UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

or

Commission File number 1-8923

HEALTH CARE REIT, INC.

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

     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 such filing requirements for the past 90 days.

Yes þ No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes þ No o

     As of July 16, 2004, the registrant had 51,640,370 shares of common stock outstanding.

INDEX

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS
HEALTH CARE REIT, INC. AND SUBSIDIARIES

NOTE: The consolidated balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

See notes to unaudited consolidated financial statements

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

See notes to unaudited consolidated financial statements

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

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

See notes to unaudited consolidated financial statements

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HEALTH CARE REIT, INC.

NOTE A – Basis of Presentation

     The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered for a fair presentation have been included. Operating results for the six months ended June 30, 2004 are not necessarily an indication of the results that may be expected for the year ending December 31, 2004. 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, 2003.

NOTE B – Real Estate Investments

     During the six months ended June 30, 2004, we invested $148,127,000 in real property, provided permanent mortgage and loan financings of $14,503,000, made construction advances of $7,280,000 and funded $513,000 of subdebt investments. As of June 30, 2004, we had approximately $8,867,000 in unfunded construction commitments. Also during the six months ended June 30, 2004, we sold real property generating $34,937,000 of net proceeds and collected $11,980,000 and $744,000 as repayment of principal on loans receivable and subdebt investments, respectively.

NOTE C – Equity Investments

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

NOTE D – Distributions Paid to Common Stockholders

     On February 20, 2004, we paid a dividend of $0.585 per share to stockholders of record on January 30, 2004. This dividend related to the period from October 1, 2003 through December 31, 2003.

     On May 20, 2004, we paid a dividend of $0.60 per share to stockholders of record on April 30, 2004. This dividend related to the period from January 1, 2004 through March 31, 2004.

NOTE E – Derivative Instruments

     In June 2000, the Financial Accounting Standards Board ("FASB") issued Statement No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, which amends Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. Statement No. 133, as amended, requires companies top record derivatives at fair market value on the balance sheet as assets or liabilities. On May 6, 2004, we entered into two interest rate swap agreements (the “Swaps”) for a total notional amount of $100,000,000 to hedge changes in fair value attributable to changes in the LIBOR swap rate of $100,000,000 of fixed rate debt with a maturity date of November 15, 2013. The Swaps are treated as fair-value hedges for accounting purposes and we utilize the short-cut method in accordance with Statement No. 133, as amended. The Swaps are with highly rated counterparties in which we receive a fixed rate of 6.0% and pay a variable rate based on six-month LIBOR plus a spread. At June 30, 2004, the Swaps were reported at their fair value as a $28,000 liability. For the three and six months ended June 30, 2004, we generated $513,000 of savings related to our Swaps that was recorded as a reduction of interest expense. We had no interest rate swap agreements outstanding at June 30, 2003.

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

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

NOTE F – Discontinued Operations

     During the six months ended June 30, 2004, we sold four assisted living facilities, one skilled nursing facility and one specialty care hospital with carrying values of $33,808,000 for a net gain of $1,129,000. In accordance with Statement of Financial Accounting Standards No. 144, we have reclassified the income and expenses attributable to all properties sold subsequent to January 1, 2002 to discontinued operations. Expenses include an allocation of interest expense based on property carrying values and our weighted average cost of debt. The following illustrates the reclassification impact of Statement No. 144 as a result of classifying the properties as discontinued operations for the periods presented (in thousands):

NOTE G – Contingent Liabilities

     We have guaranteed the payment of industrial revenue bonds for one assisted living facility, in the event that the present owner defaults upon its obligations. In consideration for this guaranty, we receive and recognize fees annually related to this agreement. This guaranty expires upon the repayment of the industrial revenue bonds which currently mature in 2009. At June 30, 2004, we were contingently liable for $3,195,000 under this guaranty.

     As of June 30, 2004, we had approximately $8,867,000 of unfunded construction commitments.

NOTE H – Accumulated Other Comprehensive Income

     Accumulated other comprehensive income includes unrealized gains or losses on our equity investments for 2004. 2003 also includes foreign currency translation adjustments. These items are included as components of stockholders’ equity. Other comprehensive income for the three and six months ended June 30, 2004 totaled $0 and $0, respectively, and $423,000 and $249,000 for the same periods in 2003.

