			—			—
Less: Assumed debt				(117,892	)					—
Assumed other assets (liabilities), net				(31,690	)					—

Cash disbursed for acquisitions				206,492						—
Construction in progress additions				162,536						285,724
Capital improvements to existing properties				20,845						12,635

Total cash invested in real property				389,873						298,359

Real property dispositions:
Senior housing facilities		1		3,437			10			44,877
Skilled nursing facilities		5		34,924			3			18,854
Hospitals		—		—			2			40,841
Medical office buildings		3		7,568			—			—

Total dispositions		9		45,929			15			104,572
Less: Gains (losses) on sales of real property				10,033						27,713
Seller financing on sales of real property				(1,470	)					—

Proceeds from real property sales				54,492						132,285


Net cash investments in real property		20	$	335,381			(15	)	$	166,074


	Six Months Ended
	June 30, 2010								June 30, 2009
	Senior Housing		Medical						Senior Housing		Medical
	and Care		Facilities			Totals			and Care		Facilities		Totals
Advances on real estate loans receivable:
Investments in new loans	$	8,617	$	15,799		$	24,416		$	1,921	$	—	$	1,921
Draws on existing loans		18,838		—			18,838			34,149		976		35,125

Sub-total		27,455		15,799			43,254			36,070		976		37,046
Less: Seller financing on property sales		—		(1,470	)		(1,470	)		—		—		—

Net cash advances on real estate loans		27,455		14,329			41,784			36,070		976		37,046
Receipts on real estate loans receivable:
Loan payoffs		1,599		—			1,599			18,440		—		18,440
Principal payments on loans		7,705		116			7,821			11,742		895		12,637

Total receipts on real estate loans		9,304		116			9,420			30,182		895		31,077

Net advances (receipts) on real estate loans	$	18,151	$	14,213		$	32,364		$	5,888	$	81	$	5,969

The contributions to unconsolidated joint ventures represent $174,574,000 of cash invested by us in the joint venture with Forest City Enterprises. Please see Note 7 to our unaudited financial statements for additional information.

Financing Activities . The changes in net cash provided from or used in financing activities are primarily attributable to changes related to our long-term debt arrangements, proceeds from the issuance of common stock and dividend payments.

For the six months ended June 30, 2010, we had a net increase of $66,000,000 on our unsecured line of credit arrangement as

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

compared to a net decrease of $228,000,000 for the same period in 2009. The changes in our senior unsecured notes are due to (i) the issuance of $494,403,000 of convertible senior unsecured notes in March and June 2010; (ii) the repurchase of $441,326,000 of convertible senior unsecured notes in March and June 2010; (iii) the issuance of $450,000,000 of senior unsecured notes in April and June 2010; and (iv) the extinguishment of $21,723,000 of various senior unsecured notes in March 2009.

The following is a summary of our common stock issuances for the six months ended June 30, 2010 and 2009 (dollars in thousands, except per share amounts):


	Shares Issued		Average Price		Gross Proceeds		Net Proceeds
February 2009 public issuance		5,816,870	$	36.85	$	214,352	$	210,880
2009 Equity shelf plan issuances		400,000		36.05		14,420		13,723
2009 Dividend reinvestment plan issuances		741,282		33.18		24,593		24,593

2009 Totals		6,958,152			$	253,365	$	249,196

2010 Dividend reinvestment plan issuances		855,343	$	41.59	$	35,570	$	35,570
2010 Option exercises		51,313		38.78		1,990		1,990

2010 Totals		906,656			$	37,560	$	37,560

In order to qualify as a REIT for federal income tax purposes, we must distribute at least 90% of our taxable income (including 100% of capital gains) to our stockholders. The increase in dividends is primarily attributable to an increase in our common stock. The following is a summary of our dividend payments (in thousands, except per share amounts):


	Six Months Ended
	June 30, 2010				June 30, 2009
	Per Share		Amount		Per Share		Amount
Common Stock	$	1.3600	$	169,069	$	1.3600	$	151,725
Series D Preferred Stock		0.9844		3,938		0.9844		3,938
Series E Preferred Stock		0.7500		56		0.7500		56
Series F Preferred Stock		0.9532		6,672		0.9532		6,672
Series G Preferred Stock		0.9376		327		0.9376		373

Totals			$	180,062			$	162,764

Off-Balance Sheet Arrangements

During the three months ended March 31, 2010, we entered into a joint venture investment with Forest City Enterprises (NYSE:FCE.A and FCE.B). In connection with this transaction, we invested $174,574,000 of cash which is recorded as an equity investment on the balance sheet. Our share of the non-recourse secured debt assumed by the joint venture was approximately $156,729,000 with weighted-average interest rates of 7.1%. Please see Note 7 to our unaudited consolidated financial statements for additional information.

We are exposed to various market risks, including the potential loss arising from adverse changes in interest rates. We may or may not elect to use financial derivative instruments to hedge interest rate exposure. These decisions are principally based on the general trend in interest rates at the applicable dates, our perception of the future volatility of interest rates and our relative levels of variable rate debt and variable rate investments. Please see Note 11 to our unaudited consolidated financial statements for additional information.

At June 30, 2010, we had four outstanding letter of credit obligations totaling $5,329,057 and expiring between 2010 and 2013. Please see Note 12 to our unaudited consolidated financial statements for additional information.

Contractual Obligations

The following table summarizes our payment requirements under contractual obligations as of June 30, 2010 (in thousands):

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


	Payments Due by Period
Contractual Obligations	Total		2010		2011-2012		2013-2014		Thereafter
Unsecured line of credit arrangement	$	206,000	$	—	$	206,000	$	—	$	—
Senior unsecured notes ⁽¹⁾		2,164,930		—		76,853		300,000		1,788,077
Secured debt ⁽¹⁾		813,749		8,957		44,085		218,866		541,841
Contractual interest obligations		1,343,802		76,465		301,497		258,963		706,877
Operating lease obligations		183,398		2,259		8,902		8,612		163,625
Purchase obligations		320,786		14,306		306,480		—		—
Other long-term liabilities		5,058		187		1,065		1,903		1,903

Total contractual obligations	$	5,037,723	$	102,174	$	944,882	$	788,344	$	3,202,323


(1)		Amounts represent principal amounts due and do not reflect unamortized premiums/discounts or other fair value adjustments as reflected on the balance sheet.

At June 30, 2010, we had an unsecured line of credit arrangement with a consortium of sixteen banks in the amount of $1.15 billion, which is scheduled to expire on August 5, 2011. Borrowings under the agreement are subject to interest payable in periods no longer than three months at either the agent bank’s prime rate of interest or the applicable margin over LIBOR interest rate, at our option (0.95% at June 30, 2010). The applicable margin is based on certain of our debt ratings and was 0.6% at June 30, 2010. In addition, we pay a facility fee annually to each bank based on the bank’s commitment amount. The facility fee depends on certain of our debt ratings and was 0.15% at June 30, 2010. We also pay an annual agent’s fee of $50,000. Principal is due upon expiration of the agreement. At June 30, 2010, we had $206,000,000 outstanding under the unsecured line of credit arrangement and estimated total contractual interest obligations of $2,121,000. Contractual interest obligations are estimated based on the assumption that the balance of $206,000,000 at June 30, 2010 is constant until maturity at interest rates in effect at June 30, 2010.

We have $2,164,930,000 of senior unsecured notes principal outstanding with fixed annual interest rates ranging from 3.00% to 8.00%, payable semi-annually. Total contractual interest obligations on senior unsecured notes totaled $1,066,637,000 at June 30, 2010. A total of $788,077,000 of our senior unsecured notes are convertible notes that also contain put features. Please see Note 10 to our unaudited consolidated financial statements for additional information.