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

NOTE I – Earnings Per Share

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

     The diluted earnings per share calculation excludes the dilutive effect of 112,000 and 112,000 options for the three and six months ended June 30, 2004, respectively, and 0 and 50,000 options for the same periods in 2003, because the exercise price was greater than the average market price. The Series E Cumulative Convertible and Redeemable Preferred Stock was not included in this calculation as the effect of the conversion was anti-dilutive.

NOTE J – Other Equity

     Other equity consists of the following (in thousands):

     Unamortized restricted stock represents the unamortized value of restricted stock granted to employees and directors prior to December 31, 2002. Expense, which is recognized as the shares vest based on the market value at the date of the award, totaled $239,000 and $478,000 for the three and six months ended June 30, 2004, respectively, and $100,000 and $593,000 for the same periods in 2003.

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

     In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, that we are required to adopt for fiscal years beginning after December 15, 2002, with transition provisions for certain matters. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Effective January 1, 2003, we commenced recognizing compensation expense in accordance with Statement 123, as amended, on a prospective basis. Accumulated option compensation expense represents the amount of amortized compensation costs related to stock options awarded to employees and directors subsequent to January 1, 2003. Expense, which is recognized as the options vest based on the market value at the date of the award, totaled $94,000 and $189,000 for the three and six months ended June 30, 2004, respectively, and $60,000 and $122,000 for the same periods in 2003.

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

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

NOTE K – New Accounting Policies

     In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51 (the Interpretation). The Interpretation requires the consolidation of variable interest entities in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Previously, entities were generally consolidated by an enterprise that had a controlling financial interest through ownership of a majority voting interest in the entity. The Interpretation is effective in the current quarter for all variable interests. We have performed a quantitative analysis for certain variable interests in our operators and determined that none of the operators’ businesses are variable interest entities because the fair value of the equity of these businesses exceeds the expected losses as calculated.

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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 Form 10-Q. Other important factors are identified in our Annual Report on Form 10-K for the year ended December 31, 2003, including factors identified under the headings “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Executive Overview

Business

     Health Care REIT, Inc. is a self-administered, equity real estate investment trust (“REIT”) that invests in health care facilities, primarily skilled nursing and assisted living facilities. We also invest in specialty care facilities. As of June 30, 2004, long-term care facilities, which include skilled nursing and assisted living facilities, comprised approximately 93 percent of our investment portfolio. 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, 2004:

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

     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 the performance of our operators on their lease and loan obligations and the rates earned thereon. To the extent that our operators experience operating difficulties and are unable to generate sufficient cash to make payments to us, there could be a material adverse impact on our consolidated results of operations, liquidity and/or financial condition. To mitigate this risk, we monitor our investments through a variety of methods determined by the type of health care facility and operator. Our monitoring process includes review of monthly financial statements for each facility, quarterly review of operator credit, annual facility inspections and review of covenant compliance relating to licensure, real estate taxes, letters of credit and other collateral. In monitoring our portfolio, our personnel use a proprietary database to collect and analyze facility-specific data. Additionally, we conduct extensive research to ascertain industry trends and risks. Through these monitoring and research efforts, we are typically able to intervene at an early stage and address payment risk, and in so doing, support both the collectibility of revenue and the value of our investment.

     In addition to our monitoring and research efforts, we also structure our investments to help mitigate payment risk. We typically invest in or finance up to 90 percent of the stabilized appraised value of a property. Operating leases and loans are normally credit enhanced by guaranties and/or letters of credit. In addition, operating leases are typically structured as master leases and loans are generally cross-defaulted and cross-collateralized with other loans, operating leases or agreements between us and the operator and its affiliates. As of June 30, 2004, 81 percent of our real property was subject to master leases, 95 percent of our real estate investments were cross-defaulted and 78 percent of our loans were cross-collateralized.