Additionally, we have secured debt with total outstanding principal of $813,749,000, collateralized by owned properties, with fixed annual interest rates ranging from 4.60% to 7.98%, payable monthly. The carrying values of the properties securing the debt totaled $1,176,865,000 at June 30, 2010. Total contractual interest obligations on secured debt totaled $275,044,000 at June 30, 2010.

At June 30, 2010, we had operating lease obligations of $183,398,000 relating primarily to ground leases at certain of our properties and office space leases.

Purchase obligations are comprised of unfunded construction commitments and contingent purchase obligations. At June 30, 2010, we had outstanding construction financings of $255,883,000 for leased properties and were committed to providing additional financing of approximately $310,022,000 to complete construction. At June 30, 2010, we had contingent purchase obligations totaling $10,764,000. These contingent purchase obligations relate to unfunded capital improvement obligations. Upon funding, amounts due from the tenant are increased to reflect the additional investment in the property.

Other long-term liabilities relate to our Supplemental Executive Retirement Plan (“SERP”) and certain non-compete agreements. We have a SERP, a non-qualified defined benefit pension plan, which provides certain executive officers with supplemental deferred retirement benefits. The SERP provides an opportunity for participants to receive retirement benefits that cannot be paid under our tax-qualified plans because of the restrictions imposed by ERISA and the Internal Revenue Code of 1986, as amended. Benefits are based on compensation and length of service and the SERP is unfunded. No contributions by the company are anticipated for the 2010 fiscal year. Benefit payments are expected to total $4,758,000 during the next five fiscal years and no benefit payments are expected to occur during the succeeding five fiscal years. We use a December 31 measurement date for the SERP. The accrued liability on our balance sheet for the SERP was $3,577,000 and $3,287,000 at June 30, 2010 and December 31, 2009, respectively.

In connection with the Windrose merger, we entered into consulting agreements with Fred S. Klipsch and Frederick L. Farrar, which expired in December 2008. We entered into a new consulting agreement with Mr. Farrar in December 2008, which expired in December 2009. Each consultant has agreed not to compete with us for a period of two years following the expiration of the agreement. In exchange for complying with the covenant not to compete, Messers. Klipsch and Farrar will receive eight quarterly payments of $75,000 and $37,500, respectively, with the first payment to be made on the date of expiration of the agreement. The first payment to Mr. Klipsch was made in December 2008. The first payment to Mr. Farrar was made in January 2010.

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

Capital Structure

As of June 30, 2010, we had total equity of $3,737,125,000 and a total outstanding debt balance of $3,154,763,000, which represents a debt to total book capitalization ratio of 46%. Our ratio of debt to market capitalization was 36% at June 30, 2010. For the three months ended June 30, 2010, our interest coverage ratio was 3.48x and our fixed charge coverage ratio was 2.78x. Also, at June 30, 2010, we had $55,423,000 of cash and cash equivalents, $59,656,000 of restricted cash and $944,000,000 of available borrowing capacity under our unsecured line of credit arrangement.

Our debt agreements contain various covenants, restrictions and events of default. Certain agreements require us to maintain certain financial ratios and minimum net worth and impose certain limits on our ability to incur indebtedness, create liens and make investments or acquisitions. As of June 30, 2010, we were in compliance with all of the covenants under our debt agreements. Please refer to the section entitled “Non-GAAP Financial Measures” for further discussion. None of our debt agreements contain provisions for acceleration which could be triggered by our debt ratings. However, under our unsecured line of credit arrangement, the ratings on our senior unsecured notes are used to determine the fees and interest charged.

We plan to manage the company to maintain compliance with our debt covenants and with a capital structure consistent with our current profile. Any downgrades in terms of ratings or outlook by any or all of the rating agencies could have a material adverse impact on our cost and availability of capital, which could in turn have a material adverse impact on our consolidated results of operations, liquidity and/or financial condition.

On May 7, 2009, we filed an open-ended automatic or “universal” shelf registration statement with the Securities and Exchange Commission covering an indeterminate amount of future offerings of debt securities, common stock, preferred stock, depositary shares, warrants and units. As of July 31, 2010, we had an effective registration statement on file in connection with our enhanced dividend reinvestment plan under which we may issue up to 10,000,000 shares of common stock. As of July 31, 2010, 9,486,174 shares of common stock remained available for issuance under this registration statement. In November 2008, we entered into an Equity Distribution Agreement with UBS Securities LLC relating to the offer and sale from time to time of up to $250,000,000 aggregate amount of our common stock (“Equity Shelf Program”). As of July 31, 2010, we had $139,356,000 of remaining capacity under the Equity Shelf Program. Depending upon market conditions, we anticipate issuing securities under our registration statements to invest in additional properties and to repay borrowings under our unsecured line of credit arrangement.

Results of Operations

Our primary sources of revenue include rent and interest. Our primary expenses include interest expense, depreciation and amortization, property operating expenses and general and administrative expenses. These revenues and expenses are reflected in our Consolidated Statements of Income and are discussed in further detail below. The following is a summary of our results of operations (dollars in thousands, except per share amounts):


	Three Months Ended						Change						Six Months Ended						Change
	June 30,			June 30,									June 30,			June 30,
	2010			2009			Amount			%			2010			2009			Amount			%
Net income attributable to common stockholders	$	45,646		$	59,240		$	(13,594	)		-23	%	$	71,458		$	120,359		$	(48,901	)		-41	%
Funds from operations		92,214			89,207			3,007			3	%		155,300			174,529			(19,229	)		-11	%
EBITDA		136,253			132,843			3,410			3	%		241,598			268,875			(27,277	)		-10	%
Net operating income		157,415			133,228			24,187			18	%		300,470			268,048			32,422			12	%

Per share data (fully diluted):
Net income attributable to common stockholders	$	0.37		$	0.53		$	(0.16	)		-30	%	$	0.58		$	1.09		$	(0.51	)		-47	%
Funds from operations		0.74			0.80			(0.06	)		-8	%		1.25			1.59			(0.34	)		-21	%

Interest coverage ratio		3.48	x		3.74	x		-0.26	x		-7	%		3.29	x		3.81	x		-0.52	x		-14	%
Fixed charge coverage ratio		2.78	x		3.07	x		-0.29	x		-9	%		2.62	x		3.13	x		-0.51	x		-16	%

We evaluate our business and make resource allocations on our two business segments — senior housing and care properties and

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

medical facilities. Please see Note 17 to our unaudited consolidated financial statements for additional information.

Senior Housing and Care Properties

The following is a summary of our results of operations for the senior housing and care properties segment (dollars in thousands):


	Three Months Ended				Change						Six Months Ended				Change
	June 30,		June 30,								June 30,		June 30,
	2010		2009		$			%			2010		2009		$			%
Revenues:
Rental income	$	97,012	$	86,231	$	10,781			13	%	$	189,638	$	170,879	$	18,759			11	%
Interest income		8,830		8,910		(80	)		-1	%		17,405		17,633		(228	)		-1	%
Other income		1,536		570		966			169	%		2,028		1,362		666			49	%

		107,378		95,711		11,667			12	%		209,071		189,874		19,197			10	%
Expenses:
Interest expense		4,978		2,097		2,881			137	%		9,513		2,885		6,628			230	%
Depreciation and amortization		28,553		23,693		4,860			21	%		54,760		47,192		7,568			16	%
Transaction costs		644		—		644			n/a			5,663		—		5,663			n/a
Provision for loan losses		—		—		—			n/a			—		140		(140	)		-100	%

		34,175		25,790		8,385			33	%		69,936		50,217		19,719			39	%

Income from continuing operations		73,203		69,921		3,282			5	%		139,135		139,657		(522	)		0	%
Discontinued operations:
Gain on sales of properties		2,639		10,677		(8,038	)		-75	%		8,368		13,358		(4,990	)		-37	%
Income from discontinued operations, net		198		1,640		(1,442	)		-88	%		478		3,453		(2,975	)		-86	%

Discontinued operations, net		2,837		12,317		(9,480	)		-77	%		8,846		16,811		(7,965	)		-47	%

Net income	$	76,040	$	82,238	$	(6,198	)		-8	%	$	147,981	$	156,468	$	(8,487	)		-5	%

The increase in rental income is primarily attributable to the conversion of newly constructed senior housing and care properties subsequent to June 30, 2009 from which we receive rent. Certain of our leases contain annual rental escalators that are contingent upon changes in the Consumer Price Index and/or changes in the gross operating revenues of the tenant’s properties. These escalators are not fixed, so no straight-line rent is recorded; however, rental income is recorded based on the contractual cash rental payments due for the period. If gross operating revenues at our facilities and/or the Consumer Price Index do not increase, a portion of our revenues may not continue to increase. Sales of real property would offset revenue increases and, to the extent that they exceed new acquisitions, could result in decreased revenues. Our leases could renew above or below current rent rates, resulting in an increase or decrease in rental income.

Interest expense for the three and six months ended June 30, 2010 represents $5,022,000 and $9,693,000, respectively, of secured debt interest expense offset by interest allocated to discontinued operations. Interest expense for the three and six months ended June 30, 2009 represents $2,913,000 and $4,557,000, respectively, of secured debt interest expense offset by interest allocated to discontinued operations. The change in secured debt interest expense is due to the net effect and timing of assumptions, extinguishments and principal amortizations. The following is a summary of our senior housing and care property secured debt principal activity (dollars in thousands):

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


	Three Months Ended						Three Months Ended						Six Months Ended						Six Months Ended
	June 30, 2010						June 30, 2009						June 30, 2010						June 30, 2009
				Weighted Avg.						Weighted Avg.						Weighted Avg.						Weighted Avg.
	Amount			Interest Rate			Amount			Interest Rate			Amount			Interest Rate			Amount			Interest Rate
Beginning balance	$	297,151			5.997	%	$	93,557			6.996	%	$	298,492			5.998	%	$	94,234			6.996	%
Debt issued		92,265			4.772	%		133,071			6.100	%		92,265			4.772	%		133,071			6.100	%
Debt extinguished		—			0.000	%		(20,928	)		7.430	%		—			0.000	%		(20,928	)		7.430	%
Principal payments		(1,324	)		6.407	%		(11,188	)		7.923	%		(2,665	)		6.208	%		(11,865	)		7.869	%

Ending balance	$	388,092			5.705	%	$	194,512			6.283	%	$	388,092			5.705	%	$	194,512			6.283	%

Monthly averages	$	324,699			5.912	%	$	226,293			6.469	%	$	313,292			5.947	%	$	226,635			6.470	%

Depreciation and amortization increased primarily as a result of the conversions of newly constructed investment properties subsequent to June 30, 2009. To the extent that we acquire or dispose of additional properties in the future, our provision for depreciation and amortization will change accordingly.

Transaction costs for the six months ended June 30, 2010 primarily represent a $5,000,000 termination fee incurred in connection with the transfer of an entrance fee property to a new operator.

During the six months ended June 30, 2010, we sold six senior housing and care properties. The following illustrates the reclassification impact as a result of classifying the properties sold subsequent to January 1, 2009 or held for sale at June 30, 2010 as discontinued operations for the periods presented. Please refer to Note 5 to our unaudited consolidated financial statements for further discussion.


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2010		2009		2010		2009
Rental income	$	242	$	4,426	$	852	$	9,213
Expenses:
Interest expense		44		816		180		1,673
Provision for depreciation		—		1,970		194		4,087

Income from discontinued operations, net	$	198	$	1,640	$	478	$	3,453

During the six months ended June 30, 2010, we had one reserved loan payoff resulting in a $158,000 write-off and related net reduction of the allowance balance. As a result of our quarterly evaluations, we did not further adjust our allowance for loan losses during the six months ended June 30, 2010. The provision for loan losses is related to our critical accounting estimate for the allowance for loan losses and is discussed in “Critical Accounting Policies.”

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

Medical Facilities

The following is a summary of our results of operations for the medical facilities segment (dollars in thousands):


	Three Months Ended						Change						Six Months Ended						Change
	June 30,			June 30,									June 30,			June 30,
	2010			2009			$			%			2010			2009			$			%
Revenues:
Rental income	$	54,134		$	41,413		$	12,721			31	%	$	104,222		$	84,174		$	20,048			24	%
Interest income		505			1,248			(743	)		-60	%		978			2,478			(1,500	)		-61	%
Other income		302			304			(2	)		-1	%		574			619			(45	)		-7	%

		54,941			42,965			11,976			28	%		105,774			87,271			18,503			21	%
Expenses:
Interest expense		6,424			4,829			1,595			33	%		11,943			9,566			2,377			25	%
Property operating expenses		12,498			11,240			1,258			11	%		25,010			22,288			2,722			12	%
Depreciation and amortization		18,898			14,422			4,476			31	%		36,078			29,121			6,957			24	%
Transaction costs		108			—			108			n/a			2,803			—			2,803			n/a

		37,928			30,491			7,437			24	%		75,834			60,975			14,859			24	%

Income from continuing operations before income taxes and income from unconsolidated joint ventures		17,013			12,474			4,539			36	%		29,940			26,296			3,644			14	%
Income tax expense		(188	)		(113	)		(75	)		66	%		(247	)		(257	)		10			-4	%
Income from unconsolidated joint ventures		1,828			—			1,828			n/a			2,596			—			2,596			n/a

Income from continuing operations		18,653			12,361			6,292			51	%		32,289			26,039			6,250			24	%
Discontinued operations:
Gain (loss) on sales of properties		675			—			675			n/a			1,665			14,355			(12,690	)		-88	%
Income (loss) from discontinued operations, net		(151	)		(52	)		(99	)		190	%		(634	)		697			(1,331	)		n/a

Discontinued operations, net		524			(52	)		576			n/a			1,031			15,052			(14,021	)		-93	%

Net income (loss)		19,177			12,309			6,868			56	%		33,320			41,091			(7,771	)		-19	%
Less: Net income attributable to noncontrolling interests		(66	)		3			(69	)		n/a			307			5			302			6040	%

Net income (loss) attributable to common stockholders	$	19,243		$	12,306		$	6,937			56	%	$	33,013		$	41,086		$	(8,073	)		-20	%

The increase in rental income is primarily attributable to the acquisitions and construction conversions of medical facilities subsequent to June 30, 2009 from which we receive rent. Certain of our leases contain annual rental escalators that are contingent upon changes in the Consumer Price Index. These escalators are not fixed, so no straight-line rent is recorded; however, rental income is recorded based on the contractual cash rental payments due for the period. If the Consumer Price Index does not increase, a portion of our revenues may not continue to increase. Sales of real property would offset revenue increases and, to the extent that they exceed new acquisitions, could result in decreased revenues. Our leases could renew above or below current rent rates, resulting in an increase or decrease in rental income. Interest income decreased from the prior period primarily due to a decline in outstanding balances for medical facility real estate loans. Other income is attributable to third party management fee income.