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     For the six months ended June 30, 2004, rental income and interest income represented 89 percent and ten percent, respectively, of total gross revenues. Prior to June 2004, our standard lease structure contained fixed annual rental escalators, which are generally recognized on a straight-line basis over the minimum lease period. Beginning in June 2004, our new standard lease structure contains annual rental escalators that are contingent upon changes in the Consumer Price Index and/or changes in the gross operating revenues of the property. This revenue is not recognized until the appropriate contingencies have been resolved. This lease structure will initially generate lower revenues, net income and funds from operations, but will enable us to generate additional organic growth and minimize non-cash straight-line rent over time. This change will not affect our cash flow nor our ability to pay dividends. Our yield on loans receivable depends upon a number of factors, including the stated interest rate, the average principal amount outstanding during the term of the loan and any interest rate adjustments.

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

     Depending upon market conditions, we believe that new investments will be available in the future with spreads over our cost of capital that will generate appropriate returns to our stockholders. We expect to complete approximately $400,000,000 to $500,000,000 of new investments net of real property sales and loan payoffs for the full year 2004. During the six months ended June 30, 2004, we completed $161,537,000 of gross new investments and had $33,808,000 of real property sales for net investments of $127,729,000. Although no investment payoffs have been specifically identified, we anticipate the potential repayment of certain loans receivable and the possible sale of additional real property. To the extent that loan repayments and real property sales exceed new investments, our revenues and cash flows from operations could be adversely affected. We expect to reinvest the proceeds from any loan repayments and real property sales in new investments. To the extent that new investment requirements exceed our available cash on-hand, we expect to borrow under our unsecured lines of credit arrangements. At June 30, 2004, we had $33,990,000 of cash and cash equivalents and $299,000,000 of available borrowing capacity under our unsecured lines of credit arrangements.

Key Transactions in 2004

     We completed the following key transactions during the six months ended June 30, 2004:

•		our Board of Directors increased our quarterly dividend to $0.60 per share, which represents a one and one-half cent increase from the quarterly dividend of $0.585 paid for 2003. The dividend declared for the quarter ended June 30, 2004 represents the 133rd consecutive dividend payment;
•		we expanded our primary unsecured line of credit arrangement from $225,000,000 to $310,000,000. The existing bank group, in conjunction with two new participants, First Tennessee Bank, N.A. and LaSalle Bank National Association, provided the additional capacity;
•		we extended our $30,000,000 unsecured line of credit arrangement to May 2005;
•		we completed $161,537,000 of new investments and had $33,808,000 of real property sales; and
•		our only remaining operator bankruptcy was resolved with the April 2004 bankruptcy court approval of the debtors’ plan of reorganization for Doctors Community Health Care Corporation.

Key Performance Indicators, Trends and Uncertainties

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

     Operating Performance. We believe that net income available to common stockholders (“NICS”) is the most appropriate earnings measure. Another useful supplemental measure of our operating performance is funds from operations (“FFO”); however, this supplemental measure is not defined by accounting principles generally accepted in the United States (“U.S. GAAP”). Please refer to the section entitled “Non-GAAP Financial Measures” for further discussion of FFO and a reconciliation of FFO and NICS. NICS, FFO 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 for our operating performance measures (dollars in thousands except per share data):

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     Concentration Risk. We evaluate our concentration risk in terms of asset mix, investment mix, operator mix and geographic mix. Concentration risk is valuable to understand 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 percent of our real estate investments must be real property whereby each property, which includes the land, buildings, improvements and related rights, is owned by us and leased to an operator pursuant to a long-term operating lease. Investment mix measures the portion of our investments that relate to our various facility types. We invest primarily in long-term care facilities. Operator mix measures the portion of our investments that relate to our top five operators. We try to limit our top five operators to 50 percent of our total real estate investments. Geographic mix measures the portion of our investments that relate to our top five states. We try to limit our top five states to 50 percent of our total real estate investments. The following table reflects our recent historical trends of concentration risk:

     Credit Strength. We measure our credit strength both in terms of leverage ratios and coverage ratios. Our leverage ratios include debt to book capitalization (“DBCR”) and debt to market capitalization (“DMCR”). The leverage ratios indicate how much of our balance sheet capitalization is related to long-term debt. We expect to maintain a DBCR between 40 and 50 percent and a DMCR between 30 and 40 percent. Our coverage ratios include interest coverage ratio (“ICR”) and fixed charge coverage ratio (“FCR”). The coverage ratios indicate our ability to service interest and fixed charges (interest plus preferred dividends). We expect to maintain an ICR in excess of 3.00 times and an FCR in excess of 2.50 times. 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