Interest expense for the three and six months ended June 30, 2010 represents $6,476,000 and $12,053,000, respectively, of secured debt interest expense offset by interest allocated to discontinued operations. Interest expense for the three and six months ended June 30, 2009 represents $5,238,000 and $10,451,000, respectively, of secured debt interest expense offset by interest allocated to discontinued operations. The change in secured debt interest expense is primarily due to the net effect and timing of assumptions, extinguishments and principal amortizations. During the six months ended June 30, 2010, we assumed $106,140,000 of secured debt loans in connection with the acquisition of 17 medical office buildings. The following is a summary of our medical facilities secured debt principal activity (dollars in thousands):

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


	Three Months Ended						Three Months Ended						Six Months Ended						Six Months Ended
	June 30, 2010						June 30, 2009						June 30, 2010						June 30, 2009
				Weighted Avg.						Weighted Avg.						Weighted Avg.						Weighted Avg.
	Amount			Interest Rate			Amount			Interest Rate			Amount			Interest Rate			Amount			Interest Rate
Beginning balance	$	418,368			6.101	%	$	352,616			5.799	%	$	314,065			5.677	%	$	354,145			5.799	%
Debt assumed		—			0.000	%		—			0.000	%		106,140			7.352	%		—			0.000	%
Principal payments		(2,798	)		6.470	%		(1,470	)		5.756	%		(4,635	)		6.234	%		(2,999	)		5.758	%

Ending balance	$	415,570			6.098	%	$	351,146			5.799	%	$	415,570			6.098	%	$	351,146			5.799	%

Monthly averages	$	416,843			6.099	%	$	351,882			5.799	%	$	387,749			6.002	%	$	352,652			5.799	%

The increase in property operating expenses and depreciation and amortization is primarily attributable to acquisitions and construction conversions of new medical facilities for which we incur certain property operating expenses offset by property operating expenses associated with discontinued operations.

Transaction costs for the six months ended June 30, 2010 represent costs incurred in connection with the acquisition of new properties.

Income tax expense is primarily related to third party management fee income.

Income from unconsolidated joint ventures represents our share of net income related to our joint venture investment with Forest City Enterprises. The following is a summary of our net income from this investment for the periods presented (in thousands):


	Three Months Ended				Change				Six Months Ended				Change
	June 30,		June 30,						June 30,		June 30,
	2010		2009		$		%		2010		2009		$		%
Revenues	$	9,355	$	—	$	9,355		n/a	$	13,080	$	—	$	13,080		n/a
Operating expenses		2,716		—		2,716		n/a		3,817		—		3,817		n/a

Net operating income		6,639		—		6,639		n/a		9,263		—		9,263		n/a
Depreciation and amortization		2,323		—		2,323		n/a		3,098		—		3,098		n/a
Interest expense		2,114		—		2,114		n/a		3,037		—		3,037		n/a
Asset management fee		374		—		374		n/a		532		—		532		n/a

Net income	$	1,828	$	—	$	1,828		n/a	$	2,596	$	—	$	2,596		n/a

During the year ended December 31, 2009, an impairment charge of $25,223,000 was recorded to reduce the carrying value of eight medical facilities to their estimated fair value less costs to sell. In determining the fair value of the properties, we used a combination of third party appraisals based on market comparable transactions, other market listings and asset quality as well as management calculations based on projected operating income and published capitalization rates. During the six months ended June 30, 2010, we sold three medical facilities that were held for sale. At June 30, 2010, we had five medical facilities that satisfied the requirements for held for sale treatment. We did not recognize any impairment loss on these properties in 2010 as the fair value less estimated costs to sell exceeded our carrying values. The following illustrates the reclassification impact as a result of classifying medical facilities sold subsequent to January 1, 2009 or held for sale at June 30, 2010 as discontinued operations for the periods presented. Please refer to Note 5 to our unaudited consolidated financial statements for further discussion.

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

Non-Segment/Corporate

The following is a summary of our results of operations for the non-segment/corporate activities (dollars in thousands):


	Three Months Ended						Change						Six Months Ended						Change
	June 30,			June 30,									June 30,			June 30,
	2010			2009			$			%			2010			2009			$			%
Revenues:
Other income	$	812		$	363		$	449			124	%	$	1,044		$	740		$	304			41	%
Expenses:
Interest expense		26,052			19,181			6,871			36	%		45,789			40,335			5,454			14	%
General and administrative		11,878			11,062			816			7	%		28,700			28,424			276			1	%
Loss (gain) on extinguishments of debt		7,035			—			7,035			n/a			25,072			(1,678	)		26,750			n/a

		44,965			30,243			14,722			49	%		99,561			67,081			32,480			48	%

Net loss from continuing operations before income taxes		(44,153	)		(29,880	)		(14,273	)		48	%		(98,517	)		(66,341	)		(32,176	)		49	%
Income tax (expense) benefit		—			92			(92	)		-100	%		(26	)		185			(211	)		n/a

Net loss		(44,153	)		(29,788	)		(14,365	)		48	%		(98,543	)		(66,156	)		(32,387	)		49	%
Preferred stock dividends		5,484			5,516			(32	)		-1	%		10,993			11,039			(46	)		0	%

Net loss attributable to common stockholders	$	(49,637	)	$	(35,304	)	$	(14,333	)		41	%	$	(109,536	)	$	(77,195	)	$	(32,341	)		42	%

Other income primarily represents income from non-real estate activities such as interest earned on temporary investments of cash reserves.

The following is a summary of our non-segment/corporate interest expense (dollars in thousands):


	Three Months Ended						Change						Six Months Ended						Change
	June 30,			June 30,									June 30,			June 30,
	2010			2009			$			%			2010			2009			$			%
Senior unsecured notes	$	28,305		$	27,297		$	1,008			4	%	$	52,371		$	55,002		$	(2,631	)		-5	%
Secured debt		163			—			163			n/a			304			—			304			n/a
Unsecured lines of credit		1,198			1,214			(16	)		-1	%		2,238			2,898			(660	)		-23	%
Capitalized interest		(5,276	)		(11,026	)		5,750			-52	%		(12,352	)		(20,891	)		8,539			-41	%
SWAP savings		(40	)		(40	)		—			0	%		(80	)		(80	)		—			0	%
Loan expense		1,702			1,736			(34	)		-2	%		3,308			3,406			(98	)		-3	%

Totals	$	26,052		$	19,181		$	6,871			36	%	$	45,789		$	40,335		$	5,454			14	%

The change in interest expense on senior unsecured notes is due to the net effect of issuances and extinguishments. The following is a summary of our senior unsecured note principal activity (dollars in thousands):

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


	Three Months Ended						Three Months Ended					Six Months Ended						Six Months Ended
	June 30, 2010						June 30, 2009					June 30, 2010						June 30, 2009
				Weighted Avg.					Weighted Avg.						Weighted Avg.						Weighted Avg.
	Amount			Interest Rate			Amount		Interest Rate			Amount			Interest Rate			Amount			Interest Rate
Beginning balance	$	1,702,129			5.186	%	$	1,823,277		5.773	%	$	1,661,853			5.557	%	$	1,845,000			5.782	%
Debt issued		602,009			5.336	%		—		0.000	%		944,403			4.489	%		—			0.000	%
Debt extinguished		(139,208	)		4.750	%		—		0.000	%		(441,326	)		4.750	%		(21,723	)		6.504	%

Ending balance	$	2,164,930			5.256	%	$	1,823,277		5.773	%	$	2,164,930			5.256	%	$	1,823,277			5.773	%


Monthly averages	$	1,967,829			5.277	%	$	1,823,277		5.773	%	$	1,836,697			5.385	%	$	1,832,587			5.777	%

During the three months ended September 30, 2009, we completed a $10,750,000 first mortgage loan secured by a commercial real estate campus. The 10-year debt has a fixed interest rate of 6.37%.

The change in interest expense on the unsecured line of credit arrangement is due primarily to the net effect and timing of draws, paydowns and variable interest rate changes. The following is a summary of our unsecured line of credit arrangement (dollars in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Balance outstanding at quarter end	$	206,000		$	342,000		$	206,000		$	342,000
Maximum amount outstanding at any month end	$	431,000		$	342,000		$	431,000		$	559,000
Average amount outstanding (total of daily principal balances divided by days in period)	$	293,505		$	273,242		$	288,337		$	344,724
Weighted average interest rate (actual interest expense divided by average borrowings outstanding)		1.63	%		1.77	%		1.55	%		1.68	%

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 balances 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.

Please see Note 11 to our unaudited consolidated financial statements for a discussion of our interest rate swap agreements and their impact on interest expense. Loan expense represents the amortization of deferred loan costs incurred in connection with the issuance and amendments of debt. Loan expense for the six months ended June 30, 2010 is consistent with the prior year.

General and administrative expenses as a percentage of consolidated revenues (including revenues from discontinued operations) for the three and six months ended June 30, 2010 were 7.25% and 9.03%, respectively, as compared to 7.61% and 9.73% for the same periods in 2009. The change from prior year is primarily related to $3,909,000 of non-recurring expenses recognized during the six months ended June 30, 2009 in connection with the departure of Raymond W. Braun who formerly served as President of the company. This was partially offset by the recognition of $2,853,000 of expenses in connection with a performance-based stock grant during the six months ended June 30, 2010.

The change in preferred dividends is primarily attributable to preferred stock conversions into common stock. The following is a summary of our preferred stock activity (dollars in thousands):


	Three Months Ended						Three Months Ended						Six Months Ended						Six Months Ended
	June 30, 2010						June 30, 2009						June 30, 2010						June 30, 2009
				Weighted Avg.						Weighted Avg.						Weighted Avg.						Weighted Avg.
	Shares			Dividend Rate			Shares			Dividend Rate			Shares			Dividend Rate			Shares			Dividend Rate
Beginning balance		11,450,107			7.697	%		11,475,702			7.697	%		11,474,093			7.697	%		11,516,302			7.696	%
Shares converted		(52,855	)		7.500	%		(609	)		6.000	%		(76,841	)		7.500	%		(41,209	)		7.478	%

Ending balance		11,397,252			7.699	%		11,475,093			7.697	%		11,397,252			7.699	%		11,475,093			7.697	%


Monthly averages		11,410,466			7.698	%		11,475,245			7.697	%		11,434,308			7.698	%		11,489,670			7.697	%

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

Non-GAAP Financial Measures

We believe that net income, as defined by U.S. GAAP, is the most appropriate earnings measurement. However, we consider FFO to be a useful supplemental measure of our operating performance. Historical cost accounting for real estate assets in accordance with U.S. GAAP implicitly assumes that the value of real estate assets diminishes predictably over time as evidenced by the provision for depreciation. However, since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient. In response, the National Association of Real Estate Investment Trusts (“NAREIT”) created FFO as a supplemental measure of operating performance for REITs that excludes historical cost depreciation from net income. FFO, as defined by NAREIT, means net income, computed in accordance with U.S. GAAP, excluding gains (or losses) from sales of real estate, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.

Net operating income (“NOI”) is used to evaluate the operating performance of our properties. We define NOI as total revenues, including tenant reimbursements, less property level operating expenses, which exclude depreciation and amortization, general and administrative expenses, impairments and interest expense. We believe NOI provides investors relevant and useful information because it measures the operating performance of our properties at the property level on an unleveraged basis. We use NOI to make decisions about resource allocations and to assess the property level performance of our properties.

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

A covenant in our line of credit arrangement contains a financial ratio based on a definition of EBITDA that is specific to that agreement. Failure to satisfy this covenant could result in an event of default that could have a material adverse impact on our cost and availability of capital, which could in turn have a material adverse impact on our consolidated results of operations, liquidity and/or financial condition. Due to the materiality of this debt agreement and the financial covenant, we have disclosed Adjusted EBITDA, which represents EBITDA as defined above and adjusted for stock-based compensation expense, provision for loan losses and gain/loss on extinguishment of debt. We use Adjusted EBITDA to measure our adjusted fixed charge coverage ratio, which represents Adjusted EBITDA divided by fixed charges on a trailing twelve months basis. Fixed charges include total interest (excluding capitalized interest and non-cash interest expenses), secured debt principal amortization and preferred dividends. Our covenant requires an adjusted fixed charge ratio of at least 1.75 times.

Other than Adjusted EBITDA, our supplemental reporting measures and similarly entitled financial measures are widely used by investors, equity and debt analysts and rating agencies in the valuation, comparison, rating and investment recommendations of companies. Management uses these financial measures to facilitate internal and external comparisons to our historical operating results and in making operating decisions. Additionally, these measures are utilized by the Board of Directors to evaluate management. Adjusted EBITDA is used solely to determine our compliance with a financial covenant of our line of credit arrangement and is not being presented for use by investors for any other purpose. None of our supplemental measures represent net income or cash flow provided from operating activities as determined in accordance with U.S. GAAP and should not be considered as alternative measures of profitability or liquidity. Finally, the supplemental measures, as defined by us, may not be comparable to similarly entitled items reported by other real estate investment trusts or other companies. Multi-period amounts may not equal the sum of the individual quarterly amounts due to rounding.

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

The tables below reflect the reconciliation of FFO to net income attributable to common stockholders, the most directly comparable U.S. GAAP measure, for the periods presented. The provisions for depreciation and amortization include provisions for depreciation and amortization from discontinued operations. Noncontrolling interest amounts represent the noncontrolling interests’ share of depreciation and amortization. Unconsolidated joint venture amounts represent our share of unconsolidated joint ventures’ depreciation and amortization. Amounts are in thousands except for per share data.


	Three Months Ended
	March 31,			June 30,			September 30,			December 31,			March 31,			June 30,
	2009			2009			2009			2009			2010			2010

FFO Reconciliation:
Net income attributable to common stockholders	$	61,119		$	59,240		$	19,130		$	31,700		$	25,812		$	45,646
Depreciation and amortization		41,326			40,731			41,085			41,780			43,581			47,451
Loss (gain) on sales of properties		(17,036	)		(10,677	)		806			(16,487	)		(6,718	)		(3,314	)
Noncontrolling interests		(87	)		(87	)		(88	)		(703	)		(363	)		108
Unconsolidated joint ventures		—			—			—			—			775			2,323

Funds from operations	$	85,322		$	89,207		$	60,933		$	56,290		$	63,087		$	92,214

Average common shares outstanding:
Basic		108,214			110,864			114,874			122,700			123,270			123,808
Diluted		108,624			111,272			115,289			123,105			123,790			124,324

Per share data:
Net income attributable to common stockholders
Basic	$	0.56		$	0.53		$	0.17		$	0.26		$	0.21		$	0.37
Diluted		0.56			0.53			0.17			0.26			0.21			0.37

Funds from operations
Basic	$	0.79		$	0.80		$	0.53		$	0.46		$	0.51		$	0.74
Diluted		0.79			0.80			0.53			0.46			0.51			0.74


	Six Months Ended
	June 30,			June 30,
	2009			2010

FFO Reconciliation:
Net income attributable to common stockholders	$	120,359		$	71,458
Depreciation and amortization		82,057			91,032
Loss (gain) on sales of properties		(27,713	)		(10,033	)
Noncontrolling interests		(174	)		(255	)
Unconsolidated joint ventures		—			3,098

Funds from operations	$	174,529		$	155,300

Average common shares outstanding:
Basic		109,548			123,541
Diluted		109,956			124,059

Per share data:
Net income attributable to common stockholders
Basic	$	1.10		$	0.58
Diluted		1.09			0.58

Funds from operations
Basic	$	1.59		$	1.26
Diluted		1.59			1.25

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

The following tables reflect the reconciliation of NOI for the periods presented. All amounts include amounts from discontinued operations, if applicable. Our share of revenues and expenses from unconsolidated joint ventures for life science buildings are included in medical facilities. Amounts are in thousands.