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widely used by investors, analysts and rating agencies in the valuation, comparison, rating and investment recommendations of companies. The following table reflects the recent historical trends for our credit strength measures:

     We evaluate our key performance indicators in conjunction with current expectations to determine if historical trends are indicative of future results. Our expected results may not be achieved and actual results may differ materially from our expectations. This may be a result of various factors, including, but not limited to:

•		the status of the economy;
•		the status of capital markets, including prevailing interest rates;
•		changes in financing terms;
•		the ability of our operators to generate sufficient cash to meet our lease and loan obligations;
•		operator bankruptcies;
•		government regulations affecting Medicare and Medicaid reimbursement rates;
•		liability claims and insurance costs for our operators;
•		unanticipated difficulties and/or expenditures relating to future acquisitions;
•		environmental laws affecting our properties;
•		delays in reinvestment of sale proceeds; and
•		structure related factors, including REIT qualification, anti-takeover provisions and key management personnel.

     Management regularly monitors the economic and other factors listed above. We 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, 2003, under the headings “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of these risk factors.

Portfolio Update

     We are pleased with the continuing improvement of our portfolio. Our overall payment coverage is at 1.64 times and represents an increase of six basis points from the prior quarter. The following is a summary of the key performance measures for our portfolio. Census and payor mix data reflects the three months ended March 31, 2004. Coverage data reflects the twelve months ended March 31, 2004.

     Assisted Living Portfolio. At June 30, 2004, our assisted living portfolio was comprised of 218 facilities with 14,139 units and an investment balance of $1,193,242,000. The stabilized portfolio was comprised of 212 facilities with 13,331 units, an investment balance of $1,142,804,000, and payment coverage of 1.40 times, an increase of five basis points from the prior quarter. Our fill-up and construction properties remained within our stated goal of having ten to 15 percent of the portfolio in construction and fill-up. We currently have four assisted living facilities remaining in fill-up, representing approximately two percent of our revenues. Eight assisted living facilities stabilized during the quarter and one assisted living facility in fill-up was acquired. Only one facility, representing one percent of revenues, has occupancy of less than 50 percent. The facility was a new acquisition in the fourth quarter of 2003. Finally, we have two assisted living facilities in construction.

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     Skilled Nursing Portfolio. At June 30, 2004, our skilled nursing portfolio was comprised of 120 facilities with 16,616 beds and an investment balance of $748,544,000. Average occupancies have risen from a low of 81 percent in the third quarter of 2000 to 85 percent in the first quarter of 2004. Our payment coverage remains strong at 1.97 times, an increase of 13 basis points from the prior quarter.

     Specialty Care Portfolio. At June 30, 2004, our specialty care portfolio was comprised of eight facilities with 1,268 beds and an investment balance of $150,278,000. Our payment coverage remains strong at 1.91 times, a decrease of four basis points from the prior quarter.

Corporate Governance

     Maintaining investor confidence and trust has become increasingly important in today’s business environment. Health Care REIT, Inc.’s 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. In March 2004, the Board of Directors adopted its Corporate Governance Guidelines. These guidelines meet the listing standards adopted by the New York Stock Exchange and are available on our Web site at www.hcreit.com and from the Company upon written request sent to the Vice President and Corporate Secretary, Health Care REIT, Inc., One SeaGate, Suite 1500, P.O. Box 1475, Toledo, Ohio, 43603-1475.

     On July 30, 2002, President George W. Bush signed into law the Sarbanes-Oxley Act of 2002 (“SOX”). SOX is designed to protect investors by improving the accuracy and reliability of corporate disclosures. SOX directed the Securities and Exchange Commission (“SEC”) to promulgate all necessary rules and regulations. We believe that we are in compliance with all of the new listing guidelines of the NYSE relating to corporate governance as well as the applicable provisions of SOX and the new rules of the SEC adopted under SOX. The following is a summary of some of the important SOX related corporate governance initiatives for which we are compliant.