	Three Months Ended
	March 31,		June 30,		September 30,		December 31,		March 31,		June 30,
	2009		2009		2009		2009		2010		2010
NOI Reconciliation:
Total revenues:
Senior housing and care:
Rental income:
Senior housing	$	47,704	$	47,678	$	47,446	$	47,856	$	52,366	$	56,197
Skilled nursing facilities		41,731		42,979		41,983		40,733		40,872		41,057

Sub-total		89,435		90,657		89,429		88,589		93,238		97,254
Interest income		8,723		8,910		9,266		9,046		8,575		8,830
Other income		792		570		557		3,389		494		1,536

Total senior housing and care revenues		98,950		100,137		99,252		101,024		102,307		107,620
Medical facilities:
Rental income
Medical office buildings		33,253		32,593		35,008		35,980		40,088		42,056
Hospitals		12,677		10,627		10,884		10,779		10,781		12,484
Life science buildings		—		—		—		—		3,725		9,355

Sub-total		45,930		43,220		45,892		46,759		54,594		63,895
Interest income		1,230		1,248		1,262		1,201		473		505
Other income		316		304		332		8,415		271		302

Total medical facilities revenues		47,476		44,772		47,486		56,375		55,338		64,702
Corporate other income		376		363		200		232		231		812

Total revenues		146,802		145,272		146,938		157,631		157,876		173,134
Property operating expenses:
Medical facilities:
Medical office buildings		11,983		12,044		12,974		11,964		12,992		12,853
Hospitals		—		—		—		—		728		150
Life science buildings		—		—		—		—		1,101		2,716

Total property operating expenses		11,983		12,044		12,974		11,964		14,821		15,719
Net operating income:
Senior housing and care		98,950		100,137		99,252		101,024		102,307		107,620
Medical facilities		35,493		32,728		34,512		44,411		40,517		48,983
Non-segment/corporate		376		363		200		232		231		812

Net operating income	$	134,819	$	133,228	$	133,964	$	145,667	$	143,055	$	157,415

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


	Six Months Ended
	June 30,		June 30,
	2009		2010
NOI Reconciliation:
Total revenues:
Senior housing and care:
Rental income:
Senior housing	$	95,382	$	108,561
Skilled nursing facilities		84,710		81,929

Sub-total		180,092		190,490
Interest income		17,633		17,405
Other income		1,362		2,028

Total senior housing and care revenues		199,087		209,923
Medical facilities:
Rental income
Medical office buildings		65,846		82,145
Hospitals		23,304		23,265
Life science buildings		—		13,080

Sub-total		89,150		118,490
Interest income		2,478		978
Other income		619		574

Total medical facilities revenues		92,247		120,042
Corporate other income		740		1,044

Total revenues		292,074		331,009
Property operating expenses:
Senior housing and care		—		—
Medical facilities:
Medical office buildings		24,026		25,844
Hospitals		—		878
Life science buildings		—		3,817

Non-segment/corporate		—		—

Total property operating expenses		24,026		30,539
Net operating income:
Senior housing and care		199,087		209,923
Medical facilities		68,221		89,503
Non-segment/corporate		740		1,044

Net operating income	$	268,048	$	300,470

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

The tables below reflect the reconciliation of EBITDA to net income, the most directly comparable U.S. GAAP measure, for the periods presented. Interest expense and the provisions for depreciation and amortization include discontinued operations. Dollars are in thousands.


	Three Months Ended
	March 31,			June 30,			September 30,			December 31,			March 31,			June 30,
	2009			2009			2009			2009			2010			2010

EBITDA Reconciliation:
Net income	$	66,645		$	64,759		$	24,685		$	36,838		$	31,694		$	51,064
Interest expense		28,011			27,332			28,833			25,596			29,985			37,550
Income tax expense (benefit)		50			21			(55	)		151			84			188
Depreciation and amortization		41,326			40,731			41,085			41,780			43,581			47,451

EBITDA	$	136,032		$	132,843		$	94,548		$	104,365		$	105,344		$	136,253

Interest Coverage Ratio:
Interest expense	$	28,011		$	27,332		$	28,833		$	25,596		$	29,985		$	37,550
Non-cash interest expense		(2,772	)		(2,844	)		(2,895	)		(3,387	)		(2,841	)		(3,659	)
Capitalized interest		9,865			11,026			9,975			10,305			7,076			5,276

Total interest		35,104			35,514			35,913			32,514			34,220			39,167
EBITDA	$	136,032		$	132,843		$	94,548		$	104,365		$	105,344		$	136,253

Interest coverage ratio		3.88	x		3.74	x		2.63	x		3.21	x		3.08	x		3.48	x

Fixed Charge Coverage Ratio:
Total interest	$	35,104		$	35,514		$	35,913		$	32,514		$	34,220		$	39,167
Secured debt principal payments		2,206			2,177			2,298			2,611			3,378			4,325
Preferred dividends		5,524			5,516			5,520			5,520			5,509			5,484

Total fixed charges		42,834			43,207			43,731			40,645			43,107			48,976
EBITDA	$	136,032		$	132,843		$	94,548		$	104,365		$	105,344		$	136,253

Fixed charge coverage ratio		3.18	x		3.07	x		2.16	x		2.57	x		2.44	x		2.78	x


	Six Months Ended
	June 30,			June 30,
	2009			2010
\|	\|
EBITDA Reconciliation:
Net income	$	131,403		$	82,758
Interest expense		55,343			67,535
Income tax expense		72			273
Depreciation and amortization		82,057			91,032

EBITDA	$	268,875		$	241,598

Interest Coverage Ratio:
Interest expense	$	55,343		$	67,535
Non-cash interest expense		(5,616	)		(6,500	)
Capitalized interest		20,891			12,352

Total interest		70,618			73,387
EBITDA	$	268,875		$	241,598

Interest coverage ratio		3.81	x		3.29	x

Fixed Charge Coverage Ratio:
Total interest	$	70,618		$	73,387
Secured debt principal payments		4,383			7,704
Preferred dividends		11,039			10,993

Total fixed charges		86,040			92,084
EBITDA	$	268,875		$	241,598

Fixed charge coverage ratio		3.13	x		2.62	x

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

The table below reflects the reconciliation of Adjusted EBITDA to net income, the most directly comparable U.S. GAAP measure, for the periods presented. Interest expense and the provisions for depreciation and amortization include discontinued operations. Dollars are in thousands.


	Twelve Months Ended
	March 31,			June 30,			September 30,			December 31,			March 31,			June 30,
	2009			2009			2009			2009			2010			2010

Adjusted EBITDA Reconciliation:
Net income	$	314,613		$	218,112		$	183,478		$	192,927		$	157,976		$	144,282
Interest expense		131,750			122,927			116,406			109,772			111,746			121,964
Income tax expense		77			54			152			168			201			368
Depreciation and amortization		164,797			165,898			165,292			164,923			167,177			173,897
Stock-based compensation expense		11,360			11,034			10,637			9,633			10,619			10,736
Provision for loan losses		234			234			234			23,261			23,121			23,121
Loss (gain) on extinguishment of debt		(2,446	)		(2,446	)		24,696			25,107			44,822			51,857

Adjusted EBITDA	$	620,385		$	515,813		$	500,895		$	525,791		$	515,662		$	526,225

Adjusted Fixed Charge Coverage Ratio:
Interest expense	$	131,750		$	122,927		$	116,406		$	109,772		$	111,746		$	121,964
Capitalized interest		29,727			35,690			39,301			41,170			38,381			32,631
Non-cash interest expense		(11,214	)		(11,289	)		(11,410	)		(11,898	)		(11,967	)		(12,782	)
Secured debt principal payments		8,232			8,592			8,810			9,292			10,464			12,612
Preferred dividends		22,579			22,311			22,101			22,079			22,064			22,032

Total fixed charges		181,074			178,231			175,208			170,415			170,688			176,457
Adjusted EBITDA	$	620,385		$	515,813		$	500,895		$	525,791		$	515,662		$	526,225

Adjusted fixed charge coverage ratio		3.43	x		2.89	x		2.86	x		3.09	x		3.02	x		2.98	x

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

Critical Accounting Policies

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

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

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

Management has discussed the development and selection of its critical accounting policies with the Audit Committee of the Board of Directors and the Audit Committee has reviewed the disclosure presented below relating to them. Management believes the current assumptions and other considerations used to estimate amounts reflected in our consolidated financial statements are appropriate and are not reasonably likely to change in the future. However, since these estimates require assumptions to be made that were uncertain at the time the estimate was made, they bear the risk of change. If actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our consolidated financial statements, the resulting changes could have a material adverse effect on our consolidated results of operations, liquidity and/or financial condition. Please refer to Note 1 to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2009, as updated by our Current Report on Form 8-K filed May 10, 2010, for further information regarding significant accounting policies that impact us. There have been no material changes to these policies in 2010.

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


Nature of Critical		Assumptions/Approach
Accounting Estimate		Used
Revenue Recognition

Revenue is recorded in accordance with U.S. GAAP, which 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 collectability. If the collectability 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 collectability risk. Substantially all of our operating leases contain fixed and/or contingent escalating rent structures. Leases with fixed annual rental escalators are generally recognized on a straight-line basis over the initial lease period, subject to a collectability assessment. Rental income related to leases with contingent rental escalators is generally recorded based on the contractual cash rental payments due for the period.		We evaluate the collectibility of our revenues and related receivables on an on-going basis. We evaluate collectibility based on assumptions and other considerations including, but not limited to, the certainty of payment, payment history, the financial strength of the investment’s underlying operations as measured by cash flows and payment coverages, the value of the underlying collateral and guaranties and current economic conditions. If our evaluation indicates that collectibility is not reasonably assured, we may place an investment on non-accrual or reserve against all or a portion of current income as an offset to revenue. For the six months ended June 30, 2010, we recognized $18,383,000 of interest income and $295,900,000 of rental income, including discontinued operations. Cash receipts on leases with deferred revenue provisions were $4,068,000 as compared to gross straight-line rental income recognized of $8,598,000 for the six months ended June 30, 2010. At June 30, 2010, our straight-line receivable balance was $84,361,000, net of reserves totaling $273,000. Also at June 30, 2010, we had real estate loans with outstanding balances of $78,438,000 on non-accrual status.

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


Nature of Critical		Assumptions/Approach
Accounting Estimate		Used
Business Combinations

Substantially all of the properties owned by us are leased under operating leases and are recorded at cost. The cost of our real property is allocated to land, buildings, improvements and intangibles in accordance with U.S. GAAP.		We compute depreciation and amortization 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. Lives for intangibles are based on the remaining term of the underlying leases.

		For the six months ended June 30, 2010, we recorded $67,376,000, $19,189,000 and $4,468,000 as provisions for depreciation and amortization relating to buildings, improvements and intangibles, respectively, including amounts reclassified as discontinued operations. The average useful life of our buildings, improvements and intangibles was 37.9 years, 11.3 years and 9.4 years, respectively, for the six months ended June 30, 2010.

Impairment of Long-Lived Assets

We review our long-lived assets for potential impairment in accordance with U.S. GAAP. An impairment charge must be recognized when the carrying value of a long-lived asset is not recoverable. The carrying value is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If it is determined that a permanent impairment of a long-lived asset has occurred, the carrying value of the asset is reduced to its fair value and an impairment charge is recognized for the difference between the carrying value and the fair value.		The net book value of long-lived assets is reviewed quarterly on a property by property basis to determine if there are indicators of impairment. These indicators may include anticipated operating losses at the property level, the tenant’s inability to make rent payments, a decision to dispose of an asset before the end of its estimated useful life and changes in the market that may permanently reduce the value of the property. If indicators of impairment exist, then the undiscounted future cash flows from the most likely use of the property are compared to the current net book value. This analysis requires us to determine if indicators of impairment exist and to estimate the most likely stream of cash flows to be generated from the property during the period the property is expected to be held.

		We did not record any impairment charges during the three months ended June 30, 2010.

Fair Value of Derivative Instruments

The valuation of derivative instruments is accounted for in accordance with U.S. GAAP, which requires companies to record derivatives at fair market value on the balance sheet as assets or liabilities.		The valuation of derivative instruments requires us to make estimates and judgments that affect the fair value of the instruments. Fair values for our derivatives are estimated by utilizing pricing models that consider forward yield curves and discount rates. Such amounts and the recognition of such amounts are subject to significant estimates which may change in the future. At June 30, 2010, we participated in two interest rate swap agreements which are reported at their fair value of $7,799,000 and are included in other liabilities and accumulated other comprehensive income.

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


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

We maintain an allowance for loan losses in accordance with U.S. GAAP. The allowance for loan losses is maintained at a level believed adequate to absorb potential losses in our loans receivable. The determination of the allowance is based on a quarterly evaluation of all outstanding loans. If this evaluation indicates that there is a greater risk of loan charge-offs, additional allowances or placement on non-accrual status may be required. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due as scheduled according to the contractual terms of the original loan agreement. Consistent with this definition, all loans on non-accrual are deemed impaired. To the extent circumstances improve and the risk of collectability is diminished, we will return these loans to full accrual status.		The determination of the allowance is based on a quarterly evaluation of all outstanding loans, including general economic conditions and estimated collectability of loan payments and principal. We evaluate the collectability 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. During the six months ended June 30, 2010, we had one reserved loan payoff resulting in a $158,000 write-off and related net reduction of the allowance balance. As a result of our quarterly evaluations, we did not further adjust our allowance for loan losses during the six months ended June 30, 2010, resulting in an allowance for loan losses of $5,025,000 relating to real estate loans with outstanding balances of $91,986,000. Also at June 30, 2010, we had real estate loans with outstanding balances of $78,438,000 on non-accrual status.