•		Prohibition on director/officer loans – effective July 2002, new officer and director loans are prohibited;
•		CEO/CFO certifications – beginning with the Form 10-Q for the period ended September 30, 2002, we provide the required CEO and CFO certifications attesting to the effectiveness of our disclosure controls and procedures for all necessary SEC filings;
•		Acceleration of Section 16 reports – we continue to meet the two day filing requirement for Section 16 reports, effective August 29, 2002, and we submit them electronically as of June 30, 2003;
•		Form 8-K Item 12 – our quarterly earnings releases are now furnished to the SEC via Form 8-K Item 12 beginning with the quarter ended March 31, 2003;
•		Non-GAAP financial measures – all public disclosures issued subsequent to March 28, 2003 contain the required reconciliations and discussion of non-GAAP financial measures. Our primary non-GAAP financial measures are FFO and EBITDA;
•		Off-balance sheet arrangements and contractual obligations – we have always reported these items and adopted the new disclosure format beginning with our Annual Report on Form 10-K for the year ended December 31, 2003;
•		Prohibition on hiring former employees of the independent auditor – effective May 2003, we may not hire former team members of our independent auditor unless they have passed the “cooling-off period” as defined by the SEC;
•		Pre-approval of non-audit services – the Audit Committee of the Board of Directors adopted a pre-approval policy in May 2003 and has continued to refine it as the SEC issues additional interpretations and guidance. A description of the current pre-approval policy can be found in our Proxy Statement for Annual Meeting of Stockholders May 6, 2004 (“Proxy Statement”);
•		Audit Committee financial expert – the Board has determined that at least one member of the Audit Committee satisfies the definition of a “financial expert” and we have made the required disclosures in our Proxy Statement;
•		Filing deadline accelerations – we have met and plan to continue to meet the SEC’s staged acceleration plan regarding Forms 10-Q and 10-K filing deadlines;
•		Code of ethics – in connection with the adoption of our Corporate Governance Guidelines in March 2004, we adopted a Code of Business Conduct and Ethics that is applicable to all Company directors, officers and employees. Our Code of Business Conduct and Ethics is available on our Web site at www.hcreit.com;
•		Independence – seven of our nine directors are independent and all members of our audit, compensation, nominating/corporate governance committees are independent. At each Board meeting, the non-management directors meet in a special session. Mr. Ballard, the chairman of the nominating/corporate governance committee, is the Presiding Director of such sessions;
•		Whistleblower mechanism – on January 28, 2004, the Audit Committee approved procedures for a) the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters and b) the confidential, anonymous submission by employees of the Company of concerns regarding questionable accounting or auditing matters. Information regarding our Corporate Governance Hotline is available on our Web site at www.hcreit.com; and
•		Disclosures regarding Committee functions and communications between security holders and the Board – beginning with the Proxy Statement, we have made the required disclosures regarding the independence and functions of the Committees of the Board of Directors and have provided the necessary instructions for how security holders may communicate with our Board of Directors or any specific director.

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     In addition to the items discussed above, the SEC has issued its final rules regarding compliance with SOX Section 404, Management Assessment of Internal Controls (“SOX404”). Pursuant to SOX404, we must develop enhanced procedures to understand, document, evaluate and monitor our internal controls and procedures for financial statement purposes. Beginning with the Annual Report on Form 10-K for the year ended December 31, 2004, we must provide an assessment report from management on the effectiveness of our internal controls. In addition, our independent auditors must attest to and report on management’s assertions. We implemented a SOX404 compliance plan in April 2003 and intend to complete all necessary documentation and testing of our internal controls in time to provide the required management report for the current year. To date, we have incurred costs (both internal and external) related to SOX404 and other corporate governance compliance initiatives and we anticipate that we will incur additional costs. These costs are included in general and administrative expenses.

Liquidity and Capital Resources

Sources and Uses of Cash

     Our primary sources of cash include rent and interest receipts, borrowings under unsecured lines of credit arrangements, 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 acquisitions, 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. The following is a summary of our sources and uses of cash flows (dollars in thousands):