Forward-Looking Statements and Risk Factors

This Quarterly Report on Form 10-Q may contain “forward-looking” statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements concern and are based upon, among other things, the possible expansion of the company’s portfolio; the sale of properties; the performance of its operators and properties; its occupancy rates; its ability to acquire or develop properties; its ability to manage properties; its ability to enter into agreements with viable new tenants for vacant space or for properties that the company takes back from financially troubled tenants, if any; its ability to make distributions; its policies and plans regarding investments, financings and other matters; its tax status as a real estate investment trust; its ability to appropriately balance the use of debt and equity; its ability to access capital markets or other sources of funds; its critical accounting policies; and its ability to meet its earnings guidance. When the company uses words such as “may,” “will,” “intend,” “should,” “believe,” “expect,” “anticipate,” “project,” “estimate” or similar expressions, it is making forward-looking statements. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. The company’s expected results may not be achieved, and actual results may differ materially from expectations. This may be a result of various factors, including, but not limited to: the status of the economy; the status of capital markets, including availability and cost of capital; issues facing the health care industry, including compliance with, and changes to, regulations and payment policies, responding to government investigations and punitive settlements and operators’/tenants’ difficulty in cost-effectively obtaining and maintaining adequate liability and other insurance; changes in financing terms; competition within the health care, senior housing and life science industries; negative developments in the operating results or financial condition of operators/tenants, including, but not limited to, their ability to pay rent and repay loans; the company’s ability to transition or sell facilities with profitable results; the failure to make new investments as and when anticipated; acts of God affecting the company’s properties; the company’s ability to re-lease space at similar rates as vacancies occur; the company’s ability to timely reinvest sale proceeds at similar rates to assets sold; operator/tenant or joint venture partner bankruptcies or insolvencies; the cooperation of joint venture partners; government regulations affecting Medicare and Medicaid reimbursement rates and operational requirements; regulatory approval and market acceptance of the products and technologies of life science tenants; liability or contract claims by or against operators/tenants; unanticipated difficulties and/or expenditures relating to future acquisitions; environmental laws affecting the company’s properties; changes in rules or practices governing the company’s financial reporting; and legal and operational matters, including real estate investment trust qualification and key management personnel recruitment and retention. Other important factors are identified in the company’s Annual Report on Form 10-K for the year ended December 31, 2009, as updated by our Current Report on Form 8-K filed May 10, 2010, including factors identified under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Finally, the company assumes no obligation to update or revise any forward-looking statements or to update the reasons why actual results could differ from those projected in any forward-looking statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

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

A change in interest rates will not affect the interest expense associated with our fixed rate debt. Interest rate changes, however, will affect the fair value of our fixed rate debt. Changes in the interest rate environment upon maturity of this fixed rate debt could have an effect on our future cash flows and earnings, depending on whether the debt is replaced with other fixed rate debt, variable rate debt or equity or repaid by the sale of assets. To illustrate the impact of changes in the interest rate markets, we performed a sensitivity analysis on our fixed rate debt instruments whereby we modeled the change in net present values arising from a hypothetical 1% increase in interest rates to determine the instruments’ change in fair value. The following table summarizes the analysis performed as of the dates indicated (in thousands):


	June 30, 2010					December 31, 2009
	Principal		Change in			Principal		Change in
	balance		fair value			balance		fair value
Senior unsecured notes	$	2,164,930	$	(188,174	)	$	1,661,853	$	(129,350	)
Secured debt		685,103		(35,837	)		491,094		(22,522	)

Totals	$	2,850,033	$	(224,011	)	$	2,152,947	$	(151,872	)

Our variable rate debt, including our unsecured line of credit arrangement, is reflected at fair value. At June 30, 2010, we had $206,000,000 outstanding related to our variable rate line of credit and $130,664,000 outstanding related to our variable rate secured debt. Assuming no changes in outstanding balances, a 1% increase in interest rates would result in increased annual interest expense of $3,367,000. At December 31, 2009, we had $140,000,000 outstanding related to our variable rate line of credit and $131,952,000 outstanding related to our variable rate secured debt. Assuming no changes in outstanding balances, a 1% increase in interest rates would have resulted in increased annual interest expense of $2,720,000.

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

Item 4. Controls and Procedures

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

PART II. OTHER INFORMATION

Item 1A. Risk Factors

Except as provided in “Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward Looking Statements and Risk Factors,” there have been no material changes from the risk factors identified under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009, as updated by our Current Report on Form 8-K filed May 10, 2010.

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

Issuer Purchases of Equity Securities

Total Number of Shares

Maximum Number of

Total Number

Purchased as Part of

Shares that May Yet Be

of Shares

Average Price Paid

Publicly Announced Plans

Purchased Under the Plans

Period

Purchased ⁽¹⁾

Per Share

or Programs ⁽²⁾

or Programs

April 1, 2010 through April 30, 2010

144

45.23

May 1, 2010 through May 31, 2010

117

42.01

June 1, 2010 through June 30, 2010

Totals

261

43.79


(1)		During the three months ended June 30, 2010, the company acquired shares of common stock held by employees who tendered owned shares to satisfy the tax withholding on the lapse of certain restrictions on restricted stock.

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

Item 6. Exhibits


3.1		Certificate of Change of Location of Registered Office and of Registered Agent of the company.

4.1		Indenture, dated as of March 15, 2010, between the company and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”) (filed with the Securities and Exchange Commission as Exhibit 4.1 to the company’s Form 8-K filed March 15, 2010, and incorporated herein by reference thereto).

4.2		Supplemental Indenture No. 1, dated as of March 15, 2010, between the company and the Trustee (filed with the Securities and Exchange Commission as Exhibit 4.2 to the company’s Form 8-K filed March 15, 2010, and incorporated herein by reference thereto).

4.3		Amendment No. 1 to Supplemental Indenture No. 1, dated as of June 18, 2010, between the company and the Trustee (filed with the Securities and Exchange Commission as Exhibit 4.3 to the company’s Form 8-K filed June 18, 2010, and incorporated herein by reference thereto).

4.4		Supplemental Indenture No. 2, dated as of April 7, 2010, between the company and the Trustee (filed with the Securities and Exchange Commission as Exhibit 4.2 to the company’s Form 8-K filed April 7, 2010, and incorporated herein by reference thereto).

4.5		Amendment No. 1 to Supplemental Indenture No. 2, dated as of June 8, 2010, between the company and the Trustee (filed with the Securities and Exchange Commission as Exhibit 4.3 to the company’s Form 8-K filed June 8, 2010, and incorporated herein by reference thereto).

10.1		Summary of Director Compensation.

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.

101.INS		XBRL Instance Document*

101.SCH		XBRL Taxonomy Extension Schema Document*

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*

101.LAB		XBRL Taxonomy Extension Label Linkbase Document*

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document*


*		Attached as Exhibit 101 to this Quarterly Report on Form 10-Q are the following materials, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets at June 30, 2010 and December 31, 2009, (ii) the Consolidated Statements of Income for the three and six months ended June 30, 2010 and 2009, (iii) the Consolidated Statements of Equity for the six months ended June 30, 2010 and 2009, (iv) the Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009 and (v) the Notes to Unaudited Consolidated Financial Statements tagged as blocks of text.

		Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.


	Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Consolidated Balance Sheets — June 30, 2010 and December 31, 2009		3

Consolidated Statements of Income — Three and six months ended June 30, 2010 and 2009		4

Consolidated Statements of Equity — Six months ended June 30, 2010 and 2009		5

Consolidated Statements of Cash Flows — Six months ended June 30, 2010 and 2009		6

Notes to Unaudited Consolidated Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		21

Item 3. Quantitative and Qualitative Disclosures About Market Risk		48

Item 4. Controls and Procedures		49

PART II. OTHER INFORMATION

Item 1A. Risk Factors		49

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		49

Item 6. Exhibits		50

Signatures		51
EX-3.1
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT


	HEALTH CARE REIT, INC.

Date: August 6, 2010	By:	/s/ GEORGE L. CHAPMAN
	George L. Chapman,
	Chairman, Chief Executive Officer and President
	(Principal Executive Officer)

Date: August 6, 2010	By:	/s/ SCOTT A. ESTES
	Scott A. Estes,
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer)

Date: August 6, 2010	By:	/s/ PAUL D. NUNGESTER, JR.
	Paul D. Nungester, Jr.,
	Vice President and Controller
	(Principal Accounting Officer)



	/s/ Erin C. Ibele
	Name:	Erin C. Ibele
	Title:	Sr. Vice President & Secretary

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

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

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

4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

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

	(b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	(c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	(a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



	/s/ GEORGE L. CHAPMAN
	George L. Chapman,
	Chief Executive Officer


		/s/ GEORGE L. CHAPMAN George L. Chapman,
		Chief Executive Officer
		Date: August 6, 2010


		/s/ SCOTT A. ESTES Scott A. Estes,
		Chief Financial Officer
		Date: August 6, 2010